Regulation and development of natural gas interconnection facilities in Europe

Transcription

1 Regulation and development of natural gas interconnection facilities in Europe Ivan Ghiosso EDF 1, Avenue du Général de Gaulle Clamart - France Tel (0) Fax (0) ivan.ghiosso@edf.fr The European Directive 2003/55/CE on the gas markets, to be transposed by the state members, foresees some measures to support the investments for gas interconnection pipelines between the European national transportation systems, with the supply sources, and for NLG regasification terminals. The objective of supporting these projects is to increase the interconnection capacity within the European markets and to make available alternative importation routes. That would contribute to improve the safety of supplies, to stimulate the development of competition and the market opening, leading to a European single market. Also the European Directive 2004/67/CE, on the security of the supply, includes among the tools to improve the supply safety (evoking the positive effects on the competition development) the investments in the importation assets and, more generally, in the development of the transportation capacities, the flexibility and the diversification of the supply sources. The paper aims at examining the tools set by laws and regulations in Europe, or available to authorities and governments, to support the investments for these assets, how they should affect the projects and their effectiveness. The analysis takes in consideration the provisions at European and national levels. Then, real cases across the European Union, realised or planned, are investigated in order to assess the role played by regulations and authorities in every single decision process. National laws, regulations and authorities decisions providing support to these investments found application in a wide range of different projects, in many state members. However, the final purposes driving legislators, the security of supply and the development of competition, which are far to be accomplished, neither in the near future, doesn t seem to benefit adequately of the assets expansions. Some considerations on how supporting the developments of the European gas system and on alternative strategies to back interconnection investments are made. Key words: Regulation, Investment, Interconnection, Natural gas, Supply, Competition.

2 INTRODUCTION The development of interconnection infrastructures has an essential part to play among the more immediate policies and objectives of the authorities because of its contribution to opening up the markets and to procurement security. The purpose of favouring the carrying through of these projects is designed to enhance its capacities and make alternate sources available. This could contribute to improving procurement security and stimulating the development of competition and market opening, to achieve a single market situation. The legislators have a wide variety of measures designed to favour investments into gas infrastructures designed to provide interconnection between European national transport systems and their procurement sources, and importing via LNG. This report aims at analysing the European and national arrangements stimulating the development of interconnection and procurement infrastructures for natural gas and their spin-offs regarding the investments made. A few reflections will be added regarding the consequences of the community energy policy objectives. The memo outlines the priorities of the European authorities and the advantages of developing gas import installations in achieving these objectives. It then goes on to demonstrate why the regulations need to stimulate these investments and describes the part to be played by the authorities in achieving this. The second part of the report concerns the analysis of actual cases where incentive measures have been put into application, with a recent list of the main European installation projects for the importing of natural gas. 1. The European authority priorities for the natural gas sector: procurement security and market opening to competition Roles of interconnection infrastructures and advantages linked with their development. Increased available capacities, diversification, problem situations Procurement security Gas demand in Europe: dependency on imports Natural gas represented around 25 % (in 2005) 1 of the European community energy sources. None of the 1 BP Statistical Review of World Energy,

3 member countries is capable of producing sufficient volumes to satisfy its domestic demand, except for the Netherlands, which exported 39 Gm 3, or 62 %, of its national production in 2005, and Denmark. Even the United Kingdom, the biggest gas producer in the EU and which exported some of its production to the continent became a definite importer, starting in So the EU countries will have to count on imports and on the infrastructures used for the purpose to address their domestic demands. The natural gas demand and the significance of this resource in the European energy context are expected to rise over the next few decades. It will mean falling back increasingly on sources of imports that are increasingly distant, and increasing dependence on producers located outside of Europe. The situation will be worsened by the current and future shrinkage of production and the gradual depletion of European reserves. This is going to make procurement security a major issue among the community and local government bodies, in particular regarding the problems and consequences gas shortage would have on the European economic and social system. The fact that a community directive has been written, dedicated expressly to the theme of procurement security (Directive 04/67), proves just how much attention the authorities at every level are giving this subject. The "Green Paper" concerning the European energy strategy, published in March 2006, includes procurement security among its essential principles Natural gas sources for Europe Most natural gas headed for Europe comes from production areas that are a long way away from the point of consumption. The gas has to be transported over long distances and gas line routes can cross several countries. The critical situations of the winter of 2005/06, and more recently concerning oil transport, showed just how vulnerable the European gas procurement system is. Noteworthy events included the fact that the Russian supplier cut down on deliveries to Western Europe through Ukraine for several days, representing 80% of European gas imports from Russia. This obliged countries like Germany and Italy to implement emergency measures and use their strategic storage supplies. This means that it is all the easier to have recourse to alternate methods, when deliveries from a procurement source are strangled off, when there are several methods of import and when the import capacity is excessive. This is why the development of import capacities and a differentiation between 2 European Commission, "Green Paper", 2006, p. 5 3

