Wholesale market functioning: GTM1 criteria 2 nd ACER Workshop on Gas Target Model review and update 19 March 2014
Agenda GTM1 criteria Results on member state level Discussion 2
GTM1 criteria Results Discussion 3
GTM1 criteria Criteria Churn rate Volume of gas traded relative to physical volume Market zone size Consumption of gas by consumers within a market zone Number of supply sources We interpret this to be the number of countries imports are originating from HHI (Herfindahl Hirschman Index) Measure of concentration amongst suppliers based on energy measured by firm RSI (Residual Supply Index) Share of consumption which can be met without largest supplier based on supply capability, i.e. capacity (again on firm level) Target 8 20 bcm (215 TWh) 3 2,000 110 % 4
GTM1 criteria assessment depends on market delineation Application of criteria Area poses a dilemma Market zone clear, but not necessarily a relevant market area Member state clear cut, but also not formally useful for competition assessment Relevant economic market Neither market zone nor member state always relevant, especially for competition assessments In theory, the competition criteria may need to be applied in the context of the relevant market from an economic perspective RSI: Concluding that SK has capacity from CZ/AT to replace largest import route not helpful if CZ/AT also depend on the same largest upstream supplier as SK Approach Computation on member state level 5
Conceptual remarks (I) Churn rate Number of supply sources HHI Not necessarily perfect indicator Hedging opportunities etc. may also exist if a market zone is well integrated (commercially and physically) with adjacent zone which has a highly liquid trading point Other aspects also relevant, e.g. Churn rate by product Bid-ask spreads As supply sources are defined on geographic level, it is only a rough measure of level of competition There might be intensive competition between multiple firms from just one or two supply sources (e.g. producers on the UKCS) Some sources (e.g. LNG spot volumes) may only arrive in small quantities and at significant price premiums, but count as separate supply source Production vs. wholesale level and relevance of long-term contracts We focus on HHI at upstream level Control over volumes may partially be transferred to importers 6
Background: RSI Our approach Computed based on data on capacities, prevailing flow directions, supply and demand balance in investigated area Pivot analysis On an area-by-area basis, qualitative assessment of how to replace largest supplier if that is not yet possible Compared to power markets where RSI more common 7 Issues Storage (seasonal) Transits and exports play large role because of natural gas characteristics Gas is storable on a large scale In many market areas, significant storage capacities are available these are part of the supply capacity depending on the time horizon of the analysis Partly subject to contracts and potentially relevant to supply/demand in an area Transits block capacities Exports contribute to demand Approach Calculation on annual basis (i.e. without storage) Transits block some capacities Exports not part of demand
Background: pivot analysis Logic of the pivot analysis In the pivot analysis, demand is compared with the total capacity of all other suppliers (apart from supplier A) in a limited period A supplier is pivotal in a period in which he is an inevitable trading partner : Thesis: By holding back supply, a (profitable) shortage of supply can be engineered There would be pivotality if the share of capacity of one stakeholder (e.g. A) is higher than the excess capacity in the market A pivotal supplier has at least the theoretical possibility of raising the price above the competitive price Incentives and practicability (of withholding) are, however, not part of this simple analysis Therefore, the analysis does not provide a final proof of market power problem (even if pivotality is found) Capacity (TWh/a) Capacity (TWh/a) Measures for pivotality and RSI 100 Firm A 20 Others 90 demand 60 Firm A 20 Others 90 demand Residual Supply Index (RSI): Share of demand which can be covered by capacity of suppliers other than A If RSI > 100%, then no pivotality 8 Firm A would be pivotal RSI = 90/100 = 0,9 = 90% Firm A would not be pivotal RSI = 90/60 = 1,5 = 150%
Conceptual remarks (II) RSI Mechanistic application on capacity level overstates level of competition On capacity level, assuming that CMP works, the largest suppliers in many member states could probably be replaced by all other suppliers. Volumes in gas market as important as capacity RSI does not check if there are actual volumes on other side of the border to back up capacity Also not considered if capacity is related to adjacent market areas where same upstream supplier has a dominant role Wider market delineation ignores potential bottlenecks within considered area Choosing a wider market delineation may overcome issues of ignoring market dominance issues in adjacent areas, but may overstate substitution possibilities Ignores price effect E.g. large LNG capacities may imply that large suppliers can be replaced, but LNG volumes would only be attracted to Europe for significant price premiums Conclusion: RSI needs to be interpreted carefully when assessing the level of competition 9
