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European energy marketsa EU regulator’s perspective

Valeria TerminiCommissioner of the Italian Authority for Electricity and Gas

Member of the Board of Regulators, ACER

British Embassy Rome

Friday, April 27th 2012

Shale gas potentialEIA estimates of 48 basins in 32 countries

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3

Shale gas forecasts

Share of shale gas on local productionSource: EIA forecasts

0%

10%

20%

30%

40%

50%

60%

70%

80%

OE

CD

Am

eric

a

OE

CD

Eur

ope

OE

CD

Asi

a

Rus

sia

Chi

na Indi

a

Cen

ter-

Sou

thA

mer

ica

Wor

ld

2008 2035

The importance of LNG is growing

LNG share on total (world) gas exportsource: IEA

20%

22%

24%

26%

28%

30%

32%

2006 2007 2008 2009 2010

4

5

World’s major LNG exporting and importing countries

Source: BG group

Where does LNG go ?

Importazioni di LNG per paese di destinazionefonte: IEA

0

20000

40000

60000

80000

100000

120000

Arg

entin

a

Bel

gium

Bra

zil

Can

ada

Chi

le

Chi

na

Taip

ei

Dom

inic

an re

p

Fran

ce

Gre

ece

Indi

a

Italy

Japa

n

Kor

ea

Kuw

ait

Mex

ico

Nor

way

Pol

and

Por

tuga

l

Pue

rtoric

o

Spa

in

Turk

ey UK

US

A

Mili

oni d

i met

ri cu

bi

20062010

=> 6

Where does LNG come from?

LNG exports by country of originSource: IEA (2011)

0

10

20

30

40

50

60

70

80

90

Aus

tralia

Uni

ted

Sta

tes

Alge

ria

Brun

ei

Egyp

t

Eq.

Gui

nea

Indo

nesi

a

Liby

a

Mal

aysi

a

Nig

eria

Nor

way

Om

an

Per

u

Qat

ar

Rus

sia

Trin

idad

U.A

.E.

Yem

en

Non

Spe

cifie

d

Bill

ions

of c

ubic

met

ers

20062010

7

LNG prices

8Source: IEA

WILL EUROPE TAKE ADVANTAGE OF THESE PROCESSES OF CHANGE ?

A. BACKGROUND

B. PRICES, CONTRACTS AND A NEW CONCEPT OF SECURITY OF SUPPLY

C. SOME CONTROVERSIAL ISSUES: policy, regulationand firms

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Why gas is key for the EU

Many reasons, but two in particular:

1. Europe has a strong dependency on foreign gas

2. The share of gas in EU power generation is increasing

To comply with Kyoto targets The need for backup of renewables create demand for

gas (baseload replacement)

The generation mix: gas and renewables are growing for all

(and will grow more)

11.0 13.65.7 4.6

52.843.9

36.0

10.8

32.428.4 31.9

26.0

31.0

8.3

1.3 1.1

0.8

1.610.1

4.7

2.21.1

5.9

2.6

36.6

51.6

4.6

9.1

13.2 9.0

31.6

39.345.7

15.8

22.2

76.8 74.8

29.4

22.5 27.7

20.2

22.6 16.5

31.227.4

20.323.1

13.3 13.76.1

11.816.3

31.1

2.34.0

13.517.2

1.0 3.5 0.8 1.2 1.87.0

0.9 1.6 1.2 4.4 1.6 4.4

2.1

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2000 2010 2000 2010 2000 2010 2000 2010 2000 2010

Italy France Germany Spain UK European Union

Coal, l ignite Oil Natural  gas Nuclear Renewables  (hydro, wind, solar, geothermal) Other

Source: Enerdata11

Electricity generation by source

Gross electricity generation by primary energy source, EUSource: Eurostat

0%

10%

20%

30%

40%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

perc

enta

ge o

f tot

al

Natural gas Solid fuels Nuclear Renewables Oil Other gases

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The importance of gas in EU 27 and Italy

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Energy dependence of the EU is strong (net imports on primary energy consumption, 2010)

86.2%

50.3%

63.2%

82.1%

29.5%

55.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Italy France Germany Spain United Kingdom European Union

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… even stronger for gas

Natural gas dependenceSource: IEA

0%

25%

50%

75%

100%

125%

Italy Germany France Spain UK

200820092010

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Gas prices: decoupling?

