EU regulators question subsidies [NGW Magazine]

The French system whereby transmission system operators (TSOs) collect network tariffs from shippers in order to pay out subsidies to gas storage terminals may not be compatible with European Union (EU) competition rules. France handed out €540mn (US$580mn), to storage operators in 2018 and €500mn in 2019, prompting the European Commission to launch an antitrust investigation in late February this year (NGW Vol 5, #7).

But France is not alone in allowing such cross-subsidies. In Italy, for example, TSOs collected €280m/year on behalf of storage operators between 2016 and 2019, according to a report published earlier in April by the EU’s Agency for the Co-operation of Energy Regulators (Acer). These subsidies are meant to cover missing revenues; storage operators have struggled to make profits in recent years thanks to a low spread between summer and winter gas prices which discourages shippers from putting gas into storage. In their defence, the French regulator CRE and the Italian regulator Arera have argued that closing unprofitable storage facilities would jeopardise security of supply.

It appears that the subsidies may have boosted the use of French storage terminals. Storage capacity in France was only 45% full in the gas year 2017/18 before the new law came into effect which was deemed too low by the French regulator CRE. It has since been higher – 65% in gas year 2018/19 – but this may also be down to other factors such as insurance against a Ukraine-Russia dispute. 

Moreover, French regulator CRE said in a statement last month that it had fixed storage tariffs to be collected from network users at €78.63/MWh/day/year for the gas year 2020-21, a reduction of 63% compared with the previous year. This means the TSOs will ‘only’ collect €251mn from shippers in 2020 in order to compensate storage operators; this is, according to CRE, a sign that the reforms put in place in 2018 are working. Moreover, the auction settlement price this year came out at €3.85/MWh, which is much higher than in previous years. This was owing to increasing summer-winter spreads and a larger number of participants in auctions, according to CRE.

However, the European Commission noted in its antitrust announcement from February that artificially high use of storage facilities could discriminate against imports via LNG terminals and interconnectors as well as against storage facilities in neighbouring countries.

The Acer report also reflects on this point; it says the French and Italian mechanisms “cannot be considered completely neutral: the abundance of gas in the storage inventory minimises imports when peak consumption occurs, which is normally when the gas price is the highest.“

It notes, however, that storage facilities are not a source of gas, just a buffer allowing to import gas when it is cheaper and to withdraw it to match demand peaks.

"The compensation mechanisms in Italy and France do not favour specific gas sources, but encourage shippers to maximise their use of the storage facilities for the purpose of security of supply," the report says. 

Key to the commission’s investigation is also the issue of proportionality and potential over-compensation; EU competition law under the Treaty stipulates that subsidies should be kept to a minimum. Acer, in its report, also addresses this point and notes that potential overcompensation could lead to inefficient cost management of assets and distortion of competition.

“More broadly, compensation mechanisms should be proportionate to the problems they aim to solve and should not affect the efficiency of the gas system,” the report said.

LNG terminals

Cross-subsidies do not stop at storage facilities: several LNG terminals and biogas promoters, for example, are also subject to such state aid. In Italy, TSOs collected around €100mn/year between 2016-2018 on behalf of LNG terminal operators to recover missing revenues resulting from under-use of LNG storage tanks. The money is collected from network users by applying a commodity charge at the domestic exits in the national grid.

Similarly, the tariff regulation in Greece stipulates that part of or all of the cost related to operating the Revythoussa LNG facility can be recovered by transmission tariffs collected by the TSO. The amount corresponds to about €28-36mn/year between 2018 and 2022, according to Acer.

In Lithuania, the TSO collects a ‘security of supply’ charge which partly covers the cost of operating the Klaipeda LNG terminal and partly the suppliers’ cost of shipping minimum quantities of LNG to the terminal in order to keep it cold and in operation. The total amount for 2020 is €57.7mn and the scheme has been approved by the EC.

Meanwhile, in Spain it is the suppliers who collect money from customers in order to compensate LNG terminal operators for costs.

Acer notes that subsidies allow operators of LNG terminals to decrease tariffs for suppliers which in return boosts their competitiveness vis-a-vis other gas sources, such as piped gas.

“This mechanism cannot be considered neutral in terms of competition for the market,” said the Acer report. “However, it may contribute to improve the competition by lowering the barrier to entry for LNG suppliers in isolated markets where an incumbent supplier benefits from market power.”

Nevertheless, it appears that EU market reforms under the third energy package and the implementation of corresponding network codes, such as harmonised transmission tariff structures for gas, have helped to bring down the number of cross-subsidies, at least in western Europe.

“Historically there have been quite a lot of cross-subsidies in network operations, but technically speaking this became illegal under the third package and the network codes. So cross-subsidies are declining step by step. Generally speaking, there are only a few issues in western Europe at the moment, but eastern Europe and the Balkans are still lagging behind,” Walter Boltz, a senior adviser at European Energy told NGW.

Stranded assets

It seems that no segment of the energy sector will escape the impact of the Covid-19 outbreak and transmission tariffs are no exception. Europe is still building new gas infrastructure and there is an increasing risk of stranded assets amid lower gas demand and the transition towards more renewable energy.

The Krk LNG terminal in Croatia, the BRUA pipeline linking Bulgaria, Romania, Hungary and Austria and the Southern Gas Corridor linking southern Europe with Azerbaijan are some of the examples of new infrastructure expected to become operational later this year or early next year.

New and existing infrastructure may not be able to recover investment costs if such assets are underused. A shake-up of the current transmission tariff regimes across Europe is therefore on the cards. However, increasing tariffs for shippers who are already hurt by lower gas prices and weakened profit margins does not seem to be an option.

“Gas demand will be reduced substantially over the next one or two years due to Covid-19. This will create stranded assets in terms of gas pipeline infrastructure. The question is how the gas companies and TSOs will recover these lost asset values through transportation tariffs. It will be an interesting discussion in the next two years,” said Boltz.

“There will also be a huge discussion on how to bring down transportation costs for shippers. €2.5/MWh in transportation costs really hurts when gas prices are around €6/MWh. The profit margins for shippers are very tight,” he added. 

The who-pays-for-what issue is also relevant for renewable gases such as hydrogen and biogas if it takes off on a larger scale.

“We need to develop a tariff system that is more suitable for renewable gases. For example, who will pay for the quality checking of biogas in terms of methane content? Will the TSO or the biogas company pay? If we want to go green then the TSOs will have to collect money one way or another,” said Boltz.