1 Introduction
On June 11th, 2009, the Board of the Netherlands Competition Authority (hereafter: the Board) sent a consultation document regarding the so-called use-it-or-lose-it principle (UIOLI) to the representative organizations of gas network users and to the operators of the high pressure networks GTS and Zebra. Originating from European legislation, UIOLI refers to the practice of re-offering to the market booked but unused transmission capacity. The purpose of this consultation is to gather information from relevant market participants about the utilization of unused transmission capacity, information which can serve as input for the planned amendment of the technical codes for natural gas with regard to this subject.
Having been repeatedly asked by market participants abroad to do so, the Office of Energy Regulation has published an English version on its website. All shippers have been informed of this consultation by email.
Consultation respondents:
Representative organizations: Nogepa, VEMW, VME, EnergieNed, VOEG
Shippers: GasTerra, E.On Energy Trading (+ E.On Ruhrgas), Dong Energy, Gaselys, StatoilHydro, GDFSuez, Centrica, EnBW, and two confidential respondents.
Network operator: GTS
About UIOLI
The term use-it-or-lose-it is mentioned in European Regulation 1775/2005 (hereafter: the Regulation). Under several provisions in the Regulation, the transmission system operators (TSOs) are required to re-offer unused transmission capacity at connections with contractual congestion to market
participants on the primary market. The Regulation’s provisions regarding UIOLI apply to the transmission capacity at all entry and exit points. In the Dutch situation, however, contractual congestion only occurs on import and export connections.
Regarding UIOLI, the Regulation is decisive and it has binding force, but it should be considered as a minimum regulation. There is room to draw up and specify more specific provisions in national legislation. Based on article 12b section 1 paragraph a of the Gas Act and article 16 of the Ministerial Decree on gas tariff structures and conditions, the Board intends to incorporate provisions regarding UIOLI in the technical codes natural gas. The same conclusion is drawn in the ruling on appeal against the Board’s decision with regard to natural gas conditions part 1, (dated October 20th, 2007, reference 101929-49). In it, the Board comes to the conclusion that, in order to have the Regulation (or more precisely, Article 5 thereof) function well, it is essential to have more detailed measures incorporated in the technical codes.
2 Conclusions
The consultation’s main objective is to gather information and to have that information serve as input in the process of including additional provisions concerning UIOLI in the technical codes.
Judging from the answers, it appears that market participants attach great value to the improvement of the availability of capacity. Contractual congestion is a considerable problem to the functioning of the gas market en must be addressed. What also became clear is that the principle of use-it-or-lose-it fits in a wider frame of congestion management and cannot be seen separate form capacity allocation. Taken into account the results of this consultation and the current developments in Europe on congestion management, the NMa will discuss the subject use-it-or-lose-it in the wider framework of congestion management.
The NMa will further analyze the market parties’ answers and remarks. The goal is to formulate a plan for improvement of the availability of capacity on import and export points with contractual congestion. In the process of decision making the NMa will involve the developments in Europe as a result of the CAM/CMP document as well as the debate in neighboring countries on this subject. The NMa has the intention to form a sounding board with the aim to discuss possible actions with market parties.
Results
After an analysis of the answers of the sixteen respondents, the most important results the NMa has found are:
1. New stand-alone UIOLI measures seem to have little effect 2. UIOLI should only be applied in proven cases of hoarding
3. Restriction of re-nomination rights could harm the functioning of the market: parties need to be able to import flexibility
4. Any capacity that becomes available should be allocated using a market mechanism 5. Distribution of possible revenues should not be disruptive to the market
6. Other thinkable measures to make additional firm capacity available are:
a. The TSO could allow overbooking in combination with ‘capacity buy back’ b. The TSO could improve the calculation model for available capacity 7. Other measures to improve utilization of the capacity offered are:
a. A well-functioning secondary market
b. Improvement of the supply of interruptible capacity
c. Improvement of transparency so parties can asses the probability of interruption themselves
8. When measures are taken, it is recommended to harmonize these with neighboring countries, and to take into account the developments in the EU resulting from the ERGEG’s CAM/CMP consultation.