4 sources are essential measures to guarantee gas procurement security at the national and European levels Market opening to competition The creation of a single natural gas market at community level is one of the main objectives of the European unit in its energy-related strategy. Developing a single market at community and competitive levels should be to the benefit of the entire sector and the economy, in particular by reducing the energy price for consumers 3. As the legislator sees it, this liberalising of the European market should be by opening up to competition from national markets and lead on to their gradual integration 4. A series of measures is being considered, regarding these two strategic lines, including an incentive towards investments. In this context, the main benefits that import infrastructure development will bring involve: i) the availability of import capacities for newcomers, ii) the integration of European market and iii) the liquidity of those markets. There are also the effects against market concentration and vertical integration, considered as obstacles to competition by Europe Market concentration, long-term contracts and capacity shortage of the newcomers: increase and differentiation of supply to stimulate competition Interconnection capacities between European gas transport systems are truly considerable. It is a consequence of the source structure and the procurement routes set up in the past. Because the production areas supplying Europe are extremely remote, 60% 5 of the gas now consumed in the EU makes at least one border crossing.. However, the European market is not sufficiently well integrated. Indeed, most of the capacity is reserved for a small number of operators who are also the dominant operators on their respective markets. The role and importance of the dominant operators vary enormously on each national market, but several markets are still characterised by a high level of concentration. The market power of the dominant operators comes from the fact that they control production and imports. Furthermore, the possibilities of choosing imported gas route solutions are small, because deliveries are generally set up on the basis of long-term contracts, as part of wider scale procurement projects. 3 Opinion of "Economic and Social Committee", par. 5 4 Dir. 03/55 art.2 and art.5 4

5 There is only a limited amount of available capacity for newcomers because of the correspondence between the physical capacities of the importing infrastructures and the object capacities of the supply and routing contracts. One of the biggest obstacles facing entry of newcomers is the lack of any import capacity. This "congestion" can be identified by a technical shortage of capacity, when the capacity is used up entirely for routing or re-gasification, or because the capacity is technically available, but reserved through long-term contracts, ruling out any right of access to the unused capacity by third parties. In the first case, "physical" congestion is referred to and in the second, "contractual" congestion. Congestion situations can be limited by a variety of solutions, including: - Creating capacities, a particularly efficient method when physical congestion is an issue; - Using faster measures that require no investments like "capacity release", "contract release", or by applying the principle of "use-it-or-lose-it" applied in contractual congestion situations, and that rationalise the use of the capacity. The scale of the margin to optimise the use of transit gas lines (and methane terminals where similar situations and problems are encountered), by allowing access to potential competitors, corresponds to the size of the unused technical capacity European market integration Despite the considerable capacities of the interconnection gas pipelines that were laid across Europe years ago, national markets are not integrated into a single market but above all are markets with a national horizon 7. A key factor for market integration and the development of transport capacities between the markets is access to the interconnection infrastructures. It is a practical and direct solution benefiting the physical exchange of gas, and therefore, a direct incentive for its integration. The context of an integrated market would allow natural gas to be moved frequently from one national system to another, or even to transit to a market not directly connected. In this set up, each operator would enjoy the logistical and regulatory possibility of acting freely on the single market, with a considerable widening of the supply and with favourable spin-offs regarding the development of the competition. 5 Technical annex, 2005, p.90 6 European Commission, 2005, p.20 7 European Commission, 2005, p. 7 5

