1. Danube Region Storage study Final report for the 6th Steering Group Meeting of the Priority Area 2 Budapest,13 June 2013 The project is supported by the European Union. (VOP-1.1.1-11-2011-0001)

2. Objective of the study Is there sufficient natural gas storage capacity in the countries of Danube Region to provide security of supply and necessary flexibility for the national markets? Can missing storage infrastructure (if there is any) on the national level be supplied on a regional basis in the Danube region? Is the emergence of a regional storage market possible? 2

3. Main conclusions The Danube Region as a whole has sufficient storage capacities but with uneven distribution across countries. As the markets become more interconnected and competitive, storage can be substituted partly by other means of flexibility that is new interconnectors. At the moment there is about 4 bcm existing spare storage capacity not utilized in the region (2012). On a competitive basis this would be about 9 bcm according to modelling. Further investment into storage and the progressing interconnectivity would increase the unused storage capacities in the region substantially. Social welfare analysis justifies the need for Moldovan and Polish storage investments. 3

4. Recommendations a better use of existing storage capacities - regional policy cooperation to facilitate the use of neighboring countries’ storage facilities in a security of supply situation the physical reverse flow possibilities are of utmost importance; the exemption from the obligation to allow physical bi-directional gas flows on pipelines is undermining the efforts to ensure continuous supply in crisis situation, a cost-benefit analysis of the individual investment projects shall be carried out Government or regulatory incentives to overcome the existing mistrust amongst countries when security of supply is ensured by facilities outside the territory of the given state 4

5. Structure Part 1.:Regional Storage market study Part 2.:Modelling exercise to forecast regional storage demand 5

6. Part 1. Regional Storage market analysis Role of storage in the region ‣Demand and sources ‣Swing Type of storage facilities Available Capacity to cover flexibility needs ‣Seasonal flexibility need: Mobile gas capacity ‣Daily flexibility: Withdrawal capacity Market structure and storage regulation Conclusion: countries with possible storage investment need are depicted – input for modelling 6

7. Role of storage in the region Storage is an essential facility: Highly seasonal consumption patterns: Bulgaria, the Czech Republic, Hungary and the Ukraine are above 70% of heating season/annual consumption ratio 7 Consumption structure (Source:IEA, Eurostat)

8. Type of storage in the Danube Region EU total 96 bcm The DR possesses almost entirely depleted field storage facilities – physical constraints for flexibility services: perfect to cover seasonal flexibility needs but not suitable for short term arbitrage (one injection-withdrawal cycle/year) 8 Source: GSE 2012 data Danube region total 57 bcm (with UA)

9. 9 9 Consumption and storage (working gas capacity) Source: IEA 2010, Eurostat 2010, GSE 2012 data The Danube Region as a whole has sufficient storage capacities, but with uneven distribution across countries. Consumption (2010) Storage working gas capacity Storage/Consumption Danube region63 bcm24 bcm39% Danube Region with UA 131 bcm57 bcm44% European Union (27) 547 bcm96 bcm18%

10. 10 Benchmarking storage need Based on available historical data (IEA, Eurostat, GSE): 26-30% of heating season gas consumption was covered from storage - This is about 20-24% of the annual consumption 1.Storage need indicator: working gas capacity/annual consumption 2. Storage need indicator: withdrawal capacity/ peak consumtion: Sufficient over 25% To be further analyzed 20-25% Insufficient Below 20% Sufficient over 50% To be further analyzed 50-35% Insufficient Below 35%

11. Storage need indicator Withdrawal, mcm/day Peak demand mcm/daiv Withdrawal capacity/ peak demand AT8857.6**153% BA01.7***0% BG317.5**17% CZ5563.8**86% HR612.0***50% HU8078.8**102% MD0n.a.0% PL3675.8***47% RO3169**45% SB512.7***39.3% SI05.6**0% SK3847.1***80,7% UA301n.a. 11 Working gas/annual consumption 2010 Working gas/annual consumption 2011 AT73% 80% BA0% BG16% 14% CZ37% 42% HR 17% 16% HU52% MD0% PL11% RO20% 19% SB20% 19% SI0% SK47% 45% UA47% n.a. No storage: Bosnia H, Moldova, Slovenia Serbia(?), Romania(?) Not sufficient: Bulgaria, Croatia, Poland, Not sufficient: Bulgaria, Croatia, Poland, Seasonal flexibility (working gas capacity) Daily flexibility (withdrawal capacity)

12. Market structure and access regime HHI Number of storage operators TPA Market share of the biggest player AT26965R 36% BAn.a. BG100001R 100% CZ63893N 78% HR100001R 100% HU66622R 80% MDn.a. PL100001R 100% RO77033R 87% SB100001NO TPA 100% SIn.a. SK66432R 79% UA94002R 97% Highly concentrated national storage markets Few big players in dominant position Majority regulated third party access ‣Czech Republic: negotiated ‣Serbia: no TPA 12 Source: GSE 2012 May, REKK calculation

