INTERNATIONAL ENERGY AGENCY FLEXIBILITY IN NATURAL GAS SUPPLY DEMAND AND INTERNATIONAL ENERGY AGENCY FLEXIBILITY IN NATURAL GAS SUPPLY DEMAND AND page2-16x23 8/04/02 15:20 Page 1 INTERNATIONAL ENERGY AGENCY ORGANISATION FOR 9, rue de la Fédération, ECONOMIC CO-OPERATION 75739 Paris, cedex 15, France AND DEVELOPMENT The International Energy Agency (IEA) is an Pursuant to Article 1 of the Convention signed in autonomous body which was established in Paris on 14th December 1960, and which came November 1974 within the framework of the into force on 30th September 1961, the Organisation Organisation for Economic Co-operation and for Economic Co-operation and Development Development (OECD) to implement an inter- (OECD) shall promote policies designed: national energy programme. • to achieve the highest sustainable economic It carries out a comprehensive programme of growth and employment and a rising standard energy co-operation among twenty-six* of the of living in Member countries, while maintaining OECD’s thirty Member countries. The basic aims financial stability, and thus to contribute to the ofthe IEA are: development of the world economy; • to maintain and improve systems for coping • to contribute to sound economic expansion in with oil supply disruptions; Member as well as non-member countries in the process of economic development; and • to promote rational energy policies in a global context through co-operative relations with non- • to contribute to the expansion of world trade member countries, industry and international on a multilateral, non-discriminatory basis in organisations; accordance with international obligations. • to operate a permanent information system on The original Member countries of the OECD are the international oil market; Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, • to improve the world’s energy supply and Luxembourg, the Netherlands, Norway, Portugal, demand structure by developing alternative Spain, Sweden, Switzerland, Turkey, the United energy sources and increasing the efficiency of Kingdom and the United States. The following energy use; countries became Members subsequently • to assist in the integration of environmental and through accession at the dates indicated energy policies. hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), * IEA Member countries: Australia, Austria, New Zealand (29th May 1973), Mexico (18th Belgium, Canada, the Czech Republic, Denmark, May 1994), the Czech Republic (21st December Finland, France, Germany, Greece, Hungary, Ireland, 1995), Hungary (7th May 1996), Poland (22nd Italy, Japan, the Republic of Korea, Luxembourg, November 1996), the Republic of Korea (12th the Netherlands, New Zealand, Norway, Portugal, December 1996) and Slovakia (28th September Spain, Sweden, Switzerland, Turkey, the United 2000). The Commission of the European Kingdom, the United States. The European Communities takes part in the work of the OECD Commission also takes part in the work of the IEA. (Article 13 of the OECD Convention). © OECD/IEA, 2002 Applications for permission to reproduce or translate all or part of this publication should be made to: Head of Publications Service, OECD/IEA 2, rue André-Pascal, 75775 Paris cedex 16, France or 9, rue de la Fédération, 75739 Paris Cedex 15, France. FOREWORD Flexibility of natural gas supply is essential for efficient operation of the gas industry. Gas companies have developed various flexibility tools to harmonise the variations and fluctuations in gas demand with the relative rigidity of gas supply. These tools mainly work on the volumes of supply and demand. Market liberalisation is changing the traditional landscape. It brings a new market-driven approach to flexibility. In competitive markets, new market mechanisms are available to bring gas supply and demand into line, for example in marketplaces where both gas and flexibility services are traded. However, inelastic demand by non-interruptible customers still needs to be covered as it arises. Traditional flexibility tools remain important for this purpose. This book surveys the impact of market opening on flexibility tools and mechanisms. The experience in competitive markets demonstrates the changes which are taking place. It is important to keep track of these developments in newly opened markets and this book suggests some developments that governments should particularly monitor: the parallel opening to competition of the electricity and gas sectors and the possible impact on gas supply and demand of the arbitrage between gas and power; the increased volatility of prices; and the responsibility of the different players. This book is one part of a more general review by the International Energy Agency of the security of natural gas supply in OECD countries. This book is published under my authority as Executive Director of the International Energy Agency. Robert Priddle Executive Director 3 ACKNOWLEDGEMENTS The main author of this book is Sylvie Cornot-Gandolphe. Ralf Dickel, Head of the Energy Diversification Division, directed the project and provided valuable input and advice. The Director of the Long-Term Office, Olivier Appert, provided support and encouragement throughout the project. Special thanks to all other IEA colleagues who provided comments on the analysis, statistical data and editorial oversight. Comments and suggestions from various delegates to the Standing Group on Long-term Co-operation as well as from key experts of the gas industry are gratefully acknowledged. 5 TABLE OF CONTENTS Foreword ............................................................................ 3 Acknowledgements .............................................................. 