Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Part 2: Unbundling options for gas storage Final report, 9 February 2016 This work is being done as part of Task 1 of the joint EC-WB Facility to support the Ministry of Energy and Coal Industry of Ukraine and NJSC ‘Naftogaz of Ukraine’ on advisory services and technical assistance for the reform and modernization of the natural gas sector The views in this report constitute the consultant’s views and do not necessarily reflect those of the World Bank or the European Commission This project is jointly funded by the European Union, This task is implemented the World Bank and the Energy Sector Management by Economic Consulting Assistance Program (ESMAP) Associates Ltd Key recommendations Transitional and target structures for transmission and storage: two-step approach The overall unbundling process is suggested to be viewed as a two- step approach, with a transition to full unbundling being accomplished in two steps  The first step, in the short term, would be a transitional structure that needs to achieve, as a minimum, the unbundling of the TSO.  Given that the TSO is part of UTG, the proposed transitional structure is for the unbundling of both the TSO (transmission operation and assets) and SSO (storage operation and assets) The transitional structure is shown in the next page  The longer term possible target structure indicates a fully unbundled system with the main functions of transmission, storage, production and supply/trading separated It could be achieved in say 3-5 years 2 Recommended transitional industry structure Current Ministry of Economic Development and Trade structure NAK Naftogaz UGV Ukrtransgaz Trading & (production) supply TSO SSO Recommended State owner 1 State owner 2 transitional structure NAK Naftogaz UGV Trading & UTG / NewCo (production) supply TSO SSO 3 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations Current arrangements for gas transmission and transit in Ukraine – how to unbundle? KEY MARKET & BUSINESS KEY LEGISLATIVE CHARACTERISTICS FEATURES  Conformity with 3EP as transposed by Gas Market Law (GML) requires transmission unbundling –  Naftogaz via its wholly owned question is which model should be adopted? subsidiary Ukrtransgaz operates:  GML allows only OU and ISO models (not ITO)  Extensive national gas transmission  Naftogaz and its subsidiaries do not own the and transit pipelines transmission and storage assets  The storage system  They are owned by the State of Ukraine with some ambiguity as to whether they are vested in the State  The transit and transmission Property Fund of Ukraine (SPFU) or other state entity infrastructure is not separated  Ukrainian Law specifies that the State must remain  Transit volumes fell to around 62 owner of gas transmission and storage assets bcm in 2014 while domestic  Assets are currently managed by 100%-owned Naftogaz subsidiary, Ukrtransgaz transmission (in 2012-2014) has  We understand that the state can grant usage been in the order of 40-50 bcm rights over the transmission system and storage  However, transit tariffs represent the facilities (and that such assets would appear on the bulk (88%) of Ukrtransgaz revenue balance sheet of the operator)  Transmission revenues are earned by  100% of shares of Naftogaz were transferred to the Ukrtransgaz directly but transit revenues Ministry of Economic Development and Trade ( are received via Naftogaz MEDT) on 18 December 2015  Naftogaz has a long term transit agreement with Gazprom, which expires in 2019  This agreement has not been assigned to Ukrtransgaz 5 The work is being undertaken under the auspices of the European Commission – World Bank Trust Fund  Initial assistance to MECI1, in refining  The Gas Sector Reform the restructuring concept of NAK2 Implementation Plan (forming Naftogaz (under EC-World Bank Trust Fund: Task 1), also contributed to part of IMF MoU) requires developing the Gas Sector Reform transmission unbundling to Implementation Plan (GSRIP) be implemented by June  The GSRIP aims to support a stable 2016 framework for Naftogaz restructuring and unbundling, covering production  Decision by the Government and price reform as well as transmission according to the GML should be and storage unbundling made by January 2016  The work undertaken by this task  Working Group established initially focuses on restructuring and unbundling analysis for the with representatives of key transmission and storage business Ukrainian stakeholders and areas of Naftogaz  This report focuses on donors pursuant to the order transmission of the MECI to coordinate this  A separate, accompanying report addresses storage work and facilitate decision  In a next step it will also include the on preferred unbundling and assessment of options for the restructuring options production business area of Naftogaz 1 MECI: Ministry of Energy and Coal Industry, 2 NAK: Naftogaz of Ukraine 6 This builds on prior work examining ownership unbundling options for transmission Naftogaz unbundling proposals have What we have previously proposed gone through changes but have  Preferred model ownership unbundling, emphasised clear separation of TSO primarily to ensure TSO is incentivised to  An evolution of proposals from 2014 invest in the upgrade of the transmission and 2015 on the basis of NAK’s system coordinated with system operation evolving business plan and associated needs implementation plan  Advised on legal issues for implementation  A number of different unbundling to ensure compliance with 3EP proposals formulated on which we provided comments  Highlighted key issues requiring  Discussion on the implications for the clarification and resolution: adoption of the ISO model compared to  Analysis of whether gas transit agreement the OU model in relation to: with Gazprom can/needs to be assigned to  The requirements for meeting the the TSO, or use of the assets can be 3EP/GML unbundling provisions facilitated by direct agreement between  The tension between options for a NAK/other state entity and independent TSO minority private shareholding with  Clarification that concessions or other European experience, and the legal similar form of usage rights over the requirement to keep fixed assets as state transmission system can be given to UTG property or other entity whether under public or  Proposal has since firmed towards a private (full or partial) ownership variant of ownership unbundling  How to ensure that public legal persons (discussed later) exercising ownership and control over  Supported by McKinsey report (June different gas activities are separate and 2015) for Naftogaz demonstrating not under common influence (eg by the significant adoption of OU model in EU Cabinet of Ministers) 7 The aim is to support Government to make an informed decision on the restructuring of Naftogaz Assessment framework 3 1 EU experience 2 Taxonomy of Review and 4 pros and cons Qualitative assessment against assessment and agreed criteria: of stakeholder theoretical • 3EP compliance unbundling • Ease of implementation assessment proposals of unbundling ` • Efficient operation and investment options • Facilitation of gas market restructuring and private sector participation Conclusions and recommendations 8 Focus is on the structural options; good corporate governance needed irrespective of the chosen model  The report builds on  The present report examines previous analysis (by us transmission in isolation – and others), discussions storage is assessed separately in an accompanying report during the November 2015 Kiev ‘mission’, subsequent  The report does not propose stakeholder proposals, and the specific public body that further meetings and a should exercise ownership control of the TSO (or of other presentation to the gas sector commercial Working Group of our draft activities), but this should be : report in Kiev in January  a body consistent with the 2016 principle of separating ownership of system operation  We attempt to distil the and transmission from supply main features and issues and production requiring to be addressed  addressed immediately in the and resolved to arrive at a next phase of the work decision on the preferred  consistent with principles of unbundling option for gas good corporate governance transmission/transit 9 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations The unbundling options EU Third Energy Package: three unbundling options (OU, ISO, ITO) Ukraine Gas Market Law*: prescribes one of only two options (OU, ISO) Increasing regulatory and control requirements Vertically Separate Transmission Transmission OU integrated system system operation undertaking Owners ownership Vertically Separate Transmission Separate Transmission ISO integrated system system operation undertaking Subsidiary ownership Owners Available options under the Ukraine Gas Market Law Vertically Separate Transmission Transmission ITO integrated system system operation undertaking Subsidiary ownership * The Law of Ukraine “On the Natural Gas Market” prescribes the use of either the OU or the ISO option but not the ITO 11 model. Therefore the ITO model is not a possible option in Ukraine Description of unbundling options - Features and main implementation options OU ISO ITO  Assets may remain with the  The vertically integrated company  Totally separated vertically integrated undertaking, retains ownership of network transmission company (from but in a legally and organisationally assets, but via a separate legal independent entity, or an entity production, supply and independent owner separate from system operation  Organisational and governance trading) owns and operates measures to ensure that the system  The network is managed and transmission network activities are controlled by an independent separate – and operate  No common shareholders company, the ISO independently - from production and  Beyond initial costs of certification, supply between transmission and greater regulatory monitoring  More onerous regulatory tasks – other activities costs (approval of contract monitoring of commercial and between owner and ISO, financial relations between different  No common board or monitoring of communications and businesses, approval of services relations between the two, dispute provided by related entities, review management members in resolution, etc) and approval of Board changes, etc the respective companies  UTG or newly incorporated  Naftogaz remains  Naftogaz remains shareholder company that is owner or shareholder of UTG, which of UTG, which becomes exercises ownership rights over becomes ‘owner’ of the ‘owner’ of the transmission transmission assets (through a system and new company system and remains system concession or other instrument), established to be ISO, or operator and  Other state entity (eg SPFU)  Requires detailed rules  UTG (or NewCo) shares and system assets ‘owned’ by owns system assets (via regarding independence of different public body to that new legal entity), new management and board, use of having the NAK shareholding company set up as ISO contractors, etc 12 Description of unbundling options - Theoretical advantages OU ISO ITO*  Should retain incentives for  Increased independence  Lower (but non-trivial) cost continued and sufficient of network management of unbundling investment in transmission and greater focus on  Could facilitate private  The overall cost of capital transmission activities sector participation, should not be affected (as  Reduced risk of particularly as the network the level of integration and size of the company is largely insufficient investment in Ukraine must remain in unaltered), provided NAK, as  Reduced scope for public ownership (but this parent company, develops a discrimination against non- can also be achieved under strong balance sheet integrated entities, thereby OU with granting of  May retain synergy benefits facilitating competition concession or similar usage (vertical economies of scale right) and scope), at least within a  Facilitation of NAK group perspective, privatisation of businesses  Addresses the issue of non- although there are restrictions in competitive sector and/or discriminatory access to under 3EP on intra-group private sector participation the transmission system transactions in transmission (profile of (but not that of investment  Addresses the issue of non- investor and expertise in adequacy) discriminatory access to the transmission system system operation is very * Note that this option is included for different to that for completeness but is not permitted under the GML. trading/supply) Also note that the benefits of integration with the holding company accrue to the holding company but not necessarily to competitors  More transparent 13 Description of unbundling options - Theoretical disadvantages OU ISO ITO  One-off transaction costs  Interface problems and  Problem of vertical to establish new entity misaligned incentives: integration (discrimination (including potential disputes Large information flows on against non-affiliated over property rights* with operational status entities) remains and may respect to certain assets) be difficult to police in the Coordination/duplication in absence of strong regulation  ‘Double mark-up problem’ planning, maintaining and if downstream market is not expanding the network  Unclear what the benefits competitive** Complicates decision- of common ownership  Potential to inflate capex making and incentives for are, if legal separation is investment, leading to effective, though assets (although the risk of may play a role in balance underinvestment, eg under significant risks for underinvestment sheets the ISO and ITO models, is generally considered to be Roles and responsibilities An ownership unbundled more detrimental to for emergencies TSO in Ukraine will be of consumer interests given  Might be too focused on sufficient size to be able to the ‘essential’ nature of the attract capital at reasonable short-term optimisation and maybe lower cost infrastructure) rather than long term infrastructure development  Heaviest regulatory burden and increased  Increased regulatory requirements for monitoring, * In practice legal disputes are likely to be burden and costs for eg for new capex for limited as between two state owned ensuring independence, competitors to enter the companies compared to OU market ** Though OU model is the most likely option to promote downstream competition  Relatively little experience in large systems 14 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations Naftogaz proposal: Ownership unbundling, new TSO, without storage, SPFU owner  Transmission system assets State of Ukraine separated from storage+  The SPFU exercises ownership rights over transmission assets on behalf of the State and also owns MEDT* SPFU** TSO  A new company, ‘MGU’, is assigned 100% 100% TSO; storage (and other non-core functions) remain with Ukrtransgaz NJSC JSC Main Gas which in turn stays within the Naftogaz of Pipelines of Naftogaz group Ukraine Ukraine (MGU)  MGU exercises “commercial management rights” 100%  Might require legislative amendment to ensure: * MEDT: Ministry of Economic  MEDT* does not exercise control of SPFU PJSC Development and Trade for the relevant assets/activities Ukrtransgaz ** SPFU: State Property Fund  SPFU does not exercise control over gas of Ukraine and electricity production and supply businesses + Storage is considered in accompanying