Security of Capacity

For many years we see a traditional and ongoing concern for the different stakeholders in the gas industry.

In gas markets consumers and politicians in consumer countries are talking about security of supply. A possible interruption of deliveries of natural gas during cold winters is something that worries the customers and the question is are we still in control in such situations.

On the E&P side, producers and exporting nations are talking about security of demand. Huge investments over a period of many years are needed before the production of gas can really start. In the meantime the energy policy in countries can change. The introduction of renewables and political decisions about the development of shale gas can have a big impact on the market.

In many scenario’s both issues play an important role but what often has been forgotten is what I call security of capacity.

In the past, companies could market their volumes simultaneously with the planning of the infrastructure needed in this kind of situations. As we know, gas fields can be connected to the market, mostly by large pipelines with compressor stations, or by LNG. The whole planning had an integrated approach.

In the last decade we have seen the unbundling and fragmentation in the gas industry. New TSO's have to operate in an independent way with a new set of stakeholders like (national) regulators and (international) traders. In this arena it is not so obvious anymore that there will be adequate gas infrastructure developed to connect supply and demand. The business models have changed and, due to the fragmentation of the industry, have become more complex than in the (integrated) past.

For planning their investments, TSO’s need to have a sound view on the developments of the gas market. This is not obvious. TSO’s are not active in the market and moreover, cannot judge the correctness of claims from stakeholders. Typically, stakeholders claim an enormous amount of future capacity.

For their investment planning a TSO can start a so called open season, an investigation of the future need of shippers. Under such a regime, shippers have to conclude long term contracts. Experiences in the Netherlands and elsewhere have shown that these contracts give a TSO a good estimate of the future need for transmission capacity. As a rule of thumb, the amount of capacity concluded in Open Seasons is just one third of the amount of capacity requested in a non binding system.

The next step is developing the business case, based upon the outcome of the open season. The most important driver for a successful business case is what can be the return on the investment for this project. Typically, regulated tariffs are too low to create a sound business case.

This is where regulators play a dominant role. Although a simple solution could be that regulators respect the long term commitments from market partcipants in Open Seasons, we see that often, they don’t. Thus, they may force TSO's to reduce the scope or even to abandon parts of the project. We have also seen examples where the whole project will be postponed or cancelled.

An even more complex problem will occur when a company is working on cross boarder projects in different countries with different regulators. In this situation they will face two different regulatory regimes and every regulator has their own set of national rules. It is very complex to adjust all these issues and reconcile them.

This introduces an interesting dilemma. The fundamental thought of a liberalized market is that the competing participants will conclude so many activities that sufficient security of supply is achieved. In other words, the responsibility for security of supply is left to the market. However, if regulators intervene and limit the market participants in their activities, what then?

When at last all these problems have been tackled there is still big risk in large projects. It is what we call the NIMBY-effect. Companies struggle with public involvement and acceptance of large infrastructure projects and for local government it is often a new and unknown situation in which they have a lot of questions concerning safety and environmental issues. It can take months and even years before they are convinced and willing to give a company all the permits that are needed.

For instance, the north south expansion, a 500 km pipeline project in the Netherlands, needed more than 700 permits.

In this short overview I hope that you will agree that security of capacity is as important as security of supply and demand. But how can we stimulate security of capacity in Europe?

In my view it is now time for the European regulators to obey the capacity requirements from market participants. If not, we can not expect that the market will solve the security of capacity problem. Next to this, regulators (ACER) should develop a pan European regulatory set of rules for all TSO’s. These rules should be sufficient to carry out investments required by market participants. Such a system would eliminate lengthy discussions between (national) regulators and (national) TSO’s.

Secondly, I think that the gas industry needs to understand the real concerns of people living close to gas infrastructure and the questions of local government in new projects to come.

Involvement of public and local government in a very early stage is crucial. Regulators should assist TSO’s and national and local governments by stressing the importance of energy infrastructure.

You may think, such a regulatory system sounds like utopia. Maybe. On the other hand, this system is actually very similar to the system which is functioning in the USA. And how about fears about security of capacity in the USA? They are nonexistent.

Eric Dam

Eric Dam is President, Energy Delta Institute and Chairman IGU Transmission Working Committee.  This article was published on Syntropolis and re-published with the kind permission of Energy Delta Institute.