Shippers in the Danish gas transmission system and other stakeholders
For Public Consultation: Tariff principles and market
design in a Baltic Pipe1 Open Season
1.
1.1
2nd November 2016
FSK/JFS
Disclaimers
Disclaimer from Energinet.dk
While the public consultation refers to time schedules and cost indicators adopted from the joint Energinet.dk and GAZ-SYSTEM PCI Baltic Pipe Feasibility
Study (2016), the proposals and views express exclusively the position of Energinet.dk. Market design and tariff principles conform to common European process towards harmonised tariff structures and their aim among others is to support the feasibility of the proposed project. However, it is proposals exclusively
directed at the future regulation of Energinet.dk’s transmission system presented to the Danish Energy Regulatory Authority. The principles do not reflect a
common or otherwise shared Danish-Polish market design or tariff methodology.
1.2
Disclaimer from GAZ-SYSTEM S.A
Please note that the present paper does not foresee any of the conclusions of
the joint feasibility study prepared by GAZ-SYSTEM S.A. and Energinet.dk with
respect to the socio-economic or technical feasibility of the project. This means
that the assumptions and results of the analyses may change significantly.
Moreover GAZ-SYSTEM S.A. has not been an author of this document as it only
presents the Danish market perspective of the NO-DK-PL project. The discussion between TSOs and NRAs in Denmark and in Poland has not been finalized
prior to the presentation of this document.
1.3
General disclaimer
The cost allocation of the Zealand CS between the Danish and Polish tariff cost
bases is not finally settled. The cost allocation is being discussed between the
two TSOs and NRAs in Denmark and Poland.
1
Please remark that in this paper the total Baltic Pipe project refers to the project also
knows as NO-DK-PL project
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2.
2.1
Background, purpose and résumé
Background and purpose
Energinet.dk and GAZ-SYSTEM S.A, state-owned transmission system operators
in Denmark and in Poland respectively, jointly analyse the feasibility of a proposed new transit infrastructure connecting Norwegian gas fields with Polish
consumers via a tie-in to Norwegian offshore system as well as establishing a
pipeline interconnection between Danish and Polish transmission systems with
the aim of being in operation from October 2022 onwards. The joint PCI Baltic
Pipe Feasibility Study is co-funded by the EU and is expected to be concluded
by the end of year 2016.
The Baltic Pipe interconnection is classified as a European Project of Common
Interest (PCI) aiming at providing supply diversification and enhanced market
interconnection between gas markets around the Baltic Sea and the adjacent
countries, including Finland, Ukraine.
In terms of new infrastructure, the project comprises four separate pipeline
sections in a transit supply chain:
1. An upstream Norwegian-Danish tie-in connecting existing Norwegian
export infrastructure with the Danish transmission system at Nybro
2. Expansion of onshore Danish transmission capacity through the existing transmission system to a new interconnection point towards the Baltic
Pipe (Baltic Pipe IP), including a new compressor station aimed at increasing the transit capacity towards Poland
3. Construction of an offshore Baltic Pipe interconnector between Poland
and Denmark through the Baltic Sea
4. Expansion of onshore Polish transmission capacity through a new and
existing Northern-Central system to enable receiving volumes from Baltic
Pipe.
Infrastructure on Danish territory including the offshore tie-in is expected to be
built and operated by Energinet.dk.
Energinet.dk and GAZ-SYSTEM S.A. plan to conduct an Open Season process
for the four sections in the transit chain during the first half of 2017.
In the Open Season, future users of the pipeline are offered at least 15-years
firm capacity contracts at selected points within a proposed joint Danish tariff
zone, which includes new and existing infrastructure between an exit point from
the Norwegian Gassled system to an interconnection point with Baltic Pipe. Capacity from Poland through Baltic Pipe to Denmark/Sweden is also made available under the Open Season, which will offer shippers the option to book import
capacity to the Danish transmission system from either Norway or Poland.
Participants in an Open Season will not be offered fixed price terms (tariffs).