Oil vs gas prices indexes

50

75

100

125

150

175

200

225

feb-

07

apr-0

7

giu-

07

ago-

07

ott-0

7

dic-

07

feb-

08

apr-0

8

giu-

08

ago-

08

ott-0

8

dic-

08

feb-

09

apr-0

9

giu-

09

ago-

09

ott-0

9

dic-

09

feb-

10

apr-1

0

giu-

10

ago-

10

ott-1

0

dic-

10

feb-

11

apr-1

1

giu-

11

ago-

11

ott-1

1

dic-

11

Gas Idx (€) Oil Idx (€)Gas: Average EU import price (WGI)Oil: Brent undated - Platt's

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Hubs and import prices

Hub prices vs average import pricessources: Platt's, ISTAT, WGI

0

10

20

30

40

50

gen-

07

apr-0

7

lug-

07

ott-0

7

gen-

08

apr-0

8

lug-

08

ott-0

8

gen-

09

apr-0

9

lug-

09

ott-0

9

gen-

10

apr-1

0

lug-

10

ott-1

0

gen-

11

apr-1

1

lug-

11

ott-1

1

gen-

12

€cen

ts/c

ubic

met

er

Hub avg EU import avg IT import avg

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Oil indexed – hub prices spread

Spot vs Oil indexed contracts

Gas supply by type of contract, EU+Switzerland+Turkey.

0

100

200

300

400

500

Pipe_oil_idx LNG_oil_idx Pipe_spot LNG_spot Total_oil_idx Total_spot

billi

ons

of c

ubic

met

ers

2008

2009

2010

Source: Carnegie Endowment for International Peace (2011)

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The development of the spot market

Source: Carnegie Endowment for International Peace (2011)

% o

f th

e to

tals

upp

ly

Gas supply by type of contract, UE + Switzerland +Turkey

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The emergence of gas hubs in Europe

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Where does gas come from?

TAP

ITGI

MEDGAZ

GALSI

TRANSMED

Source: ATKearney

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EUROPE:SOME CONTROVERSIAL ISSUES

Policy

Regulation

firms

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The new ACER’s rules:changing the EU Gas Sector

• Capacity Allocation Mechanisms for the European Gas Transmission(FG published by ACER on 3/08/2011 – NC presented by ENTSOG on 6/03/2012)

• The most innovative provision: bundled products for capacity services– the corresponding exit and entry capacity available at both sides of every point

connecting adjacent entry-exit systems shall be integrated in such a way that the transport of gas from one system to an adjacent system is provided on the basis of a single allocation procedure and a single nomination

– Big impact on existing long term ToP contracts

• Pilot projects already started at regional level to allocate bundled products (often through regional platforms):

– North West => creation of booking platforms through a bottom up approach (by TSOs)

– South = > harmonisation at the Spanish and Portuguese IP (Auction to be launched in June 2012)

– South South East => positive experience of the GATRAC platform

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The new ACER’s rules:changing the Electricity Sector

Framework Guidelines on Capacity Allocation and Congestion Management for Electricity (published by ACER on 29/07/2011)

The most innovative provisions: mandatory market coupling; a newcommon grid model (EU zonal market)

– Implicit allocation of day ahead capacity through a common EU algorithm: incentive to efficient capacity allocation and price convergence (to the limit allowed by physical congestions)

– A new network model will highly effect the current system operation

Pilot projects already started at regional level:

– ITVC (interim tight volume coupling) project => volume coupling of two regions (CWE+N); form the end of 2012 to be changed into a price coupling

– MIBEL => Iberian peninsula coupling

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Diffusion of EU rules beyond EU borders

Neighbouring areas interested in the EU energy regulatory framework => important to trade and facilitate investments

Successful experiences are

• Set up of MEDREG Association • Signing of the Energy Community Treaty

Cross border projects will benefit from common rules => i.e. ITGI (South corridor) and TAP (South East corridor)

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Gas framework guidelines on capacity allocation

The goal is moving from borders to hubs, removing gas frontiersand the need to buy separate entry and exit rights every time gas is traded between countries. With this system, entry and exit rights are “bundled” and sold with gas.

