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IUK calls for extra gas capacity allocation mechanism

09 Aug 2017 18:00 (+01:00 GMT)
IUK calls for extra gas capacity allocation mechanism

London, 9 August (Argus) — IUK, the operator of the UK-Belgium Interconnector pipeline, has proposed an additional natural gas capacity allocation mechanism to auctions on Europe's Prisma platform, after struggling to sell capacity beyond October 2018.

IUK is looking to sell unbundled capacity on the Interconnector, combined with an equivalent quantity of gas at a fixed price and outside Prisma's auction periods for bundled space on the line. The "implicit allocation mechanism" (IAM) would contribute to greater uptake of capacity and lower prices for consumers, it said.

The pipeline has operated under 20-year capacity bookings since it was commissioned, but these are scheduled to expire at the end of September next year. And no long-term capacity was booked on the Interconnector from October 2018 at Prisma auctions in March.

This was despite the UK requiring export capacity to the continent in summer, especially with the closure of the Rough storage site curbing summer injection demand. Part of the reason for the lack of interest is the move towards increasingly short-term trading, IUK said.

But the "tightly defined timetable" for Prisma auctions prescribed by EU capacity allocation mechanism network codes (Cam NC) also limits the ability of shippers to book capacity whenever they see market value, it added. The next opportunity for firms to secure annual capacity is July 2018.

Selling capacity throughout the year — except for when the same capacity is offered on Prisma — would offer more opportunities to shippers to capitalise on price spreads, IUK said.

And it has proposed offering capacity further in advance of its use. Shippers could secure monthly capacity up to six months in advance, for example, giving them greater value from owning the space, IUK said. The companies would have longer to trade around a position and adjust their hedges before using the capacity.

IUK's IAM products would enable more "shaped capacity purchases", it said, allowing firms to subscribe to capacity based on changes in seasonal flows. The loss of capacity at Rough has made seasonal swings in flows through the Interconnector more pronounced.

UK energy regulator Ofgem did not allow IUK to offer a capacity re-profiling service ahead of the annual auctions earlier this year.

The offer of capacity with gas would eliminate a "co-ordination problem", IUK said, with the move towards shorter-term markets having made it more difficult for shippers to match capacity with traded volumes.

IUK is seeking a partner for offering gas supply, it said. It has proposed a partnership either with a European exchange or with a broker and third-party communication platform for over-the-counter deals. Firms would make the capacity-plus-gas purchase from the partner, which would then tell IUK. But the shipper would have two transactions — one with the gas seller and the other with IUK.

IUK is offering unbundled, instead of bundled, capacity, as this better allows shippers to optimise long-term bookings, it said. And bundled capacity can only be booked by a single entity, while the organisational set-up for many firms is to have a separate legal entity on either side of the Interconnector.

IUK would offer a capacity conversion service, so that if a shipper secured unbundled capacity but not entry into the adjacent grid, it could buy bundled capacity on Prisma and release the equivalent unbundled space to IUK. The service would eventually cover annual, quarterly, monthly and daily products.

Offering capacity outside Prisma could ensure that a broader range of market participants have access to capacity, IUK said. Without greater bookings on the Interconnector, shippers may look to alternative "more expensive" sources of supply, increasing costs for consumers, it said.

Interconnector capacity towards the UK is in competition with that of the BBL pipeline — and the latter may introduce reverse flows. Flexibility in the Norwegian export system is another way of effectively diverting supply between the UK and the continent.

Guidelines on implementing IAM are "limited" under Cam NC, and there are few examples of it being introduced in other markets, IUK said.

The firm will submit its application to the UK and Belgian regulators for approval following the end of the consultation process on 7 September. It expects a response in December-January.

IUK's implementation of IAM is contingent on regulators not applying articles 8-37 of the Cam NC. This would allow the sale of unbundled products at fixed prices, as well as capacity allocation at times other than the standard auction timetable and for different term lengths.

The offer of capacity with supply bears some similarities with moves by European storage operators to offer capacity with gas already in storage, amid lower returns from tighter seasonal spreads in recent years.

Without long-term bookings on the Interconnector beyond October 2018, the pipeline is an "asset with challenges", IUK managing director Sean Waring said in May.

Unlike other system operators in Europe, IUK cannot depend on revenues from consumer tariffs, it said. Having an additional way to sell capacity is "critical to IUK's future success" and is a matter of "viability".