Dear Sirs,
Project Number 101903
Decision to establish a method of regulating the supply of flexibility services
BP welcomes the proposal by the NMa to establish a means to regulate flexibility services during this stage of Dutch gas market development. However we believe that the approach has been unduly cautious with regard to the provision of hourly flexibility, and further measures will be necessary to ensure the continued development of the Dutch market. We have also commented on the proposals for remedies, which we fear would undermine the achievements made to date in stimulating gas trading.
1. Hourly balancing
In their recent report on Gas Balancing1, ERGEG describe how well-designed balancing regimes can contribute to establishing and encouraging traded markets, but can also be used to create barriers to entry in the form of balancing rules that favour the incumbent supplier.
A critical factor in establishing whether balancing rules are well-designed is the availability of flexibility and tolerance services that are accessible to the shipper and that can be used to rectify an imbalance within the balancing period.
In their research into flexibility services2, Frontier Economics conclude that GuTS is not dominant in the provision of hourly flexibility, particularly in winter. This conclusion is based on the assertion that third parties hold 38% and 52% of hourly flexibility in the high-cal market, respectively for summer and winter periods. This assertion relies on a number of assumptions, which are not supported by our experience in the market.
1 Gas Balancing – An ERGEG Discussion Paper For Public Consultation (ERGEG) 18 July 2005 2 Research into Flexibility Services – Final Report, a report prepared for DTe (Frontier Economics)
March 2005
Director, European Regulatory Affairs
Douglas B. Wood
BP Gas Marketing Ltd 1 Broadgate London EC2M 2AP United Kingdom Direct: +44 (0)7769 930994 doug.wood@bp.com 26 October 2005 Board of NMa
Netherlands Competition Authority (NMa)
PO Box 16326
The principal source of flexibility from third parties in these markets is listed as coming from converter stations3. In order for this to be usable as a source of flexibility in the high-cal market, a shipper must be able to increase or decrease the amount of gas passing through the nitrogen injection stations. This in turn is dependent on the ability to increase or decrease low-cal consumption, the ability to make a compensating adjustment in low-cal production, or the level of access to low-cal storage.
Firstly, there is no evidence to suggest that customers have the level of flexibility suggested by the report to alter their consumption profiles or to switch fuels to such an extent at short notice. The assumption that customers can make significant alterations is unrealistically conservative.
Secondly, adjustment of low-cal production is dependent on GuTS’s control of available flexibility from Groningen (and explains how Groningen flexibility can be transferred to the high-cal market). Again, this is not a source of flexibility available to third parties directly, only where this has been acquired from GuTS.
Thirdly, access to low-cal storage is already counted in the low-cal sector. To include it also as a source of flexibility in high-cal market would be to double-count it. In any case, flexibility during injection mode is considerably smaller than in withdrawal, and withdrawal cannot be sustained for the entire period. Technical, operational and environmental constraints on turning facilities between injection and withdrawal mean that it is not possible to top up storage between withdrawals to ensure that full withdrawal capacity is constantly available.
Together, these points serve to demonstrate that high-cal flexibility through quality conversion is significantly overstated in Frontier’s report.
The second largest source of flexibility is assumed to come from imports. As far as we are aware, imports from production sources are based on daily contracts. Although there are some renomination rights within-day, these are not reliable and are not contractually enforceable as providing reliable hourly flexibility. A request to ramp up and down during the day is more likely to be met by a constant flow which does not adversely affect operating equipment. Imports through traded markets are again based on daily trades. Special arrangements are required to allow hourly flexibility in imports and the report does not identify which contracts may be able to provide this. The conclusion that all contracts might provide such hourly flexibility is unrealistic.
The third largest source of flexibility is assumed to come from interruptible customers, which is again overstated. Use of power station interruption to provide hourly flexibility is frequently not economic. The power generated is less fungible than gas between time periods. Even portfolio generators would have limited capability to substitute alternative generation at short notice, based on hourly profiles. Some predictable shape trading might be possible, but this would not allow a buyer to match unpredictable hourly demand and again would require an hourly price (for gas) to allow this to be hedged in the market.
The wider question of why an hourly balancing regime is necessary is reopened. Without hourly prices it is difficult for large users to value the rescheduling of production from peak to off-peak periods, or for the development of hourly allocated storage regimes. The methods used to create hourly flexibility in pipeline systems tend to be related to linepack, compression “bullets”, diurnal storage tanks and other forms that are intricately interwoven with the operation of the system. It is unlikely that these services could ever be offered competitively.
Where the TSO requires hourly balancing and is then the only party who is able to offer hourly services to third parties, then this effectively becomes part of transportation services. Shippers will continue to buy gas on a daily basis, from upstream, from international storage or from the traded market, and continue to charge customers for daily use of gas. They will continue to book transportation capacity on a daily basis. As a simplification which will significantly reduce transaction costs, operational complexity and risk of administrative error, GTS could run a daily balancing system, as long as they were given the tools to maintain a daily balance, which would be included in allowable costs as part of the tariff calculation. Obligations on shippers to provide accurate nominations and not to endanger recklessly the transportation system through profiling could be addressed exclusively in Guidelines to the Gas Act.
2. Measures to be taken (method decision)
First, for the reasons mentioned above, we think it is important to separate hourly flexibility from other periods. As the market is likely to be limited only to connected TSOs and DSOs (who, strictly speaking, should not participate in commercial markets using regulated services) an auction to supply hourly flexibility is unlikely to be meaningful. Indeed the idea of a TSO withholding linepack in its own market in order to sell this service into a neighbouring market is questionable. For such services, we recommend that this service be phased out under a move to daily balancing. If this is not possible immediately, then prices charged should be based only on initial costs. Thereafter, if GTS is responsible for bearing the costs of providing the service, then it will find the most efficient way to do so, if it can retain any cost savings. Ultimately, GTS may be able to supply the service using its existing linepack (i.e. at zero additional cost).
However, the NMa’s proposal contains a restriction that will frustrate this. Paragraph 147 describes an allocation system based on need, to be demonstrated by registered demand, i.e. a “show of contracts”. In discussions on Guidelines for Good Practice for Storage System Operators, the Council of European Energy Regulators believed that storage flexibility should be available to all Customers, as defined under the Gas Directive, including wholesale customers, traders, suppliers and end-users, and that there should be no commercial restrictions such as a “show of contracts”. The absence of traders from such a market will inhibit secondary trading, the development of virtual flexibility services and the establishment of some kind of reference price.
Consequently, we would recommend that applications for flexibility are not restricted, but that the regulatory authority monitor the market if there are concerns of possible manipulation.
We would be pleased to discuss any of the items raised here, at your request. Yours sincerely,
