Risks and opportunities in the Danube Region’s natural gas sector Dr. Péter Kaderják Director DRS PA2 Stakeholder meeting July 13, 2017, Budapest

Natural gas: a major component of a low carbon electricity future…

… and for a future low carbon electricity generation fuel mix for the DR Forecasted gross electricity fuel mix for SEE Source: REKK – SEERMAP 2017

Third Package related EU legislation completed Will the implementation of TP related legislation result in an efficient market in the DR? Third Package related EU legislation completed 715/2009 as amended, in particular the Guidelines on Congestion Management Procedures NC on Capacity Allocation Mechanisms (NC CAM) NC on Balancing (NC BAL) NC on Interoperability NC on Harmonised Transmission Tariff Structures Proposal for a Regulation concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010 Regulation on wholesale energy market integrity and transparency (REMIT) Any immediate relevance for the DR?

Preconditions for gas to play its future role Well functioning gas market… Building missing infrastructure (CESEC) Efficient use of existing infrastructure (IP tariffs) Addressing local wholesale market concentration (NS2, long term capacity bookings) …otherwise Price risk Supply security risk

Price risk of the current status: little benefit from the LNG ‚glut’ in SEE-DR Wholesale price impact of 100 Bcm LNG inflow to the EU market on a 2016 reference, €/MWh Overall price decrease but increased price divergence Benefits in SEE part of DR are minor Problems Limits on physical evacuation of LNG from certain regions Accumulated IP tariffs

Missing infrastructure

Several initiatives to address the missing infrstructure issue PCI CESEC EnC/PECI „Eastring”, TESLA …and much more BG -SB TAP, LNG CR, IGB, BRUA AL – Kosovo SB - MK CESEC: cost-efficiency, feasibility

Gas PCIs for the DR /CSEE Competition of proposals Limited feasibility to implement all

PECI and PMI projects, 2016 Welfare analysis laboratory and political compromises Still limited policy / implementation / financing impact

CEF for the Romanian section of BRUA CESEC priority projects agreed by all members and progress by September 2016 CESEC priority projects: Trans-Adriatic Pipeline (TAP) Interconnector Greece-Bulgaria (IGB) Interconnector Bulgaria-Serbia Phased Bulgarian system reinforcement Phased Romanian system reinforcement LNG terminal in Croatia (with phasing potential) LNG evacuation system towards Hungary CESEC conditional priority projects: Connection of off-shore Romanian gas to the Romanian grid and further enhancement of the Romanian system Interconnection Croatia-Serbia New Greek LNG terminal CR-HU reverse: pressure management agreement open season delayed CEF: € 180m ROHUAT KRK: 2 Bcm/y floating by 2018 CEF: € 102m BG-SB stalled CEF for the Romanian section of BRUA Romanian gas export barriers lifted by April 2017 Bulgaria: 4 compressor stations Bulgaria-Serbia interconnector: renewed MOU and EU support Signature of IA of GR-BG, BG-RO, RO-UA: tpa, contractual reverse flow on the Trans-Balkan pipeline. Physical reverse flow discussed Croatia plan 2 Bcm floating LNG by end of 2018 FID for IGB IGB: FID; 1,57 bcm booked long term TAP: Commissioning started KrK: On March 28, 2017 the service agreement has been signed; Trans-Balkan reverse flow: slow process

Majority of new infrastructure to be built is in CSEE / DR (2016-20) Infra included to the reference scenario Maximum flow Date of commissioning Basis to include into reference for 2020 GWh/d IT-CH 368 2018 FID BG-RS 51 RS-BG CH-FR 100 CH-DE 240 CH-DE2 79 2025 TR-GR2_TAP 350 2019 RU-DE 3 798 GR-MK_TAP 25 AZ-TR_TANAP 490 GR-BG 90 151 2021 GR-IT_TAP 334 SI-HR2 162 HR-SI BG-RO 14 2016 RO-BG2 IT-AT2 189 AT-DE2 36 2017 DE-AT2 143 GR-LNG expansion 81 MT-LNG 24 2020 existing 2017 Infra included to the reference scenario Maximum flow Date of commissioning Basis to include into reference for 2020 GWh/d HR-LNG 108 2020 LNG strategy RO-HU (BRUA) 126 HU-RO (BRUA) 77 FI-EE 79 2019 EE-FI PL-LT (GIPL) 51 LT-PL (GIPL) LT-LV 52 EE-LT 105 LT-EE 42 ES-PT 85 2021 PT-ES 70 ES-FR 110 FR-ES 120 Source: capacity is based on TYNDP 2017

Efficient use of existing infrastructure

Cross-border gas transmission tariffs often discourage cross border trading Exit+entry tariffs in the CESEC region (€/MWh, Q1 2017) Important tariff/market distortions detected Coordinated tariffs to correct above-average tariffs is recommended Tariff levels on interconnectors bringing spot gas to the region are critical Lower tariffs across the board lead to increased spot gas supply and decent wholesale tariffs Coloured boxes indicate above average E+E tariffs; average CB (E+E) tariff in region: 2.45 €/MWh

Missing bi-directional capabilities limit competition and reduce the level of SoS Available physical IP capacities (without backhaul), mcm/day. June 2017 (ENTSO-G)

Local wholesale market concentration

High level market concentration can conserve higher wholesale prices

Nord Stream 2: renewed risk of CSEE market foreclosure… Unilateral route dependence restored from North-West to CSEE Eastern supply route option (gradually) cancelled New infrastructure built after 2009 to be used to ship Russian LTC gas to CSEE instead of spot gas Bypassing Ukraine makes some of the existing transmission assets redundant Need for additional infra built-up Scope for efficient wholesale market competition reduced In high demand scenarios CSEE would face higher gas prices in the CEE region April 2016, EP on NS2

…especially when combined with long term IP capacity bookings Prisma, March 6, 2017 DE-CZ-SK reverse flow capacities booked by Gazprom. 80% between 2020-30 but some up to 2038 HAG, SK-HU: Hungarian regulator intervened; potential downstream market foreclosure RU-DE: Lubmin II, Greifswald, Greifswald Entry, Vierow, DE-CZ: Deutschneudorf, Oldbernhau 2, CZ-SK: Lanzhot, Lanzhot 1, Lanzhot 2

Gas market outlook post-2020 for the DR “Handing over” the lion’s share of infrastructure analysis and implementation to EnC and CESEC; Shift in the focus of DRS PA2 activities from gas supply security to energy transition (and regional planning?)? A modernized energy security concept? Proposed future action / analysis: The future of Ukraine’s gas sector reform and its integration scenarios with DR/CEE markets; Establishing IGA criteria to promote credible cross-border sharing of gas storage assets (e.g. Hungary-Serbia, Hungary-Slovenia, Hungary-Turkey, Ukraine-Slovakia, etc). The DR gas market in the context of the coming LNG glut

Should there be a shift in the focus of DR energy actions from gas SoS to support economic recovery and growth?

Thank you for your attention! pkaderjak@rekk.hu www.rekk.hu