report part 2 16 Naftogaz proposal Pros and cons Might not require changing the Requires contracts to be ownership of the transmission assigned to MGU and for system assets (if these are staff to be employed by indeed vested in the SPFU) the new company (delays) Chance to establish TSO with Also requires all relevant good corporate governance assets are identified and practices and efficient staffing transferred to MGU, else and operating levels risks MGU remaining Ensures 3EP compliance and dependent on UTG does not preclude further Establishment of a new, restructuring of Naftogaz self-standing and fully Conducive to attracting private operational TSO would be sector partner (but depends difficult to achieve in line crucially also on predictable with the unbundling and stable regulation) timetable (ie by June 2016) Does the transit agreement with Gazprom need to be renegotiated? If Gazprom consent to transfer the agreement (from NAK) to MGU is not given, could MGU entitlement to transit revenues be ensured by separate agreement between NAK and MGU? 17 MECI proposal: Ownership unbundling, UTG remains TSO, with storage, MECI is owner  Transmission system assets bundled with storage State of Ukraine  The MECI exercises ownership rights over transmission assets on behalf of the State MECI MEDT / HoldCo*  Ukrtransgaz is assigned TSO (as per current arrangements) with 100% MECI as shareholder  Gas production, trading and supply Gas Production activities transferred to MEDT (and PJSC PJSC Ukrgazvydobyannya ultimately HoldCo) Ukr- SJSC Chornomornaftogaz  Part of broader MECI reform vision transgaz for gas, electricity and oil where:  Natural monopoly activities are Gas Trading & placed within the purview of MECI * HoldCo: State Supply (PSO)  Potentially competitive activities Holding Company NSJC Naftogaz of Ukraine are managed by MEDT and/or (to be established) privatised 18 MECI proposal Pros and cons Contracts relating to There may be a conflict O&M of the between MECI’s policy role transmission system for the sector as a whole would not need to be and its shareholding of transferred to a new Ukrtransgaz+ operator TSO would remain Staff would not need encumbered with costs of to be hired by a new large number of staff operator (~23,000) Ensures 3EP Unclear whether MECI and compliance and MEDT considered fully facilitates further ‘separate bodies’ given restructuring (but common CMU supervision, requires strong unless some specific rules management and added to ensure separate regulatory drive) decision making Misses chance to establish Does the transit agreement with Unbundling is simpler new TSO with best practice Gazprom need to be and therefore feasible governance and efficient renegotiated? by June 2016 staffing, but can be If Gazprom consent to transfer the achieved with a more agreement (from NAK) to UTG is feasible timeline over the not given, could UTG entitlement longer term to transit revenues be ensured through an agreement between + Note: Under 3EP, MECI could not exercise ownership control over NAK19 and UTG? both upstream and downstream electricity assets and gas assets Other stakeholder views (1) MEDT considerations* Advantages:  Ownership unbundling, new TSO or  Does not require changing the ownership of the UTG, without storage, SPFU owner transmission system assets from the SPFU (if these are indeed vested in the SPFU)  If the transmission company remains Ukrtransgaz, avoids need to transfer contracts and staff  Ensures 3EP compliance and consistency with broader SOE reform Disadvantages of MEDT proposal:  Unclear whether HoldCo and SPFU considered ‘separate bodies’ given common CMU supervision  Transmission system assets owned by the SPFU,  May be complications in transferring UTG which would also own the transmission company ownership to SPFU and must ensure that SPFU  Potentially competitive sectors remain with the does not exercise control over competitive gas CMU** (probably, but not necessarily, within Naftogaz) and electricity activities (but this applies to other until HoldCo for ‘strategic’ state-owned enterprises options too) (SOEs) is established  Preference for storage to be separated out as a  If TSO remains Ukrtransgaz, misses chance to business independent from both the unbundled TSO establish new TSO with best practice governance and Naftogaz and staffing levels  For reasons of transparency  Alternatively, if a new company is formed,  Because of concerns about abuse of dominant requires separation of assets, rehiring staff, etc position * Informal ‘proposal’ discussed with Ministerial adviser 20 ** CMU was NAK owner at the time; presumably this would now be current shareholder, MEDT. Other stakeholder views (2)  National Energy and Utilities  Presidential Administration Regulatory Commission  Assess all options in context (NEURC) of overall vision for sector  Does not have authority over reform choice of unbundling option  Main criterion for choosing • But needs to certify it should be efficiency and  Prefers OU to other models maximising competition  Ukrtransgaz  Ministry of Finance  Main goal should be to  Key issue is to ensure ultimately attract private legality and separation of partner company ownership  Establish new company  Naftogaz perhaps owned by (separate owner) with only HoldCo if formed, with UTG in those assets in UTG related to SPFU (as per MEDT gas transport transferred (as proposal) per Naftogaz proposal) 21 Summary of stakeholder views and proposals: generally in favour of OU model  Broad consensus to:  Disagreement about:  Adopt OU model as the  Whether to establish new option that better supports transmission company or gas market development retain function within UTG and facilitates efficient operations and investment  Identity of shareholders; options are:  Ensure that there is • Naftogaz owned by effective separation of MEDT/HoldCo ownership and control • TSO owned by SPFU or MECI between bodies  Treatment of storage responsible for facilities (discussed in transmission and other gas market activities separate report) 22 Notwithstanding broad agreement about ownership unbundling, key issues remain to be resolved Commercial / contractual Structural Corporate governance • Obstacles might arise to assigning the • Should a new TSO entity be • Mechanisms for ensuring transit contract with Gazprom, created or the functions be effective separation of especially given ongoing Stockholm retained within UTG? public ‘bodies’ exercising arbitration • The latter option would seem control over the different • An alternative, to avoid the need for lower cost to implement (and companies obtaining Gazprom consent to might cause fewer problems • Which public bodies assignment, might be to have a back- with the transit contract), but should be the to-back agreement with the TSO for new entity might provide shareholders? payment of the transit fees. better opportunity for • Only one shareholder per  However, this could limit the possibility establishing good business entity provides of introducing changes, to the tariff governance at the outset greater clarity of roles setting regime, from distance and • Does separation of sector volume based tariffs to the proposed policy formulation from entry-exit tariffs (as required by 3EP) control over commercial Regulatory • An assignment could be a first step activities better align roles though would not solve some contract • An independent and and incentives? amendments that might be required to authoritative regulator is • Empowerment of board remedy provisions in contradiction with critical to certify the and management of TSO 3EP unbundling process, set cost- and effective governance • This issue would apply to ITO and ISO reflective tariffs and provide also for ownership entity models as well as OU incentives for efficient operation and investment 23 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations EU experience* indicates a preference for the ITO and OU models, with more limited adoption of ISO Most gas TSOs (88%) have chosen the options of OU (~42%) and ITO (~46%) The ISO model has been implemented in limited circumstances eg:  In Romania, Tranzgaz (the ISO) is majority owner of the transmission system; therefore the applicability of the model has been questioned by the European Commission  For major transit pipelines (TAG-AT, Yamal I and II-PL); in the case of the latter, the ISO is the ownership unbundled TSO Mixed (mainly OU) Mixed ISO ITO OU Key 25 * Based on DG Energy data on notifications received as of 2015 Countries neighbouring Ukraine have variously adopted the available unbundling models Country TSO Model Ownership Gas Pipe- Gas Key sector features transported lines consumption (bcm) (bcm) (km) Hungary 75% imports 25% domestic production 100% owned by MOL Group, which in (steadily declining) FGSZ ITO turn is 25% owned by the Hungarian 12 6,000 8 Imports increasingly from W state and 75% by private investors Europe (Russian imports are about 45% of total imports) Poland 70% imports 100% state-owned, with the Minister of 30% domestic production Economy (includes energy portfolio) 80% of imports from Russia, Gaz- OU managing the state's participation (The 50 10,000 16 but expected to fall with new System separate Ministry of Treasury owns LNG terminal and manages other gas activities) Key transit country for Russian gas Romania Owned by the Romanian State (59%), 1/3 imports (from Russia) Transgaz ISO 30 13,000 12 Fondul Proprietatea SA (15%) and 2/3 domestic production other shareholders (26%) (steadily declining) Slovakia Fully owned by incumbent gas company SPP, active in the trade and Almost 100% imports (from supply of natural gas. SPP in turn is Russia) Eustream ITO 73 2,270 4 51% owned by the National Property Key transit country for Fund (part of the Slovakian State), and Russian gas 49% by Czech group EPH 26 Most of the larger, more mature EU markets have implemented OU (exceptions are DE & FR, but even here many TSOs are OU) Country TSO Model Ownership Gas Pipeline Gas Key sector features transported s consumptio (bcm) n (km) (bcm) Belgium Owned by Fluxys Holding (90%). The 100% imports from varied FLUXYS OU remaining shares (10%) are quoted on 40 4,100 15 sources (Netherlands, the Brussels stock exchange Norway, UK, Qatar-LNG) Italy Largest of 3 TSOs. Subsidiary of 90% import dependent, 60% SNAM Snam, which is listed on Italian Stock accounted for by Russia and RETE OU Exchange. "Cassa" has 30% stake, 116 32,300 60 Algeria, followed by Libya, GAS ENI -the incumbent gas company- Qatar and Netherlands 8.5% (financial interest), others < 2% Nether- Subsidiary of Gasunie, which Largest EU gas producer lands transports gas in the Netherlands and Net exporter of gas, but also Gasunie the northern part of Germany. Gasunie imports OU 80 12,000 32 Transport is 100% state owned. Ministry of About 40% of the total Finance represents the state’s volume of gas used shareholder interest. domestically Spain State-owned holding company 'SEPI' holds 5%, remaining 95% of shares 28 10,000 26 Well diversified supply (60% ENAGAS OU are on the open market LNG - 40% pipeline) UK From self-sufficiency to Wholly owned subsidiary of National significant importer (2/3 of National OU Grid plc, which is listed on the London 67 7,600 67 consumption) from varied Grid Stock Exchange sources (mostly Neth/lands, Norway and Qatar) 27 Some key lessons from European experience: OU model more consistent with competition  Although other factors ACER Market Monitoring Report 2014 Fig. 73: Wholesale prices (EUR/MWh), are clearly at play (such market concentration (HHI index*) and as underlying resource demand (bubble), 2013 costs, coincident reform efforts, available supply sources, etc), markets with OU do tend to be characterised by more effective competition as given by indicators of market concentration and entry-exit activity (and  Where OU is undertaken within a state- other measures) owned sector, the state’s shareholder rights are sometimes exercised by a Minister  eg Belgium, Denmark, without the energy portfolio (eg UK, Netherlands and Netherlands) and other times by the energy Spain (or other sector responsible) Minister (eg Denmark and Poland) * HHI: The Herfindahl-Hirschman Index, a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero (highly competitive market) to 10,000 (monopolistic market) 28 Some key lessons from European experience: ISO model not common (in gas or electricity)  The ISO model is rarely adopted and seems to apply mostly in situations where:  There are constraints or difficulties for ownership changes eg transit pipelines such as Yamal I and II  The main (ownership unbundled) system TSO is certified as an ISO for other parts of the system  The ISO model is also not widely adopted in EU electricity markets where reform is much more advanced:  The ISO model is even less common than in the gas sector (only 3 out of 51 notified cases)  OU predominates – 70%-80% of total electricity TSOs 29 Some key lessons from European experience: ITO model popular but markets still evolving  The prevalence of the ITO model Examples of large likely reflects that gas markets markets with OU: remain relatively underdeveloped in many countries:  Do incumbents resist OU precisely because it will facilitate competition NL ES U more effectively? K Examples of countries  The larger and more mature markets seem to favour OU (eg Netherlands, moving from ITO to OU: Spain, UK)  Some countries that started with ITO have since adopted OU - eg France (1 of 2 TSOs), Germany FR DE IT (largest TSO) and Italy 30 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations Criteria for assessment 1. Compliance with 3EP, facilitation of: 2. Practice in EU countries  Competition in the gas sector  TSO independence 4. Practicalities/ease of implementation, specifically  Non-discrimination between access users minimisation of:  Transparency of operation and decision-  Implementation costs (including making corporate restructuring costs)  Ongoing regulatory requirements and costs 3. Efficiency / effectiveness of future  Other legal and related costs (that might operation and investments arise eg with existing contracts for  Providing incentives for optimal transmission) investment and efficient operation 5. Facilitating further NAK  Facilitating access to required finance restructuring and expertise  Implications for storage unbundling  Promoting the market, upstream, trading, integration with EU  Any constraints on other restructuring?  