Tariffs realised during the contract period will be determined and regulated by
the tariff methodologies in force at that time. These are conditions similar to
Energinet.dk’s Open Season 2009 conditions, according to which shippers have
existing long-term contracts for Ellund Entry capacity. See material from 2009
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process here: http://energinet.dk/EN/GAS/Det-danske-gasmarked/Sider/OpenSeason.aspx
In this paper, Energinet.dk presents the main principles for tariff structure and
market zones in the Danish gas system, which will be proposed for approval by
the Danish Energy Regulatory Authority (DERA) and implementation before
October 2022. Any future tariff methodology is conditional on approval by
DERA.
The purpose is (1) to provide market participants with basic assumptions on
tariff forecasting and capacity booking patterns for the valuation of Open Season bids, and (2) form the basis for dialogue with shippers and stakeholders on
the Danish gas market as regard to market design, given a realisation of the
project.
The council of DERA is expected to discuss the principles for future market
zones and a tariff structure on the Danish gas market before the Open Season
is conducted. However, it should be noted that any tariff or market zone methodology revision will be subject to regulatory approval by the Danish Energy
Regulatory Authority (DERA).
Parallel to the current Open Season process, Energinet.dk will conduct a proposal for future tariff methodology in Denmark with the aim of ensuring compliance with the European tariff network code. The proposal will be made in a dialogue with market participants and stakeholders and is expected to be handled
over to DERA in the third quarter of 2017 for approval in 2018 and implementation by October 2018. Energinet.dk will include in this process the tariff principles as described in this paper.
Please note that the present paper does not foresee any of the conclusions of
the joint feasibility study prepared by GAZ-SYSTEM S.A. and Energinet.dk with
respect to the socio-economic or technical feasibility of the project.
2.2
Resumé
The main proposals for future principles in the present paper are as follows:
•
A common entry point for the Norwegian-Danish tie-in in the
North Sea and the Danish transmission system. Given the differences in regulation of offshore systems and transmission system operators, a common entry point will allow for a harmonisation of capacity
products, balancing terms and tariff structures between the offshore
and onshore part of the gas system in Denmark, and will further allow
for cost-minimizing synergies for Energinet.dk (hence lower tariffs for
customers), ie gas quality blending, reduced IT investments and joint
operation of balancing
•
Uniform cost allocation of CAPEX and OPEX at points in the Danish transmission system. In Energinet.dk’s view, this is a fair, objective and transparent cost-allocation principle since the transit volumes
from the Norwegian-Danish-Polish route will change the current flow
prognosis significantly and imply a long-term contribution margin for
the Danish gas system as a whole. Furthermore, Energinet.dk assess
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•
•
that uniform cost allocation is a requirement for a positive transit business case compare to other routes.
Extension of uniform cost allocation of CAPEX and OPEX to the
joint entry point in the North Sea. Based on the same reasoning as
described above, Energinet.dk will propose socialisation of costs to include entry point(s) in the North Sea. However, such uniform allocation
will apply on condition of compliance with regulation for upstream tariff
setting
Other tariff structure elements remain. The principal foundations in
the current Danish tariff structure remain, ie allocation of yearly
CAPEX/OPEX to capacity/volume tariffs respectively and exit points and
separate security of supply tariff setting.
Section 2 of this paper considers the proposed principles for harmonisation of
market zones and the tariff structure. Section 3 describes the scenarios for
CAPEX and OPEX of the Norwegian-Danish-Polish transit connection and the
impact on the future Danish average tariff level. Section 4 includes scenarios for
the tariff setting distributed on entry/exit points based on different cost allocation principles.
3.
3.1
Proposed principles
Creating a common Danish market zone
Creating a seamless interface between upstream offshore and downstream onshore infrastructure is a long-term objective with Energinet.dk. The objective is
to ensure equal access for imported and domestically produced gas as well as to
attract volumes to the Danish gas market - thereby increasing liquidity and
competition.
Energinet.dk aims at increasing market zones nationally and towards adjacent
systems. Market zones appear to be favoured by the market players and are a
logical extension of a common European reform process towards an internal gas
market consisting of national markets operating under closely harmonised principles.
