Towards an efficient and sustainable tariff methodology for the European gas transmission network

Abstract

Gas transmission in Europe is currently based on the so-called entry-exit model. Under such a model, Europe is divided into gas balancing zones – also called entry-exit systems – and capacity is charged at both entry and exit points of every balancing zone. Current entry-exit systems largely coincide with Member States’ territory. The cost of gas transmission networks in Europe is thus covered via the so-called entry-exit tariffs. The shift to the entry-exit model was one of the most effective measures included in the Third Energy Package (2007), which facilitated smooth transition from the traditional system, based on vertically integrated European gas industry structures to a single liberalised European market. However, as the EU gas market develops, the current tariff methodology is now being questioned, on the grounds that it may be unsuitable to achieve the objective of a single pan-European market, with unbiased gas flows and no obstacles to trading. This paper analyses alternative tariff methodologies that would address the drawbacks of the current system. The first approach meets the transmission revenue requirement by charging only the transmission network’s exit points to distribution networks and to directly connected end-customers. The second approach does not charge entry and exit intra-EU boundaries, and offsets the missed revenues via charges at the points of entry of foreign gas supply into the EU transmission system. Further, we investigate data on physical gas flows, commercial transactions between EU countries and non-EU suppliers and capacity bookings, from multiple sources. Our analysis suggests that: i) current gas flow patterns in Europe are different from those that minimize intra-EU shipping cost evaluated at the current transmission tariffs; we conjecture that this feature is related to the existing stock of long-term capacity holdings; ii) in case the optimal flow pattern was implemented, a material reduction of overall tariff revenues would occur, other things being equal; further, the revenue shortfall would be unevenly split among routes and system operators; iii) the cost of shipping gas to a European country from different points of entry into the European network is materially different, to the point that one cannot rule out the possibility that the current tariff model has an impact on the selection of the upstream suppliers.