Interview: Storage leader calls for review of transmission tariff principles

29 July 2014 11:48 Source:ICIS

Leaders from across the European natural gas storage industry have called for a review of the principles behind EU transmission tariffs calculations at storage connection points, according to the chief executive of French gas storage company Storengy and former president at GSE, Jean-Marc Leroy.

The new rules should be based on an analysis of the benefits storage brings to the whole gas system, Leroy said.

With a draft EU network code for overall gas transmission tariff harmonisation due before the end of the year, storage industry leaders want to add some specifications to limit charges for shippers when they use storage.

At present, shippers have to pay a transmission fee to shift gas from the network into storage and later a fee to exit from storage back into the system.

But according to a presentation given by Brussels-based organisation Gas Storage Europe (GSE) at the gas regulatory forum in Madrid in May, a harmonised transmission tariff at storage connection points is required to achieve a level playing field.

In an interview with ICIS in Paris, chief executive of French gas storage company Storengy and former president at GSE, Jean-Marc Leroy, said: “We have called for a zero entry-exit tariff as a basis like in Denmark and Spain. Storage should not be considered as an object outside of the system. It is an integrated installation which shifts consumption over time, like travelling back to time. It is not a net source of supply or demand.”

In addition, storage sites bring benefits to the overall natural gas transmission system because of security of supply and saved investment, Leroy said. This should also be a feature of the coming new methodology to calculate transport tariffs.

Leroy also highlighted the overly complex workings of the storage market.

“Shippers are often told that the main value of storage is to inject in summer and withdraw in winter [to benefit from the winter price premium over summer]. But many of different spreads are traded in the market, representing other ways and opportunities to use storage. These are not valued [by transmission tariff calculations].”

Leroy continued: “Storage is like an iceberg, there are a lot of hidden values. The challenge is how to highlight and quantify these hidden values and translate them into tariff calculations.”

Security of supply

Among the values that are not priced into transmission tariffs, security of supply is the most obvious one, Leroy said.

With the decline of North Sea reserves and European countries increasingly relying on imports of gas, companies are likely to want to book more capacity in sites to hedge against supply risks.

At the same time, recent geopolitical tension between Europe and Russia has highlighted perceptions of the need for storage. Russia satisfies about 30% of European gas demand, around 50% of which flows via Ukraine.

Eastern European countries such as Slovakia, Hungary, Bulgaria, and Greece are the most dependent on Russian gas via Ukraine, therefore they are particularly vulnerable to supply disruption.

In this context, EU leaders recently called on member states to increase gas stocks to stand 90% full by the end of September.

GSE data shows stock levels in Europe reached 78% on average on Friday, or a total of 62 billion cubic meter (bcm). Hungary has the lowest stock reserves at 44%.

The European Commission published in May an energy security strategy with short term measures aimed at making sure Europe can meet a shortfall in imports this coming winter. One of the proposals was to set a directive to impose a mandatory minimum stock level in each state.

Regarding security of supply, Leroy said there cannot be a one-size-fits-all solution for Europe. Different circumstances require different fixes.

Consequently member states have so far opted for various measures such as pure supply standards, storage obligations or strategic reserves.

Saved investment

Other intrinsic economic values of storage were highlighted by Leroy: “Storage is often implemented close to a gas production field because it avoids production swings which deteriorates reserves,” he said.

“Providing protection to production reserves avoids significant additional costs. [Russian incumbent] Gazprom said storage is between five and seven times less expensive than the extraction of the corresponding reserve and construction of transmission facilities,” Leroy added.

Storage also optimises the transport network as it allows a reduction of the peak load that the transmission network has to be, Leroy said.

“Should we decide to close all the storage fields in France, [transmission operator] GRT Gaz would have to automatically double its transport network, which would represent up to €5bn in additional investment, thus implying increased transportation fees.”

This “system” value of storage is unknown, said Leroy, although it benefits transport networks and suppliers as well as industrial clients and final consumers. “EU regulators should bear this in mind,” Leroy said.

Storage is an insurance against peak prices in cases of supply disruption caused by potential strikes, technical problems or geopolitical conflicts, and it also provides leverage in negotiations with external suppliers. “This is also an important hidden value but rather hard to quantify,” Leroy said.

The European Network of Transmission System Operator for Gas (ENTSO-G), which is drafting the EU network code for transmission tariff harmonisation, told ICIS it has not made a decision on storage transport tariff issues yet.

The group previously launched a consultation on transmission tariff on 30 May aiming to gather feedback. It will present the first results of this in September or October this year, before it publishes the final draft before the end of December.

The EU-wide code intends to harmonise gas tariffs between EU countries in the context of the implementation of the third energy package and the aim of creating a single liberalised EU gas market. Lucie Roux

By Lucie Roux