1 and 2. UIOLI only in cases of hoarding
The general picture the consultation sketches is that there seems to be little support for applying UIOLI to contracted capacity that is not nominated or renominated. A number of respondents argue that UIOLI, as referred to in the Regulation, as a standalone measure would not provide any solution to the contractual congestion problem, since capacity would come available on the market too late. UIOLI provisions could be applicable to capacity that is contracted but not needed by the capacity holder. This is a form of capacity hoarding. Various respondents suggest granting the TSO powers to track down cases of capacity hoarding. Taking away capacity from the primary capacity holder and re-offering it to the market should only be allowed in exceptional cases where hoarding has been established.
3. Restriction of renomination is harmful
One option to offer non-nominated capacity as firm capacity before the renomination term expires (which is currently two hours before supplying) is to restrict the renomination rights or the day-ahead converting of firm capacity into interruptible capacity. Respondents overwhelmingly reject both of these proposals. Such proposals restrict the available flexibility in the market, and make it impossible for parties to manage their portfolios well. New entrants, who import their flexibility, in particular would be considerably hurt by such a measure. Since the shippers' risk increases, the end users' prices will thus be directly affected.
4 and 5. Market mechanism for capacity to be allocated
Most respondents agree that if capacity can be allocated in accordance with the UIOLI principle, capacity should then be allocated using a market-based mechanism, preferably an auction. Many consider an auction to be the most suitable method to determine the price. However, to the question of what to do with the revenues, the answers are less clear-cut, because the answers often take into account the secondary market as well. Roughly speaking, the answers come down to this: If the primary capacity holder sells the capacity through the secondary market, the revenues are his. If the TSO sells using an UIOLI mechanism, it would make sense to have the revenues not be given back to the primary capacity holder, so as to leave an incentive to sell on the secondary market. The TSO’s surplus revenues should somehow find their way back to the market though. Lower tariffs is the top named suggestion to do so. Several respondents state that market disruption should be avoided at all costs.
6. TSO could offer additional firm capacity
Although most respondents hardly favor any UIOLI provisions that would impinge on their capacity rights, it is acknowledged however that more available firm capacity is needed at points with
contractual congestion. In their answers, many respondents offer ideas on how to generate more firm capacity.
7. Utilization of capacity offered could be improved
Virtually all respondents underline the importance of having a well-functioning secondary market. The success that the German secondary trade platform enjoys, is mentioned, as well as the term Use-it-or-sell-it (UIOSI), which means that there should be some kind of obligation to sell capacity through the secondary market. Some parties claim however that a well-functioning secondary market would be a sufficiently financial incentive to market participants to sell capacity they will not use.
A number of respondents believe the supply of interruptible capacity should be improved. The volume of interruptible capacity the TSO offers should not be restricted. In relation to this increased
transparency regarding interruption probabilities is essential. The capabilities of market participants to assess interruption probabilities themselves should be improved by providing market participants with more information.
Another alternative mentioned is to adjust the tariffs, thus stimulating capacity utilization. Price differentiation between firm and interruptible capacity should be increased, thus increasing the incentive to make use of the secondary market for booked capacity that will not be used.
8. Cross-border approach is essential
3 Summary per question
This section contains a summary for each question, and includes several relevant quotes taken from the respondents’ answers.
(1) Can you indicate which length of contract (for interruptible capacity) you would require?
A large majority of respondents are in favor of offering a diverse range of interruptible products, such as contracts with various durations: day, month, quarter, seasonal, and annual contracts. Some respondents even mentioned that the various contract durations should dovetail with those on the commodity market. The short-term products are used for trade, optimization, and balancing, whereas the long-term products are particularly used by new entrants. “This [long-term contracts – red] would
help support the development of competition, especially where this is the only way that new entrants can secure capacity pending the realization of physical open season investments.” (Centrica).
According to GTS a diverse range of interruptible products is already offered: daily, monthly, annual and multi-annual contracts.
(2) What is the minimum amount of capacity that should be offered each time?
Most respondents see no reasons for setting a minimum capacity volume. Three respondents believe that, should minimum capacity volumes be offered, they had better match the minimum hub volumes on the commodity market. “The transmission capacity market should supplement the commodity
market. It would therefore make sense to match the capacity volumes with the standard volumes that are traded on the commodity market: 30MW/h at trading hubs, and 10 MW/h for annual gas.”
(GasTerra).
(3) In your view, when should it be possible to earmark ‘unused capacity’?
