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
SUMMARY1) 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?
1. Introduction To start with a market design? Why?1. The basic industry chain2. Simplification of that chain3. Open access to pipelines
1.1 Basic natural gas industry chain GatheringProduction Processing Transportation Distribution Consumption system Storage Storage
1. 2 Simplification of that chain Consumer Producer Consumer B Producer B
1. 2 Some simplification? Consumer Consumer A A ProducerProducer 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
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?
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
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
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
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
2.3 Network with guidelinesEU 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)
2.3 Network with guidelinesWhat 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
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
3. Explicit (EU) versus Implicit (Australia) 3.1 Introduction• Given a TSO and Guidelines for network servicesA/ We may separate the market for commodity (gas) and the market for network services: EXPLICIT auction of network servicesB) The rules definition based on the final gas prices ( bundled pricing and products): implicit auction
3.2 Creation “entry/exit” zones in Europe addscommodity liquidity inside each network zone FLAT TRANSMISSION SERVICE Simple Point-to-point A B
‘’FLEXIBLE’’ TRANSMISSION SERVICES Point-to-point with Simple Entry-Exit A time flexibility B (without time flexibility) Bn T=1 B4 B3time B2 A B1T=max T=1
EU ‘’Very FLEXIBLE’’ TRANSMISSION SERVICES Entry-Exit with time Bn flexibility B4 B3 B2 A B1 T=1 time T=max
3.3 Limits of “entry-exit”: (1) Lower Capacity Injection commercial Injection physical capacity up to 200 100Max 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
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
3.3 Limits(3)... What to do with time flexibility?“Daily” balancing scheme 21
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 todemand and supply – it has an economic adjust demand and supplyvalue for flex shippers Unfair competition between costless Line-pack does not exist storage and other flexibility services Cross-subsidies for flexible shippers
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)?
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?
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 availableDay-ahead (both spatial and time) – for the short capacity (transport and line-pack) andImbalances term available capacity gas trade simultaneously Real Time • Guarantee system security • TSO actionsImbalances
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?
4. How “entry/exit zones” design the cross-border market? Crossing entry-exit zones ?1. Introduction2. Capacity allocation between entry/exit zones3. Tariffs between entry/exit zones4. Investment between entry/exit zones
4.1 Introduction FLEXIBLE TRANSM. SERVICES crossing 2 ZONES
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 systemRemedy Proposals direction • In any Remedy Drawbacks • Within the balancing limitsMarket Merger Higher socialization costsMarket Coupling Separation of the LT capacity booking contract from the actual right to use the network
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
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 thefuture network needs? Consumer Large pipeline today Producer Future Consumer
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 Consumersocialization involved (depends (everyone) on negotiation) Producer Future Consumer
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?
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