GTM1 criteria Results Discussion 10
Trading at wholesale markets 10,00 Continental European Gas Hubs - ChurnRate CEGH TTF PSV huberator NCG 8,00 6,00 4,00 Churn rates 2,00 0,00 Will liquidity drop with ToP volume adjustment? 2000.01 2001.01 2002.01 2003.01 2004.01 2005.01 2006.01 2007.01 2008.01 2009.01 2010.01 2011.01 2012.01 2013.01 Only TTF (part of the time) and NBP with Churn rates > 8 Zeebrugge: 5 Austrian / German / Italian / French hub: 2-3 No transparent trading of wholesale gas in most EU member states 11
Market zone size 80 70 Spain: two legacy LTC contracts outside entry-exit system, but will be included following renegotiations 60 50 40 30 CEER target 20 10 0 United Kingdom Italy Germany NCG Netherlands Spain Germany Gaspool France PEG N Belgium Poland Romania France PEG S Hungary Austria Czech Republic Slovakia Portugal Ireland France TIGF Greece Denmark Lithuania Finland Croatia Bulgaria Latvia Sweden Romania Transit Bulgaria Transit Poland Transit (Yamal) Interconnector UK Demand in BCM PL/BG/RO: Transits not part of domestic entry-exit system Four market zones without any demand: transits and IP only Source: Frontier based on BP, KEMA E/E Study Conclusion On member state level, only six member states with > 20 bcm gas demand (currently seven market zones > 20 bcm as two German zones) Cross-border market zones required if large demand in each market zone required for competition 12
Pluralism of supply sources France Italy Spain UK Greece Belgium Netherlands Slovenia Croatia Romania Hungary Luxembourg Germany Poland Austria Czech Republic Slovakia Portugal Ireland Denmark Bulgaria Sweden Finland Lithuania Latvia Estonia Number of supply countries 0 5 10 1 1 1 1 1 1 2 2 2 2 3 4 5 5 5 5 4 4 4 4 3 3 3 1 7 7 9 1 6 7 1 CEERtarget of three supply sources 7 6 * 3 We interpret the number of supply sources as the number of countries imports are originating from Pipeline gas source LNG source Conclusion 10 member states (with gas markets) do not meet target of three supply sources on country level LNG as significant source of diversity (top 6 member states have LNG import facilities) But number of sources does not allow any conclusion on market power of individual suppliers, market structure, and potential competition (one or two sources may dominate in a given country) 13 * Not number of entities bringing natural gas into the country Source: Frontier based on Eurostat
HHI Based on energy measured by firm United Kingdom Ireland France Belgium Germany Spain Italy Netherlands Denmark Sweden Portugal Luxembourg Hungary Romania Poland Slovenia Greece Croatia Austria Bulgaria Czech Republic Slovakia Estonia Lithuania Latvia Finland 950 1,215 1,240 1,709 1,982 2,000 2,093 2,488 2,570 2,766 2,821 3,185 3,198 3,270 4,550 5,027 5,181 5,987 HHI of below 2,000 as target 7,500 7,587 9,051 9,595 0 2,000 4,000 6,000 8,000 10,000 HHI by member state Conclusion Six member states with sufficiently diversified supply on a firm level to meet GTM1 target of HHI < 2000 mainly large markets in Western Europe Single supplier in four member states But also HHI does not allow full conclusion on level of competition as it ignores potential competition E.g. Czech gas market may in reality not be less competitive than Bulgarian market because of potential competition from Germany 14 Source: Frontier
RSI RSI = 100* supply capacity (n-largest)/demand Based on border capacity/ domestic production Slovakia Belgium Netherlands Switzerland Spain Czech Republic Austria United Kingdom France Greece Croatia Germany Italy Romania Portugal Slovenia Hungary Poland Denmark Bulgaria Ireland Estonia Latvia Lithuania Finland 22% 13% 8% 0% 0% 0% 0% 74% 60% 56% 189% 186% 159% 159% 143% 142% 137% 131% 125% 116% 108% 104% 93% CEER RSI "target" 0% 50% 100% 150% 200% 250% RSI 279% 369% Conclusion Shows reliance on largest supplier Indication that, based on RSI, investments in reverse flow for the benefit of, e.g., Austria, Czech Republic, Slovakia, significantly reduced reliance on largest supplier there But RSI on itself has limitations: Focus on capacity (ignores competitive situation on other side of an IP) See methodological comments earlier RSI may also be helpful in combination with HHI 15 Source: Frontier
Country specific results: Bulgaria TWh/year 300 250 200 150 100 RSI Capacity of largest supplysource / route Pipelines via Romania Domestic production Demand Large dependence on one import source and route Only domestic production is an alternative RSI of 13 % 87 % of demand cannot be replaced 50 0 All other capacity not sufficient to meet demand 16 Source: Frontier
Country specific results: Hungary Supply capability in TWh/year 300 250 200 150 100 50 RSI Capacity of largest supplysource / route Pipelines via Ukraine Pipeline from Austria Domestic production Demand All other capacity not sufficient to meet demand Large dependence on one import source and route Only import route from Austria as an alternative (and domestic production), but cannot replace Russian imports even if capacity can be fully filled with gas RSI of 60 % 40 % of demand cannot be replaced 0 17 Source: Frontier
