Gas Regional Initiative – North West Region London 13 and 14 November 2008 Project manager: Erik Rakhou Investment project – I1 (in co-operation with I2)

Gas Regional Initiative – North West Region

London13 and 14 November 2008

Project manager: Erik Rakhou

Investment project – I1(in co-operation with I2)

Encouraging regional Investment climate

for transmission capacity

atX-borders

2 London workshops: 13 and 14 november 2008

Outline presentation

• Context of this project: “now” and “past reminder”

• Project objectives and planned steps after today

• Consultation outcomes Regional investment climate in general Responses on proposed TSO Principles Messages useful for “capacity” stream

• Final thought for lunch


Important things happen and happenedrelevant to urgency context of this project

2 examples of “now” context: Yesterday EU commission’s strategic

energy review came out and underlined again – i.a. - the importance of investment in infrastructure (i.a. gas).

By end of 2009 GTE+ is expected to present an overview of possible bottlenecks at IP’s needing potential investment, incl. GRI NW

1 example of “historical” context: CEER principles of 2003 for investment


CEER principles 2003 for investment

PRINCIPLE #1. Public authorities should endeavour to encourage sufficient investment in gas and electricity network infrastructure in order to implement the internal energy market, facilitate efficient competition and safeguard security of supply. Public authorities need to maintain oversight of infrastructure decisions in order to promote both security of supply and network efficiency.

PRINCIPLE #2. Transmission System Operators must manage their networks in a way that ensures the efficient use of infrastructure.

PRINCIPLE #3. Public authorities should establish transparent, non-discriminatory and standardised options for the development of infrastructure and aim as far as possible to minimise regulatory risks.

PRINCIPLE #4. Public authorities should enforce a minimum procedure for the publication of the Transmission System Operators’ infrastructure plans.

PRINCIPLE #5. Transmission System Operators must be effectively unbundled to ensure that there is no conflict of interest when making investment decisions and to ensure there are sufficient incentives to provide non-discriminatory third party access. Unbundling of network ownership is the preferred route to follow.

PRINCIPLE #6a. - Public authorities should establish, in advance and in a transparent manner, which regulatory regime is to be applied for both national and cross-border investments. That regulatory regime should include a clear description of its applicability, the relevant criteria for the financial reward for new infrastructure investment and should describe the relevant criteria applicable to third party access to the new infrastructure.

PRINCIPLE #6b. - Merchant infrastructures have to be decided on a case-by-case basis and should continue to be subject to an ex-ante regulatory control for each individual case. Where the merchant status is granted on a time-limited basis, the ongoing regulatory status should be properly re-appraised at the end of this period.

PRINCIPLE #7. Public authorities should guarantee that procedures applicable to granting required licences for new investments in gas and electricity network infrastructure are non-discriminatory and efficient.

PRINCIPLE #8. Swifter, more expeditious administrative authorisation procedures are required for infrastructure development, particularly those for interconnection infrastructure.

See http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_ERGEG_PAPERS/Cross-Sectoral/2003/CEERPRINCIPLESINFRASTRUCTURE_REGULATORYCONTROL_FINANCIAL.PDF


The regional investment climate: ‘timely, sufficient and efficient”,formed by sum of 9 national investment climates which is incentivising x-border co-operation.

NW GRI Project Objectives: By end 2008: understand existing incentives on TSOs to make additional capacity available

efficiently By end 2009: an agreed regional framework for new cross border investments should be in

place By end 2009: begin to establish and implement co-ordinated incentive mechanisms

Success Criteria summary: Efficient TSOs can recover their costs & earn a reasonable return commensurate with risk Adequate cross-border investment leading to increased trade & greater price convergence Regulatory regimes support investment in capacity beyond contractual commitments from

network users, if adequate

* A Vision and a Roadmap for the Gas Regional Initiative North West, 4 April 2008

“The investment climate should be such that investments in capacity…are sufficient and timely and persistent physical congestion is avoided” (*)

- NW GRI focus on cross-border (**) transmission capacity investment -

* A Vision and a Roadmap for the Gas Regional Initiative North West, 4 April 2008* * Leading to in/decrease of capacity at a regional interconnection point


Project next steps from now to end of 2009

Encourage(d)

Sound Regional

Investment

Climate

By end of 2009

(1)Incentives report (Jan)and work on

regulatory certainty via

‘MoU’/ similar(“manual” for investing)

(2) Virtual testCase

(TSO/EFET; q1)

(3) Signing of ‘MoU’/similar And, if

relevant, advise to governments


Project update: today we make a next stepby discussing meaning of consultation outcomes

Consultation/questionnaire launched at end September, on the basis of investment principles proposed by the TSOs and questions on regional investment climate in general

Principles were discussed in workshop RCC/TSOs on 19.08.08 leading to a RCC consultation paper by end of September

Around 25 responses, from both TSOs and network users of the whole region

Including 1 association, 2 special responses of German operators & TSO lead group. 16 Network Users; 6 TSO’s.

