Regulation and the gas industry in Colombia

Transcription

1 Regulation and the gas industry in Colombia David Cox: Naturgas Annual Conference Medellin April 2015 CONSULTING LONDON United Kingdom MADRID Spain London Energy Consulting Ltd 1

2 My presentation today How is the gas industry in Europe? How is the gas industry regulated in Europe? The role of gas globally What structural reorganization of Colombian gas industry would be best? April 2015 London Energy Consulting Ltd CONSULTING 2

3 The outlook for gas industry in Europe not looking very good! Gas demand declining in most sectors residential, industry and power Gas in power generation is dying due to the entry of renewable electricity technologies Renewable electricity generation subsidised in Europe and is always allowed to run ahead of fossil fuel generation Renewable electricity is depressing wholesale electricity prices thereby distorting investment decisions Gas Fired Power plants being moth balled or retired off the system as they no longer run base load and cannot operate profitably compared with renewables and coal fired generation Electricity market design is flawed and causing many problems for the gas market New subsidies are now being introduced to keep CCGTs available using capacity market payments April 2015 London Energy Consulting Ltd 3

4 The good news for gas in Europe! Gas is seen as a clean fossil fuel Gas is seen as a transition fuel which will help bridge our move to a low carbon future Climate change is the major driver of much of European energy policy Plan to completely decarbonise the electricity generation sector by 2050 Gas use in the heat sector is very difficult to replace from renewable sources so will stay for many decades April 2015 London Energy Consulting Ltd 4

5 Some issues Gas is supplied to Europe from Norway, Russia and global from the LNG producer countries Russia/Ukraine dispute led to sanctions on Russia and concerns regarding security of gas supply from Russia Some claim that US shale gas LNG exports will replace Russian gas But the economics of Henry Hub price plus liquefaction plus shipping gives a price in Europe of $10/12 MMBTU gas prices now are around $7 MMBTU Russian piped gas will always be able to undercut US LNG Gas storage facilities in Europe are now struggling to make any money Some gas storage want to close but politicians are not happy with this given the concerns over security of supply therefore new subsidies may be needed April 2015 London Energy Consulting Ltd 5

6 How Europe regulates the gas industry Europe s modern natural gas industry started in the 1960s From then until 1990s/2000s the industry was based around monopolies some state owned some privately owned The gas monopolies built the gas pipeline networks and also sold the gas directly to consumers The gas monopolies purchased gas from gas producers The EU decided that the lack of competition in the gas industry resulted in higher gas prices for consumers and started a long process of passing regulations and laws to introduce competition April 2015 London Energy Consulting Ltd 6

7 The long road to competitive energy markets First, an evaluation was done to see where a natural monopoly existed and where competition could be introduced This is achieved through unbundling and direct regulation of unbundled entities. For natural monopolies some form of efficiency based price regulation - using global benchmarks For competitive services, regulation must balance the delivery of a quality of service to customers, while allowing new entrants the space to flourish. This can be achieved by gradual roll-out e.g. restricting monopoly entity market share, price capping and price flooring to stop it from charging too much, but at the same time stop predatory pricing Creating a market structure which permits competition to flourish is difficult. This includes permitting access to monopoly services, operational and market transparency and fair and non-discriminatory pricing of access services. This may include unlocking Long Term legacy contracts, introducing market structures which permit trading and aggressive approach to the regulation of the monopoly providers Stability and certainty one of the biggest dangers to the market is an inconsistent regulator who moves the goalposts and continually changes the market framework It is essential to develop a plan, stick to it and only deviate from it when there is no other choice April 2015 London Energy Consulting Ltd 7

8 How is gas seen in the Global energy mix? gas is the only fossil fuel with growth in market share IEA projections April 2015 London Energy Consulting Ltd CONSULTING 8

9 Gas growth in electricity generation steady growth in the use of gas IEA projections April 2015 London Energy Consulting Ltd CONSULTING 9

10 LNG global gas sources growth and increase in number of sources IEA projections April 2015 London Energy Consulting Ltd CONSULTING 10

11 Gas prices are falling spot LNG prices to Asia now around $7.75/MMBTU April 2015 London Energy Consulting Ltd CONSULTING 11

