Institutional and Organizational Designs of Natural Gas Hubs: An Introduction to the Iberian Gas Hub

1. Bilbao, 24th June 2014
Javier Flórez
Chairman
Iberian Gas Group
EFET
Seminar:
Institutional and
organizational designs of
natural gas hubs in Europe
IGG
European Federation of Energy Traders
1

2. IGG 2
INTRODUCING EFET
IBERIAN GAS GROUP -EFET
GAS HUB DEVELOPMENT IN EUROPE
FINAL CONCLUSIONS
Agenda

3. IGG 3
EFET Vision
We foresee sustainable energy markets throughout Europe,
in which traders efficiently intermediate in the value chain
on the basis of clear wholesale price signals,
thereby optimising supply and demand
and enhancing security of supply,
to the overall long-term benefit of the economy and of society.
EFET: The vision of Europe’s energy traders

4. IGG 4
EFET

5. IGG 5
EFET

6. IGG 6
EFET: A wide variety of EFET Member Companies ...

7. IGG 7
... all committed to the development of energy trading

8. IGG 8
INTRODUCING EFET
IBERIAN GAS GROUP - EFET
GAS HUB DEVELOPMENT IN EUROPE
FINAL CONCLUSIONS
Agenda

9. IGG 9
The Iberian Gas Group EFET
The European Federation of Energy Traders (EFET) launched the Iberian Gas
Group (IGG) in March 2011.
In line with EFET principles and mission, the new IGG’s main objective is to
promote gas trading in the region and to improve liquidity and transparency
within the Iberian gas market.
The companies currently participating in the IGG are: ALPIQ, AXPO, BP, EDF
TRADING, EDP, ENDESA, ENEL, ENERGYA-VM, E-ON, GALP, GAS NATURAL
FENOSA, GDF-SUEZ, IBERDROLA, MORGAN STANLEY, RWE, SHELL, STATOIL
and TOTAL.

10. IGG 10
The Iberian Gas Group EFET
From the beginning, IGG focused on those key features of wholesale gas markets
that are fundamental for the development of trading in the Spanish and
Portuguese markets.
To this aim, IGG decided to create 4 Working Groups to analyze the compatibility
of the current Spanish and Portuguese gas systems with the creation of a virtual
hub.
IGG developed the Spanish Appendix to the EFET Standard Contract, in line with
the other Contracts, already existing in the main european gas Hubs
• The use of the AOC Appendix will increase the liquidity of the market
because it permits all counterparties to use a standard document, in line
with other gas markets in Europe
• The Spanish Gas Appendix is available for all users as it may be
downloaded for free: http://www.efet.org
IGG is now actively participating in the Working Group created by the Ministry of
Industry for the devolpment of the Iberian Organized Gas Market
• The Organised Gas Market is expected to be launched by January 2015

11. IGG 11
4 Working Groups in IGG, some conclusions (1/2)
Underground storage: Promote new poducts to increase the use of the UGS, as well
as a secondary market of capacity
LNG Terminals: Promote some measures to increase the usage of LNG terminals,
adapt the stock of limits/obligations to the present circmstances, develop storage
and loading products, enhance secondary market for capacity
Interconnections: Remove “pancaking”, promote secondary capacity market and
incentivize gas transits by making interconnection costs more attractive
This Group decided that the main aspect to be solved is the resolution of
congestions
The market will be based on a single market area, and not many, suppresing
existing viability regions
The market doesn’t need more infrastructures to solve congestions in the
transportation network. For new regulated infrastructures a cost-benefit analysis
should be developed
The final aim is to eliminate the currently existing feasibility process
1.
Gas
Market
Structure
2.
Interconnections
and
gas storage
infrastructures
GasvirtualHUB

12. IGG 12
4 Working Groups in IGG, some conclusions (2/2)
In order for TSOs to ensure that the system is kept within safe operational limits,
they need to be able to buy and sell gas (as last resource supply)
Renomination within gas day (D) is very important for shippers to adjust their own
balance positions: continuosly (starting 7 hours before the end of D-1 and finishing
3 hours before the end of D), with no feasibility analysis, with no lead time in order
to minimize the response time
In order to increase the hub liquidity, TSO need to provide with-in day balance
information to shippers. TSO’s variable incomes could be determined according to
the quality of the information provided
Financial settlement for imbalancing shall be levied. The imbalance charges shall
be reflective of the costs incurred by the TSO in buying gas (or the revenues
received by the TSO in selling gas), with some intermediate steps until enough hub
liquidity is achieved and the shippers have accurate information of their balance
Spain complies with most of the liquidity parameters of the Gas Target Model, but
they will significantly improve if Portugal is added, creating the Iberian Gas Market.
“Market Area” seems the best final model to achieve an Iberian Gas Market
CAM, CMP, Balancing NC should be harmonized between countries in the region
3.
Daily
operations
in the gas
system
4.
MIBGAS-SGRI
GasvirtualHUB

13. IGG 13
2. Gas Target Model
“Enabling functioning wholesale markets”
Spain comply with most of the liquidity parameters,
but they will significantly improve if Portugal is added
1. HHI < 2000
2. > 3 supply sources
3. Demand ≥ 20 bcm
4. Churn rate ≥ 8
5. RSI > 110% > 95 days per year
HHI
FR ES PT
IberiaFR ES PT
2000
FR PTES
20 bcm
Demand
⌧⌧⌧⌧⌧⌧⌧⌧
⌧⌧⌧⌧
⌧⌧⌧⌧⌧⌧⌧⌧ ⌧⌧⌧⌧
⌧⌧⌧⌧⌧⌧⌧⌧ ?
33
6
47
4.000
1.900
5.200
1.600
NEW

