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In The News
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July, 2006
Gas Scheduling in Europe
The complex nature of European gas pipelines means shippers endure a minefield of daily compromises and hidden costs. Laurence Hickey, senior energy analyst at OpenLink, considers whether the current situation should be viewed as a business hurdle or a great opportunity.
By LAURENCE HICKEY
The European gas pipeline infrastructure is a patchwork
quilt of overlapping and interlocking hourly and
daily balancing regimes. The system, as it stands, is
a compromise built of necessity: transmission system
operators manage the physical system, while shippers manage the
contractual model. Europe uses a balancing-zone model for gas
scheduling, where the need to find common ground can lead to a
convoluted ‘balancing act’.
Consider this list of key differences across European network operators: differing imbalance limit periods; percentage limits; absolute limits; fee structures; gas day definitions; shipper code tracking requirements; time zones; pipelines balanced at the zone level and others balanced at the pipeline level; unique delay times; minimum nomination intervals; maximum number of nominations; and the list goes on.
OpenLink counts 45 unique items of information necessary to fully describe the nomination and confirmation rules for a single transaction – quite a business hurdle for the energy firms and banks involved in European gas logistics.
But what if you can turn this hurdle into a great opportunity by deploying an ideal scheduling solution; an ideal system that is capable of seamlessly handling and processing the following scheduling functions?
A balancing zone
Shippers have the primary responsibility for maintaining balanced flows so that system pressure stays within limits. A pipeline operator has only a residual balancing responsibility. Shippers who cause the pipeline operator to intervene to maintain system pressure are penalized, with the exact form of this penalty varying widely. A pipeline operator intervenes when storage, annual flexibility contracts, the services of the incumbent supplier or the default of linepack to maintain balance are used. For example, if pressure increases, you have increased linepack.
Gas passes through the balancing zone via entry and exit points. Shippers must first purchase entry or exit capacity before they can move gas in or out of the balancing zone, in addition to needing transport capacity across it. The entry and exit capacity is traded in volume units that reflect the physical reality of the system. The pipeline operator owns a pipe of a certain diameter that must be maintained within a certain pressure range. However, shippers are buying and selling – and therefore delivering – energy units. The net result of capacity trading in volume is that shippers bear the risk that the energy quantity received (entry) or delivered (exit) may differ because the heat content of the gas. The gross calorific value (GCV) may be higher or lower than expected.
An ideal scheduling system would handle this volume-to-energy translation seamlessly. When gas is nominated for movement in or out of a balancing zone, the current system automatically records the entry or exit capacity in energy terms by applying the best available GCV. The information about which capacity contracts have been used is linked to the relevant transportation contract. Safeguards are in place to ensure adequate entry, exit and transport capacity exists.
A balancing zone may be an entire pipeline or a zone within the pipeline. The balancing zone’s delay time is the minimum number of hours between the receipt of a nomination and being able to affect a change in gas flow. The imbalance period is the frequency at which imbalances are cashed out. As the intent is to drive cumulative imbalances to zero, it is possible to predefine the range of hours to nullify the previous day’s cumulative imbalance.
The received and/or delivered energy amounts can differ because of variations in GCV and/or the supply or demand – whatever the cause, imbalances are created. Imbalances can accumulate until limits are violated and the network operator is forced to take action to restore system pressure. Highly configurable fees can be defined for each limit and, once the limit is violated, the associated fee is posted to the imbalance deal.
Pricing flexibility – imbalance charges
When the network operator is forced to take action, costs are incurred. The network operator is providing flexibility and imbalance charges exist to pay for this.
The setting of imbalance charges is the central issue to be addressed in the design of a balancing regime. The intent is to properly price flexibility so that shippers causing the imbalances bear the cost. If costs are too high or the regime too complicated, market entry is deterred. If prices are too low, the network operator will subsidize connected pipelines, to which the flexibility will be exported (and exploited). For example, Fluxys’ charges are low – regulated cost plus rules – so they cannot define the Zeebrugge Hub as an exit point from the Belgian system to prevent the export of cheap flexibility to neighboring systems. If the costs of flexibility are not borne by the source of the imbalance, gaming is encouraged and overall system costs will rise. If the network operator gets the flexibility price right, shippers will use network flexibility only when the network operator can provide it more cheaply than can the shipper. In the case of Fluxys, they actually market flexibility services to shippers as an alternative to imbalance penalty pricing.
The problem of getting imbalance charges right is complicated by the absence of relevant published index prices in these new markets. The thorny problem of pricing flexibility has resulted in a wide range of imbalance limit structures and fees. Typically, long imbalances are cashed out at a discount and short imbalances are cashed out at a premium.
An ideal system would be flexible, yet intuitive – a tool that displayed a balancing zone on a single screen. The buys, the sells, the injections and withdrawals from storage, the gas flows across interconnects and resulting imbalance for a given gas day would all be there. At present, transactions are grouped into ‘active’ and ‘passive’ categories, passive transactions are the ‘givens’. Users cannot, or choose not to, control these quantities – they are the sources of imbalances. Active transactions are used to drive the imbalance to zero. Active contract quantities may be changed automatically or manually. Hourly and cumulative imbalances, as well as the limits applicable to a balancing zone, are displayed.
Shipper codes
Shippers need the ability to track trade volumes over the life cycle of a trade. With OpenLink’s gMotion, the information in every transaction is viewed on a single screen that effortlessly translates different energy units. Additionally, gMotion supports tracking limits and actual values for any user-defined quality tolerance.
Rather than tracking paths as in the point-to-point model, shipper codes are used in the balancing zone model. A shipper code is a unique code assigned to a shipper on a balancing zone by the network operator. When that shipper receives gas from an interconnect, the nomination will list the counterparty’s upstream shipper code. The shipper’s assigned code is the downstream shipper code. When the shipper delivers gas to an interconnect, his assigned code is the upstream shipper code and the counterparty’s shipper code is the downstream shipper code. Movements of gas into or out of a balancing zone essentially involve shipper code exchanges.
Quantities are tracked by shipper code at every step of the communication process. Each individual shipper code quantity is available at every step in the life cycle of the deal.
Hourly trading
Another key part of this initiative was the development of hourly functionality. A detailed breakdown of flows by volume bucket per hour and by shipper code can be viewed by double-clicking the mouse on a gas day. Any of the values can be edited. Pricing indexes, receipts and delivery locations have defined gas day start times – the two do not have to match. Gas being delivered from 6:00am to 6:00am can be properly valued by using an index that runs from midnight to midnight. Furthermore, the time zones of the delivery location and the valuation index do not have to match. Daylight-saving time is also fully supported.
If a trade running from 12:00 PM to 8:00 PM Monday to Friday is likely to be repeated, the schedule can be defined as product and attached to the trade the next time it is made.
A predictable load shape can be defined to allocate daily quantities across a range of hours. The load shape is able to ‘normalize’ the result so the average is the daily value, while maintaining the relative relationship between hours.
An ideal scheduling solution for European gas
Endur and gMotion – managing it all in a single, fully integrated trading, risk and scheduling package is a lofty goal. Doing it from a single screen, sublime.
Laurence Hickey is a senior energy analyst for OpenLink. He has more than 10 years of experience as a trader, risk manager and designer of risk systems in the utility and banking industries. In 1995, he originated the first currency option trading business in Ireland for AIB.
Copyright © 2006 Incisive Media Investments Ltd.
All rights reserved. Used by permission.
First published in Energy Risk - July 2006
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