Transition to a fully competitive market 6. Attracting possible future JV/equity partner or know-how transfer 32 The unbundling options are qualitatively assessed against the common set of agreed criteria • We rate the options against each criterion showing the degree (from low to high) Low -------------------Medium--------------- High to which they meet each respective criterion • We then determine an overall ranking of options • Such ratings are inevitably subjective, but they do serve to give an overall impression of how we consider the alternative options perform against the agreed objectives 33 Evaluation of OU model: Most consistent with market development but entails up-front costs Criteria Assessment OU is the preferred 3EP model (maximises independence 1 Compliance with 3EP and non-discrimination), but must ensure effective separation within overall State ownership in Ukraine ITO model is most common currently, but OU is 2 Practice in EU countries widespread, increasingly chosen by Member States and more strongly correlated with effective competition Fully integrates investment, long run planning and short Efficiency of operation 3 run operation of the system and provides incentive to and investments make capacity available to facilitate more trading Most significant drawback of OU is its upfront costs of 4 Ease of implementation reorganisation/physical separation, but regulatory burden and therefore ongoing costs are lower Does not place constraints on (and may promote) Facilitating further NAK 5 restructuring of NAK and likely to be more robust to future restructuring evolution of gas industry (competition, etc) This is more dependent on transparency and stability of Attracting future JV/equity 6 regulatory regime, but OU likely to be more conducive to partner 34 attracting investment compared to asset-light ISO model Evaluation of ISO model: Secures non-discriminatory network access but complicates investment decisions Criteria Assessment Compliance ensured if implemented effectively and should 1 Compliance with 3EP promote non-discrimination of system users, but requires more detailed regulation and oversight Not commonly adopted; usually applied where OU is 2 Practice in EU countries difficult (eg foreign ownership of transit pipelines) and/or where ‘main’ TSO is operator of other system assets Generally perceived to be the biggest disadvantage; Efficiency of operation 3 creates interface problems between asset owner and and investments operator, and generally results in under-investment Initially, simpler to adopt than OU as it does not require assets (and contracts related to these) to be 4 Ease of implementation transferred, but ongoing transaction and regulatory costs are larger Does not hinder restructuring options for other NAK Facilitating further NAK 5 business lines, but may be inconsistent with refocusing restructuring NAK on production, trading and supply Made difficult by interface problems with asset owner and Attracting future JV/equity 6 the lack of assets upon which to earn a regulated partner 35 return (allowing return for ISO would raise costs) Evaluation of ITO model: fewer upfront costs but not conducive to supporting ongoing reform & investment Criteria Assessment Compliance can be ensured but requires effective 1 Compliance with 3EP regulation; less consistent with principles of independence, non-discrimination and transparency Consistent with the most common unbundling model in the 2 Practice in EU countries EU gas sector. However, ITO is generally associated with lesser developed and less competitive markets Allows for integrated management of the system but may Efficiency of operation 3 result in limiting investments which benefit competitors and investments (eg in cross-border capacity with EU neighbours) Simplest of the options to implement (preserves the 4 Ease of implementation Naftogaz structure) in the first instance, but ongoing compliance and regulatory costs are higher Inconsistent with the preferred NAK approach and Facilitating further NAK 5 planning; unlikely to further the reform and restructuring transformation of the gas sector in Ukraine Difficult to encourage private participation, which would Attracting future JV/equity 6 entail buying into a wholly-owned subsidiary of Naftogaz partner 36 rather than investing in stand-alone entity The overall assessment and ranking favours the OU model, although implementation costs can be high Rating against each assessment criterion Unbundling 1. Compliance 2. EU 3. Efficiency of 4.Ease of 5.Facilitation 6. Attracting options with 3EP practice operation implementa of further future JV/ and tion NAK re- equity investment structuring partner OU ISO ITO OU ranks highest overall and on most criteria – exceptions are the ease of practical implementation given the higher expected cost of establishing a new separate asset-owning company (although ongoing costs are likely to be lower), and EU practice where ITO is still prevalent 37 Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Introduction Description and theoretical assessment of unbundling options Stakeholder views and proposals EU experience Evaluation of options against agreed criteria Conclusions and recommendations The OU option is preferred based on all assessments, but key implementation issues are still to be resolved  Theoretical assessment:  Key issues: OU  UTG or NewCo?  Stakeholder proposals:  Should the TSO be unbundled with storage or on its own? OU (although different  Which public body owns transmission assets implementation options) and exercises control over these assets?  What legal instrument should be used to grant  EU experience: usage rights over transmission assets to the ambiguous as between transmission operator? OU and ITO, but:  Ensuring whoever exercises control over other state-owned segments of the gas and electricity  ISO not common and sector (production, supply, trading) remains independent of the TSO owner in future* mostly applied in non-  How can separation between the respective relevant circumstances public bodies exercising control be ensured?  OU generally in more  Are there constraints arising from the gas transit competitive, larger (and supply) contract with Gazprom? markets  Who is entitled to the transit revenues and would the restructuring entail the transfer of some  Some countries moving Naftogaz debt? from ITO to OU  Strengthening of the independence and capacity of the regulator  Qualitative assessment based on 6 criteria: OU * If the TSO remains under SPFU, then other production, supply or trading entities in the energy sector could not transfer to SPFU for privatisation 39 Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for storage Final report, 9 February 2016 This work is being done as a part of Task 1 of the joint EC-WB Facility to support the Ministry of Energy and Coal Industry of Ukraine and NJSC ‘Naftogaz of Ukraine’ on advisory services and technical assistance for the reform and modernization of the natural gas sector The views in this report constitute the consultant’s views and do not necessarily reflect those of the World Bank or the European Commission This project is jointly funded by the This task is implemented by European Union and the World Bank Economic Consulting Associates Ltd Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for gas storage Section 1: Review of options for storage unbundling Section 2: Establishing storage as a separate entity – management and operational issues Section 3: Challenges facing Ukraine’s storage Annex: Glossary; gas storage technical and market background; EU gas storage ownership Section 1: Review of options for unbundling storage Introduction  The achievement of a 3EP compliant level of unbundling requires that storage facilities are able to provide access on a transparent and non-discriminatory basis  This can be achieved within a variety of ownership and structural options but other actions are also necessary  The range of structural and ownership options are described on the following slides and assessed against a consistent set of criteria  In several European countries storage companies have remained within the trading and supply incumbent(s) eg Centrica Storage in Great Britain, E.On (now Uniper) in Germany, and Storengy (part of ENGIE formerly GdF) in France  A number of other countries have initially had a structure combining transmission and storage; some still do, eg Belgium, Denmark, Italy  The other common structure, especially where markets are more fully developed, is for transmission and storage to be fully separated in the country, but within Europe it is more complicated as a company may own transmission in one country and storage in another, such as Gasunie (Netherlands) owning TSOs and storage, and ENGIE owning storage in France and Germany while being active in various parts of the gas chain in several other countries  Separation also necessitates that the market has the confidence that the storage entity can deliver the access requirements without interference from affiliates or owners  This can be an important consideration when deciding on ultimate structure 42 Section 1: Review of options for unbundling storage Summary of contents  Background to the structural and unbundling options  Key objectives  Third Energy Package (3EP) requirements and ‘good practice’  Further considerations for assessing options  Description and evaluation of options  Assumptions and options overview  Criteria for assessing options  Option 1 – Naftogaz owns and operates storage subsidiary  Option 2 – Storage and TSO are in the same corporate structure (in various ownership formats)  Option 3 – Independent storage company  Option 4 – Hybrid – with some capacity dedicated to the TSO  Approach to analysing and comparing options  Options compared  Next steps and remaining questions 43 Background to the structural and unbundling options: Key objectives Complying with 3EP* and ‘Good Practice Guidelines’** Management and Attraction of joint operational venture partners independence * See the European Commission’s working paper entitled “Interpretative note on Directive 2009/73/EC concerning common rules for the internal market in natural gas: Third-party access to storage facilities”, 22 January 2010, for guidance on implementing the Directive (https://ec.europa.eu/energy/sites/ener/files/documents/2010_01_21_third- party_access_to_storage_facilities.pdf) ** See ERGEG “Amendment of the Guidelines of Good Practice of Storage System Operators”, 2 February 2011(http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_PUBLICATIONS/CEER_PAPERS/Gas/Tab/E10- GST-14-04_GGPSSO-CAM-CMP_2-Febr-2011.pdf) 44 Background to the structural and unbundling options: 3EP requirements and ‘Good Practice Guidelines’ Element Description Unbundling and Storage facilities to be clearly defined and (subject to some exceptions) operated as ownership entities that are at least legally separate from production and supply, and with separate accounts and operations from all other gas market activities (including transmission and distribution) – See EC Interpretive Note (link on previous slide) Third Party Access Objective, transparent and non-discriminatory TPA regime - either negotiated or (TPA) regime regulated. Effectively monitored and enforced by the independent regulator Capacity booking No hereditary rights. Range of capacity products with no restrictions on usage. Clear, and allocation non-discriminatory and transparent booking procedures. ‘Use it or lose it’ (UIOLI) arrangements with secondary capacity trading Tariffs Published, non-discriminatory. Transparent basis- either cost or seasonal spread based Congestion Clear procedures. Full details of entry/exit transmission constraints at time of booking management and in real time Information Bulletin board advertising spare capacity. Details of constraints, tariff calculation and provision levels of usage by facility New services Developed in response to customer requirements and allocated as above Investment Should be in response to customer requirements and ensure full access through the use of an ‘open season’ process where possible (this is a procedure where the market is consulted on how much infrastructure it needs and on what terms) These are deemed to be requirements ultimately essential for the provision of storage services. They may not all be possible immediately but a transition plan needs to be clear to bring them into effect 45 Background to the structural and unbundling options: Further considerations for assessing options  The extent to which the SSO is a stand-alone entity and relies on other organisations to provide services  This includes financial independence and the ability to charge and recover cost-reflective tariffs covering the ongoing operation and maintenance of the facilities and their further development  The role that might be played by a JV partner with expertise in storage operation  How an independent storage entity might operate in terms of capacity ownership and management  What steps might be necessary in the event that storage utilization levels are such that security of supply is an issue  This could require actions from the TSO or possibly legislation in the form of a Public Service Obligation These issues are further discussed after the structural options have been considered in section 2 46 Description and evaluation of options: Assumptions and options overview  Assumptions Why 4 sets of options?  The options assume that the The options have been defined storage system operator (SSO) is to: structured as a separate legal or  Examine the differences in operational entity • Ensures greater transparency and the unbundled structures independence and non- with linkages between discrimination, though it does not preclude some degree of service storage and other key provision from third parties that may or market participants may not be shareholders in SSO  Assess the implications of  At this stage in the analysis there is no material difference between the nature of those links the state as a shareholder or a (ownership or other) private company as a shareholder  Gas supply activities remain with Naftogaz (NAK) 47 Description and evaluation of options: Assumptions and options overview 4 main options The options, and their variants, have the following distinguishing main features 1. SSO is  Option 1 – NAK owns and operates gas storage through a subsidiary company associated with  Option 2a – SSO is a division in a joint NAK transmission and storage company (UTG?)  