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Security of Supply
Brian Withington, Managing Director, TPA Solutions
GTE Conference, 22 October 2003
www.tpasolutions.co.uk
Overview of presentation
• Dimensions of security of supply• GTE perspectives
– January 2003 paper– March 2003 comments on EU draft directive
• Personal perspectives• Conclusions
www.tpasolutions.co.uk
What do we mean by
“security of supply”?
www.tpasolutions.co.uk
Security of Supply Dimensions
• Access to sources of gas- long term contracts- liquid spot markets
• Adequacy of transportation capacity- average & peak conditions- flexibility & resilience
• Insurance capability against supply shocks & severe demand conditions
- role of “strategic” storage
www.tpasolutions.co.uk
Some GTE perspectives
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GTE Paper - Jan 2003
• Roles & responsibilities in a liberalised market
• Investment in transportation infrastructure
• Resilience of gas networks
• Operational integrity & balancing
www.tpasolutions.co.uk
Roles & Responsibilities
• Producers & suppliers to provide sufficient gas
• TSOs to provide sufficient transportation capacity, but shippers to balance individually
• TSOs maintain system integrity, but shippers/suppliers need to balance
www.tpasolutions.co.uk
Transportation investment
• Predictable, transparent & stable framework needed
• Reward for investment by TSOs• Importance of long term contracts• Market driven wherever possible
www.tpasolutions.co.uk
Network resilience
• Low probability events• Reliability of market signals?• Risk of underbooking by shippers• Funding “insurance” investment• Short termism versus long lead times• Differentiating security levels?
TSOs face planning, investment & stranding risks
www.tpasolutions.co.uk
Operational integrity
• Primarily TSO responsibility, but:– Shippers should not rely on TSO to
balance their own portfolio
• Need for adequate shipper incentives to balance
• Mechanism for handling shipper bankruptcy
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GTE Recommendations
• Transparent national frameworks– Minimum output standards– Contractual signals from shippers
• Healthy network investment climate– Adequate rewards for TSOs– Long term contracts
• Incentives for system integrity– Emergency arrangements– Supplier bankruptcy
• Foster dialogue with non EU producers– E.g. Energy Charter Treaty
www.tpasolutions.co.uk
GTE comments on Draft SoS Directive
• Harmonised output standards may not be appropriate
• Market forces should determine the means of meeting standards
• Opposed to minimum storage obligations for TSOs
• No need for centralised EU crisis mechanism
www.tpasolutions.co.uk
Further GTE comments
• Cost recovery– Obligations must be funded
• Exemption for new entrants– May cause uncertainty & distortions
• “Protected customer” category– Too broad, needs clarification
• Concept of single largest gas supply country– Needs amendment
• Long term contracts– Duration >> 1 year– Level should not be prescribed
www.tpasolutions.co.uk
Personal perspectives
(confessions of an ex-transporter)
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UK Approach• Security of supply was a neglected
concept at time of liberalisation– Blind faith in “market forces”– Suspicion of British Gas motives
• Attitudes changing more recently– Failures in other industries– EU debate– Gas failure = Electricity failure
www.tpasolutions.co.uk
Security of Supply Triangle
Resilience
Div
ersity
Insurance
Sources of Gas
Transportation Storage
www.tpasolutions.co.uk
Sources of supply
• Europe has access to ample sources of gas
- Norway, Russia, UKCS, Caspian, N Africa
• Import dependency is growing but manageable
• So no fundamental problem, but consider:
- Producer willingness to invest against spot price versus long term indexed contracts
- Concentration of producer power
www.tpasolutions.co.uk
Transportation Capacity
• Transport capacity facilitates diverse supplies
• Increasing interdependence of networks in EU
• Adequate capacity in any one state does not guarantee its supplies
• How do we avoid the “weakest link” in the chain?
Adopt minimum network capacity and resilience standards throughout EU
www.tpasolutions.co.uk
1. Rely exclusively on market
- Suppliers decide all storage needs
2. Market forces plus “top up”
- Agency complements supplier bookings
3. Allocate storage to suppliers - Based on defined security obligations
4. Allocate storage via end customers - Suppliers pay based on customer portfolio
Storage insurance options
www.tpasolutions.co.uk
Why not rely solely on the market?
• May work well for larger customers,but:
• Gas supply has “public good” characteristics
• Risk of “moral hazard” behaviour
• Inability to differentiate security service between neighbours on the network
Market cannot fully value insurance for most customers
www.tpasolutions.co.uk
Top Up concept
Oct Nov Dec Jan Feb Mar Apr
Inven
tory
level
Physical stock level
Intervention
Monitor level
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Who pays for Top Up?
Booked & Paid For
Avoided cost
Top up Premium
Booked & Paid For
Suppliers A&B have identical customer base
A “takes a chance”
B books in full
B subsidises A
A can grow market share!
Top Up premium
Supplier A Supplier B
www.tpasolutions.co.uk
Supplier Inventory Obligation
• Based on size and nature of supplier’s portfolio- may be tied to level of imports
• Options available to supplier :- demand management- domestic physical storage- physical storage elsewhere in EU- “virtual storage”
• Storage can be competitively provided
• Parallels with oil industry
www.tpasolutions.co.uk
Storage allocation via the end user
• The core/non-core philosophy …
• Mandated storage provision for core market– Residential & smaller I&C– Common security standard– Storage & pipeline capacity “bundled”
• Non-core market exercises full choice– Large industrial & power stations– “Get what you pay for”
www.tpasolutions.co.uk
Core/Non-core issues
• Boundary between core & non-core markets
• How much storage should be mandated?– Let the market work as much as possible
• Transporter’s role – how much discretion?– Use of algorithms & rules
• Ownership of storage– Vested interest if transporter owned?– Separate ownership – OK, but needs consistent
regime for investment
www.tpasolutions.co.uk
Underpinning the Market
OutputStandards
SecureFunding
SharedObligations
Diverse supplies
Customer Choice Competition
Infrastructure Investment
Public Policy and Regulatory Framework
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Security of Supply
“The Middle Way”
Let the market
decide level as
well as deliver
Public policy goals
Market delivery
Central planning
Strategic Reserves
Market intervention
“Hope for the best” “Isn’t this better?” “We know best”
www.tpasolutions.co.uk
Conclusions
• Liberalisation & security of supply are compatible
but not inevitable
• Need adequate infrastructure investment to enable
secure and diverse supplies of gas
• Establish public policy and regulatory frameworks
that incentivise this investment
• Facilitate supply competition and operation of
market forces within these frameworks
www.tpasolutions.co.uk