Today, the upstream infrastructure on the Danish shelf contains several entry
and exit points, with Tyra and Syd Arne being the main delivery points. This
paper solely describes principles to be applied for a merger of the NorwegianDanish tie-in with the onshore Danish transmission system. However, the principles may be applied to a market zone with one common entry point for the
Danish North Sea.
Creating a common Danish market zone stands to improve the commercial attractiveness and viability of the total Baltic Pipe project:
•
Reduces risk of capacity mismatch
•
Removes the need for multiple capacity contracts entered with independent
system operators in a coherent transportation chain
•
Minimising costs (and hence the tariff level) through synergies in IT systems for capacity booking and billing, joint operation of the balancing system and administrative tasks.
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A common market zone could be achieved by moving the entry point into the
transmission system offshore to the Norwegian-Danish tie-in. This will effectively substitute the need for shippers to make an entry/exit capacity booking upstream and an entry/exit booking in the transmission system with one entrycapacity booking and one exit-capacity booking (or a transfer of gas at the GTF
or EFT point). Such a common market zone is illustrated below:
Overall, in a common market zone there will be a list of subjects that are common, and a list of subjects that are separate. This is illustrated below:
In this model, gas flows will still be metered at the tie-in and at the current
Nybro entry point, allowing for separation of accounts between upstream offshore activities and onshore transmission activities.
With a uniform cost-allocation principle as described in the section below, a
common market model can imply that costs (both CAPEX and OPEX) are distributed equally to all entry points including the Norwegian-Danish tie-in in the
North Sea.
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Given the difference in regulation of upstream infrastructure and the
transmission system, Energinet.dk proposes to seek the fullest possible
system integration between offshore and onshore systems including
socialising costs and removing Nybro Entry as a separate interconnection point.
The justification for this proposal is provided in the following analyses, which
include the impact on resulting tariffs, contribution margins (and risk) from the
proposed project and the enterprise models that can achieve the set objectives.
The proposal is conditional on the regulatory feasibility, given the difference
between upstream infrastructure and transmission systems. The illustration
below shows the main characteristics of the upstream and downstream regulation.
The definition of upstream infrastructure is given in the Danish Natural Gas Act
(Naturgasforsyningsloven), subsection 1 of section 6. The rules for access is
given in the Danish Upstream Regulation (Opstrømsbekendtgørelsen) issued in
accordance with section 21 of the Danish Natural Gas Act (Naturgasforsyningsloven).
There is negotiated access to the upstream infrastructure, which means that
prices and conditions are set according to negotiation in a non-discriminatory
way. DERA supervises that prices and conditions for access are fair (Danish:
Rimelige).
According to Danish law governing Energinet.dk’s activities (Lov om Energinet.dk), Energinet.dk may operate upstream infrastructure assets under the
condition that the activities are kept on a separate account from the transmission system operator activities in order to avoid cross-subsidisation and distortion of competition.
The market zone and tariff structure methodology must at all times be compliant with the above regulation concerning the upstream part of the market zone.
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In Energinet.dk’s opinion, it is compliant with both upstream and TSO regulations to allow for one capacity booking giving access to both the upstream offshore and the transmission onshore system.
Uniform cost allocation with full socialisation between onshore and offshore
points will imply that the resulting tariffs be compliant with the Danish upstream regulation on tariffs (Opstrømsbekendtgørelsen) and the rules governing
Energinet.dk (Lov om Energinet.dk). In case of non-compliance, the tariffs at
the North Sea entry point must differ from the other points in the transmission
system.
3.2
Socialised and uniform cost allocation
If the total Baltic Pipe project is realised, the operation of the Danish transmission system could change drastically from servicing a domestic market to costeffectively utilising all excess capacity to service a significant transit flow. The
impact on the unit cost of transportation from higher volumes, if the project is
realized, will significantly lower the cost for all users through the system. There
are potential transit revenues that may benefit all users.
The project would also add significant costs to the transmission system cost
base. Whereas long-term contracts with Open Season participants mitigate the
major part of the economic risk, the remaining risk will be carried by future
users of the transmission system together with the owner of the assets.