6 By virtue of the role whereby they guarantee the financing of considerable investments into interconnection infrastructures, European and national legislations 8 guarantee special arrangements for long-term contracts, while preserving the contracts already in place before liberalisation, and including a specific regulatory setup for transit deals. Third parties do not all have the same conditions of access to the various infrastructures, and they are often opaque, especially to a newcomer. The "Use-It-Or-Lose-It" 9 principle is not always applied, and accordingly, part of the capacity of these infrastructures, reserved although not used, cannot be assigned to other operators Increased liquidity and stimulation of the creation and development of hubs. The limited liquidity that continues to have a detrimental effect on the European natural gas markets is a major obstacle impeding their development. Liquidity is an essential aspect of smooth operation in a market in which exchanges are almost free, simple and fast, and where price volatility is limited and levels cannot be perturbed at the initiative of a few operators 10. Market concentration and vertical integration, embodying the corollary of long-term contracts, are the main causes of a lack of liquidity. Indeed, the combination of these market limits reduces gas availability on the wholesale market 11. Suppliers could be guaranteed with the procurement reliability and flexibility they need to cope with consumer demands by a sufficiently liquid secondary market. Liquidity is, above all, an important factor for correcting the positions of suppliers and customers, especially for operators of a limited size and for newcomers. Compared to the sources available to the dominant operators, sources are limited and less flexible and the demand need not be so strictly structured. They would also be harder hit by the volatility of the prices concerning markets with little liquidity. However, the development of gas hubs depends greatly on liquidity. The availability of these physical or virtual gas transport and capacity exchange points is an essential factor benefiting market operation and development. 8 Dir. 03/55, art.32 9 Whereby reserved but unused capacity must be made available for sale to third parties. 10 AA.VV., Sector Inquiry, 2005, 2.2, p.10 6

7 2. Favouring the development of interconnection infrastructures, 2.1. Problems in setting up new infrastructures. Natural gas transport and re-gasification infrastructures call for enormous investments, so big as to accentuate the risks taken by the operators. In particular, these are commercial risks involving the balance between the risks concerning revenue volume and activity profits. Profitability must make it possible to compensate for these risks. Bundled together, profitability and project risks are essential elements on which the possibility of financing and investments depend. The banks and the financial institutions demand cash flow arrangements sufficient to refund borrowed capital. These flows have to be foreseeable and volumes sufficient, but above all, the attention of the borrowers is drawn to the reliability of these flows for which guarantee arrangements are often required. Before the regulatory liberalisation process began, the remedy to the commercial and financial risks of such projects consisted in using long-term contracts guaranteeing the generated revenue and therefore the capability of operators to pay back the borrowed funds. Very often, projects for interconnection infrastructures and the associated operating contracts were part of wider reaching projects, vertically integrated, including sales contracts. Infrastructure project financing guarantees, or even the funds, could come from the integrated operators realising them, for whom the services of the installations were exclusively intended. A financing structure like this is no longer to the advantage of the operator when third-party access to the infrastructures is required. In reality, with a structure like this, the integrated operator offers financial support to acquire a service that third parties acquire without any other commitments. Hence the need and the difficulty of defining other financing structures with recourse to third-party subjects, and alternate forms of guarantee Procurement liberalisation and security Some effects of the liberalisation process can therefore contribute to creating obstacles to investments in infrastructures for interconnections 12. On closed market with only one or very few vertically integrated operators, often public, these operators come under great incentive to make investments and set up the measures needed to guarantee procurement 12 Steve, 2003, p.3 7

8 security. In a liberalised market context, these players are no longer directly and exclusively assigned with the responsibility for security. In addition, for an integrated operator, infrastructures can play a strategic part but the opening up of the market indiscriminately to third parties, even if the contract duration is limited, excludes this function and any advantage for these operators in establishing new infrastructures. Pride of place is still granted to the relations between developing competition in the natural gas sector and procurement security. For those in favour of competition, the opening and development of the markets would allow efficient use and create an additional interconnection capacity, as long as the market signals are clearly read and the market reacts quickly to these signals. This last condition is particularly difficult to comply with because of the time required for planning and setting up this type of infrastructure Roles of public authorities Responsibilities of institutions, finalities of the national and European governments 13 The development of a competitive and liquid single market and the security of procurements in Europe depend on the capability of European and national authorities at various levels to set up a regulatory framework capable of attracting the necessary investments for import infrastructure projects. The protection and stimulation of the sector are essential for the economic development of the European Union, one of its main objectives, as confirmed in its founding act. The authorities are still responsible for guaranteeing procurement security, especially when it is a matter of long-term gas availability, but this must be obtained by means compatible with the achieving of the specific efficiency of a competitive market. The part of the authorities involves various fields of action to cover the market limits in this segment, including measures concerning the development of interconnection infrastructures. Before the process of liberalising the natural gas sector started in Europe, the most common market structure in Europe included a public player having a monopoly position, in charge of guaranteeing 13 AA.VV., 2004, p. 69 8

