Transcript Title of presentation

Energy Infrastructure Package
ERGEG preliminary views on cost allocation
for investments in gas infrastructures
Benoît Esnault
Commission de Régulation de l’Energie (CRE) - ERGEG
19th Madrid Forum, 21-22 March 2011
EIP diagnosis and objectives
• Commission’s diagnosis
• Potential lack of investment in infrastructure to implement the
European energy strategy;
• The "market" may not always finance the investments:
investment gap estimated at 10B€;
• Cross-border investment decisions made at national level.
• Introduction of new concepts where investment
should be promoted
• Positive externalities;
• Regional benefit or benefit for a « third country ».
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Regulators’ approach to
investment
•
Market based mechanisms to remain the reference principle: filling the
gap between market value (shippers’ willingness to pay) and cost is the
dominant issue;
•
Developing infrastructure to the benefit of competition and market
integration: priority to market based mechanisms when appropriate;
•
Different situations
• Market design (e.g. merger of balancing zones): market based procedures
are generally not appropriate, except if there is some additional
transmission capacity created at remaining IPs;
• Interconnectors: possibility of TPA exemption (after a market test);
• Interconnections: market based mechanisms (open seasons).
•
Regulators promote a rational approach to infrastructure development
• Priority to a sound use of existing infrastructure: precondition to avoid
inefficient network expansion is effective capacity management;
• Assess the need for new infrastructure (market test);
• Investment agreed regarding its market value, but also security of supply,
competition development, etc.
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Identification of priority projects,
the role of the TYNDP
• Market integration
• Identify where the European system lacks of capacity to guarantee a
sufficient level of cross-border interconnection open to TPA;
• According to EWI-Study and ENTSOG’s TYNDP, the EU gas grid
- in technical terms - is well developed but some (physical and
potential) bottlenecks identified.
• Security of supply
• TEN-E projects, the EEPR and the reverse flow projects to be
included in the TYNDP;
• Need to simulate system’s reaction over longer periods based on
different demand scenarios.
• Depending on the TYNDP results cost allocation is driven by
• Open Season procedures and tariffs; and/or
• Cost allocation rules according SOS regulation.
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Existing tools: Open Seasons
• Background principles
• Value based methodology focused on shippers’ willingness to pay;
• Investment decision based on an economic test.
• Key issue: elaboration of the economic test which should include
all the different benefits expected from the project
• When the collective value is higher than the market value: investment may
be rejected while potentially desirable;
• In successful open seasons, the economical conditions of long-term
commitments are consistent with the shippers’ willingness to pay.
• Additional value of the infrastructure may be due to
• Security of supply;
• Positive externalities;
• Benefit for competition and market integration.
 Challenge: addressing these dimensions when there is a
potential gap between market and collective values of the
project.
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Existing tools: Tariffs
• Tariffs are the basic tool for cost/revenue allocation, they are
adopted in most cases;
• Cost reflective entry/exit tariffs allow to cover the costs in a
balanced way for cross-border infrastructures;
• Limits and risks
• Tariffs higher than the market value of the transmission service
proposed, for instance when costs are high;
• Underuse of the infrastructure during the asset’s life, after the end of
long-term contracts for instance or when assets are used as reserve for
SoS.
 Challenges: filling the potential gap between costs and market
value and allocating the risk of stranded assets consistently
with the individual benefits expected from the interconnection.
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Focus on cost allocation (1)
• Specific cross-border mechanism only justified when
• Shippers’ willingness to pay is below the collective value of a cross-border
investment AND asymmetry of benefits between adjacent countries;
• Regional benefits of a national investment.
• Need for a sound diagnosis
• Evaluation of externalities and respective national benefits to assess the
collective value of the project;
• Identification of risks.
• Cross-border cost allocation options
• Socialisation through national tariffs when balanced benefits;
• Cross-border subsidy or financial support from the benefitting country when
asymmetry of benefits;
• EU subsidy if regional or community benefit.
 Find a proper balance between “user-pays”, “beneficiary-pays”
and “taxpayer-pays” principles in order to fill the gap between cost
based tariffs and the market value of the services.
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Focus on cost allocation (2)
• Risk based approach
• Rationale: when tariffs and market value are aligned at the time
when the infrastructure is commissioned;
• Estimation of risks during asset’s life;
• Main risk: underuse of the infrastructure leading to a lack of
revenue (stranded assets).
• In case of assymmetric national benefits risk coverage
should be agreed before the investment
• Improving the cross-border coordination of open season
procedures is often the first way of facilitating investment
• Identifying all the necessary investments to develop transmission
capacity;
• Coordination increases the value of the projects;
• Reduce the risks associated to delays from one of the investors.
• Ensure effective unbundling to prevent potential
obstruction by incumbents.
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Conclusions
• Market based approach should remain the reference
• Prevents from over-investments which could result in high sunk
costs;
• They should internalise externalities before the open seasons
are organised;
• The result of open seasons should be followed, even when the
investment is rejected  regular OS are an option.
• Tariffs are sufficient to cover costs in most cases but
• Part of the costs often need to be socialised in open seasons;
• Distorsions due to the gap between market and collective values
should be covered;
• The long-term risks of underuse of a newly built infrastructure
(stranded assets risk) may need to be addressed.
• EU/tax payer support and cost/risk allocation should
be assessed before the decision to invest is made,
based on a sound methodology.
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Thank you for your attention!
www.energy-regulators.eu
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