security of supply brian withington, managing director, tpa solutions gte conference, 22 october...

Security of Supply

Brian Withington, Managing Director, TPA Solutions

GTE Conference, 22 October 2003

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Overview of presentation

• Dimensions of security of supply• GTE perspectives

– January 2003 paper– March 2003 comments on EU draft directive

• Personal perspectives• Conclusions

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What do we mean by

“security of supply”?

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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

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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

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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

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Transportation investment

• Predictable, transparent & stable framework needed

• Reward for investment by TSOs• Importance of long term contracts• Market driven wherever possible

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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

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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

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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

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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

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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

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Security of Supply Triangle

Resilience

Div

ersity

Insurance

Sources of Gas

Transportation Storage

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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

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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

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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

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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

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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

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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

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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”

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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

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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”

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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

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