The Tariff Principles deal with how the marginal costs of the project are allocated on new and existing points in the entry-exit system. Currently, under the
principles applicable to differentiated capacity tariffs, capital costs (CAPEX)
stemming from the infrastructure expansion at Ellund operational from year
2012 have been allocated to individual points in the system, whereas the major
remaining CAPEX from other assets are uniformly allocated to all points.
The total Baltic Pipe project differs from the historic case behind the Ellund import expansion (which was a case of substituting supplies), in that it brings significant additional volumes in transit to the system. Changing the costallocation between points is not a zero-sum game if the revision results in a
significant increase in the use of the system.
The analyses presented in chapters three and four of the present memo shows
that transit volumes made possible by the project would more than recover the
marginal cost of the infrastructure expansion. There is a potential contribution
margin from transit revenues.
Under the current cost allocation principles (differentiated tariffs), participants
in the Open Season risk having to contribute to the majority of the costs of the
existing system (proportional to a share of the transport volumes) in addition to
all marginal costs.
In the opinion of Energinet.dk, this is a disproportional burden placed on new
transit customers that lacks justification since the tariffs are not increased, but
rather decreased, as a result of the project. Additionally, differentiated tariffs
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may risk to jeopardising the entire project feasibility – as shown in the following
chapters.
Principle of socialising all CAPEX: Energinet.dk proposes to apply a
principle of uniform tariffs as the basis for allocating costs.
Uniform tariffs would mean that all project-related costs are fully socialised on
all points/users, just as the contribution margin is socialised in terms of lower
tariffs. Uniform tariffs are the same in all entry and exit points independent on
route and end-destination. This was the principle in the Danish transmission
system up until year 2012.
Uniform tariffs in terms of a future Tariffs Network Code (TAR NC) are understood as a set of uniform entry tariffs and a set of uniform exit tariffs. That is
due to an ex ante 50:50 entry-exit split of the cost base (half of the cost base is
allocated to entry and exit tariffs respectively). Since more exit capacity is typically booked, the resulting set of exit tariffs is lower than the resulting entry
tariffs.
Uniform tariffs are not a default cost allocation principle in the current draft TAR
NC. Capacity-weighted distance tariffs are the default principle against which
other allocation principles are measured. However, capacity-weighted distance
tariffs are not a mandatory principle. Instead, Member States are allowed to
implement other allocation principles if these receive regulatory approval and if
the difference to capacity-weighted tariffs is accounted for. Energinet.dk will
publish a comparison to capacity-weighted distance tariffs as part of preparing a
tariff methodology proposal to DERA.
4.
Impact of Baltic Pipe on Danish transmission
tariffs
4.1
Base-case and project-related volumes
Energinet.dk publishes base case assumptions on, among other items, the projected flows in the gas transmission.2 These assumptions are utilised in socioeconomic project assessments as basis for investment decisions and long-term
planning.
The assumptions contain the projected demand for transmission together with
expected supply sources (North Sea, imports via Germany and, increasingly,
gas from renewable energy sources (RES)), which constitutes the reference
case (0-reference) for evaluating the proposed total Baltic Pipe project.
Flows in the 0-reference are decreasing over time as a result of increasing energy efficiency and gradual transition from fossil natural gas to RES parallel in
Denmark and Sweden. Transit to Germany is conditional on production levels in
the North Sea and is expected to be phased out in the period up until year
2025.
2
http://energinet.dk/EN/El/Udvikling-afelsystemet/Analyseforudsaetninger/Sider/default.aspx
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Transit from Norway to Poland could reach a very significant share of volumes
in the Danish transmission system. If the project is realised, significant transit
revenues would accompany cost of new infrastructure. It would also imply that
Norwegian and Polish shippers could become key stakeholders in influencing the
future tariff methodology.
In the figure below, incremental transit capacity from the total Baltic Pipe project is 10 bcm/year with an assumed load factor of 0.9 (9 bcm additional flow)
during the 15-year long-term Open Season period.
Figure 1 Volumes forecast in the 0-reference and incremental transit from the
total Baltic Pipe project until year 2040, million Nm3
Long-term capacity contracts provide Energinet.dk with certain revenues independently of actual utilisation during a 15-year period from year 2022 to 2037.
