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Zone Merger – learning from experience and developing an evidential based approach. Nigel Sisman Senior Adviser. Target Model Workshop 3, London 11 April 2011. Zone Merger opportunities and challenges. Opportunities Enhanced trading opportunities Focussed liquidity

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zone merger learning from experience and developing an evidential based approach

Zone Merger – learning from experience and developing an evidential based approach

Nigel Sisman

Senior Adviser

Target Model Workshop 3, London 11 April 2011

zone merger opportunities and challenges
Zone Merger opportunities and challenges
  • Opportunities
  • Enhanced trading opportunities
  • Focussed liquidity
  • Robust price indexes
  • Simpler transportation arrangements
  • Less entry/exit zone bookings
  • Easier system user balancing
  • Access to functioning balancing markets
  • Challenges
  • Risks of internal congestions
  • changes in flows may expose new constraints
  • Which options to manage risk
  • Establishment of “balancing market operator”
  • New operational and settlement functions
  • Enhanced cross-border TSO cooperation
  • - Increased contractual, tariff and operational complexity

… free lunches do not exist; so how do we assess the tradeoffs?

presentation structure
Presentation structure

Learning from merger experience

Developing an evidential approach to assess challenges

Understanding liquidity and trading depth

Conclusions

recent merger experience
Recent Merger Experience

Gas experience

France - a single TSO experience

Integration of northern hubs to create PEG Nord

Germany – a multi-TSO experience

A stepwise integration towards two zones

… and lessons learnt from electricity?

french experience
French experience

PEG North/West/East merger

2 Full Entry/Exit PEG zones

For reasonable scenarios

360 M€ investment

PEG Nord has the critical size for liquidity to develop

6 IP, 1 LNG terminal, 9 storages, 330 Twh of demand

whichenabled:

The creation of a gas exchange (Nov 2008)

The development of marketbasedbalancing

An increasedattractivity for CCGT projects

… zone merger facilitated by investment

german experience
German experience

Progressive reductions in number of zones

By 1.4.2011 3 zones

Legal obligation by 1.8.2013 2 zones

Balancing Operators introduced

“Statistical firm” capacity model

Successful model if no sudden major changesof market behaviour occur

Otherwise capacity reduction

Prerequisites

Intense cooperation and trust between involved TSOs needed

Specific characteristics of the individual grids need to be considered

Involvement of NRA when defining the model

… zone merger facilitated by reflecting congestion risks in system user’s

capacity entitlements

… increasing complexity necessitates cost benefit analysis for next step

electricity experience
Electricity experience

Scandanavia experience

single Swedish price zone but significant internal constraints

“Constraints exported to national borders”

accusation of discrimination domestic/international consumers

Swedish pricing zones to be established

… the underlying physical realities of transmission are important

… internal constraints must be “small” to ensure efficient merger outcomes

the challenge of zone merger
The Challenge of Zone Merger

Enlarged Zones

Internal bottlenecks are “transferred” to new zone borders

New risk management approaches needed

Zone mergers have implications

benefits from enhanced trading environment

redistributive effects between system users

tariff implications

changes in values of flexibility offered to market/TSOs.

Less certainty and changed flows

Increased risk of internal congestion

managing internal congestion risks in enlarged zones
Managing internal congestion risks in enlarged zones

Investment

Flow commitments

Reduced firmness of capacity or reduction of capacities

Point-to-point capacity arrangements

Constrained on/off (local purchase/sale of gas behind/in front of constraint)

or combinations of any of the above

… the options may have different costs and different benefits in delivering enhanced liquidity

possible methodology to assess potential for internal congestion costs arising from zone merger
Possible methodology to assess potential for internal congestion costs arising from zone merger

Capacity availability options

Investment Options

Flow scenarios

Simulation model

Preferred option or combination costs

Internal Constraints

Freq/Size

Evaluation model

Network Model

Flow commitment options

Balancing - constrained on/off options

international merger involves greater challenges
International merger involves greater challenges

Legal framework

Tax issues

Governance

Location of virtual trading points

Who manages the system

Regulatory and Member State sovereignty

… international zone merger in gas has not yet been delivered

benefits of larger zones liquidity and trading depth
Benefits of larger zones – liquidity and trading depth

How deep and liquid does the market need to be?

What criteria define a “Functioning” market?

  • … what value do we attach to:
      • traded volumes?
      • churn rates?
      • competition measures (HHIs)?
assessing market efficiency daily nbp gas trades
Assessing market efficiency - daily NBP Gas Trades

Simple commoditised, zero tolerance daily balancing

Improvements in balancing regime and market experience

National Grid data

recent nbp trading liquidity
Recent NBP trading & liquidity

… over 100 players each side of the market

…. HHI around 370 on both side of the market

… but how do we value the consumer benefit of this level of liquidity?

National Grid data

conclusions
Conclusions

Mergers afford both opportunities and challenges

First steps may be straightforward but challenges escalate rapidly

Trading/liquidity benefits delivered via a range of alternative approaches

but physical constraints can’t be too great

Assessing benefits and costs

How do we assess benefits?

How to assess best option(s) for risk mitigation?

… no free lunches; evidential approach should support the case for zone merger