EU Gas market design: the quiet before the storm?

by Ilaria Conti (Head of FSR Gas Area)

It’s currently time for reflection, in Brussels, on EU gas regulation and market design.

With the Third Energy Package close to being fully implemented, is it already time to start working at a new package of gas regulatory measures? And, more importantly, would it be necessary and what for?

In 2009, the Third Energy Package initiated a profound re-shaping of the EU internal gas market structure — from unbundling to the invention of ACER and the ENTSOs. Lately, the gas Network Codes have more or less smoothly entered the implementation phase — giving the impression that, although not perfectly, the current gas market design is good enough to satisfy most of the market actors’ needs and, more importantly, it seems to work.

We will talk about consistency in the history of EU gas market regulation right this week in Brussels at the CEER-FSR joint training on Fundamentals of Energy markets.

However, after the long-lasting negotiations concerning some Network Codes’ provisions (particularly the Tariffs NC) — no big controversies have lately emerged on EU gas regulation, not even after the release of last year’s Security Package.

So is the current EU gas market picture the best of all possible worlds? Is this apparent calm due to a general and multilateral satisfaction with the current frame? Or are we just witnessing a short quiet before the storm?

This strange silence made me think of Oscar Wilde’s famous quote: “Whenever people agree with me, I always feel I must be wrong.”.

And indeed, maybe just to be on the safe side, a couple of months ago the European Commission’s DG Energy opened a call for a research study on future EU gas market design — called Quo Vadis ?- which aims to investigate whether any piece is missing in the puzzle and, if needed, trigger a next regulatory package on EU gas market. We will find out in the course of next months.

Meanwhile, the Annual report published by ACER in September last year shows that there’s still some work to do in order to obtain a truly harmonised Single EU gas market. In particular, the binding implementation of the Congestion Management Procedures is still pending in six Member States; also, the achievement of the Gas Target Model seems still far away, with market integration and the creation of trading regions proceeding at slow pace.

Can a new energy Governance fill the gaps of the EU gas market?

With the Clean Energy Package released last November, the EU Commission proposed a new Regulation on the Governance for the Energy Union, specifically concerning the achievement of the “ambitious climate policy” targets.

The aim is to consolidate ‘the existing patchwork’ of national planning/reporting and EU legislation across energy, climate and replace the various existing sectorial plans with one comprehensive integrated plan and report: “These objectives can only be achieved through a set of coherent and coordinated actions — legislative and non-legislative — at EU and national level [which] requires the Energy Union to establish robust Governance.”

But what is energy Governance?

Its meaning evolves with time and circumstances. In the 80s, for instance, it strictly concerned global geopolitics, balance of powers and nuclear weapons; in the 1990s-early 2000s the focus shifted towards enlargement, whereas today it mainly relates to the Energy Union’s policy pillars.

At all times, however, the concept of Governance embraces at least three dimensions: the decision-making process, relations between actors and rules implementation.

In the energy world, physical interconnections make the debate on governance inevitable. This is particularly true if applied to the gas world, where infrastructures cross different markets, regimes, jurisdictions while keeping a strong link to the national territory. Let’s think about the fights on Third Party Access to gas pipelines, Inter-Governmental Agreements and, more generally, the complex theme of External Energy Security, which we as FSR analysed via a Conference and an online debate last year.

Why an Energy Governance debate now?

Is there a need to open a chapter about Governance of the Energy Union? And if so, why now? In my view, there are at least three topics to be addressed:

  • The role of the new actors: the consumers
  • Regionalisation of governance
  • The management of energy security, particularly the concept of solidarity in emergency situations

Regarding the first point, in recent years the “renewable energy revolution” has profoundly changed the market structure, causing a shift in the traditional roles of producers and consumers and creating new actors such as “prosumers” and aggregators. The EU debate on governance should enquire on which powers and rights these new entities might have and what their participation should be in the decision-making process on rules and future investments. What’s the minimum level of aggregation? Could/should every single prosumer participate in the political and regulatory decisions affecting his future and, if so, via which instruments?