The very long-term demand after year 2037 will depend on the competitiveness
of the route and could impose a risk on other users of the transmission system
or Energinet.dk’s owner if demand patterns change drastically.
Therefore, the following analyses compare transit revenues during the first 15year period with the economic risk after that period in order to evaluate the
resulting transportation costs.
4.2
CAPEX/OPEX
Budget estimates shown in the following analyses are preliminary and may be
subject to changes/improvements until an investment decision is eventually
made by Energinet.dk’s board some time at the end of year 2017.
Investments and associated operational expenditure are shown in 2016-prices,
and forecasts are shown in real prices excluding inflation.
4.2.1
Norwegian-Danish offshore tie-in
Four independent solutions for connecting the two systems have been developed. Solution 1 (EPII – Pipeline to Nybro) is based on a direct pipeline connection to the existing Nybro Entry point with no interconnection to existing off-
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shore pipeline infrastructure currently owned and operated by DONG Energy or
with production platforms operated by different producers.
This is the cheapest solution with the highest reliability, availability and maintainability and with the lowest risk during construction and operation. In addition the number of stakeholders is low compared to other solutions. Further the
operation of an offshore pipeline is relatively uncomplicated.
Other solutions are between 1,6 to 2,6 times more expensive than the cheapest
solution, when comparing investments and operational costs.
Consequently, in the following analyses, only the EPII – Pipeline to Nybro solution is further investigated. It is an estimated investment of approximately 2.8
billion DKK with an associated annual OPEX of around 40 MDKK.
Cost estimates are adopted from the joint Energinet.dk and GAZ-SYSTEM S.A.
PCI Baltic Pipe Feasibility Study (2016). The estimates are used only for illustrative purposes to give an impression of the scale of incremental costs relative to
the present cost base. The figures are still subject to revision as part of technical optimisation in the design phase.
4.2.2
Incremental expansions in the onshore transmission system
Expansion of the existing onshore transmission system effectively utilises spare
capacity in the system. In critical sections, the system is expanded by new
pipelines in looping with existing pipelines and on the final section on Zealand
towards Baltic Pipe on a new 42-inch pipeline is established.
Table 1
Construction budget for onshore expansions, MDKK
Note: Cost estimates are adopted from the joint Energinet.dk and GAZ-SYSTEM S.A. PCI
Baltic Pipe Feasibility Study (2016). The estimates are used only for illustrative purposes
to give an impression of the scale of incremental costs relative to the present cost base.
The figures are still subject to revision as part of technical optimisation in the design
phase.
CAPEX and OPEX are again shown in steps matching capacity in the Baltic Pipe
and in the Polish transmission system.
Since the expansion is based on ‘borrowing’ spare capacity in the existing system, CAPEX is linearly related to incremental capacity. Otherwise, the figures
would show economies of scale, ie that 10 bcm/y, if fully utilized, would result
in the lowest unit cost of capacity.
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Figure 2 Resulting annual CAPEX and OPEX shown for year 2025, MDKK
Note: The tariff cost base of the existing system is set to 430 MDKK corresponding to the
cost base for the tariff year 2016/17. Changes to the cost base (from economic regulation
or productivity gains) have not been analysed in the present paper. The future cost of the
existing system in the analyses is therefore a constant 430 MDKK/year.
Cost base, existing, is equal to the cost base used in the 0-reference.
The annual cost base of new infrastructure assets is marginal compared to the
higher cost base of existing assets. The new infrastructure is dominated by
CAPEX compared to the more balanced composition of CAPEX/OPEX in the 0reference. The economic lifetime of new and existing assets is both set to year
2052.
4.2.3
New compressor station on Zealand
A new compressor station (CS) is planned on Zealand near the expected Interconnection Point with Baltic Pipe. The cost allocation of the Zealand CS between
the Danish and Polish tariff cost bases is not finally settled. The cost allocation
is being discussed between the two TSOs and NRAs in Denmark and Poland.
Since the planned CS constitutes a separate asset with a noticeable impact on
future tariffs, the CS is treated as a separate asset in the following analysis.