9 procurement security. Without any competition, all the costs befalling these companies were simply put on the consumer price list, and the consumers had no possibility of changing suppliers. This system came to an end with the opening of the markets and the requirement to move on to a new sector organization but in which, however, procurement security is still an essential issue in a context where the authorities still play a central part. The dominant players of the sector were "public" and pursued competitive general interests. Investments in a market open to competition are made by "private" players, seeking their own goals, that may not correspond accurately to the interests of the community, for instance, procurement security or guaranteed minimum service for all consumers. Enterprises address the needs of the shareholders and invest when the capital offers a suitable profitability. The challenge facing the markets and the single European market, is to ensure infrastructure availability so that procurements respond quickly to the development of the demand 14. This is in the general interest, not spontaneously adhered to individually by the operators, because they have strategies aimed at achieving economic results; however, achievement has to be coordinated by the authorities, which, to the contrary, are aiming at collective objectives The effects of the unbundling Directive 55/03 highlights the principle of unbundling and brings in the concept of legally separating transport and commercialisation activities. Unbundling has contrasting effects on the readiness of operators to invest into interconnection infrastructures. Before market opening, dominant and integrated companies controlled the entire line and were able to coordinate measures in the various segments. The arrangements bringing in the unbundling of activities limit this integration whereby it is no longer in the interests of these companies, formally divided, to make investments in to import infrastructures, because they would not be able to take full advantage of these investments, but, on the other hand, they would allow the entry of other competitors. In the event of incomplete unbundling, it is to be expected that the operator would not make investments into infrastructures that stimulate competition and that could penalize the sales enterprise linked with the operator 15. Unbundling aims at providing non-discriminatory behaviour so that the operator only pursues interests linked with his own activity rather than those of other subjects linked with the same group. Complete unbundling of property between transport system operators and enterprises working in the field of sales would help avoiding any confusion of the aforementioned interests. It is true that the main 14 IEA 2004 p Technical annex, p.91 9

10 interest of a totally independent operator comes from the results of its own activity and not the results of a group of companies working in different segments. Therefore, the investment decisions of the operator would address project profitability criteria; the infrastructures required by the market, by newcomers, would be established and thus contribute to improving its efficiency. On the other hand, the strategy of the infrastructure operator linked with a dominant player would pursue the objectives of the latter. It would not be in the interests of this operator to develop import capacities, allowing competitors to increase the offer, and thereby having a negative effect on the results of the group sales activity, often the most profitable because of not coming under price regulation conditions. In describing the effects of unbundling on investments, it should be borne in mind that the vertical integration of the activities was an essential tool used for accomplishing major gas procurement projects. The company-wide and integrated contractual structures allowed the planning, financing and achieving of various projects. Risk control was more efficient in that the projects, at various segment levels were managed by the same player, who was able to plan the infrastructures further downstream, according to upstream strategies 16. To conclude, in the context of activities unbundling provided for by the European Union, the unbundling between transport infrastructure operators and the other activities, especially sale, is supposed to be an efficient spur to the development of these infrastructures when unbundling is complete and patrimonial. The signals sent by the natural gas market about its long term needs are not always clear and immediate. Companies working in downstream segments often have no clear view of their future needs, in particular with the unbundling of activities, while it is necessary to consider the time needed for setting up these infrastructures.. In this kind of context, regulatory instruments can help guarantee that market needs are detected in advance and that the response in terms of investments into the infrastructures for importing will offer an appropriate answer to the changing demand. 3. The initiatives and strategies for simulating investments The current European legislative framework for liberalising the market is based on three general themes 17 : 16 CEER 2005, p.10/11 17 Opinion of the "Economic and Social Committee", 2001, par. 3 10

11 the eligibility of the consumers, the access of third parties to the installations, and the unbundling of the activities. Among the instruments provided for are measures to encourage investments into infrastructures, in particular for import. Directive 55/03 and national legislations give the regulating authorities and the government the power to take the necessary initiatives in favour of these investments. These measures have different effects on the structure 18 of the gas producing sector. The authorities may favour investments through more general approaches concerning the regulatory environment alone, or by arrangements aimed directly at minimising the risks related to all the projects. Other incentive measures focused on specific structures are possible. The role and the functions of the authority and the sharing of responsibilities and powers between the authorities and the government are defined by the national legislation which determines the structure of the intervention types and the intervention areas of the subjects involved The general approach to investment stimulation: regulatory field, public goals and coordination Some fundamental conditions tend to favour investments into the infrastructures of the sector by limiting some of the risks, more closely related to the economic and regulatory field than that to the particular characteristics of an infrastructure or a category of infrastructures and of the corresponding services. Particular attention is given to: - Setting up a definite regulatory field; - Support for the objectives of recognized and evident authorities, and, - The coordination between the regulating authorities for the harmonising of the arrangements concerning the subject. Not only are these conditions focused on stimulating investments, but they are designed, above all, for wider-reaching goals like market development, the protection of smaller operators and consumers, or market integration. There are, accordingly, visible and positive effects on the expansion of interconnections through the reactions of other segments in the sector because, for instance, a developing market and confident operators 18 CEER 2005, p.5 11

