Evaluation of Responses to the Public Consultation Paper on Market-Based Investment Procedures for Gas Infrastructure: Issues and Approaches
What is incremental capacity?
Capacity refers to the amount of natural gas that a gas network can contain and transport. Incremental capacity refers to the additional capacity that is needed on top of the capacity available at an existing interconnection point. Such “points” are either cross-border gas connections between two countries or points within a country where gas enters or exits a network (and which are subject to certain rules for booking the gas capacity on that network).
As gas consumption grows and flow patterns change, it can occur that the existing networks and infrastructure no longer meet the capacity needs of a market, in which case decisions need to be taken on whether to invest in incremental capacity, taking into account technical, economic and security of supply considerations.
What does the document propose for incremental capacity?
CEER is convinced that the market needs a clear and transparent mechanism to trigger investments in incremental capacity, and that the decision to invest should be based on the results of an economic test. However, the exact design of the incremental capacity process and of the economic test still require further consideration. CEER‘s work is intended to lead to the presentation of a “Blueprint for Incremental Capacity” at the Gas Regulatory Forum in Madrid in April 2013.
How does it work?
The purpose of the work undertaken by CEER is to develop EU processes which would allow for sound investment decisions. CEER is building on lessons learnt from past processes applied in Europe (so-called open seasons and integrated auctions), which provide valuable insights into how market demand can be tested and translated into successful market-driven investments. It also takes into account the changes introduced by new European-level market rules on how capacity is allocated (“Gas Capacity Allocation Mechanisms Network Code”) and in particular the use of auctions for the allocation of long-term existing capacity. Allocation refers to the contractual arrangements between network operators and gas sellers for ‘reserving’ a given amount of a gas pipeline’s volume capacity for gas which they have bought/sold and which will need to be transported through that pipeline at a given time. CEER’s objective is to ensure the overall regulatory framework is consistent and allows for efficient investments, supporting the development of competitive wholesale and retail markets.
Why is this important for energy customers? What is the impact on energy customers?
While infrastructure development is of key importance to secure gas supplies and to facilitate the development of competition to the benefit of end-customers, it also needs to be ensured that capacity developments are properly sized in order to avoid stranded assets, as some of the costs of infrastructure investments are generally passed on to consumers through their energy bills. This socialisation of the investment costs – via “transmission tariffs” - can potentially lead to price increases for end-customers. The regulatory framework therefore seeks to ensure that any investments are cost-efficient, taking into account the supply and security needs of the energy system and the overall welfare of society as a whole. In this regard, establishing a process to identify if, and how much, additional capacity is needed by the market can help to determine what, if any, investments are appropriate.