Gas market participants rail against mandatory bundling

The Agency for the Cooperation of Energy Regulators hopes a new network code on capacity allocation will promote a more efficient and open gas market in Europe. But market participants warn the principle of mandatory bundling embedded in the code could have a damaging impact on liquidity. Gillian Carr reports

The liberalisation of the European Union (EU) energy market stretches back almost 10 years – and market participants believe it will take many more to achieve the truly unified market envisioned by the European Commission (EC). But the pace of change has begun to pick up recently, with a push by regulators and transmission system operators (TSOs) to develop and implement a set of new network codes meant to ease cross-border trading.

Network codes effectively represent the rules of the road for Europe’s gas market. The process of drawing these up is driven by the Ljubljana-based Agency for the Cooperation of Energy Regulators (Acer), which provides general principles and objectives in the form of framework guidance. This framework guidance is then handed to the European Network of TSOs for Gas (Entso-G), whose task it is to prepare binding network codes, which are returned to Acer and the EC for final approval, before becoming adopted into EU law through a process known as comitology.

As with any new rules applying to long-established markets and trading firms, the process of reform has involved some friction, with some participants fretting about the impact some of the more restrictive requirements might have. Currently, the focus of complaints is the Capacity Allocation Mechanism (CAM) network code, which received a favourable review from the EC in mid-April and will become the first of the new codes to be implemented in November 2015. Three other network codes are currently in the works – on balancing, interoperability and tariffs.

The CAM network code is aimed at simplifying the way capacity is bought and sold across Europe’s pipeline network, particularly between the most liquid trading hubs. Where entry and exit capacity was previously sold separately, the CAM network code will force shippers to buy entry and exit capacity at different hubs simultaneously. Backers of the code, including Acer and the EC, argue this will help Europe’s gas industry become more competitive, but some energy firms are concerned the code will have the opposite effect and deter traders from participating in the market.

“There is a lot in [the CAM network code] that is an improvement, such as standard capacity products, standard procedures, regular timing and information to the market about when capacity will be available. But it’s just a shame it’s not as good as it could have been,” says Alex Barnes, London-based head of regulation at Gazprom Marketing & Trading, the trading arm of Russian state-owned gas supplier Gazprom. “What the EC has said is [that] if you bundle the exit and entry capacity together, you’ll be able to go from hub to hub and this will mean there will be more trading at the hubs. But it’s not borne out by experience in liberalised markets that have successful trading hubs so far.”

There is a lot in [the CAM network code] that is an improvement… but it’s just a shame it’s not as good as it could have been

Rachel Bonfante, Brussels-based acting EU affairs director at the International Association of Oil & Gas Producers, agrees. “We support measures that are market-based and ensure a level playing field for all market players – and the new rules on capacity allocation address some of the issues. However, the proposals include mandatory bundling, which creates new issues and we are concerned [it] will restrict gas trade at physical hubs and interconnection points,” she says.

Despite the criticism, the CAM network code is expected to be made binding after a further three-month scrutiny period, and sources say it is unlikely further changes will be made.

Benefits

The CAM network code does have a few advantages, note market participants. It is designed to bring in standard firm capacity products across the EU, including yearly, quarterly, monthly, daily and within-day capacity. That represents a change from the status quo, in which the range of firm capacity products available can differ from country to country. Bonfante says the advent of standard products, along with the standardisation of the gas day, should help encourage cross-border trading.

Due to the fact capacity is not fully used along some European pipeline routes, the issue is a particularly pressing one for EU authorities. New market participants are often unable to buy the capacity they require – and when they can, the process of buying capacity in different entry and exit systems from multiple TSOs is harder than it is for better-established market players. “Throughout most of Europe, you would have a number of key interconnection points, where there was only a small number of players that had traditional arrangements in place for those interconnection points, and other companies would try to get access and find it very difficult,” notes Colin Lyle, London-based head of gas at the European Federation of Energy Traders (Efet).

