1. Designing or Modeling (Markets?) for Gas
FSR Summer School
26 June 2012
Jean Michel Glachant
(Michelle Hallack & Miguel Vazquez)
Florence School of Regulation and Loyola de Palacio Chair
European University Institute
2. SUMMARY
1) Introduction: to start with a market design? Why?
2) First decision: who designs the network services?
3) Second decision: given TSO, who allocates network services?
4) Then: how “entry/exit zones” design cross-border market?
5) Conclusion: liquidity inside and the rest outside?
3. 1. Introduction
To start with a market design? Why?
1. The basic industry chain
2. Simplification of that chain
3. Open access to pipelines
4. 1.1 Basic natural gas industry chain
Gathering
Production Processing Transportation Distribution Consumption
system
Storage Storage
6. 1. 2 Some simplification?
Consumer
Consumer
A
A
Producer
Producer A
A
Consumer
Consumer Producer B
Producer B B
B
8 in the morning 8:07 in the morning
We need some simplification to make the trade
feasible
7. 1.3 Open access to pipelines
• Different people using the same infrastructure
• If everyone is using it without coordination with others, the
resource is used inefficiently
― “Commons” dilemma
• We need to define some limitations to the use of the
network: strict bilateral contracts (Airplane rule) or
swimming pool access rule?
8. 2. First decision: who designs the network services?
Bilateral contracts (USA) versus TSOs (EU, Australia)
1. Introduction
2. Network access and usage defined by contracts
3. Network access and usage defined by guidelines
9. 2. First question: Who does the simplification?
2.1 Introduction
• Two possibilities
― Contracts owners with users: market forces
define the simplification
― Guidelines frame the use of the network: a regulator defines
the simplification
• First choice: “Contract” carriage vs. “common” carriage
― USA vs. EU
10. 2.2 Network usage by contracts
Players are responsible of
all definitions they need
Owner
Contract Contract
User A User B
Products to be traded are defined
by bilateral agreements
11. 2.3 Network usage by guidelines
Gas over a day
Day 1 (or an hour, or a week, or…) Day 2
Single Single
Point Point
Net injection Net withdrawal Net injection Net withdrawal
Consum
er A
Produc
er A Single
Point
Consum
Produc
er B
er
B
12. 2.3 Network with guidelines
EU Solutions
• Too many contracts for usage → Do less contracts
• Pipelines maybe monopolists → Regulated operator (TSOs)
• Small players have problems with time variability →
Centralize the management of time variability (“time” level
playing field inside the pipes)
13. 2.3 Network with guidelines
What else for the rest of the grid?
Consum
er A
Single Produc
er A Single
Point
point
Consum
Produc
er B
Net injection Net withdrawal er
B
We need a balancing
mechanism to bridge
the gap
14. 3. Second decision: given TSO, who allocates network
services?
Explicit allocation (EU)
versus Implicit allocation (Australia)
1. Introduction
2. Creation of “entry-exit” in Europe
3. Limits of EU “entry-exit”
4. Improvement proposals
15. 3. Explicit (EU) versus Implicit (Australia)
3.1 Introduction
• Given a TSO and Guidelines for network services
A/ We may separate the market for commodity (gas) and the
market for network services: EXPLICIT auction of network
services
B) The rules definition based on the final gas prices ( bundled
pricing and products): implicit auction
16. 3.2 Creation “entry/exit” zones in Europe adds
commodity liquidity inside each network zone
FLAT TRANSMISSION SERVICE
Simple Point-to-point
A B
17. ‘’FLEXIBLE’’ TRANSMISSION SERVICES
Point-to-point with Simple Entry-Exit
A time flexibility B (without time flexibility) Bn
T=1 B4
B3
time B2
A B1
T=ma
x T=1
18. EU ‘’Very FLEXIBLE’’ TRANSMISSION SERVICES
Entry-Exit with time Bn
flexibility B4
B3
B2
A B1
T=1
time
T=max
19. 3.3 Limits of “entry-exit”: (1) Lower Capacity
Injection commercial
Injection physical
capacity up to 200
100
Max capacity MW
100MW
Exit
Max capacity
100MW
TSOs do not
know the gas
path in advance
TSO can sell 200 MW
entry capacity if ½ goes
to Bologna and ½ to
Torino
20. 3.3 Limits (2) Tool kit in ACER Guidelines
• Overselling entry/exit capacity
• The amount is calculated through flow path forecasting (TSOs need
to adjust forecasted and real paths)
• Selling Interruptible capacity
• TSOs keep the control of the capacity offer (also calculated by path
forecasting) and the control of whether to interrupt the service
• Short-Term Implicit Auction
• Allocate available capacity according to commodity prices
• As re-nominations are allowed within the day – the risk regarding
capacity calculation is decided by TSOs
22. 3.3 Limits (4)
The line-pack dilemma
Daily Balancing Hourly Balancing
Free flexibility within-day No flexibility within-day
•The line-pack is allocated free •The line-pack cannot be offered
•Players may use the balancing to adjust •The players cannot use the balancing to