Responses justifying way forward are to be discussed today


Consultation: results (1)

Just having principles apparently is not enough (think of similar CEER principles from 2003).

It is about dialogue and using principles in practice. This consultation proves use of active dialogue.

Let us look at some statistics produced by this consultation.

However, regions consumers are missing in the consulted list, therefore Regulators need to carefully weigh the outcomes on way forward !


Investments needed for future can happen …(1)Just having perfect national investment climate is not enough, says consultation…

6 Can an adequate level of interconnection between Member States be achieved in view of future flows?

(n = 13 networkuser)

Yes 84,6%

No 15,4%

(n = 6 TSO)

Yes 100,0%

No 0,0%


Investments needed for future can happen …(1)Just having perfect national investment climate is not enough, says consultation…(2)

10 Is it sufficient to have a regulatory framework that encourages investment in each individual MS?

(n = 14 networkuser)Yes 14,3%No 85,7%

(n = 6 TSO)Yes 33,3%No 66,7%

11a What are your views on the investment climate in the region: Is there sufficient clarity on the regulatory framework?


(n = 5 TSO)Yes 20,0%No 80,0%

11b Does the regulatory framework provide the correct incentives for cross-border investment?


(n = 5 TSO)Yes 20,0%No 80,0%


Consultation: results (2) Regional investment climate in general:

Having just perfect national climates is not enough

Focus of national climates for “ sufficient and efficient” is not proven wrong…- But strong indications that potential enhancement might be needed

To improve “timely”, x-border investment must be incentivised- Including a trade off between user commitments, capacity for ‘later’

entrants and need for anti-incentive to ‘goldplate’ the system.

To improve “sufficient”, clarity is needed on valid (regional) signals to trigger investment - Crucial to link investment approvals to efficient congestion management- An approach to solving this is suggested by EFET: try to come to a

(regional) “economic test” passing which means capacity is built


Principles proposed by TSOs (1)The TSOs agree that a sound investment climate must be stable, predictable and fair.

This means that:• Important investment parameters must be stable during the lifetime of new assets. It

should not be possible to unilaterally change the core investment parameters (e.g., depreciation term, return on investment) or other important aspects of the regulatory framework on which the investment is based, after the final investment decision on a new gas infrastructure project has been taken.

• A regulatory period should be defined upfront. It must be clear prior to the regulatory period what the TSO can/should do with lower or higher costs/revenues than expected.

• The risk/reward ratio of all infrastructure projects should be fair and sufficient to attract capital

Response is largely supportive to „stable, predictable and fair“Responses are not supportive to underlying bullets.


Principles proposed by TSOs (2)The TSOs in the GRI NW require underpinning of their investments by sufficient binding commitments from a combination of the market, the regulators and possibly (where applicable) the government.

Response is supportive:


Yes 64,3%No 35,7%


Principles proposed by TSOs (3)TSOs would like improved cooperation both between regulators and TSOs in case of an investment affecting two or more TSOs. There must be a strong commitment from TSOs, regulators and governments to foster such cross-border investments. This will only be possible if there is a sound investment climate for cross-border investments supported by the involved national regimes.

Response is strongly supportive:


Yes 85,7%No 14,3%


Principles proposed by TSOs (4)TSOs need a clear division and definition of roles and responsibilities between TSOs, policy makers and the regulatory authorities, for example covering investment decisions, operational decisions, setting the regulatory framework and implementing decisions.

Response is almost unanimously supportive:



Consultation: results (3)

4 principles consulted (only principle on division of responsibilities almost unanimously supported)

Especially predictability (reg. certainty) and incentive for x-border co-operation are to be adressed specifically by RCC in accordance to analysis RCC workshop of 3.11.08 Predictability can be adressed by compiling a

“manual”/”script” on current procedures of investments from idea to a “GO”

Incentives for x-border co-operation are to be adressed by means of a study report leading to pragmatic suggestions to Regulators and/or Gov.

Suggestions above and other ideas of today can be taken aboard, used in designing a virtual test case

Opportunity for other stakeholders to use principles and other consultation outcomes as starting point for their actions (!)


Consultation: results (4): Messages consultation useful for ‘capacity’ stream

Regulatory oversight to rationalise & harmonise cross-border investment projects is also achieved via:

1. More bundled products

2. Co-ordinated planning by regional TSOs: winter outlook, longer term investment

3. More regular Open Seasons (e.g. every 1-2 years)

4. More co-ordinated Open Seasons

5. Where possible, reserve a portion of OS capacity for short to medium term transportation contracts


Final verbal picture for lunch talk…..

