Gas in Denmark. Security of supply and development

Transcription

1 Gas in Denmark Security of supply and development

2 Contents Introduction and summary of Gas in Denmark Current themes in the Danish gas market German gas infrastructure Nord Stream Ellund Future storage requirements Focus on the North Sea International consolidation of the gas system Development of EU rules Development of rules on cross-border gas trading Overview of gas infrastructure Baltic Gas Development of the European market model Capacity allocation Balancing Gas tariffs Tariff project Security of supply regulation Focal points What does Energinet.dk do? Challenges in Ellund Prices and congestion in Socio-economic analysis of consequences of new gas qualities Report conclusions Energy savings in the North Sea Background New calculations in Biogas Increased political focus on biogas Certification scheme for declaration of bio natural gas Biogas activities in Energinet.dk Nordic Biogas Conference LNG for sea transport Vision for future gas system Interaction between gas, electricity and heat Gas system Long-term role of the gas system up to The Danish gas system Infrastructure Security of supply objective Security of supply nationally and locally European and Danish gas markets Europe Denmark Historical overview General Security of supply Consumption Generation Ellund entry Storage utilisation Near-emergency situation

3 3.2.6 Use of entry/exit capacity Utilisation of the M/R stations capacity Market General market trend Ellund Gas quality Consumption and supply one year ahead (winter outlook) Short-term security of supply Winter outlook Capacity reserves in normal situations Capacity orders Emergency supply Tools Prioritisation of means Gas quality Consumption and supply in future Challenges in the coming years Supply situation in Development in consumption The Danish Energy Agency s projection Energinet.dk s projection Outlook for the deve lopment in Sweden s gas consumption and supplies Capacity requirements Long-term security of supply Gas storage capacity Transit to Germany Gas quality Gas from Germany via Ellund from Development in infrastructure Status of the Ellund-Egtved expansion Compressor station in Egtved Gas transmission pipeline Line-valve stations Authority approval Potential transmission system expansions in the long term the Norway project Optimising the technical capacity of the transmission system Background Principle behind the forecasting model Tools Distribution Capacities and offtake M/R stations Adjusting capacity requirements Gas from Germany Dimensioning of distribution network Special security of supply issues in the individual distribution areas Naturgas Fyn Distribution DONG Gas Distribution HNG Distribution and Naturgas Midt-Nord Distribution Gas supply in Copenhagen

4 4

5 Introduction and summary of Gas in Denmark Introduction Gas in Denmark contains an overview of the most important activities, challenges and developments for the gas system in Denmark in the past year and in coming years. In addition, Gas in Denmark constitutes Energi net.dk s reporting to the Danish Energy Agency in accordance with the Danish executive order on maintaining security of natural gas supply (Bekendtgørelse om varetagelse af naturgasforsyningssikkerheden) and the Danish executive order on the use of the natural gas distribution network and plans for the future gas transmission capacity (Bekendtgørelse om anvendelse af naturgasforsyningsnettet og planer for det fremtidige behov for gastransmissionskapacitet). Reading instructions The report begins with 13 themes describing current challenges and developments in the gas system and its surroundings. The description of the themes is followed by: A description of the Danish gas system in section 2 A description of developments in relation to security of supply, the market and gas quality in section 3 Expectations for supply and consumption in the coming year including in particular a winter outlook for the winter 2011/2012 in section 4 Future expected supply and consumption including the challenges in the next few years in section 5 Status of the Ellund-Egtved project in section 6 Assessment of meter and regulator station capacity relative to demand in section 7. Gas supplies and the market are changing In light of the declining North Sea production, supplies to Denmark and Sweden depend increasingly on imports from Germany. A decision on full expansion of the capacity from Germany to Denmark is still pending. Market players, energy agencies, regulators and Energinet.dk are therefore closely monitoring developments in Germany (read more in section 1.1). Due to the strained supply situation, we will be relying more and more on the gas storage facilities over the next few years. In the long term, it is uncertain what the storage requirements will be (read more in section 1.2). In addition to the general decline in gas production, a number of other changes are also taking place in the Danish part of the North Sea. Focus is on exploiting the North Sea resources as well as on offshore pipeline tariffs. Energinet.dk plans to expand its cooperation with the players to ensure increased transparency and flexibility in the gas market (read more in section 1.3). The Danish gas system is increasingly being integrated into the European infrastructure. This also means that Energinet.dk is devoting more efforts internationally to create an optimum setting for the Danish gas system (read more in section 1.4). The EU s third liberalisation package and the future European network codes will result in significant changes in the shippers operating terms. Already in the coming years, Energinet.dk will change shippers terms to match Euro pean requirements (read more in section 1.5). Optimum use of gas in the future requires that the tariffs be adapted to new needs. Energinet.dk has therefore launched an analysis of future tariff principles (read more in section 1.6). 5