Option 2b – SSO is a division of a holding company (UTG?) which owns the TSO 2. SSO is  Option 2c – SSO and TSO are separate associated with companies under a holding company (UTG?) the TSO*  Option 3 – Independent SSO (owned by GOU or private) 3. SSO is  Option 4a – Two SSOs (one TSO owned; one independent GOU - this could be NAK or another state entity - or privately owned)  Option 4b – SSO with some capacity1 reserved 4. TSO has some for TSO links with storage *The discussion of unbundling model for TSO has led to the preference for OU, therefore an ISO is 1 UTG has suggested 1-2 Bcm (but likely an even lower minimum quantity) is required not considered within option 2 for key operational purposes 48 Description and evaluation of options: Criteria for assessing options General market structure criteria Specific gas storage criteria  Compliance / compatibility with:  Improved security of supply to the domestic gas  EU’s Third Energy Package (3EP) market, including through:  Assurance of sufficient capacity for Ukraine’s seasonal  Legal/governance framework for public demand entities in Ukraine including the  Sufficient send-out/withdrawal capacity to meet interruption provisions of the Gas Market Law from any one source and peak demand  Facilitation of greater cross-border trade:  Ease of implementation,  Exploit the growing cross-border trade with EU countries, to predominantly in terms of the initial help diversify Ukraine’s gas supply (while recognising that corporate restructuring costs such trade is currently constrained by the limited export capacity from Ukraine given contractual reservation by  Development of competitive markets Gazprom)  Contribution to efficient gas system  Provide storage services to European gas traders to monetise the value of storage within a more competitive operation gas environment  Development of a competitive market,  Improved overall efficiency of storage use and by ensuring non-discriminatory access operation, including: and promoting investment in capacity to  Rationalising the set of storage facilities and their roles support trading within the gas network and gas trading to improve overall efficiency of use  Transparency  Attracting investment in storage facilities, including:  Essential to assist in the development  Gaining expertise from experienced European operators of more transparency in the sector through various types of joint venture activity, including overall options for attracting investors and JV partners from among experienced European operators 49 Market perceptions of unbundling options Market soundings  The commercial future for The issues most frequently raised: storage rests significantly on a  Transparency, meaning how to use storage, future competitive gas market what is available (how to get information, is the in Ukraine and on gas trade information on the website accurate?), how to with Europe access, how to use it, and knowing can get  Supporting transit gas out when needed  Facilitating cross-border trade  Can transparency be improved better inside or • As supply source for Ukraine outside NAK, bundled with TSO or not? • Supporting traders within  This could be a key factor for whether to unbundle Europe storage from TSO or not  Views were mixed  The study has included  Communication is slow seeking views and discussing  The idea of a pilot for (small) part of the key issues with market storage (since 31 Bcm is far too complicated) representatives from Europe:  Also smaller storage might better attract a JV  Gas traders  Some storage could be stranded  Representatives of European TSOs  Ukraine’s storage was designed to support its  Gas producers/suppliers own system including transit, not cross-border trading  A possible reason to keep storage with transit and transportation 50 Description and evaluation of options - Option 1: NAK subsidiary owns and operates storage Naftogaz 100% SSO  SSO is a separate entity, legally and operationally unbundled  Storage services are provided on an arms length non-discriminatory basis  The degree of management and operational separation from other group companies would need to be consistent with 3EP requirements  Naftogaz holds 100% of shares in the legally unbundled SSO  Level of shareholder involvement in management and strategy to be determined but likely to require complete independence with shareholder approval only for major decisions such as change of control  If new TSO company is formed and unbundled from the current NAK group (ie with new owner), the SSO could be UTG 51 Description and evaluation of options - Option 1: Assessment Criteria Commentary Compliance with 3EP Compliant, though need to demonstrate effective legal and functional and national legislation unbundling from the production and supply businesses Ease of implementation Could take time to create an entity that operates independently from production, transmission and supply, although storage operations and accounts are already being separated from transmission within UTG. Also, might be difficult to immediately separate transmission and General storage, which historically have been considered to be integrated Development of a Competing suppliers who are storage users will have concerns over competitive market non-discriminatory access and security of information Transparency Because storage will be owned by the production and supply arms, there will be concerns from other suppliers of discrimination and therefore this is unlikely to demonstrate greater transparency Security of supply May reduce willingness of some participants to use storage facilities so security could be damaged Facilitating cross-border Could be beneficial for NAK’s traders developing cross-border links trade and capabilities that may be available to the SSO, but less so for competing traders Storage Improving efficiency of Integration with some upstream or supplier based activities including specific storage operation/use trading may bring limited benefits, but likely to accrue to the incumbent rather than the market Attracting investors in Third party investors may be prepared to invest though comments from storage facilities some market participants suggest that attractiveness may be diminished by poorer prospects for long term utilisation unless storage 52 facilities are unbundled in smaller blocks Description and evaluation of options: Option 2a – SSO is division in a joint company with TSO Combined Ownership Unbundled TSO SSO Company (UTG?)  SSO is a separate operationally unbundled entity as a division in a joint company with the TSO (which is a separate division of the combined TSO-SSO company)  Storage services are provided on an arms length non-discriminatory basis  The degree of management and operational separation from the TSO entity is to be determined, but the key feature is that the SSO is completely independent from NAK (as compared to option 1)  The combined TSO and SSO company is ownership unbundled for the TSO to be 3EP compliant  Level of corporate management involvement in strategy and operation of SSO to be determined but could range from complete independence with corporate approval only required for major decisions, to being only operationally separate from other company activities but coordinated for some aspects with TSO (to improve transparency for storage users)  If UTG is unbundled from NAK as part of the transmission unbundling decision, then the combined transmission and storage company could be UTG (but would now be owned by an entity other than NAK and its shareholder) 53 Description and evaluation of options: Option 2a – Assessment Criteria Commentary Compliance with 3EP Compliant as storage is unbundled from production and supply. and national legislation Independence further reinforced by having the company ownership unbundled, but SSO must still be operationally independent from TSO Ease of implementation Could be achieved relatively easily especially if UTG is unbundled from NAK, although must ensure that storage operations are fully General independent from transmission in UTG Development of a Could be supportive of market development so long as the TSO will be competitive market incentivised to coordinate with storage to improve information and access for market players under this arrangement Transparency There might be concerns from users that the TSO will seek to gain preferential access to storage, negatively impacting transparency Security of supply Should be enhanced by facilitating coordination between SSO and the TSO, but if access to storage by other market players is not improved, the overall impact on security is likely to be relatively minor Facilitating cross-border Could be beneficial if access and appropriate products are made trade more easily available, in coordination between TSO and SSO, with fair access to the preferred storage facilities Storage Improving efficiency of Storage is dependent on the TSO for some services, so these synergies specific storage operation/use could continue, however transparency and/or access to storage by independent traders could still be difficult if TSO reserves a high amount of preferred facilities or inflates balancing costs Attracting investors in Third party investors may be prepared to invest in separated facilities, storage facilities though comments from some market participants suggest attractiveness may be diminished by the poorer prospects for long term utilisation 54 without sufficient separation from the TSO Description and evaluation of options: Option 2b – holding company owns TSO; SSO is a division Holding TSO 100% Company* SSO (UTG?)  A holding company holds 100% of shares in the TSO which is a separate corporate (ie legally unbundled) entity. The SSO remains as a division within the holding company  The holding company could be UTG although UTG is a large company with many activities. It would need to be examined whether any of these would compromise compliance with 3EP; also meeting the requirements for corporate governance and guarding shareholders’ rights; this role for UTG could also be a temporary or transitional one  The holding company will be responsible for the management and strategy of the SSO  The holding company is independent of NAK (has different owner)  SSO is operationally unbundled but remains a division within the holding company  Storage services are provided on an arms length non-discriminatory basis  The degree of operational separation within the holding company is to be determined. The SSO is also likely to continue to rely on the TSO for some services which could be provided under one or more arms-length agreements  This option could be an intermediate step towards options 2c or 3 * Note: ‘Holding Company’ here and on the following pages generically refers to a parent corporation that owns the majority voting stock in the indicated subsidiaries (ie TSO and/or SSO) and should not be confused with the proposed ‘HoldCo’ or State Holding Company under the Ministry of Economy which is intended to exercise the 55 shareholder role for strategic state owned enterprises Description and evaluation of options: Option 2b - Assessment Criteria Commentary Compliance with 3EP and Compliant as storage is unbundled from production and supply, but national legislation must also ensure operational independence from transmission in the absence of establishing a completely separate legal entity Ease of implementation Could be achieved relatively easily, but establishing an appropriate arms length relationship with the TSO may take some time, although General less so if UTG is unbundled from NAK and is the holding company Development of a Should be beneficial if SSO is resourced effectively (and internally competitive market restructured) to provide the range of services the market requires Transparency Whilst there is clear separation from the TSO, transparency may be compromised by remaining as a division within UTG. For example, cost and accounting information may be opaque Security of supply Should be enhanced as coordination between SSO and the TSO is possible, but if access to storage by other market players is not improved, overall impact on security is likely to be relatively minor Facilitating cross-border As a division of UTG, the SSO may be more focused on domestic trade requirements – particularly in the initial stages – though these would include aiming to increase cross-border capacity Storage specific Improving efficiency of There is the opportunity for significant improvements if a lean and storage operation/use effective management and operational structure can be established within UTG coupled with an appropriate sharing of common services Attracting investors in Third party investors will be difficult to accommodate within this storage facilities structure unless investment is at the level of the UTG holding company or some facilities are spun off 56 Description and evaluation of options: Option 2c – A holding company owns separate SSO and TSO Holding Company 100% TSO 100% (UTG?) SSO  A holding company holds 100% of shares in SSO and TSO, both being separate corporate (ie legally unbundled) entities and subsidiaries  Level of shareholder involvement in management and strategy to be determined but could range from complete independence with shareholder approval only required for major decisions such as change of control or more direct involvement in company operations  The holding company is independent of NAK (has different owner; similar considerations on the suitability and independence of UTG to be the holding company apply as in option 2b)  SSO is legally and operationally unbundled entity  Storage services are provided on an arms length non-discriminatory basis  The degree of management and operational separation from other group companies is to be determined though is assumed to be more independent and separate from UTG than option 2a * Note: ‘Holding Company’ here and on the following pages generically refers to a parent corporation that owns the majority v oting stock in the indicated subsidiaries (ie TSO and/or SSO) and should not be confused with the proposed ‘HoldCo’ or State Holdin g 57 Company under the Ministry of Economy which is intended to exercise the shareholder role for strategic state owned enterprises Description and evaluation of options: Option 2c - Assessment Criteria Commentary Compliance with 3EP and Fully compliant as storage is unbundled from production and national legislation supply; independence further reinforced by having separate legal entities for both transmission and storage Ease of implementation Would take more time and resources to establish given the need for a holding company and separate TSO and storage subsidiaries, although less so if UTG is unbundled from NAK and is the holding General company Development of a Should be beneficial if SSO is resourced effectively (and internally competitive market restructured) to provide the range of services the market requires Transparency Clear separation from the TSO should encourage maximum transparency, although close coordination of services and information provision is necessary Security of supply SSO may develop more innovative products and so could help utilisation and thereby security Facilitating cross-border Beneficial, especially if access and new products are developed trade quickly Storage Improving efficiency of The management independence due to the holding company specific storage operation/use structure could help to significantly improve efficiency though will require financial and managerial resources to be available Attracting investors in Third party investors could be prepared to invest particularly if storage facilities there was the opportunity to provide management and other services, and sufficient independence within the holding company structure 58 Description and evaluation of options: Option 3 – Independent gas storage company State or Private 100% SSO Investor(s)  SSO is a separate ownership unbundled entity  Storage services provided on an arms length non-discriminatory basis  The degree of management and operational separation from other group companies is to be determined, but with ownership in either private hands or a state entity independent from the owner of NAK, independent decision making should be facilitated  Compared to option 2c, neither NAK nor the TSO owner should oversee the management or operation of storage in this option. This could facilitate the transfer of ownership or JV (of some or all storage) to the private sector  State or private investors hold 100% of shares in SSO  Level of shareholder involvement in management and strategy to be determined but could range from complete independence with shareholder approval only required for major decisions such as change of control, to more direct involvement in the running of the company  If private investors are foreign companies with expertise in running storage companies, the involvement could include full operational control or the provision of services under an arms-length service agreement 59 Description and evaluation of options: Option 3 - Assessment Criteria Commentary Compliance with 3EP Highest level of compliance, as it involves ownership unbundling and national legislation and stand-alone entity separate from all other gas sector activities