Resulting tariffs are shown with and without the Zealand CS.
Cost estimates are adopted from the joint Energinet.dk and GAZ-SYSTEM S.A.
PCI Baltic Pipe Feasibility Study (2016). The need for pressure services is related to the dimensioning in adjacent systems, ie Baltic Pipe diameter and required receiving pressure in Poland. In the following analyses, the Baltic Pipe is
assumed to be a 36’’ pipeline. The electricity price is based on realised cost in
the Egtved CS. Project electricity prices are adopted from Energinet.dk Analysis
Assumptions.
The investment cost estimate is around 1 billion DKK with an associated OPEX
exceeding 200 MDKK annually.
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OPEX (compressor fuel consumption) is more closely related to the actual utilisation (how much gas is transported within a given period through the system
towards Baltic Pipe) than to technical capacity.
The assessment of OPEX is highly dependent on flow scenarios and other factors that at the time of writing can only be estimated with great uncertainty.
Hence, OPEX shown are cautiously estimated in the higher end of the expected
actual cost range. Additional analyses will aim to estimate the compressor costs
with more accuracy within flow scenarios.
The annual cost base derived is shown below. Dependent upon flow assumptions, the Zealand CS could constitute a significant addition to the annual cost
base.
Figure 3 Annual cost-base in 2025, new infrastructure and CS Zealand, MDKK
Volume tariffs in Danish transmission have always been uniform (same for all)
and are metered on the basis of the offtake from the system. The draft Tariffs
Network Code, ie Article 4, Transmission and non-transmission services and
tariffs, stipulates that future volume tariffs should remain uniform.
4.3
Resulting average cost of transportation (scenario-based unit
cost)
As shown in the previous sections, the total Baltic Pipe project with related new
infrastructure could add significant marginal cost to the annual tariff cost base.
An investment decision contains the risk that costs are transferred to existing
users or that the infrastructure owner will be forced to write down assets if the
economic lifetime is longer than the commercial value.
It is incumbent on Energinet.dk to seek to clarify the framework conditions and
mitigate risk associated to the project. It also makes sense to expect a sort of
compensation, socio-economically as well as financially, for risk borne by other
users of the Danish transmission system of a project that is expected to be primarily driven by demand for transit services.
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The potential full cost base resulting from the project is shown as a time series
below.
Figure 4 Size of new and existing assets as a time series, 2016-2050, MDKK
(2016-prices)
The figure below shows average transportation costs (unit costs) per unit delivered through the transmission system in the 0-reference case (dotted line) and
after the total Baltic Pipe project dependent on utilisation after the expiry of
Open Season long-term contracts.
The figure illustrates that the average cost of transportation could be significantly lower due to the project. Even if the use of the transit system decreases
after year 2035, transportation costs could be well below the reference case.
Figure 5 Average transportation costs incl. tie-in and excluding Zealand CS
Note:
1 EUR/MWh corresponds to 0.09 DKK/Nm3 at 7.5 DKK/EUR exchange rate.
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The difference between transportation cost in the reference case and if Baltic
Pipe is realised can be used to calculate the transit net contribution margin in
addition to the cost of new infrastructure. The net present value (NPV) of the
contribution margin expresses the value of the project for all future users of the
system. NPV values here and in the following analysis are calculated at a net
discount rate of 4 per cent per annum.
Figure 6 NPV net contributions from transit revenues, EUR/MWh
NPV (2017-2050) of the contribution margin is estimated at 340 MEUR if volumes after the expiry of Open Season contracts are reduced from 9 bcm/y to 2
bcm/year. Even if transit volumes are reduced to zero, the cash flow still has a
positive NPV of 149 MEUR, which is slightly below remaining book value of assets in year 2037, which are estimated at 137 MEUR.
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5.
A Danish tariff zone and various cost-allocation
principles
Average transportation costs ignore the fact that different points or users could
bear different shares of the tariff cost base. This is the current principle behind
differentiated capacity tariffs.