Capacity that is not nominated after the renomination term has expired should be considered unused capacity, according to five respondents. That is currently two hours prior to supply. By the same token, respondents acknowledge that offering firm capacity two hours prior to supply will have little effect in a situation of contractual congestion, which basically means that applying UIOLI would not make any sense under this definition of unused capacity. Two respondents therefore argue that unused capacity should be defined as capacity that is not nominated day-ahead.
Respondents also indicate that there is a difference between unused capacity and unneeded capacity. Unneeded capacity is contracted capacity that is not supported by a commodity contract. This falls under capacity hoarding. The TSO should have more powers to track down capacity hoarding. “The
application of firm UIOLI can only be envisaged in specific, exceptional cases of proven capacity hoarding.” (StatoilHydro).
Two respondents believe that, using experience and models, the TSO would be capable of making better estimates of how much capacity will remain unused. “[…] using effective modeling tools, as well
as with information on the functioning of the entire system, the TSO should be relatively easy positioned to get a clear picture of the expected levels of unused capacity. […].” (VOEG). This
capacity could then be made available to the market as firm capacity.
contracted capacity than to an increase thereof, because market parties want to keep their options open so they can use different suppliers and routes.
(4) How and under what conditions should GTS offer capacity as firm capacity?
Three respondents clearly indicate that the TSO should only offer non-booked capacity as firm capacity. Six respondents add that they find the TSO remains to adopt too conservative an attitude in determining the capacity that it wants to sell to the market as firm capacity. The current calculation method is aimed at eliminating all risks for the TSO, yet at the same time there are methods to offer more firm capacity and to properly manage the risks that come up. “(…) as the likelihood of full
availability can be statistically calculated by TSOs there is a realistic possibility to allocate this risk fairly while still maximizing the available technical (i.e. firm) capacity. EET believes that all TSOs should move to such a maximum scenario approach.” (E.On Energy Trading). Some of these
respondents have mentioned the option of overbooking in connection with the so-called capacity buy
back mechanism. The latter means that, if in any given hour more capacity is nominated than
technically feasible, the TSO will then use a bid-price ladder enabling parties to sell back their capacity to the TSO. The option over overbooking is also mentioned by GTS. The TSO is however of the opinion that the faith of market parties in the firmness of firm capacity is of the utmost importance. By re-offering previously sold firm capacity would raise the question how valuable a firm product actually is, since is would basically mean that all capacity is more or less interruptible.
The importance of having the offered capacity at cross-border points to be the same on both sides of the border is also stressed. “Offering capacity at cross-border points shall reflect the allocation
conditions and product designs at either side of the border. We therefore urge the Dutch regulator to ensure that exit/entry capacities are only offered if the respective amount of entry/exit capacity is available at the other side of the border and vice versa.” (EnBW).
(5) Do you believe that restricting the re-nomination entitlement would be a correct step towards offering firm capacity, and why/why not?
An large majority thinks it is not a good idea to restrict renomination rights. The prevailing opinion is that restriction of renomination rights would reduce available flexibility in the market and that it would make it impossible for parties to adequately manage their portfolios, especially in markets with hourly balancing. “In the Netherlands, the access to the flexibility (as storage capacities) is very restricted
and is not linked with the portfolio size as this is the case in other European countries (Spain, France, Italy, Belgium). Therefore, shippers who want to develop their sales in the Dutch market have to import flexibility (…). In case they could not re-nominate, they will be facing huge imbalances on the network.” (GdFSuez). Also GTS is also opposed to restriction of renomination rights. According to the
TSO it would negatively affect demand for physical capacity in Open Season procedures, thus increasing the risk of physical congestion.
(6) What is your opinion on converting non-nominated (firm) capacity into interruptible capacity for the primary capacity holder?
Virtually all respondents, including GTS, regard this option as one way to restrict renomination rights. The verdict therefore mirrors the previous question: it is disadvantageous to the market.
(7) Which allocation mechanism for released capacity do you think best fits UIOLI?