Ease of implementation Will take some time to establish completely separate company (eg asset transfers) and develop all of the arms length relationships that may be required, and is further complicated by unknown condition of General storage and integrated operation with transmission in the past Development of a Beneficial, especially if SSO is resourced effectively to provide the competitive market range of services the market requires Transparency Clear separation from both TSO and supply will give market participants the best potential outcomes in this respect Security of supply SSO may develop more innovative products and so could help utilisation and thereby security Facilitating cross-border Beneficial if access and new products are developed quickly. Also if trade transit and domestic supply has to contract for storage in the same way as independent traders/suppliers Storage Improving efficiency of Could be significant though will require appropriate level of financial specific storage operation/use and managerial resources to be available, and there could be some lost synergies with transmission Attracting investors in Third party investors could be prepared to invest particularly if there storage facilities was the opportunity to provide management and other services. There is a higher likelihood under this option that existing cross-subsidies 60 could be exposed to the detriment of the SSOs profitability Description and evaluation of options: Option 4a – Establishment of two separate SSOs State or Private 100% SSO 1 SSO 2 100% TSO Investor(s)  SSO 1 is a separate and ownership unbundled entity owning a defined number of storage facilities; storage services are provided on an arms length, non-discriminatory basis, ie commercial services with no requirement to meet obligations of TSO  State or private investors hold 100% of shares in SSO 1  Level of shareholder involvement in management and strategy to be determined as in Option 3  SSO 2 is a separate legal entity owning a defined number of storage facilities, although some storage facilities are offered exclusively to TSO (provided 3EP requirements met regarding exclusive reservation only for system stability)  TSO holds 100% of shares in SSO2 and exerts significant control such that it is operated as a division or subsidiary of the TSO  Relative sizes of SSOs 1 and 2 will be critical 61 Description and evaluation of options: Option 4a - Assessment Criteria Commentary Compliance with Compliant, but with regard to SSO 2, as the reserved storage capacity could 3EP and national be withheld from the market long-term, the TSO must demonstrate such legislation capacity is required specifically for stable system operational purposes and not available for commercial use Ease of Likely to be complicated and time-consuming to separate into two implementation companies or entities, especially in absence of sufficient understanding of General technical and financial state of storage Development of a Could be beneficial if SSO 1 is resourced effectively and has sufficient competitive market market share, but less so if SSO 2 is dominant Transparency Separation of SSO 1 entails clear separation and maximum transparency, but TSO must demonstrate clearly how it will operate SSO 2 to ensure transparency of the latter Security of supply TSO ownership of SSO 2 might help security though splitting storage could also be harmful, in case the SSO 2 capacity turns out to be too small, or results in unnecessary withholding of capacity from commercial use Facilitating cross Could be beneficial if SSO 1 is significant, able to improve access and new border trade products are developed quickly Storage Improving Facilitates operational synergies between storage and transmission, though specific efficiency of the duplication of operators in a potentially oversupplied market (excess storage storage capacity) may lead to reduced efficiency and increased costs, if operation/use rationalisation is delayed Attracting investors Investors might be interested in SSO 1 if it was large enough and there was in storage facilities the opportunity to provide management and other services though there is a risk that any existing cross-subsidies could be exposed to the detriment of 62 the SSO’s profitability Description and evaluation of options: Option 4b – SSO with some capacity dedicated to TSO State or Some dedicated Private 100% SSO resources TSO Investor(s)  SSO is a separate and ownership unbundled entity  Storage services are provided on an arms length non-discriminatory basis with the exception of a small amount, say around 1 bcm of storage capacity that is reserved exclusively for the use of the TSO (this is an amount currently suggested by UTG that is needed for system stability but is likely to be an even lower volume given typical withdrawal rates on peak demand days; also, an amount of withdrawal capacity would need to be specified). This is similar to the model currently proposed by NAK; it could be viewed as a variant of option 1 but with advantages from the different ownership (OU structure)  State or private investors hold 100% of shares in SSO  Level of shareholder involvement in management and strategy to be determined but could range from complete independence with shareholder approval only required for major decisions such as change of control to more direct involvement in the company  If private investors are foreign companies with expertise in running storage companies, the involvement could include full operational control or the provision of services under an arms-length service agreement  This option is unlikely to be fully compliant with 3EP in the Ukrainian context  The Directive does not permit the exclusive use of certain portions of storage facilities for system stability purposes – that is, entire facilities can only be reserved for this purpose  However, such facilities are likely to be relatively small and fast responding (high withdrawal rates) unlike the Ukrainian facilities, which have slow withdrawal rates and are typically used for seasonal balancing 63 Description and evaluation of options: Option 4b - Assessment Criteria Commentary Compliance with 3EP Unlikely to be compliant, as only whole storage facilities can be and national legislation reserved exclusively, while need to also demonstrate that TSO facilities are necessary for reliability in operating the network but not for balancing or seasonal purposes Ease of implementation May take some time to establish completely separate company General (eg asset transfers) and develop all of the arms length relationships that may be required Development of a Beneficial, if SSO is resourced effectively and TSO share is provided competitive market in a transparent and non-discriminatory manner Transparency Should encourage greater transparency as long as TSO pays transparently regulated charges for its share of storage Security of supply SSO may develop more innovative products and so could help utilisation and thereby security Facilitating cross-border Could be beneficial if the direct ownership of storage helps for trade transparency, access and new products to be developed quickly Storage Improving efficiency of Could be significant though will require appropriate level of resources specific storage operation/use to be available, ie minimum necessary for TSO and remainder to market – the quantity to be kept under review Attracting investors in Third party investors should be prepared to invest particularly if storage facilities there was the opportunity to provide management and other services though there is a risk that any existing cross-subsidies could be exposed to the detriment of the SSO’s profitability 64 Evaluation of options: Approach to analysing and comparing options  Analysis  The assessment of options is indicated in an options matrix, where assessment is indicated using scoring symbols (‘Harvey Balls’)  Use of scoring symbols  Each option is scored on each criterion using a nine graduations scale from very negative to very positive, where: Zero is neutral – empty circle Extreme negative scores are indicated by complete red circle Extreme positive scores are indicated by complete green circle  Intermediate scores are indicated by one of the following: • Negative scores • Positive scores • Neutral 65 Evaluation of options: Options compared Medium scoring options Higher scoring options Options 1 2A 2B 2C 3 4A 4B NAK SSO and SSO is SSO and Indepen- Two SSOs One SSO subsidiary TSO are division of TSO dent SSO (one with with owns and divisions a holding separately TSO) dedicated operates of a company owned by volume Criteria storage combined (TSO is a holding for TSO company indep.) company Compliance with 3EP and national legislation Ease of implementation Development of a competitive market Transparency Security of supply Facilitating trade Improving efficiency of storage operation/use Attracting investors in storage facilities 66 Evaluation of options: Key considerations Weighing the criteria  The suitability of each model for Ukraine  Where SSO is independent or under a depends on the relative importance of each holding company or similar structure with criterion; they are not all of equal relevance non-conflicted partner company and operational independence and value  Another consideration is the potential for  Nevertheless, based on a simple ‘addition’ of synergies with coordination of the evaluations in the above analysis, the transmission and storage in promoting more highly evaluated options are option 2a efficient trade and use of storage. These (SSO and TSO as divisions of a combined benefits are more likely in options 2a, company), option 2b (SSO as division and 2b, 2c and 4b; though there is a TSO as subsidiary of a holding company) are difference between synergies achieved indicated with medium evaluations, while through common ownership (options 2a- option 2c (a holding company owning both c) and synergies through contracts TSO and SSO subsidiaries, in effect an (option 4b), while, as already noted, 4b is unbundling of main parts of UTG), and option also unlikely to be 3EP compliant 3 (Independent SSO) are indicated with the higher evaluations  A final issue is that the TSO is quite advanced in plans to become  These options are ones: independent of NAK. The distraction of  That are compliant with 3EP (unlike option 4b) needing to (rapidly) prepare the SSO for  Without a potentially conflicted owner (NAK as legal or ownership unbundling in either trader or producer in option 1), or the coordination with the TSO (options 2c complication of two (or more) SSOs (as in option and 4a) could hinder the effectiveness of 4a) TSO unbundling in the short term. 67 Next steps and remaining questions Required actions Unresolved / other issues  Agree option or options to be pursued  Role of the Regulator  Options 2c (TSO and SSO subsidiaries of a holding  Transition to alternative tariff regimes - company), or option 3 (Independent SSO) are how realistic is it to assume a RAB-based indicated: charging basis from 2016  However, these could be preferred in the longer term (say  Impact of any revaluation of storage after 3-5 years). The process could be viewed as a two- step approach, with a transition to legal or ownership assets unbundling of storage requiring adoption of one of the  Treatment of shared costs, cost of own other options in the first instance, particularly given the expected implementation costs, and the number and use gas and any cross-subsidies that nature of unresolved issues (see right hand panel) may be revealed  The preferred options in the first step are then option  Transition to market-based balancing 2a or option 2b, with the SSO as a division of UTG rules and the role (if any) of the TSO in with separated ownership from NAK. This also enables the TSO to be ownership unbundled from NAK to meet providing balancing services the 3EP requirements for transmission  The relationship between transmission  Identify those storage facilities that are and storage tariffs – discounts to be technically and economically feasible and applied necessary to support supply and competition  Identifying any non-core storage assets (note that it is only these that need be subjected to and dealing with decommissioning an unbundling and access regime according to 3EP)  Determine level of operational, commercial and  Ownership of cushion gas and the managerial support in short and long term treatment of any non-storage gas (also called native gas) that might be produced  Develop an implementation plan 68 Transitional and target structures for transmission and storage Two-step approach The overall unbundling process is suggested to be viewed as a two- step approach, with a transition to full unbundling being accomplished in two steps  The first step, in the short term, would be a transitional structure that needs to achieve, as a minimum, the unbundling of the TSO.  Given that the TSO is part of UTG, the proposed transitional structure is for the unbundling of both the TSO (transmission operation and assets) and SSO (storage operation and assets) The transitional structure is shown in the next page  The longer term possible target structure indicates a fully unbundled system with the main functions of transmission, storage, production and supply/trading separated It could be achieved in say 3-5 years and is shown on the following page 69 Recommended transitional industry structure Current Ministry of Economic Development and Trade structure NAK Naftogaz UGV Ukrtransgaz Trading & (production) supply TSO SSO Recommended State owner 1 State owner 2 transitional structure NAK Naftogaz UGV Trading & UTG / NewCo (production) supply TSO SSO 70 Possible target structure and implementation steps Current MEDT Implementation structure actions: NAK Naftogaz  Technical and UGV UTG Trading commercial due + & supply diligence of storage TSO SSO assets and + + - operations (including role of storage in State owner 1 transit) State owner 2  Regulatory NAK Naftogaz assessment of Recommended allowed revenues (to transitional recover reasonable structure UGV Trading UTG / NewCo and unavoidable + & supply TSO SSO costs) + + -  Allocation of transit revenues Possible target structure  Separation of TSO State &/or State &/or State 2 &/or State &/or private and SSO private investor private investor private operator operator  Achieve efficient level of costs UGV Trading & TSO SSO + supply + + + 71 Possible separation Possible separation Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for gas storage Section 1: Review of options for storage unbundling Section 2: Establishing storage as a separate entity – management and operational issues Section 3: Challenges facing Ukraine’s storage Annex: Glossary; gas storage technical and market background; EU gas storage ownership Section 2: Establishing storage as a separate entity – management and operational issues Introduction  This section briefly outlines issues that would apply to any of the models in the previous section:  The necessary features for ensuring that compliant operation of storage can be achieved under various restructuring options  The role that private sector participants can play in the delivery of services and the typical and prevalent delivery modes  Some additional operational requirements in the context of a liberalised and competitive gas market  It covers the following topics:  The Third Energy Package and storage (Directive 2009/73/EC)  Management and operational separation under different storage restructuring options  The possible role of joint venture partners  Additional operational requirements 73 The Third Energy Package and storage The requirements of Directive 2009/73/EC “ It is necessary to ensure the independence of  Article 15: SSOs must be at least storage system operators in order to improve third- legally and operationally unbundled party access to storage facilities that are from production and supply technically and/or economically necessary for providing efficient access to the system for the  Article 33: Defines access criteria supply of customers. It is therefore appropriate that storage facilities are operated through legally  Article 2(9) can exclude facilities separate entities that have effective decision- reserved exclusively for TSOs. This making rights with respect to assets necessary to can only apply to facilities that are maintain, operate and develop storage facilities. It is also necessary to increase transparency in ”technically and in terms of size respect of the storage capacity that is offered to designed and suitable for system third parties, by obliging Member States to define stability purposes..