12 may determine a stable and definite demand for services thus bringing together the conditions to make it profitable to generate an additional import capability. There is a cause and effect relationship between infrastructure development and market development, in both directions, but the general conditions of stability and development may affect decisions reached by investors. The goal is to develop the "prior" and fundamental conditions needed for blunting the more elementary risks inherent in activities linked with the projected infrastructures. The consequences of regulating strategies are more difficult to evaluate and can appear over a long period of time. Among the key principles that a regulating system has to comply with to establish minimum conditions so that investors can develop their projects, the definition of a definite, clear and recognized regulatory field appears to be essential. There must not be any continuous, unexpected or irrational change in the regulating system. This principle should be recognized through the declaration of fixed periods of stability and a term that is consistent with operator needs. This could favour investment cycle management by removing the fundamental obstacles to investment decisions Regulation objectives consulting and dissemination An open and transparent decision making process, while consulting the operators concerned, helps find solutions closer to operator needs, and thus reduces their risks. The authorities and the government bodies should make their objectives public in the medium and long terms. Investors need to be convinced of the will and determination of the authorities to carry through their objectives and develop competition. These authorities need to demonstrate their commitment to the continuous efforts made towards market opening. This guarantee is far further reaching than a reliable and clearly defined regulatory framework, because it includes the final goals inspired by the regulation. Accordingly, it embodies principles that are young cast, much stronger than a formal translation of these principles into practical standards and arrangements Harmonisation of regulations: co-operation and coordination of the authorities 19 Connection projects often involve several countries and therefore different governments and regulating authorities. Directive 55/03, art. 25, requires regulators to work together for the harmonisation of interconnected network operators between different countries. The authorities of the countries concerned 12

13 need to develop interregional projects by defining clear common rules facilitating access to the gas transport services across their borders. These authorities are responsible for finding a solution to the problems concerning the regulating of gas exchanges between countries. Cooperation between the authorities of various countries, and therefore their reciprocal commitments strengthen the perception of stability within the regulatory framework General and direct incentive measures: a) for all investments; b) for determined projects; c) other measures More direct steps to favour investments into gas-related interconnections are more specifically addressed to the limiting of "economic" risks. Noteworthy among the goals of these incentives are the efficiency of the projects and their capability of addressing the demand for services. Regional legislations define arrangements to support these investment projects, and the roles assigned to the authorities and the government within the "incentive measures schemes", while sharing out the relative skills. There are several tools available, in particular those aimed at guaranteeing the profitability of the projects and those aimed at the conditions for allocating the additional capabilities produced in this way. Generally speaking, these measures can be applied in the same way to all projects or to specific projects only. But there is a definite distinction to be seen between measures habitually resulting from incentive structures intended for all projects and other tools applied to typically to the projects according to specific criteria. One of the fundamental points of the legislation aimed at liberalising the European markets for natural gas concerns access of the networks to third parties, considered to be vital for the ingress of newcomers. Investment encouragement operations, in some cases, consist in simplifying means of access to the infrastructures for third parties, especially regarding the attribution of capacities and the definition of the rates. This means that the scope of competition incentive measures is limited by steps designed to further the development of interconnection infrastructures. Although new investments may contribute to market development, this effect of investment incentives may interfere with the results aimed at by liberalisation. Accordingly, conditions calling for respect for competition are provided for, more particularly as a way of 19 CEER, 2005, p