6 The EU regulation on security of gas supply entails a shift in terms of who should be supplied with gas in the event of major supply failures. Energinet.dk focuses on phasing in the rules to make them harmonise to the greatest extent possible with the Danish gas market s demand for security of supply (read more in section 1.7). The physical supply situation in could have a very large impact on the commercial gas market in Denmark. Like the winter of 2010/2011, the market is also expected to be strained in coming winters (read more in section 1.8). Importing gas from Germany also entails the need to adopt a policy on how to handle gas which does not comply with the Danish Gas Regulation (Gasreglementet). Energi net.dk has conducted a technical and socio-economic analysis which shows that it is advisable from a security of supply perspective as well as the most economically advantageous solution to adapt the Danish Gas Regulation and ensure that sensitive equipment is adjusted, rather than treating the imported gas (read more in section 1.9). In connection with an action plan aiming to achieve more energy-efficient extraction of oil and gas in the North Sea, Energinet.dk has conducted an analysis in cooperation with the Danish Energy Agency and Danish Operators of the possibilities of reducing energy consumption for the transport of natural gas from Tyra Øst to Nybro. The analysis shows that energy consumption cuts in the North Sea result in increased onshore energy consumption. The energy savings total approximately 5% (read more in section 1.10). Great changes in store in the long run, but also great opportunities The first upgraded biogas entered the distribution network on 15 September, delivered from the plants of DONG Energy and Fredericia Municipality. Energinet.dk sees biogas as the first of a range of different renewable energy gases which are expected to play an increasing role in the Danish gas system. Energinet.dk is introducing a certification scheme which ensures that biogas can be traded in the market (read more in section 1.11). LNG (Liquefied Natural Gas) is a particularly interesting propellant for sea transport based on climate, health and environmental parameters. An infrastructure needs to be established in Denmark before ships can use LNG as a propellant (read more in section 1.12). Energinet.dk expects that natural gas will also play an important role in energy supply in It is thus expected that only 10% of the consumers will have replaced their natural gas-fired boilers with heat pumps by then. On the other hand, the annual consumption of natural gas for CHP is expected to decline, while the capacity requirement is expected to remain unchanged or increase. In the green society of the future when fluctuating wind power will constitute a significant energy source, the role of the gas system may be to ensure flexibility and being an important energy carrier. The large energy storage capacity of the existing gas storage facilities makes the gas system particularly attractive. Energinet.dk has carried out a number of assessments which show that in the long term: There is a need for a flexible energy system which can integrate different renewable resources such as wind, biomass and waste, while supplying various types of future fuels for the transport sector, including energy for the future energy-efficient fuel cells 6

7 Renewable energy gas in the form of methane and synthesis gas could ensure flexibility in the energy system as well as ensuring, via the large gas storage facilities, a stable energy supply which can compensate in relation to the fluctuating electricity generation from wind power Biogas and gasification of biomass can offer greater flexibility and ensure a better return of nutrients than conventional biomass CHP There are extensive biomass and waste resources which are suitable for the production of biogas, in the form of liquid manure and sludge and perhaps also waste Electrolysis and catalysis of fuels may, in the longer term (after 2025), be financially competitive if high efficiency is ensured, ia by integrating the processes and thus integrating electricity, gas, heat, CO 2, biomass and hydrogen. Read more in section Imports from Germany characterised supplies in 2010 The keywords for 2010 were: increased consumption in Denmark, and especially in Sweden, and imports of gas from Germany. The past year was characterised by the possibility of physically importing gas from Germany. Gas was imported from Germany from 1 October 2010 when physical imports became possible and throughout the winter. From a market perspective, this has provided better coupling between the Danish and Swedish markets and the bigger and more liquid German market. From a security of supply perspective, it has also resulted in a new supply option for the Danish and Swedish markets, which has a positive effect. The positive impact of the extra supply option was, among other things, reflected in the handling of a near-emergency situation in February Technical problems on the Tyra platform created problems with the North Sea gas supplies for three days, with a total interruption of more than 24 hours. This happened on cold winter days with daily mean temperatures of -5 C. In addition to imports from Germany, which contributed to maintaining the supply to Danish and Swedish consumers, the two Danish gas storage facilities also contributed significantly to the supply. Stenlille storage facility even set a record by supplying more than 500,000 Nm 3 /h. The imports of gas from Germany also meant greater variation in gas quality than consumers have traditionally been used to, which led to major challenges and changed adjustment procedures. However, the gas has complied with the Danish Gas Regulation at all times. Apart from the supply from the North Sea via Nybro, the year was also characterised by nearly full capacity utilisation in all points ie the gas storage facilities, Ellund and Dragør (read more in section 3). Strained situation in the coming winter Sufficient capacity is expected to be available to supply Danish and Swedish consumers in the coming winter, even in the event of a 20- year winter with a daily mean temperature of -13 C. Energinet.dk has once again entered into contracts on interruptible emergency supply and emergency supplies from Syd Arne and the gas storage facilities, and the possibilities of importing gas from Germany in emergency situation have now also been factored in. As gas is also expected to be imported from Germany in the coming year, and as the variation in German gas quality is greater than the one permitted in the Danish Gas Regulation, the Danish Safety Technology Authority has asked Energinet.dk to prepare a report on how this quality issue can be solved (read more in section 4). Big challenges in coming years Despite expectations that Danish gas consumption will see a slightly falling trend 7