[such as]..fast and publish a non-discriminatory, clear framework responding overground facilities.” that determines the appropriate regulatory regime applicable to storage facilities. That obligation Storage facilities used for balancing should not require a new decision on access purposes do not fall within this regimes but should improve the transparency definition (see Interpretive note from regarding the access regime to storage. Confidentiality requirements for commercially the Commission dated 22.1.2010 sensitive information are particularly important https://ec.europa.eu/energy/sites/ener/f where data of a strategic nature are concerned or iles/documents/2010_01_21_third- where there is only a single user of a storage party_access_to_storage_facilities.pdf) facility.” (Paragraph 24 of preamble*) *http://eur-lex.europa.eu/legal- 74 content/EN/TXT/PDF/?uri=CELEX:32009L0073&from=EN Management and operational separation under different storage restructuring options (1/2) Element Full stand-alone entity Third party Integrated with other arms length entity provision (could be NAK or UTG) Board of Appointed in line with Could appoint Issue over degree of Directors corporate legal norms. one or more independence. Can require If there is a 100% shareholder specialised majority of non-executive there may be a case for non-executive directors independently appointing one or more directors appointed and/or independent directors restrictions over certain key decisions Executive Could be seconded from the Service Degree of separation will be management shareholder(s) or appointed contract with key both in terms of independently an independence of decision experienced making and time devoted to SSO operation in the interests of storage users Asset Sensible to adopt a dedicated Not generally Could be part of a broader management asset management capability recommended asset management function in due course This and the next slide provide an overview of key organisational parameters under both integrated and stand-alone 75 restructuring options and also in the case of contracting out certain functions and services to a third party provider Management and operational separation under different storage restructuring options (2/2) Element Full stand alone entity Third party arms Integrated with other length provision entity (could be NAK or UTG) Physical Some activities may be Could have a Most services could be operation and performed in-house though blanket service provided on a joint basis maintenance specialised areas could be out contract or eg though issues over cost sourced compressor and allocation well maintenance Commercial Important for the organisation Basic functions Users and regulators will operation to develop capability in pricing such as data have concerns over and customer service management and information provision and invoicing could be conflicts of interest outsourced Support Some expertise in regulatory Most activities Main issue will be cost Services and corporate affairs required could be allocation outsourced Reporting Meet company law standards N/A Separate published Additional reporting may be accounts may be required required in the interest of transparency 76 The possible role of joint venture partners  Joint Venture (JV) partners  Any investment commitment would provide expertise in will be based on expected defined areas of storage future cash flows, not book operation with particular value of assets emphasis on operation of  Likely to be an existing independent storage facilities storage operator, though in a liberalised market could be an independent  Will need clarity on degree of investor such as an separation and access infrastructure fund with existing regime storage asset and proven  Participation may be in the management capability form of equity investment and/or management service contract 77 The role of transit in Ukrainian gas storage Known Unknown or uncertain  Historically, Russian transit gas has  Natftogaz is currently in dispute with been combined with gas storage in Gazprom over the gas transit contract Ukraine in providing gas sales to  The interaction between Russian gas Europe transit and use of Ukrainian gas  Transit volumes have been reducing storage is not known  Current contracts due to expire in 2019  Gazprom is unlikely to want to invest in gas storage in Ukraine  Other gas storage legacy arrangements Implications In terms of developing an SSO structure, the use of gas storage by transit customers could be considered as just another customer, though there are political factors involved as well as commercial factors Any future SSO structure needs to take into account the potential impact of gas transit shippers. In practice, one would expect gas transit shippers to book gas storage capacity in a similar fashion to any other customer, but the size of transit and its long term prospects are a very large uncertainty for the storage sector 78 Additional operational requirements Additional operational requirements for a SSO under a liberalised market regime (some may be outsourced)  Custody tracking system  Data collection and  This is to prevent validation routines manipulation, errors and  Invoicing and credit mistakes infecting commercial balances management capabilities  Effective and accurate metering  Custody transfer metering will be an essential part of the development of gas storage development 79 Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for gas storage Section 1: Review of options for storage unbundling Section 2: Establishing storage as a separate entity – management and operational issues Section 3: Challenges facing Ukraine’s storage Annex: Glossary; gas storage technical and market background; EU gas storage ownership Section 3: Challenges facing Ukraine’s storage Introduction  Challenges facing Ukraine’s storage need to be considered both internally and in the context of overall developments in European storage  In Europe, the liberalisation of markets has resulted in increasing competition amongst forms of flexibility, including storage  This, coupled with a decline in demand and strong investment in storage in previous years, has resulted in significant surplus capacity of storage facilities  In this context, Ukrainian storage would not appear to be offering particular additional benefits  Furthermore, the way storage will be priced suggests that the value of Ukraine’s storage is likely to be some way below its book value and that some possibly significant closure of facilities will be required 81 Section 3: Challenges facing Ukraine’s storage Summary of contents  Technical overview of Ukrainian gas storage assets  An overview of Ukrainian gas storage facilities  Storage facility specifications  Storage deliverability  Commentary on Ukrainian gas storage facilities  Comparison of Ukraine/Europe supply sources  Review of storage in the context of adjacent markets  Comparison of storage facilities and capacities  Comparison of storage operations  Comparisons of storage tariffs • Ukrainian storage becoming less competitive  Two case studies on transparency  Comparison of selected trading hubs scores • CEGH/VTP front year seasonal price spread • Comparison of spreads for selected hubs  Security of supply – N-1 compliance (2013)  Summary 82 Technical overview of Ukraine’s gas storage: An overview of Ukraine’s gas storage facilities For each facility: Actual volume stored as at 20.12.15 / Total working volume (both in thousand m3) (Source: Gas storage facilities in the Ukraine based on 20/12/2015 data, http://naftogaz-europe.com/article/en/englstorage) 83 Technical overview of Ukrainian gas storage: Storage facility specifications Working Injection Withdrawal Days Name of facility Type Volume (MCM/Da Speed (MCM/Day) withdrawal (MCM) y) Bilche-Volytsko Depleted Field 17050 102.0 120.0 142 0.7% Uherske (XIV-XV) Depleted Field 1900 17.0 17.0 112 0.9% Oparske Depleted Field 1920 12.0 14.0 137 0.7% Dašavsʹke Depleted Field 2150 26.0 26.0 83 1.2% Bohorodchanske Depleted Field 2300 40.0 26.0 82 1.1% Kegichevsky Depleted Field 700 8.5 8.5 82 1.2% Verhunske(Not presently Depleted Field 400 4.0 5.8 69 available) 1.5% Krasnopopivske Depleted Field 420 4.0 5.2 81 1.2% Proletarian Depleted Field 1000 10.0 10.0 100 1.0% Solohivske Depleted Field 1300 12.0 7.9 165 0.6% Chevonopartisansky Aquifer 1500 14.0 10.3 146 0.7% Olyshivske Aquifer 310 2.1 2.1 148 0.7% Hlibovske (Crimea) Depleted Field 1000 4.0 4.5 222 0.5% Total 30950.00 263.6 257.3 112 0.8% 84 (Source: Naftogaz/GIE) Technical overview of Ukraine’s gas storage: Storage deliverability Ukraine gas storage deliverability, using 2015 data 300 250 200 MCM per day 150 100 50 0 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 Day to empty Bilche-Volytsko-Uherske Olyshivske Verhunske Proletarske Solokhivske Chervonopartyzanske Oparske Krasnopopivske Dashavske Uherske (XIV-XV) Kehychivske Bohorodchanske The purpose of this chart, which shows deliverability against days required to empty each of the gas storage facilities in Ukraine, is to provide perspective in terms of size. In particular, it should be noted that Bilche-Volytsko-Uherske provides 45% of total deliverability (Source: GSE database) 85 Technical overview of Ukraine’s gas storage: Commentary on Ukraine’s gas storage facilities  All facilities are pore based  Some facilities have high withdrawal (hydrocarbon reservoirs/aquifers) so rates relative to working volume and injection/withdrawal follows would be emptied in 2 to 3 months if annual cycles produced at full rates  Rapid switching between injection  These are more likely to be used to and withdrawal and back again is meet peak demands generally difficult and expensive  It is understood that at present all  The lack of fast cycle storage (normally provided by salt caverns) facilities are combined for makes storage less attractive as a commercial purposes and that users trading asset book a single ‘virtual storage’  Most value is likely to be derived from facility seasonal spreads (intrinsic value)  This has potential drawbacks from  Average ‘speed’ (withdrawal a transparency perspective and is rate/working volume) of facilities is due to be changed under a new 1% Storage Code  This compares with EU averages of 1% for depleted fields, 3% for aquifers and 5% for salt cavity stores 86 Technical overview of Ukraine’s gas storage: Comparison of Ukraine/Europe supply sources Ukraine EU Ukraine EU Source Winter Winter 2014 2014 2014-15 (1) 2014-15 National 51% 29% 25% production Russian imports 36% 29% 22% Europe imports 13% n/a n/a Norwegian - 25% - 22% imports LNG imports - 9% - 8% North African 8% - 5% imports Storage n/a n/a 23% Notes (1) Supply data for Ukraine’s Winter 2014/15 to be included when available Source: http://www.entsog.eu/public/uploads/files/publications/Outlooks%20&%20Reviews/2015/SO0012-151105_WinterSupplyOutlook2015- 16_Review2014-15.pdf 87 Review of storage in the context of adjacent markets: Comparison of storage facilities and capacities Ukraine’s gas storage Comparison within EU  Ukraine has the largest  Working volumes working volumes of storage  The closest rival in working in Europe volume terms is Germany  Storage plays a key role in which has extensive salt both supporting domestic cavern capacity requirements and  Immediate neighbours underpinning transit volumes  It is understood that  Slovakia, Czech Republic, operationally the facilities Hungary and Austria are all are largely managed well provided with storage separately from the  Poland and Bulgaria have transmission activities less capacity relative to consumption 88 Review of storage in the context of adjacent markets: Comparison of storage facilities and capacities Country Number of facilities Working Cap WC as % of (BCM) consumption Salt cavity Depleted Aquifer Field Ukraine - 11 2 30.9 68% Germany 38 12 8 24.6 35% Austria - 10 - 8.3 100% Hungary - 5 - 6.3 75% Poland 2 7 - 2.8 17% Slovakia - 2 - 3.1 84% Czech 1 6 1 3.5 47% Republic Bulgaria - 1 - 0.6 23% Romania - 7 - 3.1 26% Table provides a comparison of Ukraine’s facilities and capacities with selected EU markets. Most adjacent markets have adequate storage with exception of Poland and Bulgaria. Romania has significant domestic gas production (Source: Data used from GSE database and BP Statistical Review) 89 Review of storage in the context of adjacent markets: Comparison of storage operations  Ukraine’s storage is operating significantly below full capacity  Lack of fast cycling facilities means that there are two modes – injection during the summer months (typically May to October), withdrawal during the winter  This mirrors picture for Italy (which also has no fast cycle facilities and is a relatively uncompetitive market), but differs from the more liberalized UK market which shows injections (Source: GSE database) and withdrawal occurring throughout the year 90 Review of storage in the context of adjacent markets: Comparisons of storage tariffs in 2012* (€/MWh)  Ukraine claims to have low and competitive storage tariffs compared with competing countries  However, tariffs were increased by 2.6 times in 2014; still, the business made a loss of UAH 3 billion  It is intended to move to a regulated RAB- based pricing methodology in 2016 in order to “ensure a fair return on assets *Source: Naftogaz Annual Report 2014 and improve the results of this segment” (Naftogaz Annual Report 2014) 91 Review of storage in the context of adjacent markets: Ukrainian storage becoming less competitive Comparisons of storage tariffs (€c /M3) 2014/2015 Source: EC report (2015), The role of gas storage in internal market and in ensuring security of supply, p 69 The above chart shows the evolution of gas storage prices for EU member states. It is noticeable, where data is available, that the majority of countries are seeing a reduction in gas storage tariffs from 2012 to the post 2014 data. This contrasts with the increasing trend of storage tariffs in Ukraine, though currency movements in 2014/15 have largely offset the increase in Hryvnia terms. Also, the previous slide shows that 2014 tariffs in Ukraine were still highly competitive (ie significantly lower) compared to other European countries. 