The answers to this question appear to indicate that most respondents prefer an allocation mechanism that is based on the market. Most respondents clearly favor auctioning. “Auctions have proved to be
efficient and fair mechanism to allocate capacity. Furthermore, auctions have proven to give good prices signals.” (Gaselys)
According to some respondents, capacity should, in any case, be allocated in a transparent and non-discriminatory way. Other specific allocation methods that have been mentioned include ‘pro-rata’ and ‘first come, first served’ (or upgrading existing contracts). There have also been some respondents that clearly dislike certain allocation mechanisms. “We believe that First Committed First Served
(FCFS) is not an appropriate approach in a liberalized gas market and that it is potentially discriminatory, particularly where it applies to congested points (…).” (StatoilHydro)
GTS mentions that the current and new Regulation state that capacity allocation should dovetail with the mechanism on the commodity market. Since the gas market is ‘continuously traded’ the current allocation mechanism (first come first served), is appropriate. A shipper can buy simultaneously gas and the matching transmission capacity.
(8) How should the price for capacity be determined?
A majority prefers to have prices be determined through auctions or a market mechanism. One respondent makes a comparison with the electricity market. “In case of congestion the price for
capacity should be determined by market-based auctions. In case of no congestion the price for capacity should be 0 as it is in the power market.” (EnBW).
In addition, some other respondents believe the regulated tariff to be the best way to set prices. ‘The
price for capacity should remain the same as the earlier price for capacity which was set using the regulated tariff methods. This would prevent a price-raising effect from occurring (…).’ (Nogepa).
(9) What do you believe to be a fair division of revenue from the sale?
The answers to the question on the distribution of capacity sales’ revenues are quite diverse. One point most agree on is that GTS should be compensated. Apart from that, there seems to be a split: either the revenues should flow back to the primary capacity holder, or the revenues should be
invested in solving (contractual) congestion problems. Some respondents say that perverse incentives should be avoided. ”Substantial over recovery of revenues from the release of additional capacity
would need to be managed carefully so as to avoid market distortions.” (StatoilHydro).
Furthermore, many respondents mention the secondary market. There seems to be a consensus that, if the capacity is sold on the secondary market, the revenues should then belong to the primary capacity holder. Two respondents argue that, in order to stimulate the secondary market, capacity sales using UIOLI should not flow back to the primary capacity holder. “There needs to be an incentive
market on a firm basis, before the UIOLI mechanism kicks in. For this reason, we believe the primary capacity holder should not receive any revenue from any of its capacity that is sold by the TSO via the UIOLI mechanism. (…) The TSO should be incentivized to maximize the availability of capacity to the market and should therefore be able to retain a portion of the revenue from the sale.” (Centrica).
According to GTS any distribution should be at least simple and realistic.
(10) If GTS generates higher revenue than costs incurred, what should it do with this money?
Most respondents believe that surplus revenues from secondary sales of capacity should flow back to the market. Tariff reductions is the most heard method for doing so. Another often heard option is using the revenues to solve congestion problems. If there is physical congestion, investments need to be made. Three respondents have specifically mentioned that the revenues should be directed to measures that will result in maximization of firm capacity supply. “(…) the money should be used to
either invest in new infrastructure at the respective point (to get rid of possible physical congestions) or to cover the risk for overbooking of capacities” (EnBW).
GTS feels there are various options for these kind of revenues. An option the TSO mentions is to see that the surplus partially benefit a public shareholder, and partially be returned to the market by way of tariffs discounts.
(11) Do you have any additional comments on UIOLI or the planned code amendment?
Many respondents gave some additional comments regarding UIOLI and the consultation. Some of these comments have been included below.
Nogepa
- When parties find out that they no longer have any need for the entry capacity that they had already booked, they should be able to return it to the TSO.
- It should also be made possible to trade capacity on the secondary market right before the hour of transport, or to book capacity with the TSO on the primary market.
- It needs to be considered whether capacity should also be tradable after the hour of transport. Parties with unused capacity would then be able to trade their unused capacity with parties whose realization exceeded the capacity booked in the preceding hour.
- Under the proposed new balancing scheme, parties that offer capacity on the bid-price ladder should be able to book the needed transport capacity afterwards based on GTS’s actual call order. This will prevent parties that offer capacity on the bid-price ladder from having to book transport capacity that will only be used on the (probably rare) occasions that GTS will actually call that specific offering party.
GasTerra
- With regard to contractual congestion, we believe that having interruptible capacity offered by GTS would be a satisfactory solution (…).
- Possible amendments to the technical codes resulting from the UIOLI-principle will only work if they are drawn up after more light has been shed on the new balancing regime.
- In order to cope with the (…) mentioned interdependencies between intraday capacity and the energy market we would like to see a liquid intraday market to be established prior to changes to the use of cross-border capacities.