8 in the coming years and that Swedish gas consumption will remain at the current level, the supply situation in is expected to be strained. This situation may be prolonged if the expected investments in the North German system are not made. During this strained period, it may become necessary to interrupt or reduce injections into the gas storage facilities or interruptible capacity in Dragør exit or Ellund entry to maintain the required pressure in the transmission system. The supply situation in 2012, 2013 and possibly a part of 2014 is expected to remain very strained, and consumers, suppliers, shippers and storage customers should thus carefully consider how to ensure sufficient flexibility and supply options in these years. In 2012, Energinet.dk expects imports of approximately 0.5 billion Nm 3 of gas from Germany to supplement Danish production in order to cover Danish and Swedish demand. In 2013, the Danish production is expected to have decreased further, thus requiring imports of approximately 0.8 billion Nm 3 of gas from Germany. Energinet.dk anticipates that the Danish expansion will be completed by October It is expected, however, that one of the compressors in Egtved can be commissioned as early as in April Energinet.dk expects the expansion in both Germany and Denmark to be in place by 2014 with firm capacity of 310,000 Nm 3 /h, and sufficient gas volumes will be available to supply the Danish and Swedish markets. In 2015, further expansion of the North German system is assumed to have taken place, resulting in a capacity of minimum 500,000 Nm 3 /h, while the Danish system will be able to receive minimum 700,000 Nm 3 /h (read more in section 5). Ellund-Egtved progressing as planned The Ellund-Egtved expansion is progressing according to plan in terms of both the compressor station and the pipeline looping. The former Minister for Climate and Energy approved the establishment of the installations in The project planning for the compressor station will take place in 2011 at the same time as the preparatory construction work is carried out. Moreover, the archaeological studies of the pipeline section between Ellund and Egtved was conducted in Energinet.dk is also looking into developing its models and tools to enable the enterprise to make as much capacity available to the market as possible (read more in section 6). Sufficient capacity in distribution companies In cooperation with the distribution companies, Energinet.dk has investigated whether the meter and regulator (M/R) stations have sufficient capacity to deliver the gas required. In this context, Energinet.dk has come to the conclusion, together with the distribution companies, that there is no need to change the capacities for the distribution companies in There are, however, certain stations in DONG Energy s area which will require increased capacity in the long term (read more in section 7). 8

9 1. Current themes in the Danish gas market 1.1 German gas infrastructure In light of the declining North Sea production, supplies to Denmark and Sweden depend increasingly on imports from Germany. Gasunie Deutschland has not yet decided on an expansion towards Denmark matching the Danish expansion towards Germany. The Nord Stream pipeline from Russia to Germany and the North European Gas Pipeline, NEL, which handles the onward transport of the gas, may change the supply situation in Denmark and Sweden as early as in The Danish Energy Regulatory Authority and Energinet.dk are therefore monitoring developments in Germany closely Nord Stream With parallel pipelines offering a capacity of 55 billion Nm 3 /year, the Nord Stream twin pipeline system, which runs from the area around St. Petersburg in Russia to Greifswald in Germany, will have a significant impact on the North German supply situation. The capacity corresponds to more than ten times the total Danish-Swedish consumption. Initial supplies from the first Nord Stream pipeline are expected to have been commenced through the north-southbound OPAL pipeline at the time of the publication of this report. Later on, supplies will also be made through the east-westbound NEL pipeline. NEL is under construction, and the plan is for the construction to be completed in 2012; however, a delay is expected. NEL is expected to have a major impact on the supply situation and to be able to supply the largest players in the Danish and Swedish wholesale markets. The realisation of NEL and the possibility of interruptible supplies from Nord Stream are therefore very important for the gas supply to the Danish and Swedish markets from the time when it is ready and until October 2014, when an upgraded compressor station in Achim near Bremen, Germany, is expected to guarantee firm supplies from several different sources Ellund The Gasunie group coordinated its Open Season process for its transmission systems and companies in the Netherlands and Northern Germany with Energinet.dk in The coordinated Open Season processes in Germany and Denmark demonstrated a substantial mar ket interest for capacity at the Ellund bor der point, and both the Gasunie group and Energinet.dk are therefore aiming for a considerable expansion of capacity in Ellund. Having been granted funding by the European Commission, Energinet.dk made a final decision in June 2011 to increase capacity in the Danish system with a compressor station in Egtved and a looping of the pipeline from Ellund to Egtved. A similar expansion is being prepared on the German side; however, despite extensive negotiations between the German regulator, Federal Network Agency, and Gasunie Deutschland, it was not possible to come up with a solution which was commercially satisfactory to Gasunie in terms of meeting all of Gasunie s Open Season demand in Ellund in At the completion of the German Open Season process, the Gasunie group had therefore only been able to decide on a compressor expansion in Achim near Bremen, Germany. However, together with the new NEL pipeline from Nord Stream, this expansion can ensure a considerable increase in capacity towards Denmark. The Achim compressor expansion is expected to be completed in The new capacity from 9

