Dato - Dok.nr.1 User Group on balancing 12 December 2013

Agenda Process and timeline 1. Physical vs. commercial balance Short introduction to the topic Shipper Task Force view Energinet.dks expected solution 2. Cash out vs. linepack flexibility for end-of-day settlement Initial comments by Energinet.dk Shipper task force view Comments from 2 shippers 3. Within-day data Shipper Task Force view 4. Trading and liquidity Shipper task force view Dato - Dok.nr.2

3 Process and timeline - balancing

Market involvement Involving different market stakeholders Dato - Dok.nr.4 Final model described STF 1 Market Implementation step 1 DERA dialogue Final method delivered DERA Second DMS model DSO co-oporation – 2.DSO co- oporation 1. First DMS model DSO DSO co- op. -3. nDMS Analysis ENDK User Group 1 & shipper meeting Implement. step The different topics will be discussed in one step User group 2 & shipper meeting (Today) STF 2 (possible)

STF on balancing - timeline Dato - Dok.nr.5 January 2014 Market recommendation - balancing 28 Nov.  1st meeting 5 or 6 Dec.  2nd meeting 12 Dec.  User Group ”Homework”Prepare UGPossible market consulation BODIL Early Jan.  (possible) 2nd meeting

Dato - Dok.nr.6 Physical vs. commercial balance

Basic model inspiration Dato - Dok.nr.7 Gasday Upper TSO reaction zone Lower TSO reaction zone Basic model consists of: A green tolerance zone, where the commercial balance is allowed An optimal point where the commercial system is in perfect balace Limits of the green zone can be fixed or updated down to a day-to-day basis Optimal system balance

Basic model – forecast on daily balance Dato - Dok.nr.8 Gasday Upper TSO reaction zone TSO reacts within the gas day (trade) Lower TSO reaction zone SCB (start position/EOD position) SCB (expected EOD position) SCB: System Commercial Balance Expected balance position of total commercial system (all shippers) End-Of-Day (EOD) Calculated every hour through the gas day Changes based on renominations TSO reachts within-day when forecast EOD is out of green zone (trade -> market renomination 2 hours later) Optimal system balance Shipper renominaton (based on trade)

Shipper Task Force view on calculating the green zone (minutes from first meeting) The STF said that they prefer an announced green zone which is based on the physics (maybe with a fix for weekends and holidays). The arguments are: Even though Energinet.dk has announced a monthly or one with a longer duration, Energinet.dk will still have to change it in special circumstances Therefore all shippers would need to every day to be aware of the zone. However, it may be best with a fix zone for weekends and holidays to help small shippers, so they do not need to be aware of possible changes. The green zone should be based on the physics because it will sometimes give more flexibility to shippers and sometime less, but it is better to get more flexibility instead of getting an averaged zone. This means that the band in some circumstances could change within-day, which shippers would need to be aware of. This circumstance was all right for STF. Dato - Dok.nr.9

STF view on calculating the SCB The STF argued that they want the SCB to be based on the physics (going from a SCB model to a Total System Balance model; TSB). Moreover, the STF does not want fees on how correct their nominations are compare to the actual take during the day. Instead STF suggested Energinet.dk should make use of external forecast (not only based on nominations). The arguments are: Nominations are too weak a “forecast” for balancing purposes for three reasons: Shippers will always try to do their best when nominating, but nominations are often not correct mostly due to differences in expected offtake in the Exitzone If shippers are not paying proper attention to their nominations, it could cause unnecessary action in the market by Energinet.dk If shippers are not deliberately nominating incorrect, they could be accused of manipulating the market By using the physics, Energinet.dk will not have to rely on potentially “incorrect” nominations, and will not have to incentivize nominations. Dato10

Since the Shipper Task Force meeting… Energinet.dk has closely investigated the effect of bringing the physical and commercial balance close together… …meaning that shippers would act in the true physical world where within-day changes in - Compressor operation (need for different amount of cushion gas) Usage of OBAs at border points and storages - will effect the overall balance situation, and thereby also how shippers should react… Dato - Dok.nr.11

Findings from investigation - 1 Flexibility: The total daily flexibility (the seize of the green zone) would not change within-day… …but the “placement” of the green zone in relation to the linepack position could change… = no extra flexibility & less stability Green zone reaction: In the commercial system, shippers are helpers and causers, and causers have incentives to renominate and “pull” the balance away from the yellow zone, before it is actually reached. In the physical system, the system itself can be ”causer”, and if shippers are perfectly balanced, who will help the balance away from the yellow zone? Could ultimately mean less flexibility in the physical model than in the commercial model, to compensate for lack of reaction in green zone Dato - Dok.nr.12

Findings from investigation - 2 Mismatch between operation and market reaction there could occur situations where the market disposition would require a scenario change, which could change the position of the green zone (changed need for cushion gas) This could change the disposition of the market, which again could require changing the scenario back again, which again would change the market disposition Energinet.dk sees that moving the physical and commercial balance too close together would not be beneficial for neither the operation of the system, nor the market Dato - Dok.nr.13