14. IGG 14
INTRODUCING EFET
IBERIAN GAS GROUP -EFET
GAS HUB DEVELOPMENT IN EUROPE
FINAL CONCLUSIONS
Agenda

15. 15IGG
Virtual hub in
entry-exit system-
Physical hub
Mature, liquid hub
with price
transparency
Less mature or
less liquid hub,
with growing price
transparency
Future hub
Active exchange
trading
Strong price link
Weaker or
expected future
price link
NBP
ZEE
TTF
NCG
Gaspool
AVTP
PSV
PEG-N-
PEG-SW
AOC
NordpoolGas
PEG-S-
European Gas Hub Development
Rationale for study
Each new hub tries to reinvent services to market,
incurring unnecessary costs for them and for traders
1. Develop best practice model for
creating a successful virtual trading point
2. Benchmark Europe’s existing hubs and
recommend improvements
3. Work with local EFET Task Forces to
apply best practice model at evolving
VTPs
EFET Hub
Development
Group Project
We are
here
Spain
Turkey
(Greece)
Poland
Local balancing markets also required but not all are shown

16. 16IGG
Scoring mechanism
Responsible party What should be done Scoring mechanism
NRA Establish a consultation mechanism 1 if group set up and English language
TSO Entry-exit system established ½ for Entry Exit; 1 if a single VTP
TSO Title Transfer
TSO Cashout rules
TSO Accessible to non-physical traders 1 if trade without signup to physical rules
TSO Firmness of hub 0 if not firm; ½ if firmness “managed” by
TSO; 1 if BUBD; 2 if fully market-based
TSO Credit arrangements non-punitive
NRA Resolve market structural issues (defined role for historical player) ½ for release etc; 1 if market maker
NRA Role of Hub operator 1 – role defined; 2 – gov’nce addressed
NRA Agree regulatory jurisdiction if cross border 0 if cross border and no agreement; 1 if not
cross border or does have agreement
Market Establish a reference price at the hub for contract settlement 1 if price always available; ½ if deemed
Market Standardised contract 1 if specialised contract – EFET or
equivalent (or standard is sufficient)
Market Price Reporting Agencies at the hub 1 if several’ ½ if only one PRA
Market Commercial / Voluntary market makers
Market Brokers 1 if voice or few ; 2 if systems and many
NRA Establishment of exchange 1 if exchange appointed and hub is liquid;
½ if exchange appointed and hub illiquid
Market Index becomes reliable and used as benchmark 1 if Market parties frequently requested

17. 17IGG
Hub development scores (2014 Q1)
0
5
10
15
20
25
NBP
TTF
Zee-beach
ZTP
Gaspool
PEGs
NCG
AustrianVTP
PSV
GTF(DK)
CZ
AOC
UDN(TU)
GR
HVP(HU)
Poland
SK
RO
Mibgas
BU
AreaD
Major
Illiquid
Future
Other
0
1
2
3
4
5
6
7
8
9
Major
Illiquid
Future
Other
0
2
4
6
8
10
12
14
16
18
20
Consultation
Entry-exit
TitleTransfer
Cashoutrules
Puretraders
Firmness
Credit
Roleforhistoric
HubOperator
Cross-border
Referenceprice
Standardised…
PRAs
Marketmakers
Brokers
Exchange
Index
NRA
TSO
Market
Measures split between in sequence / out of sequence
0
5
10
15
20
25
EFET
ICIS
Source: ICIS for Tradability Index and maturity definitionsRaw scores by trading hub
Measures completed across all hubs

18. 18IGG
-
NBP
ZEE
TTF
NCG
Gaspool
AVTP
PSV
PEG-N-
PEG-SW
AOC
NordpoolGas
PEG-S-
Regional Hubs and pricing zones
Suggestions for emergence of regional markets
a) Build on NC BAL implementation, which
implies that every MS needs to have a local
balancing market.
b) Make sure that capacity rights for Entry/Exit
systems give fully firm access from one VTP
to the next.
c) Promote the other conditions that will allow
some forward trading to take place, even if
liquidity is low.
d) Help market areas to merge where that is
supported by market participants and/or
TSOs
Facilitate hubs and allow prices to converge according to
market demand
Possible areas of price convergence ?

19. IGG 19
INTRODUCING EFET
IBERIAN GAS GROUP -EFET
GAS HUB DEVELOPMENT IN EUROPE
FINAL CONCLUSIONS
Agenda

20. IGG 20
FINAL CONCLUSIONS FOR THE IBERIAN HUB
A change of model is needed. This new model needs to be in line with the
European markets harmonization process.
IGG offers its help on the market design process
It’s necessary to create a transition or evolution in the current gas system, in
order to create market reliability: Improving Information> Reliability> Increased
liquidity
Such transition can be achieved through a range of options and transitional
arrangements
All actors must be involved in this process: market participants, TSOs and
Regulators
We should all strive for the shared goal of:
A unique balance zone, with no feasibility analysis
Within a single Iberian "market area“.
A fair and efficiently organized market is key for a successful process

21. IGG 21
European Federation of Energy Traders
Tel: +31 (0)20 5207970
Email: secretariat@efet.org
www.efet.org

22. 22IGG
Annex
annex

23. 23IGG
Next steps
Study is known to be incomplete – must decide what criteria to refine (e.g.
information transparency?) and how often to update
Draw up recommendations for markets in the order of interest to market
participants
Offer support to EFET national / regional task forces and open consultation
programmes
Most common “next steps” for illiquid hubs
Establish a consultation process accessible in English language
Implement Entry-Exit regimes with a (preferably) single virtual trading point
Ensure the VTP is firm – through market based rules, with a transparent reference cashout price
Make sure the roles of TSO, hub operator, exchange etc are clearly defined with appropriate
governance arrangements
Continue to work on other market-opening measures in addition to hub
design

24. 24IGG