Security of supply concept and storage vision Walter Boltz, Chair of CEER Gas Working Group 27 th Madrid Forum, April 2015

Agenda Agenda Topics 1.CEER response to EC 994/2010 Regulation consultation 2.CEER SoS concept paper 3.CEER gas storage vision

Major challenges for the gas market Ensure that gas can be supplied for balancing RES power generation Keep prices at competitive level Develop new uses of gas to improve GHG balance in transport Retain the role of gas in the energy mix Diversification of sources Diversification of routes Solidarity and cooperation in prevention and management of disruptions Keep Europe attractive as destination for gas Ensure and improve SoS 3

1. CEER response to EC 994/2010 Regulation consultation

CEER general approach A completed energy market – a crucial framework for our Security of Supply (SoS) ►CEER believes that the distinction between the “prevention phase” and the “mitigation phase” is essential for developing and implementing SoS policy ►Ensure that provisions in Network Code on Gas Balancing of Transmission Networks are working ►Ensure that SoS objectives are transparent and clear to the market CEER proposes to define regions according to the “integrated market area” or as intermediate step “single supplier/route area” ►Coherent Risk Assessments (RA), Preventive Action Plans (PAP), Emergency Plans (EP) in regions are important 5

Regional coordination (1/2) CEER believes that Member States are no longer the only appropriate reference point for an SoS policy within the internal gas market in Europe. We have to refer to market areas 3 layers may be distinguished corresponding to the move towards an internal gas market: ►Currently most common reference point: Virtual Trading Point (VTP) area (BAL-zone, EE-zone), e.g. VTP areas of NCG or TTF ►In integrated market areas with no relevant congestion, planning for the whole market area is appropriate, e.g. UK and Ireland or Belgium and Luxembourg ►At EU level, adjacent regions have to be incorporated in the planning, e.g. Energy Community countries, Norway, Switzerland 6

Regional coordination (2/2) An increased role for the European Commission ►The EC should support efforts of Member States, National Regulatory Authorities (NRAs) and Transmission System Operators (TSOs) towards cross-border cooperation in SoS when market mergers or trading regions are identified as the most cost efficient solution ►CEER supports the idea of closer regional cooperation in relation to SoS, as interventions in one market area may affect neighbouring market areas ►If a region struggles for consensus on the content of a regional plan, the EC could help by appointing a SoS-mediator ►For the EU level, the European Commission should ensure that a Risk Assessment, Preventive Action Plan and Emergency Plan are developed 7

Prevention phase ►Ensure the market and market-based instruments can guarantee continuity of supply as long as possible ►The Network Code on Gas Balancing of Transmission Networks could incorporate the value of SoS in a market-based balancing regime ►No cap on balancing costs, system balancing position is appropriate trigger for emergency ►Maximum internalisation of SoS objectives within the market: imbalance fees, contractual compensation clauses: “incentives and sanctions”, etc. ►Processes between market regulation and SoS regulation need to be aligned 8

Mitigation phase ►Regionally coordinated plans and rules (incl. prioritisation of customers, cross-border solidarity, etc.) need to be prepared in advance ►In mature, well-functioning markets, the prevention phase can remain in place longer than in other markets ►Triggers for the emergency phase need to be clearly defined in advance and transparently communicated. Declaration of emergency needs to be justified ►The market requires transparent and evidence-based rule setting and SoS communication ►The use of non-market based measures should not impact the process of moving to well-functioning markets (according to the Gas Target Model) 9

When do we have an emergency? Market threshold: market-based balancing 2 3 System integrity: market instruments Excess Shortfall Time Day 6 Day+1 Market Balancing Position Thresholds to limit the aggregated market imbalances, sized to domestic market needs. No TSO action and no impact on market parties as long as market imbalance is within market threshold. Continuity of gas flows is guaranteed for all consumers. Residual action initiated by TSO on the exchange when market position goes beyond market threshold, with cash compensation for causers. Imbalance cost should incentivise market to stay in balance. TSO is no longer able (market instruments are exhausted) to residually balance. State of emergency prevails since pressure drops and and system integrity must be restored by using non-market-based instruments. Internalisation of SoS within the Market Based Balancing regime is possible if imbalance fees could raise to the cost of interruption (see e.g. VoLL) TSO as a residual imbalance operator Emergency: non-market instruments 4 State measures intervene to control the crisis 10

CEER position on specific issues (1/2) N-1 formula ►Introduce an export component to reflect the situation of transit countries ►Consider the approach to use the “most critical” infrastructure ►Calculate N-1 twice (at the beginning and near the end of a winter period) to reflect the technical storage characteristic curves ►N-1 standard in principle applicable on VTP, integrated market area and EU-level Coordination of plans and SoS mediator ►Standard templates for plans appreciated, merging into one SoS document could be a good idea ►Regional approach for the plans with Member States and NRA involvement ►Update of plans every four years and in English ►EU SoS mediator to step in coordination if Member States fail to agree upon regional plans 11

CEER position on specific issues (2/2) Supply Standard ►Clarification that Supply Standard a) and b) is an obligation for suppliers of protected customers ►Supply Standard c) could be seen as obligation for importing shippers ►Foreseeable supply interruptions due to political tensions and questionable reliability of producers shall not be in the scope of a Force Majeure clause ►Market participants shall choose efficient tools to achieve supply standards and shall be penalised in case of failure, unless market evidence shows the need for additional prescriptive rules Protected Customers and Solidarity ►Harmonisation of the definition of protected customers at least on regional level is needed, once entering the mitigation phase ►Clarification of solidarity principles, minimal gas flows at cross-border exits must be guaranteed in coherence with shut-off plans while the minimal gas flows are influenced by the definition of protected customers ►TSOs need to know the share of protected customers in the relevant market 12

2. CEER SoS concept paper

Objectives of Concept Paper ►CEER input for the Reg. 994/2010 revision in a coherent structure leading to an integrated SoS policy ►Framework: a market-based provision of SoS and a cost/benefit-based evaluation of state measures to remedy market failures and to cope with emergencies ►Maximum internalisation of SoS into the market and seeking efficient remedies where the market may fail: pushing the emergency phase as far as possible ►Matching the SoS mix of instruments with the level of market maturity and national/regional gas supply situation (sources and routes) (regional approach) ►Matching the role of Member States and the role of markets (not limited to Member States) in the provision of SoS ►Analysis of the roles of storage and LNG in security of supply 14

3. CEER storage vision

Update on CEER storage work ►CEER public consultation on the draft CEER Vision on Regulatory Arrangements for the Gas Storage Market received 38 responses ►CEER also hosted a workshop in Budapest to engage widely with Central and Eastern European stakeholders Evaluation of Responses and Updated vision document will be published on CEER website Agreement that “one size doesn’t fit all” Regulatory framework should promote innovation Different views on the extent to which storage was valued Divided on how best to achieve SoS, through storage regulation or with market measures only No easy answer but any framework should be transparent and must not distort the internal energy market Key messages from respondents: 16

Storage to deliver SoS CEER is convinced that a pan-European approach to storage regulation would not be the most efficient solution CEER advocates a solution tailored to the relevant regional market ►In liquid well-functioning wholesale markets with access to diverse supplies, the market should be allowed to work to provide SoS as long as possible ►CEER recognises that this will not be the case in all countries and therefore solutions could include interventions where the market does not, or cannot, appropriately value SoS ►Where interventions are in place, they will have an impact on the market and should therefore be designed to minimise this impact, through clear and transparent rules CEER notes the importance of developing the internal energy market and therefore regulators and policy makers should ensure that, when implementing these interventions, development of a wholesale market is not disrupted 17

Thank you for your attention!