5 Table of contents .................................................................. 7 Executive Summary ............................................................. 13 ■ Gas demand and supply do not always react to market signals in ways typical of other commodities..................................... 13 ■ How flexibility requirements are evolving to meet supply and demand trends in the OECD ............................................... 15 ■ Traditional flexibility tools .................................................... 18 ■ The role of flexibility is evolving with market liberalisation .. 20 ■ New flexibility patterns in the LNG market ......................... 22 Recommendations ............................................................... 25 ■ Ensure the working of the new markets ................................ 25 ■ Ensure the provision of the flexibility needed by non- interruptible customers that lack fuel-switching capacity ...... 26 ■ Monitor investment performance and take action, if needed 27 1. Introduction .................................................................. 29 ■ Why flexibility is needed ...................................................... 29 ■ Large variations in demand; a certain rigidity in supply ........ 29 ■ Different flexibility requirements by sector ........................... 33 ■ Changes that come with market liberalisation ....................... 35 7 2. Supply and Demand Trends in OECD Regions and Their Impact on Flexibility ....................................... 37 ■ Introduction ......................................................................... 37 ■ OECD North America ......................................................... 38 Market overview ............................................................ 38 Regulatory reforms in gas and electricity ....................... 39 Gas demand trends. ...................................................... 41 Gas supply trends .......................................................... 42 Impact on flexibility ...................................................... 42 ■ OECD Europe ..................................................................... 43 Market overview ............................................................ 43 Regulatory reforms in gas and electricity ....................... 44 Gas demand trends ....................................................... 45 Gas supply trends .......................................................... 46 Impact on flexibility ...................................................... 50 ■ OECD Pacific ...................................................................... 51 Market overview ............................................................ 51 Regulatory reforms in gas and electricity ....................... 51 Gas demand trends ....................................................... 53 Gas supply trends .......................................................... 54 Impact on flexibility ...................................................... 54 3. Flexibility Tools in Traditional Markets .................... 57 ■ Introduction ......................................................................... 57 ■ Flexibility of supply .............................................................. 58 Flexibility in gas production and imports ...................... 58 Access to spare capacity at import and transportation facilities.......................................................................... 63 ■ Storage ................................................................................. 64 Functions and characteristics ......................................... 64 8 Storage development in IEA .......................................... 65 Line-pack ...................................................................... 68 Storage at LNG terminals .............................................. 68 ■ Demand side measures ......................................................... 69 Interruptible contracts. .................................................. 69 Fuel-switching ............................................................... 70 Demand-side reaction to price signals ........................... 73 ■ Conclusion on the current state of flexibility ........................ 75 4. Market Liberalisation: A New Context for Flexibility .......... 77 ■ Introduction ......................................................................... 77 ■ The emergence and development of gas trading .................... 78 Marketplaces: new hubs ................................................ 78 Spot and futures markets ............................................... 81 Emerging trends in Continental Europe ........................ 85 ■ New forms of flexibility and the changing role of gas storage .. 88 Unbundled services ....................................................... 88 The new functions of underground gas storage ............. 90 Forces favouring storage use – the US and UK experiences ............................................................. 92 Storage and liberalisation in Continental Europe .......... 93 ■ Electricity-gas arbitrage at hubs ............................................ 95 5. The role of LNG in Flexibility .................................. 99 ■ Introduction ......................................................................... 99 ■ International LNG trade ...................................................... 99 Global trends ................................................................ 99 Regional trends .............................................................101 ■ Deregulation of Asian and European LNG markets ..............103 9