1. Gas Regional Initiative - Region South-South East 3rd Implementation Group Meeting Towards a Regional Entry-Exit System in the SSE Gas Market. A Preliminary Study Sergio Ascari, Consultant, AEEG Maribor, 9 October 2007

2. 2 Objectives of current preliminary study  Overview of current tariff systems  Stylised simulation of a regional tariff system  Disclaimer: approximate though plausible data  Comparison between transport costs with current (national) tariffs and with regional tariffs  No change in total TSO revenue – same as with current national tariffs  Benefits and costs for countries, SSE  Inter-TSO Compensation (ITC) issues

3. 3 SSE current tariff system

4. 4 Scope of the study: countries, routes ● Preliminary version includes A, CZ, I, SK, SLO ● Routes already considered in GRI for SSE-5: 1. UKR-SK-CZ-GER (Vel'ké Kapušany - Waidhaus or Hora S. Kateriny) 2. UKR-SK-A-SI-I (Vel'ké Kapušany – Baumgarten – Murfeld - Šempeter/Gorizia) 3. UKR-SK-A-I (Vel'ké Kapušany - Baumgarten - Tarvisio) 4. UKR-SK-A-GER (Vel'ké Kapušany – Baumgarten - Oberkappel) 5. ALGERIA-I-(SI)-A-SK (- CZ, -H) (Mazara-Tarvisio (Gorizia–SI) – Minerbio - Baumgarten – CZ/SK)

5. 5 Scope of the study: other routes ● Other Routes included in this version: ➢ CH-I-A/SI (Griespass-Minerbio-A/SI/CZ/SK) ➢ Italian LNG terminal connection (Panigaglia-Minerbio-A/SI/CZ/SK) ● Routes to be added when data are provided: ➢ UKR–H-Austria (Beregdaroć-Mosonmagyarovar-Baumgarten) ➢ BELARUS-PL-GER-CZ (Kondratki – Mallnow – HSK) ➢ UKR-RO-BG-GR (Isaccea–Negru Voda-Kula-Revithoussa) ➢ UKR–H-Serbia (Beregdaroć-Szeged)

6. 6 Scope of the study: TSOs, entry/exit points ● TSOs ➢ RWE-TN, SPP-P, BOG, TAG, OMV(SOL), Geoplin-P, SRG ● Entry points ➢ Import points (Vel'ké Kapušany, H.S. Kateriny, Overkappel, Griespass, Panigaglia, Mazara/Gela) ➢ Main domestic production and storage areas (S. Moravia, SW Slovakia, Lower Austria, Adriatic Sea, Po Valley, Basilicata) ● Exit points ➢ Export points (H.S. Kateriny, Waidhaus, Overkappel, Rogatec, Griespass) ➢ Virtual national consumption areas (Slovakia, Czech Rep., NE/NW/S Austria, Slovenia, N/S&Central Italy)

7. 7 Scope of the study: a stylised regional system PANIGAGLIA ADRIATIC FIELDS SOUTHERN ITALY MAZARA DEL VALLO/GELA GRIESPASS NORTHERN ITALY SOUTHERN & CENTRAL ITALY 313 186 SK 26 33 HORA S. KATERINY 55 CZ WAIDHAUS 27 22 BAUMGARTEN/ EAST AUSTRIA 17 4 OBERKAPPEL SOUTHERN AUSTRIA CH DE UKR RAINBACH/ WEST AUSTRIA SLO Lanzhot Weitendorf Tarvisio Cersak Gorizia Bologna HR 291 53 36 43 0 89 6 7 53 0.2 3.5 5 174 33 11 8 92 ALG SPP - P RWE - TN BOG TAG SRG Geoplin OMV y x ENTRY POINT (Booked capacity Mcm/d) EXIT POINT (Booked capacity Mcm/d)

8. 8 Is the study representative? ● Most flows, capacity included in the study (see Table) ● Consumption regrouped into simplified areas ● About 21% of capacity for transit through SSE-5 ● 2006 data used throughout