While these questions currently concern the electricity sector more than the gas one, the shift from a national to a more regional or even local perspective is something that the gas sector too, albeit in smaller proportion, is also experiencing. I’m thinking about the “new” ways of utilising gas –from biogas to district heating, but also the possible utilisation of gas as fuel for local transport (cars, vehicles etc.). While in the past the EU gas market used to have an undiscussed national — if not global — dimension, today there are already those who think about a “mirroring” exercise with the EU electricity sector to make the two markets (artificially) more alike.

The debate on solidarity originates, instead, from the gas sector. While solidarity is included as a principle in the EU Treaties, it’s only in the Review of the Security of Supply Regulation (2015) that solidarity is for the first time, in a detailed manner, provided for.

FSR looked into the “economic principles” which should trigger solidarity between EU member states in case of emergencies such as gas supply disruptions.

But, of course, solidarity between EU Member States doesn’t arise naturally just because of economic incentives: we have also seen this on other occasions, such as the Greek economic crisis or the recent Refugees emergency. For these reasons, an attentive review of which governance should apply in case of security of supply emergencies is absolutely necessary at this point. Which rules: internal needs first and the neighbours’ ones later — or a pre-established plan? Until which point should the market be left free to compensate these needs? And who should intervene?

Infrastructure: the difficult ingredient of the recipe

Being Italian — and a woman! — the world has high expectations concerning your cooking skills. Your mother is almost certainly a good cook, not to mention your grandmothers — whose pasta al forno and tiramisu have indelibly marked your family’s taste buds for generations.

Flour, sugar, eggs…the recipe is often easy and the ingredients are always the same, but in every recipe there’s always a secret — usually a tricky ingredient — which is able to make the difference between a masterpiece and a total failure.

In the recipe for the perfect gas market, this ingredient is infrastructures.

What’s the right amount?

Luckily enough, I still have the possibility to find out my grandmothers’ cooking secrets by simply calling and asking them. “Nonna, how much cinnamon should I add? How much milk do you use for your besciamella?”. And, to make things even more complicated, the answer I get is always the same: “Oh, you know…quanto basta!”.

Yes — because the right amount of the tricky ingredient is always quanto basta (in English, “the right amount” or “as much as you need”)[1] — a quantity that nobody has yet managed to measure, but which has to be included in the right doses to contribute to the successful outcome of the recipe!

Applied to the gas market, how many LNG terminals does Europe need? Do we have too many gas pipelines already? Or too few? Or is the current number of gas infrastructure just the right one?

Europe has tried to answer these questions by developing a common methodology for EU infrastructure development. Regulation 347/2010 established a process with clear roles for the EU Commission, NRAs and ACER concerning the development of new infrastructures.

Regulation 347/2013 provided guidelines concerning the identification and analysis of the so-called Projects of Common Interest (PCIs) and required ENTSOG to develop a methodology for an EU-wide cost-benefit analysis (CBA) of PCIs.

The Florence School has been researching in the past on these subjects. Very recently, FSR — jointly with Deloitte — was tasked by the European Commission to look into the methodology currently used by ENTSOG for the PCI selection and CBCA processes and identify recommendable updates or improvements.

We organised an online debate on 10 March to discuss our first findings and our draft recommendations have been on public consultation until last week. FSR and Deloitte will be collecting the feedback received and shall be working at a final draft in the course of the next weeks.

So, to conclude, the main ingredients are all there: competition, liquidity, transparency of information… all in different doses they contribute to a pretty well-mixed dough.

The constant challenge is to identify the “quanto basta” level of gas infrastructures for Europe at all times, but what we can do is looking into the right methodology — to be regularly updated — to assess at least which elements should be taken into account, in the analysis of a new project.

[1] This is not an invention of my grandmothers. “Quanto basta” is found as q.b. in most of Italian recipes.

This essay was originally published as a series of fully referenced blog posts on the FSR website which can be read here.

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