Benoît Esnault Commission de Régulation de l’Energie (CRE) - ERGEG 19th Madrid Forum, March 2011 Energy Infrastructure Package ERGEG preliminary views on cost allocation for investments in gas infrastructures

2 19th Madrid Forum, March 2011 EIP diagnosis and objectives Commission’s diagnosis Potential lack of investment in infrastructure to implement the European energy strategy; The "market" may not always finance the investments: investment gap estimated at 10B€; Cross-border investment decisions made at national level. Introduction of new concepts where investment should be promoted Positive externalities; Regional benefit or benefit for a « third country ».

3 19th Madrid Forum, March 2011 Regulators’ approach to investment Market based mechanisms to remain the reference principle: filling the gap between market value (shippers’ willingness to pay) and cost is the dominant issue; Developing infrastructure to the benefit of competition and market integration: priority to market based mechanisms when appropriate; Different situations Market design (e.g. merger of balancing zones): market based procedures are generally not appropriate, except if there is some additional transmission capacity created at remaining IPs; Interconnectors: possibility of TPA exemption (after a market test); Interconnections: market based mechanisms (open seasons). Regulators promote a rational approach to infrastructure development Priority to a sound use of existing infrastructure: precondition to avoid inefficient network expansion is effective capacity management; Assess the need for new infrastructure (market test); Investment agreed regarding its market value, but also security of supply, competition development, etc.

4 19th Madrid Forum, March 2011 Identification of priority projects, the role of the TYNDP Market integration Identify where the European system lacks of capacity to guarantee a sufficient level of cross-border interconnection open to TPA; According to EWI-Study and ENTSOG’s TYNDP, the EU gas grid - in technical terms - is well developed but some (physical and potential) bottlenecks identified. Security of supply TEN-E projects, the EEPR and the reverse flow projects to be included in the TYNDP; Need to simulate system’s reaction over longer periods based on different demand scenarios. Depending on the TYNDP results cost allocation is driven by Open Season procedures and tariffs; and/or Cost allocation rules according SOS regulation.

5 19th Madrid Forum, March 2011 Existing tools: Open Seasons Background principles Value based methodology focused on shippers’ willingness to pay; Investment decision based on an economic test. Key issue: elaboration of the economic test which should include all the different benefits expected from the project When the collective value is higher than the market value: investment may be rejected while potentially desirable; In successful open seasons, the economical conditions of long-term commitments are consistent with the shippers’ willingness to pay. Additional value of the infrastructure may be due to Security of supply; Positive externalities; Benefit for competition and market integration.  Challenge: addressing these dimensions when there is a potential gap between market and collective values of the project.

6 19th Madrid Forum, March 2011 Existing tools: Tariffs Tariffs are the basic tool for cost/revenue allocation, they are adopted in most cases; Cost reflective entry/exit tariffs allow to cover the costs in a balanced way for cross-border infrastructures; Limits and risks Tariffs higher than the market value of the transmission service proposed, for instance when costs are high; Underuse of the infrastructure during the asset’s life, after the end of long-term contracts for instance or when assets are used as reserve for SoS.  Challenges: filling the potential gap between costs and market value and allocating the risk of stranded assets consistently with the individual benefits expected from the interconnection.

7 19th Madrid Forum, March 2011 Focus on cost allocation (1) Specific cross-border mechanism only justified when Shippers’ willingness to pay is below the collective value of a cross-border investment AND asymmetry of benefits between adjacent countries; Regional benefits of a national investment. Need for a sound diagnosis Evaluation of externalities and respective national benefits to assess the collective value of the project; Identification of risks. Cross-border cost allocation options Socialisation through national tariffs when balanced benefits; Cross-border subsidy or financial support from the benefitting country when asymmetry of benefits; EU subsidy if regional or community benefit.  Find a proper balance between “user-pays”, “beneficiary-pays” and “taxpayer-pays” principles in order to fill the gap between cost based tariffs and the market value of the services.

8 19th Madrid Forum, March 2011 Focus on cost allocation (2) Risk based approach Rationale: when tariffs and market value are aligned at the time when the infrastructure is commissioned; Estimation of risks during asset’s life; Main risk: underuse of the infrastructure leading to a lack of revenue (stranded assets). In case of assymmetric national benefits risk coverage should be agreed before the investment Improving the cross-border coordination of open season procedures is often the first way of facilitating investment Identifying all the necessary investments to develop transmission capacity; Coordination increases the value of the projects; Reduce the risks associated to delays from one of the investors. Ensure effective unbundling to prevent potential obstruction by incumbents.

9 19th Madrid Forum, March 2011 Conclusions Market based approach should remain the reference Prevents from over-investments which could result in high sunk costs; They should internalise externalities before the open seasons are organised; The result of open seasons should be followed, even when the investment is rejected  regular OS are an option. Tariffs are sufficient to cover costs in most cases but Part of the costs often need to be socialised in open seasons; Distorsions due to the gap between market and collective values should be covered; The long-term risks of underuse of a newly built infrastructure (stranded assets risk) may need to be addressed. EU/tax payer support and cost/risk allocation should be assessed before the decision to invest is made, based on a sound methodology.

10 19th Madrid Forum, March 2011 Thank you for your attention!