Long-term Security of Gas Supply in a Liberalized Market

1. Long-term Security of Gas Supply in a Liberalized Market Jean-Paul PINON Director Gas Market, CREG Co-chairman of the Gas Working Group, CEER UNEC Round Table – Genève 20/01/2004

2. Security of supply (SoS) framework

3. Risk Management Tools Most countries manage their SoS combining : • Network sizing based on long term planning • Storage • Diversification of supplies • Interruptible contracts and virtual storage • Booking of additional transportation capacities. Fewer countries (can) rely presently on: • Utilisation of LNG terminals • Excess of production capacity • Purchase on the Spot Market • Buy back mechanisms of firm capacity

4. Supply contracts in 2000 (% of industrial customers) : 52% non firm 21% firm 27% firm and non firm For non firm supply contracts : 76% the supplier has the right to interrupt 24% the customer has the right to interrupt Why do customers choose a non firm supply contract : 62% ‘bi-fuel’ equipment this investment is in 56% of the cases not only made for hedging against the interruption risk but also for arbitrage Non firm supply contracts : market survey in Belgium in 2001

5. Modal frequency of interruptions: once per year Notice (modal period) : 1/3rd 1 hour 1/3rd 1 day 1/3rd 1 week Price reduction compared to firm supply : the price reduction required by the ‘modal’ customer is lower than 25%. Non firm supply contracts : market survey in Belgium in 2001

7. Minimizing transport costs by swapping • contractual flows  physical flows • areas supplied from one source Supply Supply Supply Supply

8. YEAR 2000 source : GTE, July 03

9. YEAR 2005 source : GTE, July 03

10. YEAR 2010 source : GTE, July 03

11. Fixing security of supply ( SoS) levels in an open market Collective level of SoS = sum of individual levels of SoS + corrective PSO (e.g. PSOs for PLR services) Individual level of SoS = PSO (e.g. 1 in 20) Individual level of SoS = negotiated households large consumers

12. Top-up In a liberalized market there is a real risk that suppliers take a chance on weather conditions and do not book enough storage. “Top-up” refers to public service obligations guaranteeing that enough physical storage capacity and/or gas in storage will be available.

13. Complex system : monitoring both the available infrastructure and the inventory levels throughout the year calculation of the amount of top-up storage: taking into account the benefits of virtual storage, the legitimate trade-off between additional transport capacity and storage, etc who is in charge of top-up storage: centralizing the responsibility in one supplier of last resort (TSO, storage operator or a specific body?) or imposing a level of storage to every supplier or combining both methods ; targeting the costs: the costs incurred by the centralized body should be covered by a legal fund, preferably fed by those who are responsible for a lack of storage. Top-up

14. Belgian case market demand for infrastructure services supply portfolio network simulations pre-feasibility studies draft indicative plan for gas supply in Belgium, with an investment program for the next 10 years consultation of interested parties proposal by the CREG approval by the Minister

15. World Energy Investment Outlook 2003, published by IEA: to be taken with caveats! distinguish regulated business (network activity) from competitive activities (production) in regulated business: fundamental difference between cost-plus tariffs and price-cap regulation in production: no need for industry-specific incentives for investment, besides the acceptance of long term take-or-pay contracts Financing new infrastructure