Brussels workshop on Investment: 26 and 27 February 2009 “Simulating a (virtual) gas pipeline investment in the NW region” Why do we need the Virtual Test

Brussels workshop on Investment: 26 and 27 February 2009“Simulating a (virtual) gas pipeline investment in the NW region”

Why do we need the Virtual Test / Business Simulation

GRI NW Investment I1- Virtual Test/Business Simulation


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Content of presentation

1. Why are we all here? (History and background)

2. What is our common end goal?3. What is important for shippers/traders,

regulators and TSO’s?4. How can we reach our common end goal by

creating a virtual test?• Including management summary Road Ahead


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creating a virtual test?


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Why are we all here? (history and background)

• Last year’s GRI NW stakeholder group showed broad agreement among participants that the regional investment framework could be enhanced

• The idea of a.o. EFET that the current way we sell capacity and investments are triggered in the current investment framework could be improved


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What is our common end goal?

• A competitive European internal gas market with the regional market as “a stepstone”

• Giving consumers the possibility to choose between different suppliers

• Adequate infrastructure with sufficient level of Security of supply

• Trying to reach the same goal from different perspectives


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What’s important for Shippers/traders?

• Clear commitments to secure investment• Fair distribution of risk across stakeholders• Clarity on capacity tariffs, access and

conditions• Choice of routes to enhance flexible response


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A Better Way?• Liberalisation, single market, regional markets…

can these be delivered under existing mechanisms?

• Have a tri-lateral debate – consumers-TSOs-shippers

• Allow true demand to be discovered• Reduce uncertainty• Diversity of supply can only occur with options

on delivery routes


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Challenge

• Flexible mechanism allowing shippers to show actual demand

• Economic test to determine investment decision based on demand in an EU context

• Adjustment to the regulatory contract to properly reward risk and innovation


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What Regulators want (1)?

CEER principles 2003 for investment 1. PRINCIPLE #1. Public authorities should endeavour to encourage sufficient investment in gas and electricity network

infrastructure in order to implement the internal energy market, facilitate efficient competition and safeguard security of supply. Public authorities need to maintain oversight of infrastructure decisions in order to promote both security of supply and network efficiency.

2. PRINCIPLE #2. Transmission System Operators must manage their networks in a way that ensures the efficient use of infrastructure.

3. PRINCIPLE #3. Public authorities should establish transparent, non-discriminatory and standardised options for the development of infrastructure and aim as far as possible to minimise regulatory risks.

4. PRINCIPLE #4. Public authorities should enforce a minimum procedure for the publication of the Transmission System Operators’ infrastructure plans.

5. PRINCIPLE #5. Transmission System Operators must be effectively unbundled to ensure that there is no conflict of interest when making investment decisions and to ensure there are sufficient incentives to provide non-discriminatory third party access. Unbundling of network ownership is the preferred route to follow.

6. PRINCIPLE #6a. - Public authorities should establish, in advance and in a transparent manner, which regulatory regime is to be applied for both national and cross-border investments. That regulatory regime should include a clear description of its applicability, the relevant criteria for the financial reward for new infrastructure investment and should describe the relevant criteria applicable to third party access to the new infrastructure.

7. PRINCIPLE #6b. - Merchant infrastructures have to be decided on a case-by-case basis and should continue to be subject to an ex-ante regulatory control for each individual case. Where the merchant status is granted on a time-limited basis, the ongoing regulatory status should be properly re-appraised at the end of this period.

8. PRINCIPLE #7. Public authorities should guarantee that procedures applicable to granting required licences for new investments in gas and electricity network infrastructure are non-discriminatory and efficient.

9. PRINCIPLE #8. Swifter, more expeditious administrative authorisation procedures are required for infrastructure development, particularly those for interconnection infrastructure.

See http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_ERGEG_PAPERS/Cross-Sectoral/2003/CEERPRINCIPLESINFRASTRUCTURE_REGULATORYCONTROL_FINANCIAL.PDF


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What Regulators want (2)?Quote from projectplan (leadregulator):

A successful regional market will develop by 2012 provided the basic building blocks are in place. One of the 9 building blocks identified in Roadmap is investment climate. Clarity on investment climate in transmission capacity is fundamental to new investments. And new investments in the EU (and specifically in the NW-region) are broadly needed for (at the very least) solid security of supply (see i.a. IEA studies):

“The investment climate should be such that investments in capacity… are sufficient and timely and persistent physical congestion is avoided. Investments should facilitate gas supplies from diverse sources to meet the need for secure gas supplies” (quote from Roadmap GRI NW).


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What’s important for TSOs?1 Stable, predictable and fair investment framework

– Stable important investment parameters– Clarity upfront about lower or higher costs/revenues– Fair risk/reward ratio for investment projects

2 Underpinning infrastructure investment with sufficient binding commitments from a combination of the market, regulators and possible government

3 Improved coordination between regulators and TSOs4 Clear division and definition of roles and responsibilities

With the goal to deliver the market demand for capacity in a timely, efficient and flexible way


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What are we trying to achieve with this virtual test (1)?

• Improving transmission access • Enhancing gas market functioning• Establishing fair risk/reward distribution

– TSOs– Shippers– Regulators (in role of end-consumer)

Clarity to enable investment to facilitate efficient market functioning by end of 2009


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What are we trying to achieve with this virtual test (2). Road ahead?

