The launch of a single market for gas in France on 1 November 2018 is the last step of the integration of the French gas market, which started in 2005.

The single gas market represents a crucial turning point given the importance of the French gas market. France is the fourth-largest gas market in Europe, with an annual consumption of around 50 billion Gm3, or 10% of EU demand^[1]. It has both a large domestic market and a high-potential transit market. Moreover, France has the third-largest LNG receipt capacity in Europe, with regasification capacities spreading across its Atlantic and Mediterranean coastlines. Its transmission network is the longest in Europe, with extensive gas interconnections as a result of its borders with five European countries to the north and south, including via Switzerland and Italy. France heavily relies on imports, with 98% of its gas supply being imported: approximately 70% via gas pipelines and approximately 30% via LNG.

Background

There are two natural gas transmission system operators (“TSOs”) in France: GRTgaz^[2] and Teréga (formerly TIGF^[3]).

The French transmission network went from five marketplaces in 2005 to three in 2009, and in 2015 the network was reduced to just two marketplaces: the PEG^[4] Nord (on the GRTgaz network) and the Trading Region South (“TRS”) in the South, which is shared between GRTgaz and Teréga.

These mergers increased the liquidity of the French gas market and allowed end consumers to benefit from a greater range of sources of supply and therefore achieve significant savings. Consequently, users of the French natural gas networks have gradually been able to access a more liquid and more competitive market, regardless of their location in France.

The simplification of the market places was critical given the discrepancies between the North and South zones.

While the North has significant interconnection capacities with the Norwegian, German and Belgian networks, the North-South link capacity does not cover all of the needs in the South zone. Moreover, while the North zone may be supplied by LNG imported via LNG terminals or by gas transported by pipeline from the markets in the north-west of Europe, the South zone depends on LNG, which is more expensive than pipeline gas, for approximately 40% of its supply, and, for the other 60%, on importations from the north of France, whose physical capacity is limited. As a result, price differences between the two market places have increased, per period, to the detriment of users in the south of France, who can pay up to 50% more for the gas than users in the north of France. This situation negatively affected the competitiveness of industrial customers, in particular, gas-intensive customers.

The situation became even more critical between 2012 and 2014, when the steep increase in LNG prices in Asia, linked in particular to the increase in Japanese demand following the Fukushima accident, encouraged LNG players, producers and importers, to redirect LNG cargoes to these better paid markets, to the detriment of European markets.

In this context, the energy market regulator – Commission de régulation de l’énergie or “CRE” - decided through a deliberation of 7 May 2014 on the creation of a single market place, through the strengthening of the transmission network.

The creation of a single market place became even more critical after the significant congestion in the southeast occurred in the winter of 2016-2017. This congestion, caused by low LNG supplies in the south of France coupled with high consumption, resulted in difficulties for certain players to nominate the desired amounts.

Implementation

After having assessed various scenarios, the CRE estimated that an investment scheme that would have removed all congestion would have been too expensive (given that investment costs are eventually passed on to gas consumers). It has therefore chosen a medium investment scenario, comprising mainly the reinforcement of the Val-de-Saône pipeline (on the GRT network) and the reinforcement of the Gascogne-Midi pipeline (on the Teréga network), an investment configuration with a total target budget of EUR 823 M. As an incentive, the CRE provided that the two TSOs would receive a premium of up to EUR 16 M and EUR 4M respectively if the works were commissioned by 1 November 2018.

At the end of August 2018, the two TSOs confirmed that works would be completed and commissioned on time so that the single market would be effective on 1 November.

The single trading area, called Trading Region France (“TRF”), will operate a single entry/exit zone, divided into two balancing zones (GRTgaz and Teréga). A virtual gas exchange point, the PEG, shall condense the purchase/sale of gas for the entire TRF.

GRTgaz estimates that the new structures will increase the transit from the North to the South of + 220GWh/d per day i.e. an increase of 42% of possible flows on average^[5].

Mechanisms to relieve congestion

The chosen investment scheme has been designed to enable the creation of a single market at an optimised cost. Consequently, in certain network configurations of use, residual congestion could occur in exceptional circumstances.

Studies have shown that the most likely congestion scenario is North-South congestion, corresponding to a situation in which the price of LNG is higher than that of gas from the Russian and Norwegian fields. This would be reflected in the low use of LNG terminals in the south of France, and in Spain importing gas from France.

The TSOs and the CRE have examined the mechanisms that could be put in place in order to manage inherent congestion situations and submitted their proposals for public consultation in 2017^[6] and 2018^[7].

The purpose of these mechanisms is to guarantee that all subscribed firm capacity is available for the shippers to use. If congestion occurs, the working principle is to alter scheduled flows upstream and/or downstream of the congestion, to reposition them in time and space.

The following mechanisms to deal with congestion have been approved by the CRE^[8]:

(i)  interruption of interruptible capacities on D-1 and during the day, given that interruptible capacities are sold at a lower price than firm capacities specifically to compensate for the risk of seeing capacity interrupted. The CRE recommends this method as a matter of priority;

(ii)  swap agreements with adjacent operators to optimise the allocation of the flows between different physical points. However, the possibility of making inter-operator swaps depends on nominated capacities at the contractual point and the limits of both operators. There is, therefore, no guarantee it will work in all conditions;

(iii) non-trading of unsubscribed capacities on D-1 and D-Day;

(iv) locational spread. Under this mechanism, TSOs will simultaneously contract the purchase of gas downstream of the congestion and the sale of gas upstream of it. These two operations may result in a reduced quantity transiting through the bottleneck. These two ‘legs’ of the locational spread can be established with two different shippers. The purchase and sale of gas is settled between the purchaser and seller at the PEG. The nomination made by a shipper on either side of the congestion, at the entry or exit point, is matched by a movement at the TSOs’ PEG. As such, the mechanism has a neutral effect on balancing each contracting party and on balancing the overall network. In order to implement this mechanism, the TSOs would issue a call for tender where there is a risk of congestion. Shippers would submit offers comprising volumes and prices (in Euro per MWh/h), by purchasing upstream of the congestion and/or selling downstream of it. If, at the beginning of a cycle, once nominations have been processed, the congestion indicator confirms that TSOs are required, the latter will inform the shippers that a call for tenders is going to be triggered. Shippers then have a deadline to amend or propose new offers. The suppliers select the cheapest offers to reach the required volume. Finally, the successful shippers re-nominate at the end of the cycle to amend their programmes;

(v) partial interruption of firm capacities, to be used as a last resort. In order to implement this mechanism, the TSOs would introduce an overall mutualised pro rata nomination restriction of subscribed capacities. The shippers would therefore be free to use their capacities, within their own limits, and at each point in their overall limit at all the points. Mutualised restrictions have the advantage of leaving each shipper with capacities at several points upstream and downstream of the congestion and scope to decide which points to favour. No financial compensation would be paid to penalized shippers, as the CRE fears that such compensation could limit the chances of success of locational spread calls for tenders because a shipper might prefer the ex-ante defined compensation rate compared to the price set by the call for tenders.

Conclusion

The creation of a single marketplace will enable:

(i) the introduction of a single price on French wholesale markets, which will benefit  all French users, particularly those in the south;

(ii) a more liquid, less volatile and more competitive French market better integrated in the European market;

(iii) the reinforcement of France's security of supply, with improved access to the various gas sources.