Dong Energy
- (…) in DONG Energy’s view most (…) congestion problems have been resolved and except from some specific cross border issues – where it is necessary to find solutions which works on both sides of the border – we do not see a general application of the UIOLI principles is appropriate for the Dutch market.
- Basically, it is DONG Energy’s position that capacity congestions shall be addressed via open seasons with long term bookings.
Gaselys
- UIOSI should be studied as an alternative to UIOLI StatoilHydro
- (…) we would like to emphasize that UIOLI is intended to incentivize the utilization of the secondary market for capacity. In a fully functioning liquid market, this measure is unlikely to be used, as shippers have no desire to miss market opportunities, carry imbalance positions or not deliver on contracts, nor do they wish to pay for capacity, which they no longer require, provided they have the confidence that a proportion of capacity is available to meet shorter term
requirements. UIOLI is a measure that addresses the inability of the market to capture the value inherent to unutilized capacity. The measure should be designed to aid the market in its
development, it should be proportionate, avoid value destruction by creating uncertainties and affecting long-term capacity planning.
- StatoilHydro suggests removing the segregation of interruptible capacity in different ‘bands’ that currently exists in the Netherlands. A single interruptible capacity product distributes the risk of interruption equally over all parties and replaces ‘last booked, first interrupted’, with a non-discriminatory position for all market parties, irrespective of their time of booking.
GDFSuez
- (…) other measures could be put in place to encourage the use of capacities and to improve the access of the Dutch market to all the shippers:
o for the next Open Seasons, TSOs could keep 20% of the new capacities for short term commercialization (period of one year or less),
o TSOs could improve the secondary capacity market (for example, by organizing release of capacities as it has been done in the past with Quality Conversion),
o TSOs could adapt its tariffs to encourage the use of the capacities (for example, by increasing the tariff for capacity and putting in place a negative variable fee for border points).
VME
- VME would like (…) to suggest that the Office of Energy Regulation would make a comparison of the systems currently used abroad, in order to work towards a single Northwestern European market as much as possible.
- VME understands that, based on the Regulation, a UIOLI-system is to be implemented in case of contractual congestion, but is, at the same time, curious about the impact of Open Seasons on this contractual congestion.
- VME suggests taking Germany as an example. Under Section 14 of the
Gasnetzzugangsverordnung, the TSO is legally obliged to create a platform where secondary
capacity can be traded on. That same Section also stipulates that this platform is the only legal place where capacity rights can be transferred on. This has worked extremely well in Germany. The fact that GTS can benefit from a less well-functioning secondary market is exactly why it is important that it is imposed the legal obligation to facilitate one platform.
Centrica
- We are concerned that the document does not mention secondary trading or Use-it-or-sell-it (UIOSI) mechanisms.
- We would urge the EK to consider the effect any changes to capacity management in the Netherlands will have on the ability of market participants to manage their portfolios efficiently within an hourly balancing regime
- The code amendment should reflect the ERGEG Guidelines on Capacity Allocation Management and Congestion Management Procedures once these are finalized later this year.
- (…) the application of UIOLI should be extended to storage facilities in the Netherlands. EnBW
- We therefore sketched up an idea that we call the “reset option” for congested entry/exit points allowing capacity holders to give all of their capacities back to the market while being adequately incentivized to do so. (…) By giving all capacities back into a market-based, non-discriminatory and transparent allocation process, the respective point would be to a 100% managed in a market-oriented way. We encourage the NMa Office of Energy Regulation to discuss such a voluntary approach with the respective market participants confidentially.
EnergieNed
- EnergieNed is against a UIOLI system, because it would offer capacity holders too few guarantees for their available capacity, and because there is no compensation for the loss of guarantee. Furthermore, UIOLI is no solution to contractual congestion, as capacity is then made available too late to the market.
VOEG
- VOEG sees UIOLI as just one measure towards a functioning capacity allocation management as proposed by ERGEG. Therefore further changes will be required. Recent developments on these issues in Germany could be a good basis for discussion in the Netherlands, provided the
difference in balancing regimes is taken into account. VOEG views the proposal of BNetzA as an example showing that an effective capacity allocation management has to go further than UIOLI and that certain measures/tools like e.g. overbooking of capacities; auctions etc. should
