Liquified Natural Gas (LNG) plays an increasingly significant role in European gas supply. Over the past two years, EU imports of LNG have doubled and its share within total EU gas imports rose from 12 per cent in 2018 to over 23 per cent in 2019.
Ongoing efforts to support LNG development in the EU have strengthened the position of LNG in the gas supply of several Member States and have increased the attractiveness of the European market for LNG importers overall. The efficient use of LNG terminals could contribute to enhanced security of supply and competition on the EU gas market, by enabling market access for new players and new gas sources.
To attract LNG imports, terminal operators have adapted and expanded their services and product offerings in recent years to meet the demand for increased flexibility from shippers. Their expanding product ranged enhanced competition between terminals with access to the same gas markets. In the European LNG landscape today, not only do shippers compete for delivery slots at terminals, but terminals also compete to attract shippers to their facilities.
In this context, it worths to take a look at the development of the regulation of European LNG infrastructure and the wider market set-up to identify potential challenges and opportunities ahead of the European LNG market. Experts from across the industry discussed the future of LNG regulatory framework in Europe in a workshop organised by the Regional Centre for Energy Policy Research (REKK).
The starting point of the discussion was a study prepared by a consortium led by REKK and Trinomics for the European Commission, elaborating exiting barriers and gaps that could be addressed in order to ensure optimal use of existing LNG terminals in the EU. The study found that although there is increasing competition among terminals to attract spot cargoes (inter-terminal competition) and among users of a specific terminal (intra-terminal competition) there is still room for improvement on the regulatory side to allow for even better utilisation of the terminals.
“Of course there is always a place for development, in this case mainly with a focus on transparency, comparability and access side, but the main takeaway of the study is that the current status quo is a sound one,” said Péter Kotek, Senior Research Associate at REKK.
So what is the exact regulatory framework that is currently in place? Dr Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies underlined that at present there is no single LNG-specific legal framework at the EU level, which makes it quite difficult for LNG suppliers to Europe to understand the rules as they differ between terminals.
The provisions governing access to EU terminals are provided in two key pieces of legislation: the Third Gas Directive, Gas Regulation 715, which set out mandatory third party access (TPA) based on published tariffs, as well as non-discriminatory and transparent capacity allocation mechanisms, although it left a significant discretion for terminal operators in designing these mechanisms. LNG network codes do not exist, therefore the terminal operators developed their own terminal codes. Additionally, six terminals in the EU, representing 37 per cent of capacity operate under an exempted regime.
Ms Yafimava raised the question if there is an existing level playing field between regulated and exempted terminals in the EU as they are governed by a patchwork of terminal codes, the national regulatory authority’s guidance, the Third Gas Directive, Gas Regulation 715 plus the exemptions.
The way forward, however, is not so clear. There could be some legislative proposals on part of the European Commission, such as adopting an LNG network code, where all these LNG specific provisions are put together. There could be also possible further action by the national regulators and the Commission in amending existing exemptions or making new exemptions more strict, however – as Ms Yafimava also underlined – this could be difficult to undertake without violating principles of contractual certainty and legitimate investor’s expectations.
According to Doug Wood, Chairman of the Gas Committee, European Federation of Energy Traders (EFET), before engaging in a comprehensive modernisation of the regulatory environment we should first look at the problem we are trying to solve.
“There are certainly challenges in the regulatory framework but it is not sure that these will be remarkably improved by an overarching EU legislation,” he underlined.
Mr Wood pointed out that at the beginning the initial concern was low terminal utilisation and this was rather related to regulation then an indication of better were available for LNG traders outside Europe. Now, when prices are favourable in Europe compared to the prices of Asia, the cargoes are coming back, so it is much more related to price conditions and not regulation.
According to Mr Wood, the second important aspect of looking into regulation could be to assess if we have enough LNG import capacity in Europe if new development is required.
“The whole principle of exemption has allowed additional terminals to be built by different players,” he said. “Historically terminals were built by TSOs and affiliates, through the exemption mechanism a new category of players mostly involved in the upstream value chain could enter.”
He sees the biggest concern over the liquidity of the underlying market, which could be a greater discouraging factor for the utilisation of terminals than any of the terms established by the terminals themselves. Therefore, the focus should be much more on ensuring that the market behind is functioning properly. The analysis of REKK and Trinomics also found that LNG entry and trade is in some EU Member States hindered by lack of competitive and liquid traded gas markets.
An additional regulatory challenge could be that LNG has brought substantial improvements in energy security by supply diversity but at the same time, it challenged storage owners and operators who were the main providers of security.
Mr Wood raised the question that, if we are subsidising storage because of a service has been provided by LNG there is a regulatory issue how to recognise on a non-discriminatory basis the value of the security of supply that is brought by one or another.
Christoph Riechmann, Director Energy Practice, Frontier Economics on the other hand emphasised that there is scope for some regional differentiation on how LNG terminals are regulated.
“The starting point of LNG regulation was in 2003 where most of the gas wholesale markets were highly concentrated and LNG provided an opportunity to open up the market, so we designed a regulation but we didn’t quite know at that time how the market will look like,” started Mr Riechmann.
At that time the regulation was introduced to prevent abuse of horizontal market power and vertical foreclosure of downstream markets by incumbents, but LNG came a long way since so it’s worth to revisit the current regulations in light of market developments.
As Mr Riechmann pointed out, there have been some fundamental market improvements (on the wider gas market and LNG market alike) in recent years and the concerns that motivated the establishment of the initial regulatory environment diminished over time, at least on the mature North-Western European markets. Therefore he concluded that a review and modernisation of the LNG regulatory framework is required, the question is whether we can strike a new balance on how to regulate them.
“By regulating more leniently, not necessarily removing all regulations, we can reap a number of benefits and the development of LNG terminals can be more dynamic than today,” added Mr Riechmann.
It is important to highlight that the development of the gas and LNG markets are not the same across the EU. There are significant differences in terms of the maturity level of gas hubs, pipeline infrastructure. This is also reflected in a way terminals are regulated. In North-Western Europe there is a very high share of capacity (71 per cent) that is TPA (third party access) exempted, while the rest of Europe has a very low share of exempted capacity.
“We recommend that regulation becomes more lenient in these areas where the gas market is more developed, which doesn’t mean the absence of regulation, we want to make sure that access to terminals is effective, whether regulated or not and make sure there are no barriers of entry,” he continued.
Well-functioning and liquid gas markets will also play a role in achieving the environmental ambitions of the European Green Deal, which foresees the decarbonisation of the gas sector via a forward-looking design for a competitive decarbonised gas market.
“Keeping our eyes on our mid-century climate targets, it is clear that the gas sector including LNG needs to be decarbonised,” said Łukasz Lisicki, Policy Officer at European Commission, DG ENER.
The Commission presented various strategies to present the way forward comprising of the European Green Deal, the Hydrogen Strategy and the Energy System Integration Strategy and most recently the Methane Strategy.
“The decarbonisation of the LNG is intertwined with the future of the decarbonised European gas market and a well-functioning internal energy market,” concluded Mr Lisicki.