14 keeping the application of the more telling instruments in tune Diffused measures for investments in general Among the measures provided for investments in general, and applied without any specific or preliminary evaluation, the most efficient and most widely deployed concerns the profitability granted to investments by regulatory systems. Specific tools for developing this profitability work on the definition of the rates concerned, using parameters employed to determine them: - profitability factor of the invested capital; - definition of the invested capital;- - infrastructure depreciation time; - costs of refunded exercises; - taxing; - indices for periodic updating More particularly, this measure refers to national regulating authorities whose roles extend to a responsibility for defining or approving price structures. Even so, these rates should not grant excessively high profits to the operators, tantamount to distortions, and the advantages granted in terms of the profitability of new investments should be on a par with the risks of the activity. "Commercial" risks could also be decreased by granting the permission to assign capacities with long-term contracts and with exemptions regarding the access offered to non-discriminating third-party access to the networks, for limited periods of time. The competent authorities will define the terms of these exemptions as a way of moderating, defining, and therefore even limiting the scope of the advantages: i) part of a capacity intended for long-term contracts or discretionary assignation, ii) duration of long-term contracts and the combination of this tool with arbitrary assignation, iii) duration of exemptions Specific measures for determined investments All the actions considered thus far may be of wide-reaching interest to all new investments or specific projects alike. But the agreement to the exception of third-party access arrangements, as provided for in article 22 of Directive 55/03 for interconnection infrastructures is granted specifically by competent authorities to projects for which a request has been made and when the required objective conditions are 14

15 satisfied. In particular, this waiver concerns the principles of non-discrimination regarding third-party access to essential infrastructures, contract duration and rate calculation methods. The powers of the regulating authorities concerning these points will be processed in like manner by the Directive. Art. 22 also concerns the incentive to storage development. Waivers are granted individually to some projects by the regulating authorities but national legislation can be required by other authorities. The European Commission may ratify waivers, expressing its opinion by virtue of a number of objective criteria. The infrastructure that the waiver covers must comply with a series of general requirements. The application of this arrangement concerns new infrastructures, significant capacity increases and modifications to existing infrastructures allowing the development of new procurement sources. Because a project can benefit from this waiver, it means that five criteria defined by the Directive must be complied with. In assessing the projects, the national authorities will be furthering the interests of the consumers. Even so, there is a contradiction between the waiver (regarding the third-party access system and as applies to longterm contracts) and the development of the competition, one of the principles behind the incentives. The authorisation depends on the condition of not limiting the competition so that the ratio between the disadvantages and the benefits of the waivers will need to be examined with particular care regarding excessively high investment costs. Waivers will be granted only to projects for which exemption is an essential condition for them to get the necessary backing from investors. Remember that the presence of the objective conditions explained by the Directive is necessary but not sufficient in itself for granting a waiver to the benefit of the new infrastructure. The conditions to be complied with by the projects to benefit from the waivers according to article 22 of the Directive are as follows 20 : 1) The project must contribute to the development of competition and the dependability of procurements. It is not surprising that the first condition corresponds to the goals of the incentive towards new investments into interconnections. The reason for attributing benefits to a project relates to its utility for the market. 2) The economic risk level linked with the operation of the infrastructure is such that, without the waiver, it would not go through. 20 GD Memo "Energie et transports",

16 3) The infrastructure must belong to a subject that has been legally separated by the installation operator. This condition appears to be intended to limit the property-management-operation link resulting from the waiver. 4) Users will pay for the services of the infrastructure. The management on the activity benefiting from the waiver must be separate from the other regulated activities of the operator. 5) The waiver will not deteriorate the competition and efficiency of the market or the efficiency of network operation. There are many alternatives and options to this waiver and the authority in charge of granting the waivers will deliberate on a "case-by-case" basis. The exemption can concern all or only part of the installation and even the actual duration of the granted system can be used for modulating the advantages. In this case, only one part of the additional capacity defined by the competent authority comes under the benefit of the exemption, whereas the residual part depends on ordinary regulation for access conditions. But the Directive does define the minimum share of the capacity to benefit from the granted exemption. The concession regarding the exemption of a project may depend on specific conditions concerning, for instance, the quantity of the additional capacity, the way that the capacities intended for third parties are assigned, the transferring of unused capacities and the transparency, in order to limit the effect of any prejudice on the competition. A more sophisticated means of extending a third-party participation opportunities is to check the interests of the third parties and allow them to participate in the project ("open season") and thus allow third parties to benefit directly from the exemption. The exemptions should not affect the liquidity of the market and should endeavour to favour short term capacity availability. Special attention must be given to integration between transport systems benefiting from exemptions, and the regulated system, especially concerning "input -output" access. The article of the directive does not directly concern interconnections with countries outside de EU but that can be attributed to an "increase modifications [of the infrastructures] allowing the development of new procurement sources". National transport networks are excluded except when development concerns transit capacities. Generally speaking, the principle of article 22 aims at a conciliation of the subjects behind the infrastructure, and which want to keep control of it, and of the goals of the Directive. The "Energy and 16