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Old gas routes: from Russia to Italyvia Austria (TAG)

Source: TAG30% of the natural gas imported by Italy comes trough TAG

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New gas routes for Italy?

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The effects of change on gas players

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Focus – Italy

AEEG current regulation stanceand ….

renewables

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Gas vs renewables

Shares of gas and renewables on power generation, ItalySource: Eurostat, Terna, GSE

0%

10%

20%

30%

40%

50%

60%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

GasRenewables

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AEEG regulation favouring an efficient and integrated EU market /1

Gas sector:

• New market based balancing market: providing a transparent pricereference for the daily value of natural gas in the system

• Establishing a regulatory framework able to favour new investments: the TSO foresees 7 billion€ investments in the next 3 years

Electricity sector:

• Important deployment of smart meters: around 40 million customers – now able to actively respond to energy price signals

• Establishing a regulatory framework able to favour new investments: the TSO foresees 5 billion€ investments in the next 4 years

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AEEG regulation favouring an efficient and integrated EU market /2

Gas sector:

• Capacity Allocation=> coordinated short term capacity services at Tarvisio/Arnoldstein IP

• Promoting competition=> reference retail price to take into account spot prices at Italian and EU level

Electricity sector:

• Short term capacity allocation: market coupling IT-SI• Long term capacity allocation: joint allocation of

transmission rights for the entire Central South market region

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• The target for Italy coming from the EU directiveis: 17% of internal energy consumption by 2020 should come from renewable energies.

• For electricity, the National action plan indicates a 29% target by 2020.

• Recent estimates for 2011 show that IT already reached24.5% of internal energy consumption.

The weight of E-RES

Share of renewables on total generation, ItalySource: GSE

0,0%

5,0%

10,0%

15,0%

20,0%

Hydro Geothermal Wind Solar Biomass

perc

enta

ge o

f gro

ss g

ener

atio

n

2008

2009

2010

2011

36

37

The growth of solarComposition of RES generation, Italy

Source: GSE

0%

25%

50%

75%

100%

2008 2009 2010 2011

perc

enta

ge o

f tot

al g

ener

atio

n fr

om R

ES

Biomass

Solar

Wind

Geothermal

Hydro

…and for users

0

0,02

0,04

0,06

0,08

0,1

0,12

0,14

0,16

Medium sized industries Medium sized households

Electricity Prices by type of user (Eurostat 2011)

€/kW

h

ItalyGermanyFranceEU-27

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What price for renewables?

AEEG estimated (PAS 21/11, May 2011) € 100bn incentivesfor renewables until 2020, paid for by electricity bills.

New estimates last week (REL 56/12) is €10.5bn for 2012 only: €100bn cumulative by 2020 could be underestimated.

Between 2008 and 2012 we estimate about €24bn spent in incentives for E-RES.

Is it sustainable?

• Incentives have been revised (Ministerial Decree April 2012 – “Quinto Conto Energia”)

• The idea is linking incentives to technology• But technology is running faster

Ssource: KEMA, Imperial College London)

Electricity interconnection capacity requirements 2020 in MW

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THANK YOU FOR YOUR ATTENTION !

vtermini@autorita.energia.it

“Im Zweifel für Europa"

Nel dubbio, per l’Europa*

*S. Cassese, “Introduction: Im Zweifel für Europa”, S. Micossi, G.L. Tosato, “The European Union in the XXI century: Perspectives from the Lisbon Treaty, 2009

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