EU bodies nearing decision on interruptible backhaul tariff

EU policymakers are set to decide in the next weeks how big a price discount should be applied to virtual reverse flow capacity at interconnector points across Europe, a source from a European regulator told ICIS on Wednesday.

This has been a controversial aspect of the EU ambition to make it as easy as possible for buyers in the east to cut their reliance on imports from the east – mainly Russian gas – to instead tap into supplies from the west, despite a lack of pipelines flowing gas in that direction.

High-level informal meetings are currently taking place in Brussels between the agency for the cooperation of energy regulators (ACER), the European network of transmission system operators for gas (ENTSOG) and the European commission concerning issues of the EU-wise network code on harmonisation for gas transmission tariffs.

Last December, ENTSOG released the final draft of the network code, but several contentious points will be discussed further, one being about how to calculate the reserve price for virtual reverse flows in Europe, also called non-physical backhaul.

“ACER wants to encourage virtual reverse flow nominations by offering low prices, as they reduce overall costs and [make it possible to] avoid having to build physical infrastructure. Some TSOs do not yet offer this virtual reverse flow,” said the regulatory source.

But he admitted this solution would hurt shippers selling forward capacity from east to west.

A stakeholder involved in ENTSOG’s consultation while drafting the code recently commented: “The person who has to flow gas from east to west has to pay the full cost of the system. The one flowing gas from west to east can benefit from that, with no contribution to the cost of the system.”

ENTSOG, supported by some stakeholders, argue that virtual reverse flow services should not be free of charge but rather sold on the same principles as interruptible capacity.

Interruptible product

Interruptible non-physical backhaul is used as a way to net off nominations when gas can physically flow from east to west, but not from west to east.

Because nominations for the non-physical backhaul are dependent on the availability of the physical forward flows, these nominations cannot be guaranteed. Non-physical backhaul is considered by all stakeholders as an interruptible product.

“With less and less flows coming from east to west through the main traditional pipelines, there are more risks that virtual reverse flows are interrupted,” said the regulatory source.

But ACER thinks non-physical backhaul differ from standard interruptible products.

Incentive approach

In its framework guideline and opinion document released last year, ACER said that interruptible backhaul excluded costs such as infrastructure investments, compressing and energy fuels. Therefore this kind of service should sold via ‘marginal cost pricing’, which means with tariffs close to zero.

Another argument to lower reserve price was that backhaul flows reduce congestion as it has the potential to reduce physical flow by netting off capacity nominated.

ACER also considers that backhaul differs from other standard interruptible capacity products which are offered on top of firm physical capacity, because it offers a service against physical flows.

In addition, unlike interruptible products, non-physical backhaul enables new transaction paths which cannot be programmed by transmission grid operators.

Service view

But ENTSOG and traders lobbies argue that the incentive approach contradicts the gas regulation, a key piece of legislation in the EU energy market. According to the rules, interruptible prices have to be discounted in line with the probability of interruption, not according to the marginal cost.

“TSOs [would] be forced to offer much larger discounts for this product as compared to other interruptible products […]. The use of a different approach for non-physical backhaul capacity appears to treat the network users differently, i.e. discriminating between them,” said ENTSOG in the network code accompanying document in December.

“People flowing gas from east to west will cross subsidise people flowing from west to east and I don’t think it is fair,” said the stakeholder.

The commission, the third party involved in the current informal meetings, declined to comment on the possible decision. “[How] the pricing of the non-physical back haul is set up will only be possible to say at the end of the whole process,” said the spokeswoman on Tuesday.

ACER has until the end of March to provide an opinion but it is expected that the three parties will make an informal decision in the coming weeks, according to the regulatory source.

“There is not really a room for compromise. It is true that it is a bit extreme to change from interruptible capacity price to almost zero price,” he said. Lucie Roux