12 Structural reorganisation of the Colombian gas industry - First separate gas transportation from gas sales In order to focus pressure on gas costs and reveal the true costs we recommend consideration of the following options: Separate the natural monopoly of gas transmission and distribution from the potentially competitive selling of gas ie gas supply The new pipeline gas companies (NewPipeComs) must be separate legal entities and be prevented from selling gas to consumers NewPipeComs would publish clear and transparent rules for the use of their pipes in the form of a Network Code NewPipeComs would publish gas transportation tariffs for the use of their pipelines the gas transportation tariffs would be agreed and regulated by the CNE The gas transportation tariffs would be benchmarked by the regulator against tariffs from other countries taking account of relevant differences The gas transportation tariffs would allow a reasonable rate of return for the NewPipeComs and be high enough to incentivize investment April 2015 London Energy Consulting Ltd CONSULTING 12

13 Structural reorganisation of the Colombian gas industry the big choice is between competition vs regulation of prices Competition vs price regulation? What is best for the next stage of Colombia gas market development? The choice open to Colombia is a gas supply market based around competition or one based on price regulation There are pros and cons to each approach Competition is normally the best method of delivering the lowest prices and the best service in most markets However, the Colombia gas market is not expected to grow significantly in the residential sector at least? Is there a case for granting monopoly concessions for residential/household areas? But allow the larger gas users ie commercial/industrial customers access to competitive quotes from a number of gas companies All the gas companies would use the gas transmission and distribution network on the same commercial terms April 2015 London Energy Consulting Ltd CONSULTING 13

14 How should gas transportation tariffs for moving gas through the pipes be set in Colombia? The high pressure and lower pressure gas networks are natural monopolies Government and regulator would determine how much return on capital the pipeline companies are allowed The process consists of the pipeline company submitting a business plan to cover the next 8 years which sets out its costs including investment plans The regulator approves the business plan and determines the allowed revenue the pipeline company can recover from gas companies shipping gas through the pipes the allowed revenue is the size of the cake The regulator and the pipeline company works with the gas companies to decide what is a fair and economically efficient way of setting the gas transportation charges The total gas transportation charges must equal the allowed revenue Gas transportation charges normally consist of capacity and commodity charges capacity can typically be 90% of the charge and commodity 10% April 2015 London Energy Consulting Ltd CONSULTING 14

15 Future horizon In a market where gas is competing with renewables the demand dynamics will change Renewable resources tend to be either intermittent of baseload. Changing energy demand (in gas and power markets) will need to be serviced by a flexible supply. Gas can provide such flexibility Gas generation is cheap to install, operate and is highly flexible. It is essential to the transition to a low carbon energy market When future gas demand is uncertain, private investment can be difficult to justify. In order to attract investment, the following areas need to be addressed: Clear and unwavering central policy setting out national expectations for energy supply/demand Where investment returns are below the societal benefit then government should step in an provide subsidies (particularly important where subsidies for renewables are skewing signals). These can take a number of forms: Capacity payments which guarantee a revenue stream irrespective of utilisation, commonly used for power generation and potentially, gas storage Regulatory obligations on market players to procure certain levels of service e.g. PSO s for gas storage April 2015 London Energy Consulting Ltd 15

16 Future horizon Addressing interactions between electricity and gas markets Need to ensure that both markets are competitive and complimentary Market structures need to permit the correct derivation of the price of each commodity Need to ensure equivalence in market power between buyers and sellers Limit pollution of markets by external influences i.e. intervention in one market impacting another, cross subsidies, market power, structural deficiencies and market rules Set clear goals to solve the energy trilemma of security, sustainability and reducing carbon emissions All are important but transparency needed in terms of targets for each. Gas has a role to play in the achievement of all three! April 2015 London Energy Consulting Ltd 16

17 Questions to address Any model of regulation must be adapted to the Colombian situation What are the main objectives for the gas industry in Colombia? Lower gas prices? Expanding the gas demand? Using gas as a transition fuel? Discover more gas conventional and unconventional to allow gas exports? What do electricity generators pay for the option of using gas when they need it? How much competition and market solutions and how much regulation what is the best balance for Colombia? April 2015 London Energy Consulting Ltd CONSULTING 17

18 David Cox CONSULTING April 2015 London Energy Consulting Ltd 18