A Study of the Gas Balancing Rules in Europe
The separation of gas trading from transportation activities across the different gas markets in Europe has put the need for market rules for gas balancing at the centre of the operation of the gas market. The Council of European Energy Regulators (CEER) put forward a set of Balancing Principles which were revised and then adopted by the 7th Meeting of the Madrid Forum in September 2003. TPA Solutions and NERA were invited by CEER, under funding provided by the Belgian regulator CREG, to assess the need for further harmonisation by evaluating the operation of the balancing rules.
The study was undertaken in two parts. First, a set of standards was developed against which the balancing principles could be reviewed. These standards drew on the requirements of European Legislation as well as Economic Theory. This theoretical review drew attention to the need for an open and transparent process for achieving the tradeoffs inherent in the design of balancing rules, to give greater confidence of fair and equal access and treatment of market participants. It also indicated that transportation system operators (TSO's) should be required to use market-based procedures for procuring gas for system balancing, and ensure cost reflectivity in imbalance cash-out pricing.
The second part of the project assessed the current operation of the balancing rules in France, Belgium and the Netherlands. Detailed discussions were held with regulators, transporters and shippers from each of these countries. The regimes in GB, Spain and Italy were also briefly reviewed, primarily on the basis of existing experience. Several key issues were highlighted, including the importance of appropriate information flows, the calculation of imbalance cash out prices, choice of balancing period, the role of the transportation system operator, treatment of gas in cross border transit and concerns over flexibility.
The Final Report for the study made a number of recommendations for improving detailed aspects of the operation of the rules, particularly in relation to information flows. The report also detailed proposals for amendments to the Balancing Rules that would help address concerns about inadequate flexibility. CEER have used the final report extensively in producing their own consultation document in July 2005, which is due to be reviewed by the September Madrid Forum meeting.
Project carried out by Brian Withington,
working with David Hough and Sean Gammons from NERA.
Bord Gais Eirean Transmission Market Arrangements
The Irish regulator, CER, has been pursuing reforms to existing transportation arrangements, including the treatment of capacity and balancing methodology, in order to further encourage market liberalisation. BGE have sought assistance in responding to the regulator's consultation documents and proposals, whilst also accommodating requests to amend contracts from their shippers.
Working closely with the client and partner, Brian has provided expert advice on the implications of CER proposals for the client's business, focusing attention on those issues of greatest significance in both economic and operational terms.
He has brought his experience of developing the UK regime particularly to bear in considering the benefits and problems associated with moving from a point-to-point capacity regime to an entry/exit approach, as favoured by CER. Similarly he has been able to make an important contribution to the review of gas balancing arrangements, and the merits of short term market mechanisms versus term contracts for flexibility.
Throughout the work, it has been important to consider the specific context of the Irish gas market and the client, and not simply replicate experience from UK and elsewhere.
Brian has commented in detail on CER documents and assisted significantly in the production of formal written responses, as well as attending meetings on behalf of the client with the regulator and shippers.
BGE Transportation has been able to respond to CER in a reasoned and business-like fashion, taking a considered view of the wider context of gas market development and liberalisation and its own important role within that process.
Discussion has been focused on the appropriateness of proposed solutions to the Irish market, taking account of costs and benefits across the industry, as well as the practicality and timing of implementation.
Dialogue between CER and the client continues on a constructive basis, mindful of the numerous other challenges facing BGE and the market, including the introduction of competition to the whole of the gas market.
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Development of a Distribution Code for Phoenix Gas in Northern Ireland
Phoenix is a fast growing gas distribution company supplying in excess of 80,000 consumers in Greater Belfast. Phoenix had carried some early work towards developing a Network Code for large gas consumers and a draft contract was available. However a number of important regime design issues were outstanding which needed to be addressed. In particular, Phoenix wanted the regime to be simplified to reduce costs and, at the same time, provide for competition down to the level of the domestic consumer.
Mike Piggin developed a suite of high level business rules to fulfil the project brief. Some of the key features included:
- The crystallisation of shipper's daily gas balance positions on the upstream transporter, Premier Transmission Limited (PTL) to avoid the need for Phoenix to fulfil a residual system balancing role.
- The addition of shrinkage gas to Shipper delivery nominations so that Phoenix would not need to fulfil a shipping function to procure shrinkage gas.
- A demand forecasting and attribution process to enable Phoenix to determine Shipper nominations and allocations in respect of non daily metered (smaller) gas consumers.
