Comments by the Market Area Managers on the responses received regarding the Target Model for a Standardized German Balancing Gas Market 1. Description of the overall process In the autumn of 2011 the Market Area Managers (MAMs) initiated a joint process for the development of a standardized, cross-market area target model for the procurement of balancing gas in the market areas NCG and GASPOOL. Upon consultation of the result with the federal German regulator Bundesnetzagentur (BNetzA) the MAMs presented the planned target model to market participants on 6 June 2012 in the course of a kick-off workshop and asked the participants for written responses to be submitted by 30 June 2012. Section 3 of this summary addresses all the responses received from participants; the comments are addressed under the relevant topic to which they refer, with comparable responses on the same aspect by different participants not being commented on individually. Favourable responses are not commented on. Following the evaluation of all responses and the modification, if applicable, of the target model the final version of the model will be published on 12 October 2012 and the target model will be implemented according to the described timeline. 2. Responses on the target model by market participants Overall, a total of 11 organisations have submitted their comments on the MAMs' target model. The following 10 organisations have agreed to their responses being published: BBH Initiative Gashandel/GABi Gas Bundesverband Neuer Energieanbieter e.v. Econgas GmbH EFET Deutschland e.v. EnBW Trading GmbH European Energy Exchange AG MITGAS Mitteldeutsche Gasversorgung GmbH RWE Supply & Trading GmbH Statoil ASA Storengy Deutschland Leine GmbH Along with the present evaluation by the MAMs the original responses of the consultation participants were made publicly available on the MAMs' websites on 21 September 2012. 1
The MAMs welcome the positive reception of the target model in the market and hereby thank the respondents for their feedback and in particular for their constructive suggestions. 3. Discussion of responses received FUNDAMENTALS Overall, it can be said that the presented target model has found widespread agreement among consultation participants. In particular the future balancing product groups chosen and the stronger focus on wholesale products have been evaluated very positively by the majority of respondents. The balancing product groups proposed under the target model and the resultant excessive market fragmentation are the result of the physical requirements of the market areas. If in the future it should become possible to procure appropriate locational or quality-specific products via the exchange the MAMs would also welcome a channelling of all balancing gas procurement activities towards the exchange. From the point of view of the MAMs the request to provide incentives for suppliers to offer more short-term products, which was raised by one respondent, is already sufficiently taken care of through the configuration of the MOL, where short-term products are given absolute priority and long-term products are meant to be used for system integrity purposes only. The suggestion, proposed once, to strengthen cooperation between the MAMs with a view to reducing the balancing gas volumes procured in the market as much as possible has already been implemented to a sufficient degree through the cross-market area cooperation in place between the MAMs and TSOs as regards internal gas balancing mechanisms. OVERVIEW OF BALANCING PRODUCT GROUPS STANDARDIZED SHORT-TERM PRODUCTS Exchange-based procurement within own market area Under the new target model the exchange-based procurement within the MAM's own market area has been awarded a merit order rank of 1 and has thereby been given the highest priority. As a consequence of the downgrading of the procurement in adjacent market areas to a merit order rank of 2 and the removal of title products for procurement via the bilateral platforms it remains the only product group with the highest merit order rank, whereby the MAMs have complied with the request to award it absolute priority. Exchange-based procurement in adjacent market areas 2 Taking into account the responses received and the latest discussions in relation to the drafting of the Network Code on Gas Balancing the MAMs will downgrade this procurement method, awarding it a merit order rank of 2. As a result of this downgrade, balancing gas is to be procured in adjacent market areas only if in the MAM's own market area no wholesale market products are available to satisfy specific requirements (qualityspecific or locational). As soon as a functioning wholesale market has been established for
such products in the MAM's own market area, the MAMs will no longer need to procure balancing gas in adjacent market areas. Therefore, this procurement method remains a significant aspect of the target model. In order to avoid advantages or disadvantages of any kind for products procured via the exchange of other market areas vis-à-vis products offered on the bilateral platforms within the MAM's own market area, it is intended to increase comparability between these products by making use of short-term capacity bookings as much as possible. The above notwithstanding the MAM will carry out an ex-post evaluation of the costs for capacity bookings as well as of the price differences between the adjacent exchange and the MAM's own bilateral platform on a regular basis. In addition, the transportation capacity required is to be contracted only to a degree that does not restrict or adversely affect the capacity on offer for regular shippers. Procurement of standardized products via bilateral platforms A number of respondents expressed the opinion that title products were only