Unbundling experiences in Hungary László Varró Chief Economist EPP-ED Public Hearing, 13 February, 2008
Jan 01, 2016
Unbundling experiences in Hungary
László VarróChief Economist
EPP-ED Public Hearing, 13 February, 2008
New Europe: inefficient markets due to supply dominance and inadequate infrastructure
►Excessive reliance on one single source
►Lack of interconnections
►Insufficient storages
►No LNG
►High prices due to lack of competition
►Bad energy efficiency
►Resulting a much higher economic and social cost of gas supply security problems
The bad case: New Europe
2
Composition of gas sources
Meshed networks vs. parallel East-West transit routes
►Share of gas in primary energy
►Prevalence of gas in heating
►Reliance of the electricity system on gas
►Lack of significant transit flows
►The strongest national interest for developing infrastructure and enhancing infrastructure
The worst case: Hungary
13%
19%
15%
19%
21%13%Russia
Norway
Holland
UK
Algeria
other
64%
36%
Russia
other
Efficient markets reinforce supply security
► Prices as signals: demand reaction
► Reorientation of trading flows
► The value of peak, market based storage investment
► The big lesson: the January 2006 „almost crisis”
Unbundling: a key of efficient markets
► Access to infrastructure
► Incentives for infrastructure developoment
► Barriers to entry, cross subsidies
► Facilitating the emergence of new gas sources
► Capacity utilization, incentives for market liquidity
► Avoiding conflicts of interests
Legal unbundling is an illusion
Legal unbundling
► Network operation and trading interests still in collusion with respect to network investment and capacity allocation
► High monitoring and enforcement costs
► Fails to deliver non-discriminatory TPA
Ownership unbundling
► Deep, serious remedy BUT
► Long lasting structural improvement for the market
► Welfare benefits
‘Proper regulation’
► Information asymmetry between regulator and regulated entity is too deep
► High costs of the regulatory regime
Non-structural solutions cannot create fair competition
Legal or „Bundled” unbundling: techniques in the practice
► Cash pool between the trading and the network company.
► Pledging the network assets as collateral for the trading positions.
► Joint outsourcing of key operations to the holding company which is not under regulatory oversight.
► Inadequate Chinese walls, linked IT system
Timeline of the liberalization of the Hungarian gas market
► MOL has been vertically integrated dominant player on the Hungarian market
► January 1, 2004 Market opening: New Gas Act entered into force, but very little competition. Market split into regulated and competitive markets until July, 2007 (formally)
► 2005 MOL-E.ON Ruhrgas transaction
► Originally MOL retained 25 % of supply, 75% of transmission network
► DG Competition’s condition for transaction approval was full unbundling: E.ON purchased 100 % of supply, MOL retained 100 % of transmission
► 2008 Residential sector is also free for competition
Structure of the Hungarian gas market changed due to the sale of MOL’s certain gas assets to E.On Ruhrgas International
► Gas market before the gas transaction ► Gas market today
Import gas
source Regula-ted
market Gas transmi-
ssion
Gas storage
Gas distribu-
tion, consum-
ption
Import gas
sourceRegula-
ted market
Gas transmi-
ssion
Gas storage
Gas distribu-
tion, consum-
ption
Compe-titive market
Domestic gas source
MOL’s presence Other market participant(s)
Compe-titive market
MOL’s re-entering in progress
Domestic gas source
Competitive gas market has grown significantly since the market opening in January 2004
0
50
100
150
200
250
300
Competitive market gas volume (mcm)
mcm
/ m
on
th
MOL’s experience: Ownership unbundling: a nice idea that works
Regulatory aspects
► Better investment incentives
► Truly independent TSO behavior
► TSO objectives now aligned with the regulator
► Lower compliance burden
► More market based balancing
Management aspects
► Clear incentive structure
► More transparent management structure
► Focus on core competences
► Positive effect on corporate culture of the TSO
► Better reputation among stakeholders
185 - 220
100 - 120
Norway
Wes
t-A
fric
a
Russia
25 - 60 Middle East
Libya15 - 40 Central Asia
+ Caspian
85 - 115
16 - 35
12 - 25
5 - 10
15 -
20
Egypt
Algeria
Source: IEA, OME 2004
With proper infrastructure, Europe could have an efficient diversified market
Indigenous
Production
145-160
Carib.
11
Estimated natural gas supply structure of the EU in 2010-2020 (billion m³/year)
Estimated natural gas supply structure of the EU in 2010-2020 (billion m³/year)
* EU-27, Switzerland and Balkan states
NETS: An unbundled infrastructure platform
► Proposal to unite Central and South-Eastern Europe’s gas pipeline networks within a new and independent regional natural gas transmission company
► Significantly higher value for shareholders than operating separate systems
► Would be well positioned to leverage international capital markets to finance major projects
► Consumers would also enjoy the benefits of an integrated platform for natural gas supply and a greater overall security of supply
Austria
Czech Republic
Italy
Hungary
Slovakia
Greece
Romania
Bulgaria
Turkey
Bosnia
Germany Ukraine
Moldova
Croatia
Slovenia
Serbia
Albania
Montenegro
Poland
Macedonia
Source Company Information
NET, as an unbundled transmission company would be a natural ally for the required massive infrastructural investments
New infrastructure investments through NET
Main planned new investments in the region
Nabucco pipeline project and Adria LNG providing the entire region with new source
Interconnectors between the national gas transmission systems
Capacity de-bottlenecking optimizing regional balance system
Establishment of a regional hub(s)
NET as a platform for new investments
The united gas transmission company would be much more capable of carrying out infrastructure investments, which would be further enhanced through a possible IPO
Most of the planned projects in the region affect the countries in question
NET as a growth story
NET would provide a tremendous growth opportunity on several counts
Based on its sound financial background, NET could easily become an active player of the regional (and European) privatizations and other transactions
The expected total European ownership unbundling would lead to a high volume infrastructure transactions wave only available for independent operators like NET
After a possible IPO, NET shares would represent the growth opportunity of planned international projects with already diversified country risk
The establishment of gas hubs facilitates the development of secondary trading
Harmonization of regulatory systems enhances NETS and further contributes to market efficiency
Enhancement of the operation of existing gas transmission infrastructure
Unified grid codeAn entry-exit tariff system
Current
system of
Transpor-
tation tariffs
Clear and
easy to
understand
tariff system
Reflection of
location
differences
Establishing a new regional entry-exit tariff system
A clear regional tariff system enabling investors to understand the expected position of the infrastructure company
Reflecting location differences in marginal costs Providing price signals for congestion managementMitigating excess capacity demands
The bulk of the revenue would come from relatively short
period capacity reservation fees and volume related fees
Reservation period should not exceed one year
NET would encourage secondary trading of booked
capacity
Enhancing the development of an efficient market
Facilitating spot trading
Medium term capacity utilization risk
Could be socialized within NET countries
NET, as an entity, should assume this risk due to its
superior knowledge of the system and its strong
balance sheet