17 Transport" General Division has drafted a memo 21 also addressing the interpretation of the provisions of article 22 of Directive 55/03. This memo underscores the "exceptional" nature and the importance of the effect that the waiver as evaluated by the authorities would have on the competition; it brings in the principle of participation of other subjects and in terms of the preliminary arrangements of the project and of risk proportionality regarding the duration of the waiver. This brings in the concept of a "risk" which causes would be related to the exclusive use of the infrastructures and the commercial consequences of under-using the installations. The memo points out that a waiver to the application of the Directive does not include a "general exemption to the standards of the competition" Other measures Stimulation through market signals The authorities can smooth the way for investments by measures facilitating access of third parties to infrastructures revealed by market signals. The advantage of this approach is that it indicates the physical congestion points, therefore where investments are really necessary, and offers an efficient answer to the needs of the system. The practical embodiment of the above is the allocation of long term capacity by auctioning. This method would supply the incentives needed to make more "efficient" investments regarding the market concerned. The participation of potential users in the preliminary phases of the project is a very practical way of evaluating how useful they really are. The measure is all the more interesting in that the market is developed and liquid, capable of supplying the operators with clear signals. This incentive instrument is intended for specific structures. The efficiency of the market signals to adapt the infrastructures and guarantee procurement reliability is currently open to discussion, especially regarding the market reaction time to these signals. Other more general measures can have investment incentive effects. The continuation of unbundling between infrastructure operators and companies involved in the sale, through to property unbundling, would make it possible for the market signals to generate more directly new connection investments. An independent operator can address these signals better when he is not linked with dominant players but is focusing on economic advantages. It is not in the interests of dominant operators to develop new 21 European Communities Commission General Division "Energy and Transport",

18 infrastructures 22 which would allow newcomers to enter the market. Applying constraints is to the advantage of procurement safety, as is the limitation of the proportion that any subject, or a country, can obtain of a single source, favouring investments to diversify procurements. The initiatives of the authorities to set up a favourable regulatory framework are a good thing. What is more, the authorisation procedure must be as fast as possible. Coordination between national and local authorities may be essential for the purpose. The government has the possibility of acting directly through subsidies, even by tax encouragement, or financing, especially in the early stages of the project. The "TEN-E" Trans-European Energy Networks Project The European Union directly finances electricity and gas transport projects when they are in the interests of Europe, crossing national borders or involving several member countries, through the "TEN-E" project. What the community is aiming at is the improving of interconnections and interoperability between national networks, as well as access to the installations, as part of an open and competitive market. The orientations of TEN-E were defined by a decision reached by the European Parliament and Council (cf. 1364/2006/CE of 6 September 2006) the annex which includes a list of the accepted projects. The document includes the conditions required of the projects to obtain financing, a way of accurately designating the projects concerned. In the course of the years , 174 millions Euros were ploughed into TEN-E, in particular to finance the studies. Natural gas sector projects received 63% of these contributions. The European Union contributes to financing TEN-E with other tools: - Structural funds (e.g. European Region Development Fund, ERDF) ; - Cooperation programmes with third countries; - EIB (European Investment Bank) ; - EIF (European Investment Fund offering guarantees for project loans). 22 Technical annex, 2005, p.91 18

19 Solutions for limiting the anti-competitive effects of the incentives In the general context of investment stimulation for import infrastructures, a series of measures has been set up to limit the contrary effects regarding the opening of the markets that these incentive measures produce. The purpose of the preparatory measures is always to favour the entry of new operators and the development of competition. The types of intervention can be summarised as follows: - Widening project participation at company level, to other players - Allowing third parties to reserve capacity by means of long-term contracts before the completion of the infrastructures ("open season") - Reserving part of the available capacity for third parties - Reserving part of the available capacity for short term contracts - Limiting the duration of long-term contracts - Defining rules for the application of the reserve capacity that is not used (principle of "UIOLI") - Stimulating the exchange of capacities on the secondary market. The last two tools listed here have the advantage of favouring competition without affecting measurement efficiency, to limit economic risks linked with investments and encourage their accomplishing. Measures aimed at avoiding that long-term contracts close the market, in particular long-term contracts reserving all the capacity and preventing the ingress of new competitors. The national regulating authorities are responsible for employing means of compensating for the negative effects of investment incentive on competition. Several examples of these measures can be seen in the various countries. The obligation to commercialise the unused capacities (use-it-or-lose-it) in different forms appears to be efficient and furthers market liquidity. 4. Application of incentive measures to European projects This chapter describes a number of projects to the benefit of the development and diversification of procurement sources in the European countries and takes a look at the incentive solutions set up by the authorities for these different investments, representing the grouping of interconnection infrastructures described in paragraph 1. It will address the interests and roles of the operators can have the benefit of the markets, the real problems 19