to be traded at the exchange and no longer on the bilateral platforms in order to increase the liquidity at the exchange, which has led to the decision to use the bilateral platforms only for products that are settled by delivery in specified physical zones or at specified physical points under the future target model. This might entail the introduction of two new zones H gas and L gas as a replacement for the VTP-only products and in addition to the network-specific products hitherto used, which would apply to day-ahead as well as to rest-of-the-day products. Through this measure the suggestion to include the possibility to flag commodity offers on the bilateral platforms as either or which was otherwise considered reasonable by the MAMs would be rendered irrelevant. However, it is not the MAMs' point of view that a merger of the two bilateral balancing platforms would have a positive effect on liquidity. Furthermore, a joint platform for two independent market areas, possibly pursuing different strategies, would be difficult to implement. The MAMs are however planning to align the platforms in the course of the planned standardisation. STANDARDIZED LONG-TERM PRODUCTS Under the target model the MAMs have the possibility to conduct tendering procedures for longterm options within a specified timeframe prior to the start of the delivery period. Such tendering procedures are carried out via the MAMs' balancing platforms, with all balancing gas suppliers that have successfully completed pre-qualification for the relevant market area and tendered product being eligible for participation. Given that long-term options are primarily held for locational balancing requirements in exceptional situations where the short-term wholesale market is not sufficiently liquid or an inappropriate vehicle to cover the imbalances, a failure to make use of the options in a given quarter of the year cannot be used to derive any direct implications for the following period. The scope of the demand for long-term options to be contracted is rather determined based on a combination of analyzing the 3
long-term, seasonal demand and the use of long-term options. Furthermore and with a view to security of supply, the wholesale trading market will be evaluated as to its functional reliability in terms of delivering or accepting the required products on a short-term basis and based on this analysis a qualitative projection of the demand within the period under consideration will be developed. NON-STANDARDIZED LONG-TERM PRODUCTS Two participants suggested a general merit order upgrade for non-standardized long-term products in order to fully exploit the potential of these products; this does seem plausible from a mere profitability and system integrity perspective. However, their current ranking at a merit order rank of 4 is the result of regulatory requirements and of the current status quo of the Network Code on Gas Balancing. Additionally, the balancing gas target model expressly aims at a strengthening of wholesale-traded products; from this perspective any upgrade of non-standardized long-term products in the merit order list would be counter-productive. Once it was mentioned that the MAMs should examine, in cooperation with storage system operators, to what extent a cross-quality provision of products with a MOL rank of 4 could contribute to a more cost-efficient framework for the required conversion. It is indeed true that particularly in cross-quality market areas there might be a demand for products of a MOL rank of 4, however, it is not necessarily the case that this situation requires bundled products. Non-standardized long-term products will only be used if none of the other balancing vehicles are available or inappropriate to ensure system integrity. For this reason the consideration of the utilisation ratio of previous periods cannot be the sole criterion for the future demand if system integrity is not to be put at risk. A mechanism to determine an utilisation ratio threshold from which the relevant product is not to be procured for the following period, which has been suggested by one participant, is therefore not reasonable. As to the future tendering conditions for non-standardized long-term products the following applies: The balancing products of this product group will continue to be procured in tendering procedures. When determining the demand for products of this product group the liquidity of the relevant market area will be taken into account. The frequency at which such an analysis is carried out is determined according to demand. MERIT ORDER Given that a strengthening of the wholesale market has been defined as a central aim of the crossmarket area target model, the merit order list has been configured so as to maximize the balancing gas volumes traded on the wholesale trading hubs. In line with the requirements of the Network Code on Gas Balancing this approach is meant to provide incentives for market participants to take part in wholesale trading and thereby to consistently increase market liquidity. Only a strict adherence to the merit order and the prioritizing of wholesale trading hubs vis-à-vis balancing 4