9. 9 REETS costs and revenues ● Assumed that revenue = costs ● Calculation of (approximate) revenue requirements for each TSO based on: ➢ current tariffs or methods, approved by NRAs ➢ applicable for standard long term contracts (15.6 Mcm/d; 5 Bcm/y, load factor 88%) ➢ for considered routes only, secondary grid excluded ➢ for Geoplin-P primary grid cost estimated as 68% of total

10. 10 REETS simulation: required revenues SPP-Preprava904.980.100 RWE-Transgas Net534.594.287 BOG (WAG) 52.142.679 TAG172.766.806 OMV(SOL) 6.812.659 GEOPLIN-Plinovodi 24.814.518 SnamReteGas 1.032.861.236 Total 2.728.972.286

11. 11 REETS simulation: building sections ● Each routes split into “sections” ● For each TSO, 2 or 3 sections on each route ● If no more information available TSOs with virtual exits split into sections of the same size and exit point located between such sections (RWE-TN, SRG for South-Central Italy, Geoplin-P) ● If more precise information available sections may be different (Austrian TSOs, SPP-P) ● cost of each section = currently paid tariffs of standard LT contract for that section ● cost of sections when used “backhaul” = 10% of normal cost, 30%also simulated

12. 12 SSE-5 system: building sections

13. 13 REETS simulation: further work ● Simulation of increased cost (+20%) to pay for enhancement of selected congested pipelines – included in this version ● Cost data are being collected and will be used for benchmarking, further simulations

14. 14 REETS simulation: tariff structure ● Single balancing zone ● Entry-exit, 100% capacity tariffs ● Gas fuels and losses not considered - to be provided in kind by shippers ● Entry-exit split as generated by the simulation (not constrained) ● Multiple balancing zones with interlinks may be considered in next version

15. 15 REETS simulation: basic results (€/m 3 /d/y) EntriesExits

16. 16 REETS simulation: results with backhaul = 0.3 (€/m 3 /d/y) and comparison with basic results

17. 17 REETS simulation: impact of increased cost (investment allowance) in BOG or TAG

18. 18 Cost of transport for selected paths after basic simulation results of REETS, €/m 3 /d/y

19. 19 REETS simulation: change of transport cost entailed by regional tariffs vis-à-vis current tariffs, €/m 3 /d/y

20. 20 REETS simulation: change of cost transport entailed by regional tariffs vis-à-vis current tariffs (% of wholesale price, for profile 1 contracts)

21. 21 REETS simulation: comments ● Recall that total revenues – and hence weighted average transport cost in SSE-5 – does not change in this simulation ● With respect to current tariffs, REETS entail: - increase of transport costs for “close” sources - decrease of transport costs for “far” sources ● Cost increase due to investment is spread among all routes ● Weight used for sections used “backhaul” has limited impact

22. 22 REETS simulation: ITC mechanism/1 ● Unlike in electricity, physical flows triggered by scheduled transportation patterns are largely predictable ● No need to devise inter-TSO compensation mechanism based on ex-post flows ● Tariffs may be entirely capacity – based, required revenue is defined ex-ante ● If commodity-based component is agreed, related revenues are simply attributed to each TSO

23. 23 REETS simulation: ITC mechanism/2 ● Regulated allowed revenue (AR) determined and approved by NRAs for each TSO ● Tariffs may be collected by individual TSOs (e.g. according to exit area) and/or by a regional grid manager (RGM) ● Tariff revenue is then re-allocated to match individual AR ● Cost of tariffs and fuel gas to be separately provided by shippers at metered or regulated rates

24. 24 REETS: preliminary conclusions/1 ● Based on assumption of no TSO revenue change ● A regional tariff solution can be easily estimated for a stylised system and is stable ● Transport cost changes vis-à-vis current tariffs would be remarkable but usually between ± 10- 15% of wholesale price, 4-8% of retail price ● Reduced transport cost from more remote sources likely to offset increases for close sources

25. 25 REETS: preliminary conclusions/2 ● Risk of sharp changes adversely affecting wholesale prices in some countries suggests that REETS should be phased in gradually ● Hence transitional system consisting of smaller balancing areas with interlinks may be appropriate ● Since transport costs from “close” sources increase, from “far” sources fall, competition opportunities between suppliers and exporting sources increase ● ITC required but based on TSO's required revenues, implementation easier than for electricity