The aim of the CAM network code is to change that, making the process of buying capacity easier for new market players and ensuring that pipelines get fully used, says Dan Harris, Rome-based principal at energy consultancy The Brattle Group. “The key is making sure that trade can happen when there’s a demand for it and that there’s a physical pipeline capacity available, because under those circumstances you want the gas to flow – and flow at the maximum physical rate possible, because that’s when you get the benefits from trade,” he says.

Anything that creates obstacles to the use of pipeline capacity can be costly, he adds. “If you think about how much it costs to expand and build these pipes, it’s a very expensive thing to have some of the pipeline capacity not being used.”

However, market participants complain that national regulations on products such as firm and interruptible capacity differ in some parts of the EU, meaning contractual mismatches could arise if they are forced to make use of bundled capacity. Firm capacity means a shipper has the right to pump gas except in exceptional circumstances, while interruptible capacity means pipeline operators cannot guarantee an uninterrupted flow of gas.

“The underlying fact is that is you can have two very different contracts with entirely different terms and conditions [and] entirely different ideas of firmness in some cases – and whichever [has] the worst terms and conditions predicts the whole of your cross-border capacity product,” says Lyle at Efet. The mandatory bundling of contracts will have a negative impact on the ability of shippers to tailor entry and exit capacity to meet their specific needs, he adds.

In some cases, regulators have recognised the problems mandatory bundling can create. “The French and German regulators have realised there is a serious problem on the border and are now allowing capacity to be unbundled and traded again, so that shippers can manage the risk,” Lyle notes.

Meanwhile, Acer has backtracked on an original ‘sunset clause’ that dictated that already-contracted capacities should become subject to mandatory bundling when the CAM network code is introduced. Instead, a compromise was reached by the agency, allowing shippers that currently have capacity contracts to continue to use their unbundled contracts until they expire. Once such contracts expire, it will become necessary for shippers to buy bundled contracts if they are available on that pipeline or interconnector route.

Strong support

In spite of this concession, Acer and the EC still strongly support the CAM network code. “The EC has been extraordinarily thorough and careful in designing the network code, including the provisions on mandatory bundling, which is a co-production of Acer and Entso-G and based on numerous stakeholder consultations and workshops over a period of five years,” says a spokesman for the EC in Brussels. “On this basis, [we are] convinced the code will facilitate cross-border trading enormously and contribute to increased competition.”

Furthermore, Acer and Entso-G published a road map on March 1 that calls for the implementation of parts of the code before November 2015. “Early implementation of CAM network code provisions can potentially promote, on the one hand, significant progress towards the internal market by 2014 and, on the other hand, opportunities to share knowledge about the experience gained during pilot projects and full implementation projects,” says the document.

Pilot projects have been launched offering primary booking auctions of standard bundled capacity across borders between countries such as Hungary and Romania, Poland and Germany, and Portugal and Spain. The largest and most ambitious project to date is called Prisma, which began operating on April 1. A joint project involving 19 TSOs from seven countries, Prisma merges the IT systems used by the firms to offer a standardised web-based platform for both primary and secondary capacity bookings. The system covers the majority of traded European gas hubs, including those in Austria, Belgium, France, Germany, Italy and the Netherlands.

There were good reasons why TSOs decided to set Prisma before the adoption of the CAM network code, says Lorenz Birklbauer, Vienna-based spokesperson at Austrian TSO Gas Connect Austria. “There was a strong wish expressed by the customers in general in Europe to have a centralised capacity booking platform right now,” he says. “It’s very clear for customers that this creates a benefit, because it will improve the ability to transport gas volumes. It also strengthens the cost efficiency, which is good for us, so we had a joint interest to get this done.”

Regulators will hope the controversy over bundled capacity isn’t a sign of things to come for the other EU network codes that are in the pipeline. While the CAM network code has proven a particularly thorny subject, Efet’s Lyle believes the codes on balancing, interoperability and tariffs should be easier. “As the process has developed, everybody has learned quite a lot. The capacity allocation network code was the first that was done, so it’s not surprising that it needed some adjustment,” he says.