Contents Management summary of Road Ahead (see next slides):– Reminder Investment project goals as a whole– Overview cases (and differences)– Overview process/case– Possible testing outcomes– Required organisation– Key decisions today

Clarity to enable investment to facilitate efficient market functioning by end of 2009


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NW GRI Project Objectives (*): By end 2008: understand existing incentives on TSOs to make additional capacity available

efficiently By end 2009: an agreed regional framework for new cross border (**) investments should be

in place By end 2009: begin to establish and implement co-ordinated incentive mechanisms

Success Criteria summary: Efficient TSOs can recover their costs & earn a reasonable return commensurate with risk Adequate cross-border investment leading to increased trade & greater price convergence Regulatory regimes support investment in capacity beyond contractual commitments from

network users, if adequate

* A Vision and a Roadmap for the Gas Regional Initiative North West, 4 April 2008

* Based on ‘A Vision and a Roadmap for the Gas Regional Initiative North West’, 4 April 2008* * Leading to in/decrease of capacity at a regional interconnection point

Reminder roadmap: this project is about path to agreed regional

framework…


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BaseCase:

2-3 parametersdiffer from today:

‘market test’,‘Risk dialogue’.

Innovative Case:

All parametersare allowed

to vary

Reality Greenfieldthinking

3 Keys to success:

- Simplicity (executable in given resources)

- Balance between realism and sufficient distance to reality in order to have open dialogue in “reasonable comfort” on risk distribution.

- Numbers can be realistic but not necessarily exact.

- You need possibly 2 situations to judge and present results in qualitative manner, based on comparison.

Currentprojects

Only via laboratory

experiment, to learn...

This 1 case in

VT (but 2

routes) ?

Differences in the cases: we propose to end today with 1 case and 2 routes


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The process is about iteration, especially between steps 4,5 and 6.

1. Route1. Route 2. Initialsize

2. Initialsize

3. Capex

3. Capex

4. Reg frameWork

(revenue)

4. Reg frameWork

(revenue)

5.Risk

distribution

5.Risk

distribution

6.Design

test process

6.Design

test process

7.Conclude

7.Conclude

November November September September May May February February

Process of the case: we shall walk through steps during today….


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High risk

High risk

75%mitigation

needed

75%mitigation

needed

None, unless society

need proven (eg Inv. only with

Gov. Support)



Gov. Support)

Low riskLow riskNo

mitigationneeded

Nomitigation

needed

Award “tools”:No

(TSO, shipperscan manage

withoutReg intervention)




MedriskMedrisk

25%mitigation

needed

25%mitigation

needed

Low reg. Intervention

Needed(eg x % extrafor 10 years)



Some notesSome notes

Project risk profile Type of ‘help’ need?X% (range) cost at risk

Outcome of the simulation is at least: (1) being able to have risk (distribution) dialogue (incl. range & ranking in critical and non-critical reg. parameters in frameworks to come to certain

project risk profile; ability to determine level of needed risk mitigation and advise on required regulatory treatment (ie deny, shift or accept risks between tso/shippers/consumers)) AND

…….


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High risk

High risk

75%mitigation

needed

75%mitigation

needed



Gov. Support)



Gov. Support)

Low riskLow riskNo

mitigationneeded

Nomitigation

needed







MedriskMedrisk

25%mitigation

needed

25%mitigation

needed





Some notesSome notes

1. Assumptions to come to 3 columns

form valuable output of VT, so all can assess when low/med cases

happen

2. Idea market test

‘tested’ (X% hurdle; known in advance)

3. Low and Med risk

projects are likely

to be invested

(= this gives the requested clarity)

Project risk profile Type of ‘help’ need?X% (range) cost at risk

Outcome of the simulation is at least: (1) being able to have risk (distribution) dialogue AND (2) market test idea ‘tested‘ as such

and (3) clarity on when projects likely get invested…….


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Next workshops:

- First work: by 19 May

- Final work: September

- Final results discussed: November

Work organisation:

Make required today decisions (see next sheet)

Form subgroup(s)/route with core of 3 and reference group of all involved; appoint volunteer-coordinator/group:

- telcos

- 1 prep mtg/period

- written comments/email

Key task: Getting from today to first set of numbers in early May, as basis for discussion; with possibility to adopt choices in variables towards September.

Process organisation requires commitment of us here today in general and people able to work on simulation

towards presenting results in May, September, November workshops.


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Decisions that will need to be made at the 26/27 February 2009 Workshop include:

1. Choice of route(s)2. Choice of (initial) increment sizes for “virtual pipeline(s)”3. Choice of key elements of regulatory framework (and cases)4. Formation of working subgroups of TSO/Regulator(s)/(observing)shippers

to do Virtual Test tasks on way to May and September workshops.5. Assignment of detailed tasks and respective timings needed to complete

the Virtual Test process to the subgroups6. General confirmation of any other crucial details (if any).

Key decisions today


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This is about taking a risk of success together….One could compare 2 views of securely crossing the street…1 lesson: your safety grows only with experience of knowing

what matters in ‘street crossing’….


Thank you.Time for further work….

Documents

Brussels workshop on Investment: 26 and 27 February 2009 “Simulating a (virtual) gas pipeline investment in the NW region” Why do we need the Virtual Test