- A simple aggregate reconciliation process to avoid the need to carry out costly individual reconciliations in respect of non daily metered consumers.
- A capacity regime where the correct amount of capacity is automatically determined and attributed to Shippers who, in turn, are then able to book an equivalent amount of upstream transmission capacity.
Following endorsement of the high level business rules, Mike was asked to develop the full contractual provisions. The Distribution Code was developed in a number of iterative stages in consultation with Phoenix.
The Distribution Code was authorised by the Northern Ireland regulator. Phoenix requested assistance with the specification and implementation of the business processes and IT requirements to put the contract into operation. This work was successfully carried out by Richard Robinson and is now fully implemented.
By summer 2005 Phoenix met its obligation to develop and implement a distribution code including associated modifications to the upstream transmission code. The project was delivered at substantially less than budget cost.
Project carried out by Mike Piggin and Richard Robinson working with Energy Markets Limited
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Regulatory Framework in Completion of the Internal Energy Markets in Slovenia
The Energy Agency of the Republic of Slovenia was actively pursuing the unbundling of network activities with respect to the gas market. In order to achieve this, the Agency needed to develop their position with respect to the structure of gas transportation tariffs. Also they needed to provide clear guidance on the quality standards required and the role of the Agency in regulating the development of the networks, including how they could judge the effectiveness of investment with respect to quality standards.
Richard worked closely with the Agency to develop very detailed reports which were presented to and discussed with the Agency and the Ministry. The details of some of the material produced included:
- Full details of the options for developing network tariffs for transmission and distribution tariffs for Slovenia, based on comparisons with tariff structures in the UK and Belgium
- Detailed recommendations for the structure of network tariffs in Slovenia
- Review of the current quality standards that are applied in Slovenia and comparison with UK, Italy, the Netherlands and Austria
- Detailed recommendations for changes to the current quality standards to meet the changing needs of liberalisation
- Review of the current investment planning process in Slovenia and comparison with the process in NL, I, A & UK. Recommendations were made for Slovenia
Richard was also the gas expert on the whole project and contributed a wide range of support on gas related matters to other task leaders that were looking at benchmarking unit operating costs and tariff structures, investment valuation and regulatory reporting arrangements.
All the recommendations that were presented were accepted by the Agency and the process of incorporating them into legislation has begun. The Agency were very happy with the outcome of the reports and as a result of in country discussions Richard was able to advise the Agency on areas of priority and elements of the regulatory role where the Agency need not become as deeply involved, reducing the commitment to a specific resource in that area.
Project carried out by Richard Robinson working with KEMA International B.V.
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UK Network Code development
After several years and numerous negotiated bi-lateral transportation contracts with individual shippers, there was a pressing regulatory and commercial need to create a contractual "level playing field" covering the use of Transco's transmission and distribution network. In particular, the British Gas supply business had to be put on the same contractual footing as all other users of the transportation system.
Brian was the Transco manager responsible for leading the development and negotiation of the Network Code. This task had to be performed in parallel with IT systems development, since the deadlines for implementation were onerous. Accordingly, the Code was developed in a series of structured stages, each involving intensive negotiation and review with shippers and the regulator.
Firstly, high level principles were produced by Transco and then reviewed by the Network Code Panel (a forum consisting of shipper and Transco representatives chaired by the regulator). Next, business rules were produced and reviewed by ten workstreams, each chaired by Transco representatives. Then detailed business rules were developed following a similar process, followed by an extensive legal drafting process. The Network Code Panel continued to meet to review progress and resolve problems throughout the whole process.
Brian was Transco's lead representative on the Network Code Panel in open meetings that ran for almost two years. In addition to his commercial expertise drawn from previous negotiations of transportation and gas purchase contracts, he brought a unique blend of tact, diplomacy and humour to proceedings in a way that facilitated successful progress in the face of vested interests and numerous obstacles.
Despite all the challenges, the Network Code was introduced in March 1996, less than two years after the first panel session. Transco now had a robust contractual and IT framework that enabled it to balance its system safely whilst going on to introduce full domestic competition to 20 million consumers by 1998. Shippers were invoiced and paid their bills on time. British Gas was able to complete the separation of its supply business (which became part of Centrica in 1997) and was no longer cross-subsidising new entrants. One of the key Network Code concepts, the National Balancing Point (NBP), became a successful liquid trading hub, further facilitating the development of the competitive gas market. In 1997, Brian was awarded the MBE for his services to the gas industry.
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