13. Storage tariff benchmarking Yearly storage products and fees are converted to €/MWh Expensive markets: Austria Slovakia Very cheap markets: Ukraine, Bulgaria, Croatia, Romania 13 Rekk calculation on 2012 tariff data collection

14. Utilization of existing storage in 2012 Full utilization in Austria (long term), Czech Republic, Poland, Romania, Slovakia Spare capacities: Bulgaria, Croatia, Hungary, Ukraine On a regional level: 3800 mcm spare capacity (with Ukraine 16000mcm) 14 source: GSE AGSI, storage operator’s websites Note: no available utilisation data for Serbia (SB)

15. Part 2.: Modelling 2011: DRGMM results and fact utilization data 2015: price and storage demand forecast without additional storage investment 2015: price and storage demand with additional storage investment in the countries defined in Part 1. (Bulgaria, Croatia, Moldova, Poland, Romania, Serbia) 2015: price and storage demand with all the proposed infrastructure 15

16. Modelling storage use in the Danube Region 16

17. One gas year – 12 months 25.01.2013 17 INPUT Demand by countries Domestic production TOP contract infrastructure: Interconnectors, storage, LNG infrastructure: Interconnectors, storage, LNG External price: for TOP, spot (TTF, PSV), LNG, TR Wholesale gas price by country Consumption by countries Gas flows on interconnectors Storage stock change Import through long term contracts and spot trade OUTPUT MODEL

18. Modelling 1.Base scenario for model check: 2011 – to be compared with „Reference scenario” 2.„Reference scenario” for 2015 ‣Assuming that only interconnectors (and PL LNG) are build in the region, and no additional storage enters the market 3.“Investment in shortage capacity countries” scenario ‣Same as reference but additional storage investment for the region is assumed 4.Security of supply modelling ‣A 30% supply drop on all Ukrainian interconnectors in January is modelled For the „Reference Scenario” For the „Reference Scenario” but without strategic stock obligation of the SOS Regulation For the Investment in shortage capacity countries” scenario 18

19. Reference case scenario 19

20. 20 Reference scenario for 2015 Demand and production modified according to available 2015 forecasts New infrastructures added to the infrastructure setup: reflecting latest TYNDP Storage and transmission tariffs reflect the prices set by SSOs and TSOs for 2013 An obligatory level of storage stock is assumed for all countries with storage facilities (calculated on supply need for the residential consumers for 30 days) TOPs expiring between 2011 and 2015 (HU, BG, HR) renewed with a reduced rate of annual contracted capacity (80% of the former contract) 20

21. 21 REFERENCE SCENARIO Prices (€/MWh) Regional average price (excl UA): 28,7 €/MWh Regional average price (excl UA): 31,8 €/MWh 2015 base case and changes to 2011 21 2011 Notes: Circles and pictograms indicate new infrastructuresNotes: Grey arrows indicate congested lines 21

22. 22 Modell results: Commercial storage (yearly injections) Regional injection (excl UA): 16.169 mcm Regional injection (excl UA): 14.266 mcm 22 Notes: Dark green boxes indicate full utilization of capacities 2015 base case and changes to 20112011 Notes: Dark green boxes indicate full utilization of capacities 22

23. Yearly consumption Regional natural gas consumption grows by 21 bcm according to forecast used in the modelling. At the same time new interconnectors are in place, providing new ways to serve the flexibility need → despite increased consumption, less storage is needed a s the markets become more interconnected and competitive, → a redistribution of storage usage across the countries due to increased storage competition happens 2015 base case and changes to 2011 Regional consumption in 2011 (excl UA): 82 bcm Regional consumption in 20 15 (excl UA): 103 bcm Interpreting the results

24. Yearly injection forecast in the base case 2015 Storage facilities in many countries operate at full capacity (PL, CZ, HR, RO, BG) Three countries (AU, HU, SK) have significant spare capacities Countries without storage site (SI, MK, MV, BA) use storage facilities in other countries NOTE: Modelled spare capacities do not necessarily reflect the fact data of slide 12 – the difference can be well explained by the AT long term capacity booking and 1 year timeframe of the model 24 Regional injection (excl UA): 14.266 mcm Spare capacities (excl UA): 9.136 mcm 24 Notes: Dark green boxes indicate full utilization of capacities 2015 24

25. “Investment in shortage capacity countries” scenario A reduced investment package has been introduced: only the investment proposals of the countries indicated in the first part of the study to possess less than sufficient storage capacity – HU, SK, CZ, AT excluded 5197 mcm i.e. a 20% increase in working gas capacity for the region New storage facilites have uniform tariff: 5,3 €/MWh 25

26. Price forecast in 2015 with the new storages As assumed: storage investment does not drive price convergence Minor price decrease in some national markets (RO, BG, SB,) as a consequence of storage investment: due to storing cheaper gas in summer 26 Regional average price (excl UA): 32 €/MWh