platforms can ensure the development of a continuous wholesale market with a 24/7 liquidity that can be the platform for MAMs to procure balancing gas, on the one hand, and that can be used by market participants for the purpose of market-based balancing activities, on the other hand. Accordingly, price inefficiencies within the merit order ranking are expressly accepted to achieve this overarching objective. As in the responses received participants requested a detailed description of the criteria used to choose between procurement methods within the merit order list, the procedure for selecting a procurement method, which reflects the currently known circumstances and requirements, is described in detail below: 1. As a general principle, each balancing requirement is to be satisfied through the use of procurement methods with a merit order rank of 1 2. Procurement methods with a merit order rank of 2 are to be used in all cases where procurement methods with a merit order rank of 1 are not or no longer available (e.g. if no bids are placed in the wholesale market); or where a quality-specific requirement cannot be satisfied by any of the procurement methods with a merit order rank of 1; or where a locational requirement cannot be satisfied by any of the procurement methods with a merit order rank of 1 3. Procurement methods with a merit order rank of 3 are to be used in cases where procurement methods with a merit order rank of 1 or 2 are not or no longer available (e.g. if no short-term bids are placed in the wholesale market or on the balancing platforms, or if no transportation capacity is available for procuring balancing gas in adjacent market areas); or where a quality-specific requirement cannot be satisfied by any of the procurement methods with a merit order rank of 1 or 2; or where a locational requirement cannot be satisfied by any of the procurement methods with a merit order rank of 1 or 2 4. Procurement methods with a merit order rank of 4 are to be used in cases where procurement methods with a merit order rank of 1, 2 or 3 are not or no longer available (e.g. if no bids are placed on the balancing platforms); or where a locational requirement cannot be satisfied by any of the procurement methods with a merit order rank of 1, 2 or 3; or where the requirement must be satisfied within a timeframe that does not allow for the use of a procurement method with a merit order rank of 1-3 Furthermore, one market participant requested in his response that rules for deviations from the merit order list were to be defined. As an ex-ante definition of rules for a deviation from the MOL is impossible, this will be done in consultation with BNetzA when necessary, taking into account the circumstances. However, it is a fact that the MAMs are committed to fully adhering to the merit order list as defined under the target model. 5
In response to the question raised in one of the responses as to the criteria used to distribute the demand between products with a merit order rank of 3 and 4, respectively, we would like to clarify at this point that these products are used to satisfy different types of requirements, which have their separate effects and which will be determined separately when projecting the demand. Accordingly, the volumes to be contracted will not be determined based on a distribution of demand between these types of product. PROCUREMENT PROCEDURES AND FRAMEWORK As regards the arrangements under the target model for the capacity products required for MOL ranks 3 and 4, which one participant considers to be unclear, the target model is based on the assumption that the suppliers of products with a MOL rank of 3 have arranged for the relevant capacity for the offered period. The relevant conditions for products of a MOL rank of 4 have been deliberately described in a general way to reflect the fact that these products are not standardized. The details of the framework contracts will be determined and published prior to the target model's entering into force and will be based on the current provisions. Individual consultation participants wished improvements to simplify the daily management of the balancing gas operations for the suppliers (integration of the bilateral platforms into the overall market (e.g. Trayport), procurement of RoD volumes preferably within office hours). An integration of the bilateral platforms into the wholesale market is also in the MAMs' interests, who will review this possibility in terms of cost and efficiency. In view of the fact that system integrity requires a 24/7 use of balancing gas it is not possible, however, to restrict the trading of RoD volumes to office hours. Finally, one participant requested that clear rules for breaches of contract etc. were to be defined. This will be done as part of the drafting of the framework contracts. TIMELINE As the target model imposes radical changes on the currently implemented processes in some respects, and as an undisturbed and efficient procurement process for balancing gas will also require corresponding test phases, the target model can be implemented until 1 October 2013 as previously announced. Should it become apparent that an earlier implementation date might be viable, market participants will be informed accordingly. Given the underlying aim of strengthening the wholesale trading market it is in the MAMs' interest to implement the target model as soon as possible. 4. Implications for the target model The following changes have been made to the target model as a result of the responses received in the course of the consultation process and of the subsequent evaluation and discussions between the MAMs: The procurement in adjacent market areas has been downgraded to a merit order rank of 2 The option to procure title products via bilateral platforms has been removed from the target model 6
This has resulted in the exchange-based procurement within the MAM's own market area remaining as the only procurement method with a merit order rank of 1, thereby clearly prioritising this approach The commitment not to restrict or adversely affect the capacity available for regular shippers when procuring in adjacent market areas has been strengthened A possibility to procure gas quality-specific or locational products via the exchange, which might be possible in the future, has been added The conditions for selecting procurement methods within the merit order will be described in detail 7