Country specific results: Poland HHI RSI 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% HHI of 4,550 Gazprom with about 60 % market share Domestic production as second largest supply RSI of 56 % 18 0% Market shares Others RWE Shell ExxonMobil PGNiG Gazprom Source: Frontier We are still researching supply firms 44 % of demand cannot be replaced, LNG terminal operational as of 2014 already taken into account Supply capability in TWh/year 600 500 400 300 200 100 0 Capacity of largest supplysource / route Pipelines via Belarus/Ukraine LNG import capacity Pipeline from Czech Republic Pipeline from Germany Domestic production Demand All other capacity not sufficient to meet demand
Country specific results: France 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% HHI HHI of < 1,300 Diversified supply because of LNG and multiple upstream pipeline suppliers RSI of 137 % Market shares Based on upstream shares, not the whole story Other ENI Total NNPC Qatar Petroleum 600 ExxonMobil Gasterra Shell Sonatrach Gazprom Statoil Source: Frontier 0 Significant pipeline capacities from NO, DE, BE and ES plus LNG import terminals allow replacing each individual supply route Supply capability in TWh/year 1,000 900 800 700 500 400 300 200 100 RSI Capacity of largest supply source Capacityfrom other sources exceeds demand Import capacity from Norway LNG import capacity Pipeline from Belgium Pipeline from Spain Pipeline from Germany Demand 19
100% Country specific results: Spain 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% HHI HHI of approx. 2,000 Diversified supply because of LNG RSI of 159 % Market shares Other ENI BP ExxonMobil BG Total Statoil Shell Qatar Petroleum NNPC Sonatrach Source: Frontier Especially spare LNG import capacity allows replacing pipeline supplies from Algeria, but Spain very exposed to global LNG prices Supply capability in TWh/year 900 800 700 600 500 400 300 200 100 0 RSI Capacity of largest supply source Capacityfrom other sources exceeds demand Algeria pipelines LNG import capacity Pipeline from Portugal Pipeline from France Contracted exports Domestic production Demand Multiple terminals and upstream LNG suppliers 20
RSI and HHI index 0.0 IE SE DK LU BG LV FI LT EE RSI 0.5 1.0 1.5 2.0 2.5 FR GB No potential competition Competition IT DE ES NE BE HU RO PT PL SI GR Neither diverse supply structure nor potential competition HR No diversesupply structure, but potential competition AT CZ Member states where there may be need for action Does potential competition actually constrain potential market power of existing upstream suppliers? Why is potential for further supply diversification not utilised? 21 3.0 SK (RSI 3.6) 0 2,000 4,000 6,000 8,000 10,000 HHI The few member states where competition is not an issue based on both measures, but these are large MS with many gas consumers Source: Frontier
Overall results for discussion Criteria Number Zone size of Member State Churn Rate [TWh/year] sources HHI RSI Austria 3 105 3 7.500 143% Belgium 6 197 8 1.709 279% Bulgaria 0 39 2 7.587 13% Croatia 0 35 5 5.987 125% Czech Republic 0 95 3 9.051 159% Denmark 0 45 2 2.570 22% Estonia 0 9 1 10.000 0% Finland 0 36 1 10.000 0% France 3 165 13 1.240 137% Germany 4 438 4 1.982 116% Greece 0 49 9 5.181 131% Hungary 0 113 4 3.198 60% Ireland 0 52 2 1.215 8% Italy 3 799 12 2.093 108% Latvia 0 21 1 10.000 0% Lithuania 0 39 1 10.000 0% Luxembourg 0 12 4 3.185 0% Netherlands 7 424 6 2.488 189% Poland 0 193 3 4.550 56% Portugal 0 55 2 2.821 93% Romania 0 157 4 3.270 104% Slovakia 0 70 2 9.595 369% Slovenia 0 12 5 5.027 74% Spain 0 365 12 2.000 159% Sweden 0 13 1 2.766 0% United Kingdom 15 910 11 950 142% GTM1 target 8 215 3 < 2,000 110 % Only UK meets all GTM1 criteria, Netherlands and Belgium close to meeting all criteria Hub liquidity an issue in DE, IT, FR, ES French market separated into too many zones Italy very dependent on two large sources Germany only barely meets HHI and RSI targets may not meet them if demand picks up again Eastern European gas markets usually meet none or only one or two out of 5 criteria 22 Source: Frontier Economics
GTM1 criteria Results Discussion 23
Conclusion Large western European gas markets Except UK and NL, liquidity below target churn rate and uncertainty regarding further evolution of liquidity But existing and transparent gas trading in large market zones Pluralism of supply sources, also thanks to LNG, and diverse market structure with imports from multiple firms and production by multiple firms (where applicable) But dependence on large suppliers may increase again should gas demand pick up Many consumers (in largest markets) already benefit from wholesale gas competition Central and Eastern Europe Most gas markets without transparent hub trading and according to CEER criteria relatively small to develop into competitive wholesale markets Often high concentration on the supply side Potential competition in some Central European member states But often large reliance on largest supplier, i.e. Gazprom Lack of competition in smaller member states should not be ignored 24
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