20 being faced and the measures used to allow their going through Transit gas pipelines connecting the transport networks of two or more member countries of the community Above all, this concerns undersea gas pipelines like the Interconnector (between Belgium and the United Kingdom), BBL (Balgzand-Bacton, between the Netherlands and the United Kingdom) and IGI (between Greece and Italy), but also the Euskadour gas pipeline designed to connect France and Spain together, a totally overland venture. As is often the case with importing infrastructures, this type of infrastructure may be included in larger projects including investments for production and complementary upstream and downstream transport infrastructures. In addition, investments are required to adjust the national transport networks to handle additional capacities but that do not necessarily involve incentive schemes. As a general rule, these projects are an exception to the third-party access systems based on article 22 of Directive 55/03. Indeed, the commercial risks resulting from the size of the investments needed, and the irreversible destination of the infrastructures, call for guarantees supplied by long-term transport contracts and the attribution of the capacities in line with the interests of the developers. The Balgzand Bacton Line (BBL), between the Netherlands and the United Kingdom BBL is for the most part a gas pipeline running under the sea, connecting the Netherlands, near Balgzand, to Bacton in the United Kingdom, with a total transport capacity of 16 Gm3/year. The project contract is BBL Company, a joint venture controlled by Gasunie (60%), E.ON-Ruhrgas (20%) and Fluxys (20%). Transport towards the United Kingdom began in December 2006 and the full transport capacity will become available in March The capacity could be increased by 30% more by increasing the compression power at the Netherlands end. BBL will then be able to transport gas pumped in from Russia through the planned "North European Gas Pipeline". This could be tied in with negotiations between Gasunie and Russian operator Gazprom to write off 9% of the BBL Company to it, for participation in the North European Gas Pipeline Project. The scale of the project demands large investments entailing the corresponding risks. This would mean that it would go through supported only by long-term transport contracts in a definite regulatory field. It took several years to set up the procedure for this project and in 2003, an exemption to the terms of Directive 20

21 03/55 concerning third-party access to the networks was requested of both of the Dutch authority (DTe) and the British authority (Ofgem), and of the respective ministries in charge. When the exemption request was made, neither Ofgem nor the British Trade and Industry Ministry (DTI) and had formal powers of guaranteeing this exception because of the Directive had not yet been transposed and there was no national law allowing this function of authority. Nevertheless, Ofgem and DTI endeavoured to drive home their stand in favour of the exemption (although informal as "early guidance" through the publication of a document describing their position. Ofgem's opinion, given after consultations with the subjects concerned, was based on the way the project would contribute to developing competition in the procurement sector of the country, and to procurement security. With respect to this opinion, one point underlined by the authority was that there was an "open season", which made it possible to evaluate the interest of the infrastructure for the operators, that the information supplied to the authority was appropriate and that the reserve but unused capacity could have been made available to other operators (on the basis of "Use-It-Or- Lose-It"). Ofgem also recommended a definite unbundling from the infrastructure operator, at the time GTS (the Belgian network operator, a subsidiary of Gasunie), going even beyond the community prescriptions. These measures were considered a way of countering the contrary effects of waivers regarding the opening of the market. In 2005, the British and Dutch authorities finally granted waivers to the requested third-party access systems 23, and signed a coordination agreement. The provisions were then put in the hands of the European commission for validation. According to Ofgem the BBL interconnection complies with the required conditions for the application of article 22 of Directive 03/55, meaning that its achievement would have a positive effect on procurement competition and reliability. The British legislation is thinking in terms of a licence for the management of the gas infrastructures and the waiver is represented by the suspension of certain conditions of the licence which in the case of BBL would include any "virtual" transport services running in the opposite direction to the main direction, towards the continent, lasting until the 1st of December The agreeing of waivers to third-party access systems for additional capacities created by subsequent expansions will be evaluated apart The terms and conditions of access of third parties to networks have been transposed to the United Kingdom through "Energy Act 2004"". This document brings in a "license" scheme for gas interconnections and it is through these licenses that the provisions for third party access tp the networks and similarly, the exemptions of these arrangements through the suspension of some terms of the license are applied 24 Ofgem, 2004, p.17 21