10 NORD STREAM Hamburg BBL NEL RHG Hanover OPAL Berlin JAMAL Amsterdam London INTERCONNECTOR JAGAL WEDAL Kassel MIDAL STEGAL Natural gas pipeline, OPAL NEL TRANSPORT GMBH. Planned/under construction WINGAS TRANSPORT natural gas network. Planned/under construction Transit pipeline. Planned/under construction WINGAS natural gas storage facility. Planned/under construction Compressor station. Planned/under construction Frankfurt/Main MIDAL TRANSGAS ERM Stuttgart München WAG Figure 1 1 The map shows the German gas system with connection to Nord Stream and the location of NEL. the NEL pipeline and Achim in 2014 will be firm capacity, and the gas is assumed to come from both Russia, Norway and the Netherlands. Any capacity in excess of this will require further expansion of the North German system towards Denmark. With regard to ownership and operation, the infrastructure is distributed on several companies in Germany. Following DONG Energy s sale of its ownership interest to the Gasunie group, the DEUDAN system from Ellund to Quarnstedt is now owned by the E.ON Ruhrgas-owned, unbundled infrastructure company Open Grid Europe and the Gasunie group. Physically, DEUDAN is still operated by Gasunie, while capacity is shared according to a mutual allocation key. This allocation key and the mutual agreements between the transmission system operators (TSOs) Open Grid Europe and Gasunie entail that the new capacity resulting from the investments in NEL and Achim will also be distributed between Open Grid Europe and Gasunie. Gasunie has thus only obtained sufficient capacity to cover just under half of its Open Season demand. Gasunie is therefore still working to obtain approval for full expansion towards Ellund and is participating in a socalled round-table dialogue with the German regulator, the German legislator, Open Grid Europe and a few other large transmission companies on how to ensure the necessary investments. The market players, energy agencies and Energinet.dk are therefore closely monitoring developments at both the TSOs Gasunie and Open Grid Europe and at the German regulator, Federal Network Agency, and the German legislator. This is done to ensure support for the investment needs of the Danish and Swedish markets in Northern Germany. In a best-case scenario, a decision on further German expansion can be expected in 2012, following which full expansion can be realised by Other alternatives, including the possibility of establishing an interconnection to Norway, are also being looked into. 1.2 Future storage requirements We will become more dependent on the gas storage facilities over the next years. The storage requirements in the longer term are uncertain. Energinet.dk expects gas and the gas storage facilities to play a crucial role in the energy system of the future, where the fluctuating wind will require the ability to store energy from periods with high windpower generation for periods with no wind. Today, a working storage capacity of around 1 billion Nm 3 (equivalent to approximately 12 TWh) is available, corresponding to one fourth of Danish gas consumption distributed on the two gas storage facilities in Stenlille and Lille Torup. The storage facilities are used for making seasonal adjustments (adjusting differences between consumption and supply, summer and winter), for providing emergency storage (handling short and long-term supply failure situations and maintenance work at supply locations) and for ensuring commercial flexibility (exploiting short-term differences in gas prices). The decline in North Sea gas production for the Danish and Swedish markets in the period will increase the need for and utilisation of the existing gas storage facilities. The first stage of the expansion of the transmission system in Germany is expected to be completed in 2014 to partially match the Danish system, and the Danish Hejre field in the North Sea is expected to be commissioned in In a best-case scenario, the second German stage will also be ready in 10

11 2015. This will reduce the pressure on the existing gas storage facilities. However, a number of other factors will also have an impact on storage requirements. As previously, the gas storage facilities will obviously have to be used for making seasonal adjustments, providing emergency storage and ensuring commercial flexibility. Also, with the Danish wind power expansion, gas and the gas storage facilities may play an important role in handling the highly fluctuating wind generation and in the work towards achieving the fossil fuel-free Denmark, where renewable energy gases may gain greater importance in the energy system. The quantification of the future storage requirements is highly uncertain at present. Natural gas storage facilities may be needed in the form of facilities for underground storage, LNG (liquefied natural gas), CNG (compressed natural gas) and, for example, hydrogen storage. However, a number of factors will impact storage requirements in Denmark in the period : 1. Impact of the EU security of supply regulation after Wish for flexibility to exploit differences in gas and electricity prices 3. Scope and timing of the expansion of the Danish part of the North Sea (Hejre, Svanen, etc.) 4. Scope and timing of additional secondstage expansion in Germany after Possible competition with natural gas storage facilities and other energy flexibility tools in Germany 6. Possible interconnection to the Norwegian gas fields after Load factor on supplies (North Sea, Germany, Norway) 8. Possible interconnection to Poland after Biogas volume in the Danish gas system 10. Developments in the Swedish gas market 11. Role of LNG in the Danish gas market, including the use of LNG for sea transport 12. Use of gas in the transport sector 13. Requirement for gas-fired peak-load plants for handling fluctuating wind generation 14. Scope of biomass and renewable energy gases in the energy system 15. Possibilities of expanding and establishing new gas storage facilities in Denmark. Danish natural gas consumption has seen a slightly falling trend in recent years, which will result in lower storage requirements if this trend continues. The question is, however, whether gas will play an increasing role as a flexibility tool in the period a number of parameters may thus lead to increased gas storage requirements. Gas allows for the storage of large quantities of energy, which is necessary in order to handle the energy system of the future in both the medium and the long term. The 1 billion Nm 3 of gas which can be stored corresponds to one-third of Danish power consumption. The future production of renewable energy is primarily expected to involve electricity from wind power, which is difficult and expensive to store as electricity. Other significant parts of the renewable energy resources will be based on biomass, which must be converted in order to be utilised. Being able to utilise the other energy systems with their specific strengths is therefore important. Electricity, gas and district heating can be seen as a trio of energy carriers which, with their highly different properties and strengths, together can rise to the significant challenge of creating an energy system independent of fossil fuels. 11