Possible solution Based on these findings, and to meet the market as far as possible, Energinet.dk suggests a semi-physical model, where: Energinet.dk sets the limits (green/yellow zones) down to a day-ahead basis based on physical flexibility These limits are fixed within the gas day, and can only be changed in very special circumstances (eg. Early Warning) Energinet.dk will investigate the possibility to use forecasts in stead of nominations, to calculate the System Commercial Balance (SCB) within- day Dato - Dok.nr.14

Dato - Dok.nr.15 Cash-out vs. linepack flexibility

End-of-day settlement models Cash-outCash-out & local LFS Global LFS Shippers’ imbalance EOD is fully cashed out The cash-out also affects the commercial position = SCB goes to zero Shippers start from zero every day (BEL – daily) Same as cash- out model, but shippers can buy flexibility (balance margin) as an insurance Gives shippers a tolerance margin where imbalances are not cashed-out (DK – H/C) No cash-out EOD Shippers keep their balance position from day-to-day No imbalance charge Shippers pay a charge, based on their balance position from zero (NL - daily) Dato - Dok.nr.16

Initial comments by Energinet.dk It should be noticed that a linepack flexibility model would be different in Denmark than in the Netherlands: In the Netherlands there is an hourly balance, in Denmark it is daily In the Netherlands, the helper/causer function is applied within-day to the specific hour, and the linepack flexibility tariff is very close to the market price In Denmark the helper/causer function would have to be applied in the linepack flexibility tariff (trades are allocated to linepack tariff),as there are no within-day function Thus, the price for the linepack flexibility service = price for cash-out Dato - Dok.nr.17

Comment by Shipper 1 First of all, we prefer the LFS model and no cash out. This is also in line with the flex model presented Thursday as the balance is continuous forward- looking and therefore no reason to have a specific deadline at 6 am. In addition, this would limit the need for within-day trading for shippers during night compared to the cash-out model as there is no fee for being out of balance. Also to the benefit of small players. By using the linepack flex model in the calculations of imbalances the need for forcing shippers to a zero balance can also be reduced. Another comment regarding the limited with-in day liquidity at GTF: ENDK could make use of the within-day capacity product at Ellund and thereby sell/buy balancing gas at Gaspool/NCG and transport to Denmark. Dato - Dok.nr.18

Comment by Shipper 2 In general we favour a cash out model at the end of the day. Primarily this preference comes from a belief that it will create a more stable system if it is continuously brought to balance. In a Linepack Flex model we see some risk that the imbalances can accumulate and create the need for balancing actions on days where the market in general are very well balanced but shifts slightly outside the “green band”. This preference is however based on the assumption that balancing will be carried out at neutral prices without incentives for all market participants, except on days where Energinet.dk actually carries out balancing actions. If this is not the case we cannot give any indications as to preferences before a more clear picture of suggested models have been presented. Dato - Dok.nr.19

Dato - Dok.nr.20 Within-day data

STF view on within-day data The STF wants more data than twice daily. The best solution will be each three hours from 12 am to 12 pm (five times for 12 am, 3 pm, 6 pm, 9 pm, and 12 pm with 1:45 minutes lead time). The arguments are: The first update at 12 am takes the first six hours into account. This is fine as a first update, as it include the total morning peak Then it is critical to have an update up to the hours 8-9 pm, where the evening peak is included. Thereby the shipper will still have a chance to react before night, and before the shipper is too restricted in its hourly capacity Two-three extra updates are especially critical, if the dynamic green zone is implemented. This will give the shippers the opportunity to go to the market and buy the flexibility at a time where it is not as expensive as it will be late at night (due to lack of liquidity). Dato - Dok.nr.21

Dato - Dok.nr.22 Trading & Liquidity

STF view on trading & liquidity - 1 The STF claimed that Energinet.dk should work towards having all trading at one platform, being the gas exchange. The STF does not necessarily see the need (and market) for a 24/7 gas exchange, but does see other possibilities: Shippers communicate prices on bids and offers on beforehand, which Energinet.dk can “take” Energinet.dk sends out a message to the market that Energinet.dk needs to buy or sell a certain amount at a certain time, where shippers can place bids/offers. A kind of a warning system. Energinet.dk could design a middle step before full market balancing, where Energinet.dk could use system operational storage outside normal trading hours, which should be expensive for causer if activated. Energinet.dk gets inspiration from ELBAS (Nord Pool Spot’s intraday trading system for the physical electricity market). Dato - Dok.nr.23

STF view on trading & liquidity - 2 The arguments are: With a 24/7 exchange, there will be many hours with very low liquidity. This could be partly solved by announcing certain trading slots outside of normal trading hours on beforehand, as the market would know exactly when to bring the liquidity to the exchange. Using an exchange gives the market full transparency on prices and amounts, which are important to market players. Dato - Dok.nr.24