92 Review of storage in the context of adjacent markets: Two case studies on transparency Hungary Czech Republic  Mix of strategic (MOL) and commercial  No strategic storage (E.On) storage in 2010  Government re-designated some  RWE has linked its 6 storage sites strategic storage as commercial & sold to create one virtual facility with at non-transparent negotiated prices direct access to the virtual trading  Proportion of strategic storage continues point (VTP) to be varied  Published annual statements on  E.On sold its storage company to state transmission and storage tariffs electricity company in 2013  Storage system has been criticized as  78 active hub participants in 2014 being extremely expensive, market (ACER) distorting (tariffs are not cost  Withdrawals >50% of winter reflective) and non-transparent demand  Withdrawals <20% of winter demand  20 active hub participants in 2014 (ACER) 93 Review of storage in the context of adjacent markets: Comparison of selected trading hubs scores1 Hub Score 2014 Score 2015 NBP (UK) 20 20 TTF (Netherlands) 19 19.5 GPL (Germany) 16 19 VTP(Austria) 14 14 VOB (Czech) 8 8.5 VPGS (Poland) 4.5 5.5 (Source: Heather, OIES 2015) Whilst on the day trading is understood to be well developed at certain points in East Europe the development of broader based hub trading is still to reach the status of NW European hubs such as NBP and TTF. This means a reliable forward price curve has not yet been established which in turn suggests that a market based pricing mechanism for storage is presently lacking. Forward price data is available for the CEGH (now VTP) hub in Austria. The fact that it is a less traded market than TTF or NBP suggests that forward curves may not be reliable for other than very short term deliveries. The resultant seasonal spread is shown on the next slide. (1) Trading hub scores are a measure of the success or otherwise of gas trading hubs based on churn, liquidity, depth and forward curve developed by European Federation of Energy Traders (EFET). A score of 20 is essentially a perfect hub, with high levels of transparency, liquidity, churn etc. (Source: http://www.efet.org/EnergyMarkets/VTP_assessment 94 Review of storage in the context of adjacent markets: CEGH/VTP front year seasonal price spread Spreads Prices €/MWh €/MWh (Source: EC report, The role of gas storage in internal market and in ensuring security of supply, p 41) Leaving aside questions over the reliability of the forward curve it is clear that seasonal spreads have fallen in recent years 95 Review of storage in the context of adjacent markets: Comparison of spreads for selected hubs Comparison of the historical front year seasonal price spread, monthly average in March for selected hubs Spreads €/MWh TTF: Netherlands NBP: United Kingdom PSV: Italy CEGH: Austria NCG: Germany The chart shows the declining winter/summer spread across the main gas trading hubs in Europe, which is the fundamental driver for the value of gas storage. The key point to note is that declining winter/summer spreads reduce income for gas storage companies. (Source: EC report (2015), The role of gas storage in internal market and in ensuring security of supply, p 43) 96 Review of storage in the context of adjacent markets: Security of supply – N-1 compliance (2013) The N-1 rule requires that Member States meet gas demand on extremely cold days even if the main supply infrastructure fails. 100% or greater = compliance (Source: https://ec.europa.eu/energy/sites/ener/files/documents/SWD%202014%20325%20Implementation%20of%20the%20Ga s%20SoS%20Regulation%20en.pdf) 97 Summary of Ukraine’s gas storage challenges in the context of EU developments  Ukraine has very significant gas  European storage has suffered storage facilities. However: from declining revenues:  They are operating well below  Seasonal spreads have fallen technical capacity  The lack of fast cycle facilities  Gas demand is lower reduces the attractiveness as  A number of new facilities have a trading asset come on stream  The storage business is loss  Ukraine may be able to attract making despite some users from adjacent markets significant tariff increases and is seeking to move to a with limited storage (eg Poland) RAB- based charging or supply concerns or with more methodology expensive markets 98 Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for gas storage Section 1: Review of options for storage unbundling Section 2: Establishing storage as a separate entity – management and operational issues Section 3: Challenges facing Ukraine’s storage Annex: Glossary; gas storage technical and market background; EU gas storage ownership Glossary Glossary 3EP the EU’s Third Energy Package ACER Agency for the Cooperation of Energy Regulators Aquifer Underground gas storage facility in a non hydrocarbon bearing aquifer Bcm one billion cubic metres Cushion gas (also referred to as Base Gas) the volume of gas required to be kept in a storage facility in order to maintain operating pressure but that is only produced when the facility is decommissioned Depleted field Underground gas storage facility located in a hydrocarbon bearing reservoir storage EFET The European Federation of Energy Traders ENTSOG The European Network of TSOs for gas GOU Government of Ukraine JV Joint venture, in this case usually referring to joint ownership between a private company and a state-owned company kWh kilowatt hour LNG Liquefied natural gas, natural gas liquefied by cooling to minus 162 degrees Centigrade Mcm Million cubic metres MWh A unit of energy equivalent to a Megawatt of power over the duration of one hour N-1 Security standard, the requirement to be able to meet domestic gas demand after the failure of the single largest infrastructure (usually pipeline or import source) NAK National Joint Stock Company (NJSC) Naftogaz of Ukraine NBP UK’s National Balancing Point - a virtual point (hub) in the National Transmission System where gas trades are deemed to occur. It is also used as shorthand for the UK spot gas price. PSO Public Service Obligation. Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market provides for Member States to impose public service obligations to guarantee security of supply, economic and social cohesion objectives, regularity, quality and price of the gas supply and protection of the environment 100 Glossary (continued) Glossary (continued) Salt cavern Underground gas storage facilities contained in salt caverns SBU Storage bundled unit Seasonal The difference between the purchase price of gas in the summer and the sales price in the spread following winter at any one point in time. Seasonal Storage that is capable of delivering gas at maximum rates for extended periods – typically in storage excess of 90 days. These facilities have high working volumes and normally be in either depleted fields or aquifers. SO System operator SSO Storage system operator (can also be the storage system owner), may be a company set up to operate and own storage facilities Strategic Gas that is stored for use only in case of an emergency which would be a clearly defined set of storage circumstances TSO Transmission system operator (can also be the transmission system owner) TTF Title Transfer Facility – the Dutch trading hub UAH Ukraine’s national currency, Hryvnia UIOLI Use It or Lose It - usually refers to booked but unused (pipeline or storage) capacity that can be offered to the market in the short term UTG Ukrtransgaz, Ukraine’s existing gas transmission and storage entity, a subsidiary of NAK VTP Virtual trading point WC Working capacity Working Gas The quantity of gas that is normally injected and withdrawn in any one year in a storage facility. Working gas is distinct from ‘cushion gas’ which is only withdrawn from storage when a storage site is decommissioned 101 Annex: Gas storage technical and market background Contents  Introduction to gas storage assets  Depleted field storage  Salt cavity storage  Aquifer and LNG storage  Physical characteristics of gas storage  Operating gas storage in a liberalised market  Traditional use of gas storage  Commercial use  Valuing storage projects  Key issues  Pricing of gas storage products  Security of supply  Gas storage developments in Europe  The declining value of gas storage  EU storage facility ownership structure  Storage in liberalized markets - summary of key issues 102 Introduction to gas storage assets: Depleted field storage  Uses existing infrastructure  Offshore or onshore  Typically comparatively slow withdrawal rate  Ukraine facilities  11 facilities  ~30 BCM working capacity  Cushion gas can be an issue  High CAPEX element of new gas storage  Gas used in depleted field and aquifer storage that is not (easily) recoverable  Volume depends on geology and pressure requirements (Source: MJM Energy) 103 Introduction to gas storage assets: Salt cavity storage  Medium size  Fast withdrawal  Ukraine facilities  None  Typical uses  Historically used for short acting seasonal storage, but increasingly used by gas traders due to operational flexibility 104 Introduction to gas storage assets: Aquifer and LNG storage  Peak shaving  Aquifer gas storage  Large  Built to meet seasonal peaks  Comparatively slow  Can provide transmission withdrawal support  2 facilities in Ukraine (1.3  No facilities in Ukraine BCM) 105 Introduction to gas storage assets: Physical characteristics of gas storage Factor Salt cavity Depleted field Aquifer LNG Limited multi cycle (small fields) Seasonal Peak shaving Main Usage Multi cycle Seasonal Strategic System support Strategic High injection and Existing and withdrawal rates understood Very high rates of Advantages Large capacity Low cushion gas Relatively low cost deliverability Phased development Large capacity Small volume in High cost individual cavern High cushion gas Extended High cost Brine disposal requirement development time Low capacity Disadvantages Subject to Slow injection and Potential Greater safety convergence withdrawal rates environmental exposure Higher operating cost objections Working capacity 500 500 500 32 (mcm) Deliverability mcm/d 23.8 7.2 5.4 5.0 Cushion gas “Heel” of around 5 to 20% of total capacity 45% of total capacity 55% of total capacity requirements 10% Cycle rates 6.9 2.1 1.6 n/a Speed 4.8% 1.4% 1.1% 15.6% Speed (EU 28) 5% 1.0% 3.0% 28.0% 106 Operating gas storage in a liberalised market: Traditional use of gas storage Traditional use of gas storage: Seasonal supply / demand matching  Supply-demand matching  Short term disruptions/ (daily, seasonal) network support  Peak demands  Security of supply (load duration curve)  Commercial requirements  System balancing 107 Operating gas storage in a liberalised market: Commercial use Developing role of gas storage in a liberalising gas market  All the traditional requirements plus a growing role in terms of energy trading by providing value from both  Intrinsic value (seasonal spread)  Extrinsic value (price volatility)  Contractual benefits  Managing take-or-pay contracts  Make-up or carry-forward  Gas supply back-up Optimising production  Managing end user portfolios  Exploiting price differentials  Time arbitrage  Seasonal  Short-term  Multi-cycling and fast response useful 108 Operating gas storage in a liberalised market: Valuing storage projects The evaluation of storage projects in a liberalised market typically examines two key elements of value:  The intrinsic value of being  The extrinsic value from able to store gas across being able to exploit the seasons that is cheaper to buy arbitrage between spot and in the summer and of higher future prices through injecting value in the winter and withdrawing gas in  referred to as the seasonal multiple cycles in a year and spread further optimisation through  Whilst intrinsic value is trading around a physical effectively captured on an position annual basis it can be  This element will be higher the optimised within year greater the number of cycles  for example, by altering that the asset is able to deliver injection profiles from day to - so salt cavern storage will, day in order to take advantage other things being equal, have of changing spot gas prices a higher extrinsic value than a depleted field facility 109 Key issues: Pricing of gas storage products (1/2) Storage facility Injection capacity Storage Delivery (SBU) capacity (SBU) capacity (SBU) Rough (GB) 0.35 kWh/d 67 kWh 1 kWh/d Hornsea (GB) 0.11 kWh /d 18 kWh 1 kWh /d Kalle (Germany) 1 m3/hour 1,250 m3 3 m3/hour Epe Hcal (Germany) 3 MWh/d 7.5 GWh 10 MWh/d  Prices are normally published tariffs in the case of regulated TPA or subject to negotiation if negotiated TPA rules apply.  Need a unit/product for pricing – usually the storage bundled unit SBU  Price itself can be cost or market based. In latter case usually determined by auction or linked to seasonal spreads. Seasonal spreads require a fully traded Market 110 Key issues: Pricing of gas storage products (2/2) The pricing of gas storage via the winter / summer spread (Source: Summer / Winter spreads at NBP using data from Heren) 111 Key issues: Security of supply Source Transit Facility Operational Technical risk Underinvestment Damage to Storage failure Telemetry failure in indigenous import pipelines production Commercial risks European Contractual Quality issues Supplies diverte supplies divert to disputes restrict volumes d to more liquid higher priced hubs markets Human Russia/EU Disputes with Uncertain policy Corruption standoff, Russia framework leads restricts flows to to certain markets underinvestment Natural Cold weather in Major global Flood damage Landslip Russia/Europe disaster impacts leads to diversion on supplies of supplies 112 Key issues Security of supply - the role of PSOs  Bulgaria: Mandatory storage obligation,  Germany: Suppliers are legally obliged to equates to approx. 