12 As opposed to electricity and heat, gas is a form of energy which, in a relatively flexible and economical manner, can be stored in very large quantities of energy over a long period of time without loss of energy. This may turn out to be an important property if a large part of energy supplies is to be based on fluctuating wind power. It is therefore assessed that a significant increase in the requirements for gas storage may arise. 1.3 Focus on the North Sea In addition to the general decline in gas production, a number of other changes are also taking place in the Danish part of the North Sea. For one thing, there is political focus on maximising the exploitation of the North Sea resources, and the Danish Energy Regulatory Authority has also announced that the tariffs charged for transmission in the pipelines between the platforms and Nybro on shore must be lowered. Energinet.dk plans to increase the level of cooperation with the players to ensure increased transparency and flexibility in the gas market. Danish North Sea production is declining in these years, and there is considerable uncertainty as to how much gas can be expected to be produced and when. As the entity responsible for Danish security of supply in the Danish and Swedish gas markets, which until October 2010 will be supplied exclusively by supplies from the Danish part of the North Sea, Energinet.dk therefore has considerable focus on the North Sea. The projections of the North Sea production are prepared by the Danish Energy Agency, which publishes an updated projection every year. The latest projection from April 2011 appears from Figure 5 1. In Denmark, there is broad political consensus on maximising the exploitation of the oil and gas resources in the Danish part of the North Sea. As mentioned in section 6.2 on Norway, a Danish interconnection to Norway via the existing Danish North Sea infrastructure can contribute to improving the profitability of the Danish North Sea infrastructure and thus potentially extend the opportunities for extracting gas in the North Sea. In the spring of 2010, the Danish Ministry of Climate and Energy appointed a working group chaired by the Danish Energy Agency and with participants from DONG Naturgas A/S, Mærsk Olie og Gas A/S, Energinet.dk, DONG E&P A/S, Hess Danmark A/S, the Danish Energy Regulatory Authority, the Danish Ministry of Finance, the Danish Ministry of Economic and Business Affairs, the Danish Ministry of Climate and Energy and Rambøll. The group analysed how the Danish installations and pipelines in the North Sea can best be used with the onshore infrastructure. In Energinet.dk s opinion the conclusions will remain relevant and, in addition to the interconnection to Germany, considerable advantages of interconnecting to the Norwegian system are pointed out. In addition to Denmark, the Danish part of the North Sea also has interconnections to the Netherlands, and it is thus far from certain that the entire Danish production will be sold in Denmark. Apart from the uncertainty with regard to production and the Dutch offtake, uncertainty also surrounds the commercial situation between the producers and the gas market players, into which Energinet.dk has no insight. Energinet.dk is aware, however, that a number of important gas trade agreements expire completely or partly in 2012, 12

13 which will potentially open up for increased market integration between the gas market in the North Sea and the onshore gas transmission system. Moreover, the Danish Energy Regulatory Authority announced in June 2011 that tariffs should be lowered considerably in the Danish upstream pipeline system in the North Sea which is owned and operated by DONG Energy. The Danish Energy Regulatory Authority also announced that it should be made possible to introduce options for purchasing capacity and transport in the pipeline for short periods of time (short-term products), improve balancing conditions and increase transparency in respect of volumes and flows in the North Sea. This may further support improved market integration between the gas market in the North Sea and the onshore gas transmission system. If the tariff reduction calculated by the Danish Energy Regulatory Authority is realised and the flexibility and transparency are increased, this may, in addition to increased market integration, have an impact on: The distribution of Danish-produced volumes between the Netherlands and Denmark The production in the North Sea The possibilities of a Norwegian interconnection. Energinet.dk will therefore maintain strong focus on the North Sea, in respect of which Energinet.dk is expecting increased cooperation with the other players and operators in 2012 on increasing transparency and flexibility. 1.4 International consolidation of the gas system The Danish gas system is increasingly being integrated into the European infrastructure. This is being done to strengthen security of supply, create a more efficient gas market and ensure that the gas system contributes to creating a more environmentally friendly energy supply. This also means that Energinet.dk is devoting more efforts to international work in order to create an optimum setting for the Danish gas system Development of EU rules In these years, considerable efforts are going into implementing the EU s third liberalisation package, one of the purposes of which is to create transparent competition in the European gas markets and ensure optimum interaction between the national gas systems. In this connection, Energinet.dk and the other European TSOs have been charged with participating in developing the rules which are to define gas cross-border trading from These rules are not intended to replace the gas trading rules in the individual countries. The work to establish cross-border EU rules on gas trading is anchored in the European or ganisation ENTSO-G (European Network of Trans mission System Operators for Gas), which has been established on the basis of Regulation No. 715/2009 and comprises all gas TSOs in the EU. The work in ENTSO-G is of high priority to Energinet.dk, and employees from the entire Gas Division participate actively in the working groups, which make up the foundation of the organisation s work. In addition, Torben Brabo, Vice President, Gas Market, Energinet.dk, has been elected member of ENTSO-G s Management Board. Energinet.dk has also seconded an employee to ENTSO-G for a preliminary period of two years. 13