27. Yearly injection forecast in 2015 with the new storages New investment increases storage capacity utilization on a regional level by 844 mcm/year due to an investment of 5197 mcm working gas capacity!!! 13,5 bcm/year unused working gas storage capacity in the region! Even in previously congested countries (BG, HR) the new storage is not utilized on a 5,3 €/MWh price No need for that much storage investment According to model results Czech and Moldovan storage is congested, further investment is needed. 27 Regional injection (excl UA): 15.110 mcm Spare capacities (excl UA): 13.489 mcm

28. Welfare analysis 28 Bulgaria, Serbia: Total welfare is close to zero, but different consumer groups gain Moldova and Poland have positive total social welfare change gains: good projects Due to lower level of congestion in storages, and lower utilization of storage, storage operator’s profit on a regional level decreases. Local producers benefit from increased prices. Investment cost of a 1 bcm UGS is about 400 million €. Based on social benefits payback period would be 23 years BUT who shall invest?

29. Security of Supply

30. 30% supply cut on all pipelines through Ukraine in January With the present storage infrastructure in place: No serious supply security problem Due to strategic stocks (see next slide) Regional emergency plans and regulatory cooperation to allow regional use of storages are to be pushed along 994/2009 SoS Directive Change in avearge regional price: +0,23 €/MWh Change in regional consumption: -13 mcm

31. 30% supply cut on all pipelines through Ukraine in January without strategic stocks Strategic stocks matter! Without them: Supply shock in Moldova, Romania, Bulgaria and Macedonia Significant price increase in the region There is a need to incentivise/regulate storage utilization to prepare for security of supply cases and to enhance regional cooperation Change in average regional price: +5,04 €/MWh Change in regional consumption: -243 mcm

32. 30% supply cut on all pipelines through Ukraine in January with the new storages Assuming that there is a strategic stock obligation, and with the new storage investment in place supply cut scenario does not infect the region. Even the minor price increase of slide 32 disappear. (reference to this slide is slide 32) As a consequence of the storage investment in Poland January wholesale gas price in Poland decreases (cheaper spot can be bought instead of the oil indexed take-or pay contracted Russian gas) January prices with new storages and changes to the base case under SOS Change in avearge regional price (relative to the base case under SOS): -1,63 €/MWh

33. Welfare analysis under SOS Long term contract holders gain on a supply cut: they were suffering huge lossess on their contracts, and this loss decreases. Local producers gain on increased prices. Storage operators welfare is positive, their net benefit decreases here because they gain less than without new investments. (congestion rent disappears)

34. Total social welfare with the storage projects in 2015 For Danube Region countries benefits of the producers and long term contract holders can not outweight the too much loss of the consumers and of the storage operators. The welfare losses under normal scenario can not be outweighted by the supply cut scenario’s welfare gains.

35. Thank you for your attention! For any feedback and/or comment please contact Rekk@rekk.euRekk@rekk.eu or pkaderjak@uni-corvinus.hupkaderjak@uni-corvinus.hu TEL: +36 1 4827070 35

36. Appendix 36

37. Danube Region Gas Market Model 25.01.2013 37 Geographical coverage of the model: 15 countries –see map DRGMM: Competitive market equilibrium prices by countries Natural gas flows and congestions on interconnectors One year (12 months) are modelled Trade is based on long term contracts and spot trade within the DR and with exogenous countries (Russia, Germany, Italy, Turkey and Greek LNG) Physical constraints are interconnection capacities Trade constraints: TOP obligation Domestic production and storage facilities are included

38. Model scheme 25.01.2013 38 Local Market 1 Local Market 2 External Market 2 D P Q S D P Q External Market 1 Market price spot X X TOP E1 T-E1 TOP L1 T-L1 TOP L2 spot S quantity price t=1 t=2 …

39. 39 Strategic storage assumptions HU: storage determined by 13/2011 NFM Decree in Szőreg AT, SK, CZ, RO, BG, RS, PL: Regulation 994/2010 EU, supply obligation of the residential consumers for 30 days UA: 30 days supply Sources: Eurostat, IEA, national statistics Total 4368 mcm natural gas strategic stoc assumed for the region 39 Stock of gas to be used only in emergency situations 39

40. 40 Price assumptions for outside markets For storage operators mainly relative prices (seasonal spread, TOP/spot spread etc.) matter Average TTF spot price: 24,6 €/MWh Oil-idexed price: 34,2 €/MWh Russian TOP price: 32,2 (with 80% oil price and 20% spot price indexation) Seasonal spread in western- european markets: 4,4 €/MWh Russian spot contracts are traded at a premium to TTF/PSV contracts as well as to Russan TOP contracts Average spread between oil- indexed and TTF spot gas prices: 10 €/MWh Monthly spot and TOP prices in 2015 4,4 €/MWh 40

41. Price forecast in the base case 2015 Reference scenario Prices are relatively low in the neighborhood of Germany 41 Regional average price (excl UA): 31,8 €/MWh 41 2015 Notes: Grey arrows indicate congested lines, Circles and pictograms indicate new infrastructures 41