demand and supply – it has an economic adjust demand and supply
value for flex shippers
Unfair competition between costless Line-pack does not exist
storage and other flexibility services
Cross-subsidies for flexible shippers
23. EU unwanted?
• Too many contracts → Do less → Too few contracts?
• Pipelines are monopolists → Regulated operator (TSOs) →
TSOs are intervening in the market?
• Small players have problems to deal with time variability →
Centralize management of time variability (level playing
field) → Small players are paying for large players’ time
variability (far from a level playing field)?
24. 3.4 Improvement proposals (1):
Separating balancing tasks?
Allocation of:
Market decisions Auction design
•Transport
Ensure system Balancing
TSO decisions
security mechanism
Two different kinds of imbalances?
25. 3.4 Improvement proposals (2):
Criteria for adjustment mechanism design?
• Need for the allocation of network capacity according to short-term market
preferences
• But ensuring the security of the real-time network operation
Objective Tool
• Allow efficient network allocation • Auction Procedure - allocate available
Day-ahead
(both spatial and time) – for the short capacity (transport and line-pack) and
Imbalances
term available capacity gas trade simultaneously
Real Time
• Guarantee system security • TSO actions
Imbalances
26. 3.4 Improvement proposals (3):
Auctioning Network Flexibility?
Allocation of:
•Transport Market decisions Flexibility
•Line-pack Auction design
Ensure system Balancing
TSO decisions
security mechanism
Two different kinds of imbalances?
27. 4. How “entry/exit zones” design
the cross-border market?
Crossing entry-exit zones ?
1. Introduction
2. Capacity allocation between entry/exit zones
3. Tariffs between entry/exit zones
4. Investment between entry/exit zones
29. 4.2 Capacity allocation between “Ent/Exi” zones
• Under entry-exit, network constraints are pushed at the
border in the definition of cross-zone available capacity
• Contractual congestion appears between zones, as within
the zone the shipper has the right to use the whole system
Remedy Proposals direction
• In any Remedy Drawbacks
• Within the balancing limits
Market Merger Higher socialization costs
Market Coupling Separation of the LT capacity
booking contract from the actual
right to use the network
30. 4.3 Tariffs between entry/exit zones
• Entry/Exit tariffs designed only inside each zone
― By definition costs do not reflect distance => longer distances
imply higher distortions
• Pancaking when one adds several zonal tariffs to go across
― Investment decisions are assessed through existing zonal tariffs
• Entry/Exit tariffs redesigned for crossing zones?
― Inter-TSO compensation
• Coordination of payments among TSOs already nightmare in
electricity
32. 4.4 Investment in between (2)
What to build to connect players?
Consumer
Small pipeline today
Producer
Small pipeline tomorrow Future
Consumer
Who decides on the
future network needs?
Consumer
Large pipeline today
Producer
Future
Consumer
33. 4.4 Investment in between (3) Investment in
“contract” and “common” carriages
Consumer
Small pipeline today
Who decides on the Producer
future network needs?
Small pipeline tomorrow Future
Consumer
Who pays for the
mistakes?
Regulation: Contracts: parties Large pipeline today
Consumer
socialization involved (depends
(everyone) on negotiation) Producer
Future
Consumer
34. 4.4 Investment in between (4)
• Market mechanism: Open Season
― Shippers are not able to reveal preferences
a) Bundled services
― no information about players preferences: where the gas flows
and how much line-pack storage
b) Tariffs do not reflect cost allocation
c) Measures to manage contractual congestion between zones –
decreasing the shippers’ rights
• Centralized mechanism: EU Ten Years Development Plan
― Should not be based on the abstraction implied by
entry/exit zones > Which algorithm? What data?
35. 5. Conclusion: free (“Markets”) for gas?
• Definition of Ent/Exi trading zones is a regulatory
mechanism to push liquidity
― Increasing possibilities of zonal trade
― Forgetting actual network and gas flows
• As consequence: trade constraints displaced to the borders
• However crossing zones is core of EU internal gas market
― How to redesign regulatory mechanisms to deal with the 3
types of cross border “barriers” or “imperfections”?
Capacity allocation Tariffs Investment decision