14 1.4.2 Development of rules on cross-border gas trading As the development of common rules for crossborder gas trading (and electricity trading) is highly technical, the member states have established a special decision-making process aimed at ensuring that the rules are implemented in a professional and applicable manner while ensuring maximum transparency. ENTSO-G, in which the TSOs cooperate, is not the only organisation established for this purpose. Similarly, the agency ACER (Agency for the Cooperation of Energy Regulators) has been established, the objective of which is to support the cooperation between the national regulators and promote the development of the European energy market. ACER is situated in Ljubljana in Slovenia. The European Commission, ENTSO-G and ACER constitute the three key cogs in the development of new rules. The European Commission defines the sequence of network codes, ie market rules, and chooses the decision-making process prior to asking ACER to develop framework guidelines setting out the general outline. Subsequently, the Commission will ask ENTSO-G to prepare a thorough draft within twelve months. Following approval by ACER and the European Commission, the Commission will initiate the so-called Comitology procedure. With the Comitology procedure, the European Commission chairs a committee of experts from the member states which will make the network codes legally binding. The first subelement in the overall set of rules is the rules on capacity allocation, on which the European Commission has asked ENTSO-G to submit a draft, which has now almost been completed. In this connection, Energinet.dk and the other ENTSO-G members have made considerable efforts to create an open, efficient process which can also be used for future subelements, eg balancing and interoperability rules. The European Commission, the national regulators and various stakeholders have noticed the efforts made and praised the process. Close interplay between the individual sets of rules will be crucial. Ensuring, in the further work, that new tariff principles and planning procedures do not undermine the TSOs incentives to establish new infrastructure will also be a crucial factor. Read more about the development of the European market model in section 1.5, and keep an eye on developments on ENTSO-G s website: Overview of gas infrastructure ENTSO-G is also charged with preparing non-binding overviews of how the gas infrastructure should develop over the next ten years in order to support the market development and ensure security of supply. These overviews are reported every two years in a European Ten-Year Network Development Plan (TYNDP). The second TYNDP was published at the beginning of Due to the unilateral dependence on the decreasing Danish North Sea production and the limited scope for imports from Germany, Denmark- Sweden was highlighted as the only area with insufficient operating capacity in TYNDP. In the intervening period, similar analyses will be conducted at regional level, with Energinet.dk contributing to the development of the analyses for the Baltic region 14

15 and the north-western region of the EU. The results of these analyses are reported in Gas Regional Investment Plans (GRIPs), which are expected to be published at the beginning of Furthermore, Energinet.dk contributes to preparing analyses of the expected gas supply for the coming seasons. ENTSO-G thus also plays a role as analytical coordinator in respect of the development of the gas infrastructure in the EU Baltic Gas The gas infrastructure in the eastern part of the Baltic region is not connected with the pipelines in the rest of Europe. Via Baltic Gas and the regional work in ENTSO-G, Energinet.dk contributes to placing focus on the special challenges that this poses. In the period , Energinet.dk holds the chairmanship of Baltic Gas, which is a regional forum of gas companies and TSOs in the Baltic Sea region. The organisation has particular focus on security of supply and on the possibilities of developing the gas market in the region. This also makes it possible to exchange knowledge on the potential for developing the gas system so that it has a role to play in a greener energy system and exchanges experience with the German and Swedish colleagues, who have more experience with biogas in the gas system and gas in the transport sector. 1.5 Development of the European market model The EU s third liberalisation package and the future network codes will significantly change shippers terms. Already in the coming years, Energinet.dk will change shippers terms to match European requirements. ENTSO-G is currently developing network codes. The first two issues to undergo this process will be capacity allocation rules and balancing rules Capacity allocation The first common set of rules of the European Commission, the regulators (ACER) and the transmission companies (ENTSO-G) designated as a pilot project for the entire process are rules on how the allocation of capacity in the border points to shippers is to take place (Capacity Allocation Methodologies, CAM). The CAM Network Code will include the following areas: All capacity must be allocated via auctions throughout the EU Auctions will be coordinated so that they are held at the same time and according to the same principles Capacities at the border points between two TSOs must be bundled and allocated as one product and cannot, like today, be sold separately on each side of the border Adjacent systems must to a far greater extent cooperate on optimising capacities, flows and data exchange Joint booking platforms must be developed. ENTSO-G was invited to develop a network code for CAM in January 2011 and is now fully engaged in this work, which must be completed in January Subsequently, the rules must be approved by the European Parliament. Expectations are that the transmission companies must implement the rules in Energinet.dk will scrutinise the content of the CAM Network Code in connection with the development of the Rules for Gas 15

16 Transport over the next years. Energinet.dk expects that parts of the CAM Network Code will be implemented gradually before the rules are finally approved Balancing Shippers must ensure balance between the gas volumes they deliver into and withdraw from the gas transmission system. The Framework Guidelines on balancing propose that balancing in the EU should: Primarily be based with the shippers rather than the transmission companies Be market-based and cost-efficient Increase and stimulate gas trading across systems and borders Take account of the physical conditions in the various systems. ENTSO-G expects to be invited to develop a balancing network code in autumn In the course of 2011, 2012 and 2013, Energinet.dk will gradually change shippers balancing terms with a view to harmonising and adapting the terms to the overall framework for the future common EU balancing regime, which is expected to be fully implemented in Denmark in 2014 or Gradual changes from the current Danish balancing regime to the markedly different EU balancing regime will give the market mechanisms for balancing the chance to mature at a steady pace while offering shippers particularly small shippers the chance to acquire the competencies required to operate in the EU balancing regime. The specific rules governing the EU balancing regime are expected to be ready in 2013, after which time Energinet.dk will implement any adaptations needed. 1.6 Gas tariffs Optimum use of gas in the coming years requires that the tariffs be adapted to new requirements. The new investments must be incorporated in the tariffs, and the EU s third liberalisation package must also be implemented. Moreover, a review of the tariffs is required as gas con sumers increasingly go from using the gas all year round to more varied uses. The development of the methodology is expected to continue throughout 2011 and possibly into Proposed changes will be presented at Energinet.dk s Shippers Forum - Gas and at customer meetings. Changes in methodology require the acceptance of the Danish Energy Regulatory Authority prior to resulting in new tariffs. The Danish Energy Regulatory Authority has not yet received or accepted the changes to tariff methodology mentioned below, but has been kept informed on an ongoing basis during the process. The tariffs are developed in connection with several projects, the first one being the tariff project. This project is in its final stages. The following topics were discussed in the tariff project: Internalisation of new infrastructure (differentiated tariffs) Volume/capacity ratio Auctions at Ellund and Dragør (initially monthly products). Future projects: There are many relevant topics which Energinet.dk intends to review on a forwardlooking basis in dialogue with the market players, the regulator and ENTSO-G Tariff project Tariff policy The natural gas system uses the entry-exit model where capacity is purchased at entry 16

