20130515, Brussels Gas Pricing Workshop

Gas pricing Walter Boltz, Executive Director E-Control Vice Chair of ACER‘s Regulatory Board

European gas market at a crossroads Oil indexation is a disadvantage for EU buyers Gas too expensive for power generation in comparison to coal Decoupling of HH prices and NBP prices since 2010 Source: IEA, Developing a Natural Gas Trading Hub in Asia, 2013

Market conditions have improved Source: IEA, Gas Medium-Term Market Report 2012, figure 62, p. 149 Source: Eurogas, Gas: Fuel for the future, 29.6.2012, page 4, www. Eurogas.org

Chance for real supply competition is there Imports from Norway Imports from Russia LNG from US Shale gas? Imports from Caspian Area Imports from Africa LNG

…. But Europe profits only limited Prices in oil indexed LTC higher than hub prices since 2009 Source: Platts, European Gas Prices, Theory and Practices, www.platts.com

Furthermore the shale gas revolution created a competitive edge for the US

Competitiveness of EU industry is compromised Prices for industrial electricity costumers in Europe more than twice as the electricity prices in US; gas and coal prices more than triple Impacts: About 1/3 of the energy content of the European exports represented by foreign energy; 1995 about 1/5 i.e. preparation of an action plan for the steel indsutry (High Level Meeting in Feb 2013) target in energy sector is securing favorable prices in the long term resp. convergence to competing countries

And the shale gas revolution in the US caused a renaissance of coal in Europe Impact of the low gas prices for Europe: in the US gas has displaced coal in power production US exports of coal to Europe has risen since 2009, by 30% from 2012 to 2011 Source: EU-Commission, Quarterly report on European gas markets, Q 4 2012, p.5 Source: ENTSO-E, statistics, data portal

Since 2012 gas is losing ground in the electricity production Clean Spark and Dark Spreads for Year 2013 [EUR/MWh] Quelle: EEX, Berechnungen Energie-Control Austria

Uncertain future of Gas-to-Power in Europe Source: Wall Street Journal, 8.5.2013 Source: ESGM, 8.5.2013 Source: ESGM, 18.4.2013

Not a single EU gas market Differences cannot be explained by contract volumes, but by import dependence and lack of supply diversity in the EU member states EU member states still pay different gas prices for the same source of gas Source: Russia behind the headlines, 5.2.2013, „Gazprom expects price drop for Europe in 2013” and Ivestija

Competition law aspects Only suppliers with significant market power can apply price discrimination and can demand different prices for the same product Only suppliers with market power can transfer the price risk to their customers: Oil indexed gas pricing does not reflect the changed market conditions in the EU gas market The rigid ToP obligations do not take into account the decreasing gas demand in EU The combination of long term and rigid contract clauses does not reflect the buyers needs

Decoupling of oil and gas prices

Repercussions of oil indexed ToP-contracts Oil indexation resulted in massive losses for midstreamer Markets with captive customers (households) have to bear the burden of the high oil indexed prices: hindering the development of competition in these markets Oil indexed gas prices do not give the right price signals for new investments Oil indexed gas prices distort the pricing in the spot markets Decreasing demand with rigid ToP-obligation resulted in higher ToP-obligations for the buyers

The future of gas is at risik EU Energy Roadmap 2050: Gas plays a ´critical´ role: „Natural gas considered to play an important role in EU energy mix in the future”: 25% share in energy mix "Transition fuel" to decarbonisation Less CO2 intensive fuel Backup capacity for renewables Electricity "storage" But the future role of gas depends on its competitiveness and its price!

Competitiveness is challenged by Gas producers adhering to oil price indexation Denying market situation: Oil is not any longer the main substitute for gas! Chances for supplier competition are limited despite improved market conditions Long term contracts hinder the substitution between expensive LTC gas and cheaper hub gas Denying opportunities of shale gas production in EU Shale Gas production in Europe could cut the costs for industrial customers Market distortion in the electricity production political influence on CO2-certificates market

What has to be done? (1) From the regulatory side Strengthening the gas-to-gas-competition and hub trading Animating the Gas Target Model Creating a stable framework for investments From the EU gas industry side Supporting gas-to-gas-competition and hub trading Further development and flexibilisation of the EU network Implementation of 3rd package: Improving access to transport and storage Diversifying supply sources

What has to be done? (2) From the suppliers side Accepting that the market changes are here to stay Urgent restructuring of the LT contract terms Suppliers need to take also part of the gas price risks (not just oil price risk!) Market/Hub based pricing Taking into account the substitutes for gas – which is mostly coal today Proper sharing of the volume risk between buyers and suppliers Reducing ToP obligations Taking an active part in the hub trading

What has to be done? (3) Contracts have to support the new, emerging role of gas in the European energy mix Flexible fuel, used to substitute the varying electricity production from renewables Gas as a major source of SoS in extreme weather conditions Large fluctuations in demand to be expected Capacity in greater demand than volume A price level, that allows for the use of gas instead of coal! Keeping gas prices for industrial use at a level that allows energy intensive industry to stay in Europe

What has to be done? (4) Supply agreements need to conform to the new market structures Flexibility is no longer only in LT contacts and storage -> Balancing markets are developing LT and short term fleibility needs are increasing Sharing of storage and flexibility across markets will become the standard There is competition in LT flexibility through LNG If suppliers accept that they need to adapt quickly to ensure the long term role of gas in Europe we have made significant progress

 walter.boltz@e-control.at  www.e-control.at  + 43 1 24 7 24 200  walter.boltz@e-control.at  www.e-control.at Contact 20130515, Brussels Gas Pricing Workshop

20130515, Brussels Gas Pricing Workshop