10% of domestic meet the demands of residential and district consumption, applies only to the dominant heating customers in both normal and domestic supplier Bulgargaz exceptional conditions using all of the measures listed in the EU regulations. No  Denmark: Expected to move from being a mandatory or strategic storage requirements net exporter to an importer as domestic production falls. Despite this obligations  Hungary: Only EU Member State to require have been relaxed and a new balancing both suppliers’ storage obligations and mechanism introduced in 2014 are much strategic storage. The storage obligation more market based. The TSO retains some requires that suppliers to households store access to storage that can only be used in 60% of their customers’ previous winter an emergency and if market based consumption. This amounted to 1.8 bcm in measures fail to work 2012/13. In addition 1.2 bcm of strategic storage is exclusively reserved for  France: All suppliers should have 80% of household and communal consumption in their allocated storage capacity filled with crisis situations gas on November 1 in each year necessary to supply domestic customers and  Italy: No mandatory storage obligations on customers providing services of general suppliers. Strategic storage equivalent to a interest (for example, hospitals, schools) for loss of 50% of peak capacity for 60 days. a 6-month period under normal weather Importers and domestic producers pay for conditions. These arrangements are this in proportion to their volumes. In described by the EC as the toughest in 2014/15 strategic storage volumes were 4.6 Europe after Hungary bcm – approximately 8% of annual consumption. The yearly cost is estimated at €60million No equivalent in GB though Ofgem consulting on DSR tender 113 Gas storage developments in Europe: The declining value of gas storage (1/2)  Expectations of growth in  Markets have progressively demand, declining domestic liberalised and the level of production, growing concerns interconnection and import over security of supply and capacity has increased high seasonal spreads (in significantly some markets) led to a surge  Substantial additional volumes in storage investments in the of LNG are likely to become 2000’s available and Europe is well  UK placed to benefit  Netherlands  Whilst indigenous output has  Germany fallen (mainly UK and  Hungary Netherlands) it should remain  Since 2008 gas demand has broadly flat for the next 5 years fallen and forecasts are for it to remain flat or fall further  Concerns over disruption to imports persist and a number  New storage has come on of security of supply measures stream increasing deliverability have been introduced and capacity 114 Gas storage developments in Europe: The declining value of gas storage (2/2) Market opening and falling demand have combined to show that many storage investments are over- valued/loss-making  Market opening and falling  Bergermeer sells 2.9 BCM of its demand have combined to show 4.1 WC by Dec 2012. Remaining that many storage investments capacity will be sold short term are over-valued/loss-making  Dutch gas storage prices show a  DONG write down - DKK 2.3 declining trend. billion (€300m) provision for three German storage contracts. “..  France - lower storage capacity liberalisation and greater liquidity sales and higher transmission ..[means].. the value of access to tariffs gas storage facilities has  EON have sold its Hungarian gas diminished” storage to the local power  Lower storage utilisation in company. Germany leading some companies to review holdings and consider divestment or alternative uses 115 Gas storage developments in Europe: EU storage facility ownership structure & related data (1/8) Country* Number and type of Working (technical) Storage operators# With or separate Ownership structure Third party access operational capacity (million from TSO in regime+ facilities m3) by facility relevant country?^ operator and Total working Unbundling model proportion of total capacity 3 (million m ) Austria 10 (Depleted fields) 2 484 (30%) OMV Gas Storage Separate from TSO - 100% subsidiary of Negotiated Legal unbundling integrated OMV Holding Company 8 250 1 393 (17%) RAG.Energy.Storage Separate from TSO - 100% subsidiary of Negotiated Legal unbundling Rohöl-Aufsuchungs Aktiengesellschaft (RAG) a producer and trader of gas 880 (11%) astora Separate from TSO - 100% subsidiary of Negotiated Legal unbundling Gazprom European holding company, W & G Beteiligungs-GmbH & Co. KG via WINGAS (Gazprom’s European trading company) 1 760 (21%) GSA LLC Separate from TSO - 100% subsidiary of Negotiated Legal unbundling Gazprom export and Gazprom UGS 1 733 (21%) E.ON Gas Storage Separate from TSO - 100% subsidiary of Negotiated (renamed to Uniper Legal unbundling German integrated Energy Storage) energy company E.ON (now named Uniper) Source: GSE (Gas Storage Europe), May 2015 * Does not include Ireland, Portugal and Sweden # Main storage operators only for Germany ^ ‘With TSO’ applies where storage is within the TSO company itself or part of a broader company structure that also includes the TSO for the specific country + In some cases, not all capacity is subject to TPA 116 Gas storage developments in Europe: EU storage facility ownership structure & related data (2/8) Country* Number and type Working Storage operators# With or separate Ownership structure Third party access of operational (technical) from TSO in regime+ facilities capacity (million relevant country?^ m3) by facility Total working Unbundling model operator and capacity proportion of total (million m3) Belgium 1 (Aquifer) 700 (100%) Fluxys With TSO - Part of Owned by Fluxys Regulated ownership Holding (90%). The unbundled TSO remaining shares (10%) 700 are quoted on the Brussels stock exchange Bulgaria 1 (Depleted field) 550 (100%) Bulgartransgaz With TSO – Part of 100% subsidiary of Regulated legally unbundled integrated state owned TSO company Bulgarian 550 Energy Holding Croatia 1 (Depleted field) 553 (100%) PSP With TSO - Part of 100% subsidiary of Regulated ownership ownership unbundled unbundled TSO (and state owned) 553 Plinacro Ltd Czech Republic 8 - Aquifer (1), 2 696 (77%) RWE Gas Storage Separate from TSO 100% subsidiary of Negotiated Depleted fields (6), ‘Virtual storage’ -Legal unbundling Germany’s integrated Rock Cavern (1) RWE Group 576 (16%) SPP Storage Separate from TSO 100% subsidiary of Negotiated -Legal unbundling Slovak integrated SPP 3 507 Infrastructure group (SPPI Group) 235 (7%) MND Gas Storage Separate from TSO 100% subsidiary of the Negotiated -Legal unbundling Czech KKCG private investment group (KKCG Oil & Gas engages in E&P, storage and trading) 117 Gas storage developments in Europe: EU storage facility ownership structure & related data (3/8) Country* Number and type Working Storage With or separate Ownership structure Third party of operational (technical) operators# from TSO in access regime+ facilities capacity (million relevant m3) by facility country?^ Total working operator and capacity (million Unbundling proportion of m 3) model total Denmark 2 – Aquifer (1), 998 (100%) Energinet.dk Gas With TSO - Legally 100% subsidiary of Negotiated Salt cavern (1) Storage unbundled within Energinet.dk, the ownership Danish state owned unbundled TSO electricity and gas 998 transmission system owner and operator France 17 – Aquifers (12), 8 747 (73%) Storengy Separate from 100% subsidiary of Negotiated Depleted field (1), TSO -Legal French integrated Salt caverns (4) unbundling energy company GDF SUEZ (now named ENGIE) 12 008 496 (4%) Geomethane Separate from Equally owned by Negotiated TSO -Legal Geosud (which in turn unbundling is 56% owned by Total, 14% by Ineos and 30% by Geostock Entrepose) and Storengy. 2 765 (23%) TIGF With TSO - Part of Owned by Italian grid Negotiated ownership operator Snam unbundled TSO (40.5%), Singapore sovereign fund GIC (31.5%), France’s EDF (18%) and Credit Agricole Assurances (10%) 118 Gas storage developments in Europe: EU storage facility ownership structure & related data (4/8) Country* Number and type of Working (technical) Storage operators# With or separate Ownership structure Third party access operational facilities capacity (million from TSO in regime+ m3) by facility relevant country?^ Total working operator and capacity (million m3) Unbundling model proportion of total Germany 58 – Aquifer (8), 5 818 (24%) E.ON Gas Storage Separate from TSO - 100% subsidiary of Negotiated Depleted fields (12), Legal unbundling German integrated Salt caverns (38) energy company E.ON (now named Uniper) 24 566 914 (4%) RWE Gasspeicher Separate from TSO - 100% subsidiary of Negotiated Legal unbundling German integrated energy company RWE 2 526 (10%) VNG Gasspeicher Separate from TSO - 100% subsidiary of Negotiated Legal unbundling German VNG group, a natural gas wholesaler and importer 1 932 (8%) EWE Gasspeicher Separate from TSO - 100% subsidiary of EWE Negotiated Legal unbundling AG, an energy supplier (mostly of electricity and heat) 1 669 (7%) Storengy Separate from TSO - 100% subsidiary of Negotiated Deutschland Legal unbundling French integrated energy company GDF SUEZ (now named ENGIE) 1 085 (4%) BES (Berliner Separate from TSO - 100% subsidiary of Negotiated Erdgasspeicher) Legal unbundling GASAG group engaged in energy supply 4 400 (18%) astora Separate from TSO - 100% subsidiary of Negotiated Legal unbundling Gazprom European holding company, W & G Beteiligungs-GmbH & Co. KG via WINGAS (Gazprom’s European trading company) 119 Gas storage developments in Europe: EU storage facility ownership structure & related data (5/8) Country* Number and type of Working (technical) Storage operators# With or separate Ownership structure Third party operational facilities capacity (million m3) from TSO in relevant access regime+ by facility operator country?^ Total working and proportion of capacity (million m3) Unbundling model total Hungary 5 (Depleted fields) 4 430 (70%) Hungarian Gas Separate from TSO - 100% subsidiary of the Regulated Storage Legal unbundling state owned Hungarian MVM Group, predominantly 6 330 a power producer and trader and the electricity ITO but also engaged in gas trading 1 900 (30%) MMBF Separate from TSO - Owned by the Hungarian Regulated Ownership State via the Hungarian unbundling Development Bank (51%) and the Hungarian Hydrocarbon Stockpiling Association (49%) funded by member fees with members of the Natural Gas Section comprising gas market licence holders (producers, traders and operators) Italy 10 (Depleted fields) 698 (4%) Edison Stoccaggio Separate from TSO - 100% subsidiary of Regulated Legal unbundling integrated energy company Edison 16 582 15 884 (96%) STOGIT With TSO - Legally 100% subsidiary of listed Regulated unbundled within gas infrastructure company ownership unbundled Snam spa (engaged in the holding company that transport, dispatch, includes TSO regasification, storage and subsidiary distribution of natural gas) 120 Gas storage developments in Europe: EU storage facility ownership structure & related data (6/8) Country* Number and type Working (technical) Storage operators# With or separate Ownership structure Third party of operational capacity (million from TSO in access regime+ facilities m3) by facility relevant country?^ operator and Total working Unbundling model proportion of total capacity (million m3) Latvia 1 (Aquifer) 2 320 (100%) Latvijas Gaze With TSO – No Latvijas Gaze is the only Regulated unbundling, but natural gas Energy Law requires transmission, storage, 2 320 legal unbundling of distribution and sales transmission and operator in Latvia. It is storage (together) by listed on the Riga stock 1 January 2017 exchange and key owners are Uniper (previously E.ON) Ruhrgas International GmbH (47%), Gazprom PJSC (34%), Itera Latvija SIA (16%) Netherlands 5 – Depleted fields 300 (2%) EnergyStock BV With TSO - Legally 100% subsidiary of Negotiated (4), Salt cavern (1) unbundled within state owned gas ownership infrastructure company unbundled holding Gasunie 12 900 company that includes TSO subsidiary 8 000 (62%) NAM Separate from TSO NAM is an oil and gas No TPA – functional E&P company; its two unbundling shareholders are Shell (50%) and ExxonMobil (50%) 4 600 (36%) TAQA Energy BV Separate from TSO Owned by TAQA, an Negotiated (Gas Storage – ownership international energy and Bergemeer) unbundled water company listed in (independent SSO) Abu Dhabi (60%) and 121 EBN (Dutch State, 40%) Gas storage developments in Europe: EU storage facility ownership structure & related data (7/8) Country* Number and type of Working (technical) Storage operators# With or separate Ownership structure Third party access operational facilities capacity (million m3) from TSO in regime+ by facility operator relevant country?^ Total working 3 and proportion of capacity (million m ) Unbundling model total Poland 9 – Depleted fields 2 524 (92%) Operator Systemu Separate from TSO – 100% subsidiary of Regulated (7), Salt caverns (2) Magazynowania Sp. z Legal unbundling PGNiG group with core o.o. business of producing and selling natural gas 2 754 and oil. It is 72% state owned (Treasury) and 28% free float 230 (8%) PGNiG n/a See above No TPA Romania 7 (Depleted fields) 2 750 (90%) Romgaz Separate from TSO – Largest natural gas Regulated Legal unbundling producer and the main supplier in Romania, 70% 3 050 state owned, 30% free float 300 (10%) Depomures Separate from TSO – 59% owned by French Regulated Legal unbundling integrated energy company GDF SUEZ (now named ENGIE) Slovakia 2 (Depleted fields) 2 480 (79%) Nafta Separate from TSO – NAFTA is a gas storage Negotiated functional unbundling and hydrocarbon E&P (separate division) company. Its main 3 135 shareholders are SPP Infrastructure (56%) and Czech Gas Holding Investment B.V. (40%) 655 (21%) Pozagas Separate from TSO – The shareholding Negotiated Legal unbundling structure of Pozagas is SPP Infrastructure (35%), NAFTA (35%) and GDF International (30%) 122 Gas storage developments in Europe: EU storage facility ownership structure & related data (8/8) Country* Number and type of Working (technical) Storage operators# With or separate Ownership structure Third party access operational capacity (million from TSO in regime+ facilities m3) by facility relevant country?^ operator and Total working Unbundling model proportion of total capacity (million m3) Spain 4 – Aquifer (1), 3 417 (83%) Enagas With TSO - Part of State-owned holding Regulated Depleted fields (3) ownership unbundled company 'SEPI' holds TSO 5%, remaining 95% of shares are free float 4 103 686 (17%) Gas Natural Fenosa Separate from TSO – 100% subsidiary of Regulated Legal unbundling Spanish integrated energy group Gas Natural Fenosa (a publicly traded company) United Kingdom 8 – Depleted fields 3 728 (74%) Centrica Storage Separate from TSO – 100% subsidiary of Negotiated (3), Salt caverns (5) Legal unbundling British integrated energy company Centrica plc (a publicly traded company) 5 040 711 (14%) SSE Separate from TSO – SSE is an integrated Negotiated Part of ‘Wholesale’ energy business division (also (production, distribution covering energy and supply of electricity portfolio and gas) and is publicly management, traded generation and gas production) 50 (1%) EDF Trading n/a No TPA 283 (6%) Humbly Grove n/a No TPA Energy 168 (3%) E.ON Gas Storage n/a No TPA UK 100 (2%) Storengy UK n/a No TPA 123 Storage in liberalised markets – summary of key issues  Strategic  Opportunities  Moves from a physical  Gas trading component to a  System optimisation – competing source of intrinsic and extrinsic flexibility as price used to value incentivise balancing  Additional services  Challenges:  Issues  Regulation  Unbundling: degree of  Security of supply separation, structure and  Transition ownership  Transparency  Competition from other sources of flexibility Deliverability becomes more crucial than capacity 124 Analysis of the Restructuring Options of NJSC Naftogaz Part 2: Unbundling options for gas storage Section 1: Review of options for storage unbundling Section 2: Establishing storage as a separate entity – management and operational issues Section 3: Challenges facing Ukraine’s storage Annex: Glossary; gas storage technical and market background; EU gas storage ownership Analysis of the Restructuring Options of NJSC Naftogaz Part 1: Unbundling options for gas transmission Part 2: Unbundling options for gas storage Final report, 9 February 2016 This work is being done as part of Task 1 of the joint EC-WB Facility to support the Ministry of Energy and Coal Industry of Ukraine and NJSC ‘Naftogaz of Ukraine’ on advisory services and technical assistance for the reform and modernization of the natural gas sector The views in this report constitute the consultant’s views and do not necessarily reflect those of the World Bank or the European Commission This project is jointly funded by the European Union, This task is implemented the World Bank and the Energy Sector Management by Economic Consulting Assistance Program (ESMAP) Associates Ltd