With the present Tariff Principles, Energinet.dk proposes to depart from differentiated tariffs. Because:
1. differentiated tariffs impose disproportional costs on new shippers, which
are expected to provide a net contribution margin;
2. uniform tariffs provide a more transparent pricing principle that reduces
regulatory risk associated with changing cost-allocation principles during the
period of operation, and finally
3. differentiated tariffs may risk jeopardising the entire planned project by
decreasing the competitiveness of the route compared with alternative
sources of supply-side diversification in Poland and regionally.
The present chapter analyses the impact of the total Baltic Pipe project on
transmission tariffs dependent upon cost-allocation principles. Different costallocation principles lead to changes in the net contribution margin, transit revenues, as marginal costs are either shared proportionally by all users or borne
exclusively by shippers participating in the Open Season.
In parallel, it is considered how different cost-allocation principles support or
contradict the objective of creating a common tariff zone encompassing the
entire area of Denmark by including the onshore and offshore systems in one
and the same tariff zone.
The figure below shows a sketch of the involved infrastructure. Pipelines owned
by third parties are indicated as dotted lines. New infrastructure is shown in
light blue (Zealand CS is a trapezium) and the existing system as a darker blue
cross.
Figure 7
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Tariffs calculated according to current principles of differentiated
capacity tariffs
15/19
Note: The labels North Sea Entry and Exit as well as Zealand CS, Baltic Pipe Entry and
Exit are temporary designations for new system points that have no official names. These
will be determined in the period up until the launch of the Open Season. The calculation
does not include Zealand CS. Inclusion of Zealand CS under the current principles would
increase the transport cost of the route, but not tariffs in the existing system. The entryexit split is defined ex ante as 50:50.
The table above calculates the resulting tariffs for each segment individually
according to the principle of differentiated capacity tariffs in force today. A participant in the Open Season would pay a separate entry-exit (and volume) tariff
in the tie-in. The marginal cost of new infrastructure is allocated only to the
Open Season participants whereas all users, new and existing, pay the tariffs
for the existing system.
According to this cost allocation principle, the resulting route cost is 0.86
EUR/MWh from tie-in entry to an exit point towards Baltic Pipe. The net contribution margin ‘savings current users’ in the year 2025 is 29 MEUR. These savings will change along with changes in the cost allocation principles as a measure of how costs are moved between users of the new infrastructure and all
other users.
0.86 EUR/MWh is above the cost of an alternative transport route taking Norwegian gas through Germany, when factoring in the additional transportation
costs through a new Baltic Pipe offshore interconnector traversing the Baltic
Sea.
5.1
Socialising onshore pipelines
The principle of differentiated capacity tariffs was introduced to safeguard users
of competing entry points from cross-subsidising their direct competitors
through socialised tariffs. In its implementation, it removes CAPEX related to
expanding import infrastructure (Ellund Entry) from the Nybro Entry (from the
North Sea) and the Ellund Exit (towards Germany) tariffs.
The total Baltic Pipe project case differs from the Ellund expansions that were
put in operation from year 2012:
1. Investments in new infrastructure are expected to reduce transportation
costs through substantial transit revenues from additional volumes. The Ellund expansions, in contrast, lead to increasing transportation costs through
substituting volumes from domestic production by imported gas. The substitutional effect is reduced if domestic production continues to decline to a
level below demand in the Danish-Swedish gas market.
2. Whereas Open Season capacity bookings are expected to be a key criteria
for Energinet.dk’s investment decision, just as it was the case with Ellund
expansions, there is expected a much closer match between reservations
and incremental capacity than was the case with the Ellund expansions,
where more than half of the new capacity was allocated to short-term products. The capacity allocation criteria for the Baltic Pipe Open Season are expected stricter: 90 per cent of incremental capacity in the tie-in is allocated
to long-term contracts that have duration of minimum 15 years. Contracts
in Open Season 2009 were 10-year contracts.
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3. The project will establish a new entry point (Baltic Pipe). However, it is designed to preserve existing technical capacity at other system points. This
was also the case for the Ellund expansions, but it should be noted that the
project does not compete or crowd out other users.
Uniform tariffs result in full socialisation of all cost. Thus, the capacity tariffs will
be the same at all entry and all exit points. Uniform tariffs result in a simplified
tariff structure as shown in the table below.