Imagine your hotel... Imagine you want to plug in your laptop

or mobile... Imagine you find out you need to have 3

“holes” in power plug...and you have just 2.... Then you realise that fortunately it is all

220 volt and you just need a compatibility “adapter”...

Perhaps, it’s a metaphor for keeping national differences,

but still reaping the reward of moving in 1 direction of national

investment climates...


Thank you for your attention !


Back-up slides


Incentives: an overview report is to be finalized by end of January 2009

Back-up slides: To provide background on forthcoming study on

incentives.

Building on work of Advisory Group (mtg 19.09.08) and consultation/SG outcomes

Shall serve as an input for virtual test case (February

2009).

Can lead to advise to governments and/or Regulators on best practice for regional incentives for cross-border investment (by end of ’09).


What is “incentive regulation”?

1. Definitions

Summary from Advisory Group mtg of 19.09.2008:

1. incentive = stimulus to act in a specific way (“carrot/stick”)

2. economic agents pursue their self-interest (profit, utility), i.e. they have the

incentive to maximise their profit/utility

3. in competitive markets, the pursuit of self-interest results in maximum welfare

4. in case of market failures, the pursuit of self-interest results in costs for

society

1. absence of market for coordination

2. presence of externalities

3. information asymmetry

5. in that case: additional incentives might correct these failures

(i.e. incentive regulation)


When is “incentive regulation” useful?

3. Incentives for investments: which one?

Lack of coordination

Problem Explanation background

Externalities likeSecurity of Supply

And Competition

InformationAssymetryTSO/Reg.

Absence of mechanism (market) giving actors information

about the value of co-ordination

Absence of mechanism (market) giving actors information

about the value of specific costs or benefits which are caused by them

The principal has less information than the agent (typical situation in

gas markets regulation)


Choice of incentives depends on problems3. Incentives for investments: which one?

Lack of coordination

• obligation to submit integrated investment plans • financial bonus for co-operation• exemption of regulation in case of joined projects

Problem Incentives: examples

Externalities likeSecurity of Supply

And Competition

InformationAssymetryTSO/Reg.

• higher ROR• ex ante approval of investments• longer regulatory period• exemption of regulation

• bonus/malus for timing• bonus/malus for available capacity • x-factor regulation to raise productive efficiency• long-term capacity auctions to raise allocative efficiency (see UK)

1ryFocusstudy


The regional need for investment supports need for regional encouragement of investment climate inStrategic Roadmap of the GRI NW.

Expected further rise in gas demand, especially power generation Long term decline in indigenous EU/regional gas production Rising need for gas imports (both pipeline and LNG) Needs of new projects – LNG re-gasification terminals, import pipelines, gas-

fired power plants & new gas storage Even greater cross-border gas flows within our region

“The development of the region’s gas transmission network should be based on regional…rather than national planning” (*)

* A Vision and a Roadmap for the Gas Regional Initiative North West, 4 April 2008

“Network development must be effective and meet the needs of the region, including the need to respond to diverse sources of gas to

ensure supply security” (*)


Current status of investment projects shows a certain progress but issues remain. Especially in central countries of the region (outcome of just finalised consultation)

National regulatory regimes are evolving/maturing to respond to markets

TSO investment already rising in several countries to meet market needs Thank you to TSOs for launching “www.gasinvestment.org”

“Open Season” (OS) processes increasingly used across the region to gauge market demand and secure User Commitments which help to underpin investment

System is not perfect. OS “User Commitment” rules varied significantly (*)

A number of projects have already been successful in promoting network expansion (e.g. IUK, BBL, Fluxys, GTS etc)

Individual TSO Projects have seldom been formally co-ordinated across borders This is now starting to change – e.g. Fluxys/GRT-Gaz (ongoing) and GTS/GUD (recently

initiated)

Regional ‘grassroots’ move to improve cross-border co-ordination and build on positive experience is already taking place at a national level…

Is that enough?

* CRE is leading project on co-ordination of ‘open seasons’ under strategic roadmap. Both GRI projects closely coordinate.


GRI NW operator principles as consulted

Stable, predictable and fair - Stable investment parameters- Predictability for the TSO what happens with higher/lower

costs/revenues- Fair risk/reward ratio

Underpinning of investments- Sufficient binding commitments from market, regulators and

governments

Improved cooperation both between regulators and TSOs

Clear division and definition of roles and responsibilities

Page 27

Documents

Gas Regional Initiative – North West Region London 13 and 14 November 2008 Project manager: Erik Rakhou Investment project – I1 (in co-operation with I2)