17 Annual cost base Capacity tariff 75% of expected costs Capacity tariff 25% of expected costs Figure 1 2 Tariff cost base allocation key. Today, capacity tariffs cover 75% of costs, with volume tariffs covering 25%. 2 2 The figure simplifies the method used to gather all capacity products into yearly products. The actual tariff calculation also includes sales of short-term capacity products, other fee income as well as excess revenue and deficit transferred from the previous accounting period. Emergency supply services are calculated on the basis of separate financial statements. Average Additional tariff element General tariff element Point A Point B Point C Figur 1-3 Tariff principle for new investments. Investments have been made in points B and C, and an extra tariff is therefore imposed on these points Transport volume through DK Transmission, billion KWh 80 75% utilisation and exit points. All exit points directed towards Danish consumers are included in a zone, and the exit capacity is flexible and can be moved from one consumption site to another. Along with the consumers, the shippers 1 reserve capacity and determine the flows in the natural gas system through daily transactions % utilisation Annual transport capacity (2010) 7.6 billion Nm 3 Total transport volume Since the introduction of capacity payment in the Danish transmission system, the rela tionship between income from sales of capacity and volume services has been determined on the basis of fixed cost allocation. Figure 1-2 illustrates how the service sales budgets are divided up into the shared tariff cost base, thus determining the tariffs for the subsequent year. Realised budget deviations result in excess revenue and deficits, which are transferred to the next period. 20 Figur 1-4 Available transport capacity is increased in step with falling transport volumes. While capacity utilisation of 75% is expected in 2012, utilisation is only assumed to be 50% in The figure shows the maximum annual transport capacity in the system to be the same as the transport volume in The figure does not include a theoretical capacity increase after 2014 when new installations will be commissioned. Capacity tariffs, DKK/kWh/h/y Heat tariffs, DKK/kWh % = DKK/kWh 75% = DKK/kWh/h/y The current tariff method is simple, transparent and proven, but contains an implicit, static capacity value assessment relative to variable payments which is challenged by changed market conditions Capacity tariffs, DKK/kWh/h/y Volume tariffs, DKK/kWh In connection with Energinet.dk s Open Season 2009, where new import capacity Transmission users gas suppliers and large consumers Figur 1-5 The figure shows the possibilities of varying the capacity and volume tariffs share of the tariff cost base in

18 was sold under long-term contracts, it became necessary to reconsider the model as it does not take account of the fact that the new investments benefit some points more than others. It was therefore decided that tariffs in the points benefiting from the investments should also reflect the costs to cover the new investments. The new model is an addition to the old model, with the costs for the new investments being added to specific points as a special additional tariff element. However, the difference between the new and the old system is not major as the new investment costs constitute a relatively small part of the total cost pool. This is, among other things, due to the high investment aid from the EU covering just under half the costs. Volume/capacity ratio EU reforms aiming to solve congestion problems, lack of market liquidity and technical border barriers at European level may have an unintended impact on markets facing other challenges, eg where consumption declines in the longer term as a consequence of a political desire, and there is a risk that this development will be augmented by consumer shifts to other forms of energy if costs get too high. In the Danish gas market of the future, congestion problems will only occur during parts of the year, and the focus should to a very large extent be on how the flexibility of the gas system can be offered most effectively. There are several conditions in the Danish gas market which differ from the European trend and which create different challenges. At European level, natural gas is considered an efficient fuel in connection with the establishment of new power station production, and the growth opportunities for the gas are good. In Denmark, consumption is expected to be stagnant, and the talk is already of natural gas as a transitional fuel towards the fossil fuel-free society. If natural gas is to be an effective bridge to cleaner forms of energy, the fuel must be competitive in the electricity sector, where flexible production to support wind power can maintain demand for gas-fired power plants. The question which needs to be answered is: To what extent should prices in the natural gas system reflect the scarcity problems, and how can the price structures be adapted with a view to maintaining integration with the European market while making the investments tied to the transmission system available to the users in an optimum manner? Figure 1 5 shows the margin within which capacity and volume tariffs can vary depending on how the current 75:25 ratio is changed. If the capacity tariff of DKK 10.54/kWh/h/y in 2010 is to be maintained in 2014 despite dropping transported volumes and increasing costs, around 70% of the total costs must be allocated to the volume tariff, which, in turn, will be more than four times higher than the 2010 level. Depending on the booking profile of the individual shipper (and the mix of short-term and long-term capacity products), there may be redistribution effects which will move costs around between shippers and between endusers. Lower transmission tariffs will primarily strengthen the competitiveness of the transmission system and may lead to increased use of the transmission system, which in itself will increase efficiency. A higher volume share of the necessary costs can be achieved by allocating future operating and maintenance costs to the volume tariff. This will increase the volume payment to approximately 40% of the total costs, and this methodology can be justified by a clearer 18