Figure 8 Resulting tariffs according to a principle of socialisation of incremental
onshore pipelines
According to the principle, all CAPEX from new and from existing infrastructure
is pooled into a single tariff cost base. The tariff is calculated as the sum of all
CAPEX divided by the sum of expected capacity reservations in all entry and
exit points. This is arguably a more cost-reflective principle; it is certainly a
more transparent and predictable principle than the current differentiated tariffs. Additionally, socialised tariffs support the notion of a national tariff zone.
The principle of cost socialisation reduces the route cost for Open Season Participants transporting gas from tie-in to Poland from 0.86 to 0.80 EUR/MWh (- 7
per cent). The net contribution is similarly reduced from 30 MEUR in the year
2025 to 25 MEUR. Proportional to the share of volumes in the transmission system, Open Season Participants will cover more than 75 per cent of the cost
base in that year alone.
The transportation chain through Denmark still contains six separate pay points
(two entry, two exit and two volume tariffs) with individually varying regulatory
risk compared to a model in which offshore and onshore systems are more
closely integrated.
5.2
Establishing a tariff zone
A Danish tariff zone would incorporate offshore and onshore tariffs into a combined product, either as bundled capacity or through full socialisation of offshore and onshore systems.
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A Danish tariff zone brings closer integration between the systems to increase
economies of scope, reduce transportation costs and to achieve cost-effective,
non-discriminatory third-party-access to the Danish transmission system for all
players, be it at interconnection points, Danish gas producers in the North Sea
or domestic biogas producers.
A tariff zone would also allow Open Season Participants to reserve capacity for
entry capacity to the Danish system in either the Norwegian tie-in or in Baltic
Pipe Entry towards Baltic Pipe (import capacity from Poland) and for transit
flows also a matching exit reservation in Baltic Pipe Entry.
The revenues of bundled capacity products are divided between the tie-in subsidiary and the onshore system. One model could be to allocate all costs in the
tie-in together with the Nybro Entry to a North Sea Entry tariff. The resulting
tariffs are shown in the figure below.
Figure 9 Tariffs in a tariff zone with bundled capacity products
The table above lists the various tariff elements. The resulting tariffs for Open
Season participants are shown in the column ‘Total Baltic Pipe’. The model
maintains the tariff structure in the onshore system for all users. The cost of
transportation for Baltic Pipe users remains 0.80 EUR/MWh and the resulting
tariff is dominated by an entry tariff in the tie-in of 0.41 EUR/MWh.
In order to achieve even lower costs on the route and have a more uniform
tariff structure, additional socialisation of cost offshore and onshore is required.
5.3
Socialising offshore pipelines
As described in section 2, Energinet.dk proposes a common market zone with
one entry point and a uniform cost allocation for all points in the system.
In the proposed model, all costs offshore and onshore are fully socialised. This
reduces transportation costs on the new transit route further. The resulting
tariffs are 7.8 per cent below the principle for bundled capacity tariffs and 13.4
per cent below the principle for differentiated tariffs. The net contribution to the
onshore tariffs in year 2025 is reduced from 25 MEUR to 22 MEUR.
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Figure 10 Resulting tariffs following full tariff socialisation of all incremental and
existing infrastructures within a combined offshore and onshore tariff
zone
Please note that uniform allocation of all costs offshore and onshore is conditional upon the provisions in the Danish upstream regulation and the Law governing Energinet.dk – described in section 2.1.
5.4
Comparison of tariffs resulting from the analysed costallocation principles
The resulting tariff according to the various cost-allocation principles is shown in
the figure below. The figure also shows the marginal cost of transportation from
incremental infrastructure alone. The marginal cost also expresses a capacity
tariff in which no other users are put in a worse situation tariff-wise than in the
0-reference, where the total Baltic Pipe project is not realised.
Figure 11 Resulting tariffs, EUR/MWh
Note: The resulting tariffs are shown from different viewpoints. 0-reference shows the
tariffs without the project being realised in year 2025. Differentiated tariffs show the resulting tariffs on the transit route through Denmark from Norway to Baltic Pipe.
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