By Alex Barnes, Government Relations Advisor, Nord Stream 2 AG..
The EU has aimed to create a single gas market since the early 1990s as part of the overall single market drive. However the First Gas Directive (1998) was ineffective. The Second Gas Directive (2003) had the right regulatory approach but still had limited effect. It was only after an EU Commission competition enquiry into the gas and electricity sectors in 2005-7 led to the Third Energy Package (TEP) of 2009, coupled with competition law cases, that a competitive gas market really begun to emerge.
The EU now has a competitive gas market
As of today we have a market where there is substantial and growing gas trading. The two biggest trading hubs (NBP and TTF) alone traded 42 275 TWh in 2016, over 8 times total EU gas consumption of 4973 TWh. Hub trading in turn creates a market price for gas, so that now 64% of EU gas sales are based on a gas indexed price, whether as part of long term contracts or spot purchases, rather than being indexed to oil. Last but not least there is growing convergence between prices in the different national markets, indicating that gas is able to flow between markets and that competition is working. Countries such as the Czech Republic, Slovakia, Hungary and Ukraine, which have traditionally relied on oil indexed gas from Russia, have also benefitted from increased competition in the EU market and access to hub prices.
EU rules ensure consumers can choose from where they buy gas
EU liberalisation borrows heavily from the earlier liberalisation of the US and UK gas markets. Here the key concept is that it is only the transportation of gas within a market (i.e. the pipelines) that is a natural monopoly and therefore needs to be regulated. The other parts of the chain e.g. production or supply of imports to the market, and the sale of gas within the market both at wholesale and retail level, are fully capable of supporting competition. Many countries are gas producers and supply gas to the EU either via pipeline or LNG tanker, and there is no reason why consumers cannot choose between different gas supply companies in the same way as they choose between different mobile phone providers.
To take a simplified example it would be highly inefficient to have two gas pipelines to your house to enable you to choose between different gas suppliers, and thereby benefit from competition between those two suppliers. Instead it makes far more sense to allow different gas companies to use the pipeline networks to transport gas from where it enters the EU internal market to the end users. And this is what the Third Energy Package enables. This is known as regulated Third Party Access (rTPA). Regulated because the price and terms and conditions for using the pipelines is set by the regulator to ensure all companies are treated fairly, and Third Party Access because companies other than the owner of the pipeline (third parties) are allowed to use the pipeline (access).
Gas companies cannot block others from the market
The Third Energy Package has detailed rules which implement rTPA. Key amongst these are Capacity Allocation Mechanisms (CAM) and Congestion Management Procedures (CMP). CAM ensures that all companies who want to use pipelines are able to compete to buy pipeline capacity on a level playing field via competitive auctions. Companies can buy capacity for a day, a month, a quarter or up to 20 years, depending on their requirements. CMP ensures that if a company buys capacity but does not use it, then such capacity is made available to the market. This is crucial as it prevents big or dominant gas companies from preventing new entrants from competing for customers by hoarding capacity. The above may all sound very obvious but prior to TEP it was very hard for new entrants to compete with incumbents in national markets simply because they could not get hold of the pipeline capacity to supply gas to their prospective customers.
Natural gas is traded in a virtual market place
Whilst rTPA is essential in ensuring that companies can compete to sell gas to customers, it is only part of the picture. To have a wholesale market price for something you need a market where buyers and sellers meet. In the past markets were physical (e.g. a traditional farmers’ market) but these days they can just as easily be virtual (e.g. electronic trading screens for stock markets). The EU gas market has Virtual Hubs where all the gas companies in a market can easily buy and sell gas. This is enabled by an approach called “entry – exit” whereby any gas which enters the system (e.g. from an LNG terminal or import pipeline) is deemed to be at the hub, and any gas which exits the system (to a power station or distribution network for houses) is deemed to come from the hub.
Trading at hubs is encouraged by the need to ensure that companies put the same amount of gas into the system each day as they take out to supply customers; otherwise the pipeline system will have too much or too little gas in it, which eventually causes too high or too low pressures. This is called “balancing” and companies have to be “in balance.” The Virtual Hub acts as an accounting point where inputs and outputs from the system are reconciled. Where companies find they are out of balance (e.g. because a power station uses less gas than expected) they either have to pay extra charges to the pipeline company or they can buy or sell gas with other companies until they are in balance. This stimulates gas trading, and helped kick start the largest European traded hubs in the UK (NBP) and Netherlands (TTF).
It is no accident that the UK hub is called the NBP or National Balancing Point. Of course once companies found they could easily trade at hubs they started trading for normal commercial reasons as well, just like other commodity markets such as oil. And this in turn helped create a market price for gas, and the more companies traded on hubs, the more confident they were that the market price was a true reflection of the value of gas on any given day, and hence their willingness to buy and sell gas on the hub increased.
In conclusion, it is true that hubs are currently less developed in Eastern Europe as these countries are at an earlier stage of liberalisation compared to North West Europe. But those countries already can access the main gas trading hubs, and physical interconnections with Western Europe are improving courtesy of EU security of supply rules and Projects of Common Interest (PCI) funding. The relevant rules are in place to make the market work. The result is that the EU has a competitive gas market where no single company is able to dominate, and the market price is set by the normal laws of supply and demand.
Alex Barnes, Governmental Relations Advisor, Nord Stream 2 AG.
Alex Barnes has over 25 years’ oil and gas industry experience, focusing on energy market design and regulation since 2001. Between 2009 and 2016 he was Head of Regulatory Affairs for Gazprom Marketing & Trading Limited, providing advice and analysis of EU energy market regulation, including financial regulation. He also advised Gazprom Group and participated in the EU Russia Gas Advisory Council. Prior to Gazprom he worked for BG Group and Total in a number of different roles. He has also been a member of various European gas industry expert panels and represented the European Federation of Energy Traders. He has a degree in Politics, Philosophy and Economics from Oxford University, and an MBA from Henley Management College.
 National Balancing Point which is the UK trading hub.
 Title Transfer Facility which is the Dutch trading hub.
 Oxford Institute of Energy Studies “European traded gas hubs: updated analysis on liquidity, maturity and barriers to market integration.” Table 2 page 8.
 IGU estimate quoted in ACER Gas Market Monitoring Report 2016 p. 7
 ACER Gas Market Monitoring Report 2016 p. 36
 DG COMP fact sheets on proposed remedies in the Gazprom anti-trust case 13th March 2017
 ACER Gas Market Monitoring Report 2016 p. 12