19 correlation between variable costs, especially compressor fuels, and a variable, consumption-dependent volume payment. There are similar methodological arguments in favour of letting the capacity tariff reflect the costs of capital. Finally, an increased volume payment may absorb any excess revenue and deficit from the capacity tariffs. Auctions at Ellund and Dragør Auctions are a fixed and well-functioning part of the electricity market and have been successfully introduced several places in the gas market, eg for storage services in the two national natural gas storage facilities. In the gas transmission system, capacity has so far been sold according to a first come, first served principle which does not take the users varying willingness to pay into account. Secondary markets for gas and capacity between shippers enable customers to subsequently exchange products. Market-based allocation mechanisms are anticipated to play a bigger role in gas transmission. Auctions may facilitate access for new players in system points without long capacity bookings and where scarce capacity in situations with congestion can be distributed according to willingness to pay. On 29 June 2011, Energinet.dk eliminated the option of purchasing yearly products at the Ellund and Dragør points. Daily and monthly products could be purchased instead. In the third week of September, an auction was then started for monthly products for the capacity not already sold as annual products. Initially, only interruptible capacity can be purchased at Ellund, but as annual capacities are gradually depleted, it will also be possible to purchase firm capacity 4. The purpose of the auctions is to offer stakeholders with the greatest willingness to pay the chance to purchase the capacity. 1.7 Security of supply regulation The EU security of gas supply regulation entails a shift in terms of who should be supplied with gas in the event of major supply failures. In future, there must be solidarity between EU countries, which means that large industrial enterprises and power stations cannot count on being supplied with gas. Energinet.dk is focusing on phasing in the rules to make them harmonise to the greatest possible extent 4 Firm capacity is capacity for which there is no risk of interruption. with the high priority assigned to security of supply in Denmark. The EU security of gas supply regulation (no. 994/2010) came into force in December 2010 and had direct legal effect in the individual member states. The Danish Energy Agency has been appointed the competent authority in respect of the regulation in Denmark and has asked Energinet.dk to handle a substantial part of the practical work. In the period until 2014, the member states must on an ongoing basis organise their systems and planning according to the new rules, subject to a number of deadlines specified directly in the regulation. The regulation is the result of the Russia- Ukraine gas crisis in the winter of 2008/ 2009 and reflects the increased focus in the EU on security of supply at a time when member states own production of gas is declining and imports from third countries are being increased. The crisis made it clear, among other things, that there were serious infrastructure flexibility problems, particularly at the border points between the member states, but also that there were member states which had acted in their own interests rather than sharing the scarce 19

20 resources in solidarity with their neighbouring countries during the crisis. The main purpose of the new regulation is therefore to ensure that all member states act in solidarity with the other EU member states in situations with supply scarcity and that member states do not act in a way which endangers supplies to protected consumers in their neighbouring countries. This is achieved by harmonising supply and infrastructure standards and by establishing joint and coordinated crisis management. The regulation sets out a minimum standard for handling the security of supply task in the EU, but opens up for individual member states specifying wider-ranging requirements, provided that this is non-discriminatory towards the market players, does not hamper the functioning of the gas market or negatively impact supplies to protected consumers Focal points Protected customers Pursuant to the regulation, a member state must ensure that there is sufficient gas to supply all household customers (single-family houses) at all times. In addition, Energinet.dk expects that gas-consuming small and medium-sized enterprises, essential social services (eg schools and hospitals) and plants producing district heating will also be covered by this protection. Large industrial enterprises and directly connected power stations are not expected to be covered by the protection in the future system. This represents a marked shift in relation to the existing system. Under the existing regime, all gas customers in Denmark have been covered by the emergency supply service. In practice, around 80% of the market has thus been effectively covered as the remaining 20% was interruptible via voluntary agreements and against financial compensation. In future, only about 60-70% of the Danish market is expected to be covered by the protection under the regulation. The remaining 30-40% will be interruptible under the regulation, and, generally, no compensation will be paid to customers affected in connection with such a lawful interruption. The obligation towards the protected market means that the players in the Danish gas market are responsible for ensuring that there is sufficient gas for protected Danish customers in situations where demand is unusually high (eg cold winters) as well as in situations where the part of the gas infrastructure supplying most gas to the system is interrupted. The new rules on protected and non-protected customers are expected to come into force at the beginning of the 2012/2013 gas year. Market mechanisms and coordinated crisis management The regulation introduces three crisis levels in connection with an emergency situation: Early warning, Alert and Emergency. The purpose of an early warning to the market before an actual emergency situation potentially occurs is to encourage the market, to the widest extent possible, to introduce measures which could on their own relieve an emergency situation prior to such situation arising. Generally, the regulation assigns high priority to the use of market-based measures rather than non-market based measures, among other things by setting out that market-based measures may be introduced only in the event of an actual emergency (level 3). Enforced interruption of non-protected customers constitutes a nonmarket based instrument. 20