1. , Brussels
Gas Pricing Workshop

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

3. 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

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

5. 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

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

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

8. 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; 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

9. 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 , p.5
Source: ENTSO-E, statistics, data portal

10. 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

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

12. 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, , „Gazprom expects price drop for Europe in 2013” and Ivestija

13. 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

14. Decoupling of oil and gas prices

15. 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

16. 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!

17. 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

18. 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

19. 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

20. 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

21. 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

22.  walter.boltz@e-control.at  www.e-control.at  
Contact
, Brussels
Gas Pricing Workshop

23. , Brussels
Gas Pricing Workshop