Final Decision – Storengy UK Ltd's application for a minor facilities exemption for Stublach gas storage phase 2
Decision
Publication date
Company
Industry sector
Generation and Wholesale Market
We have decided to grant Storengy UK a minor facility exemption (MFE) for phase 2 of the Stublach gas storage facility. This is because we consider that negotiated Third Party Access (nTPA) at the facility is not technically or economically necessary for the operation of an efficient gas market.
On 7 March 2014 we published a consultation on our initial view to grant the MFE. This consultation closed on 2 May. We received one response to our consultation, which was supportive of our initial view. Taking this response into account, we have confirmed our initial view. Our final decision is to grant the MFE. This letter explains the reasons for our decision, and includes the exemption order. Our consultation contained more detail on our assessment.
Background
Storengy UK Limited, a wholly-owned subsidiary of GDF Suez, is the owner and operator of the Stublach gas storage facility in Cheshire. Phase 1 of Stublach is currently under development. It will provide 200 mcm of capacity with 16 mcm/d peak deliverability and injectability when fully operational. This is expected by winter 2015.
In 2009 we granted an MFE for phase 1. In March 2013 we amended this exemption to account for an increase in the working volume of gas (ie, space, but not deliverability) available under phase 1.
In December 2013 Storengy submitted an application under section 8S of the Gas Act 1986 (the Act), as amended, for an MFE from the requirements of sections 8R and 19B of the Act. Phase 2 would double the capacity of the facility, with ten additional caverns. The expanded facility (phases 1 & 2 combined) would have total space of 400 mcm and peak deliverability and injectability rates of 30 mcm/d. This work is expected to be completed by winter 2018.
Exemption criteria
The Gas and Electricity Markets Authority (the Authority) exempts storage facilities from nTPA and independence requirements when it considers that the use of the facility by other persons is not technically or economically necessary for the operation of an efficient gas market. This test for an MFE is contained in section 8S of the Act.
Ofgem is also required to interpret national law in the context of European legislation. Therefore, when assessing an MFE application we consider, pursuant to Article 33 of the Third Gas Directive , whether the facility is technically and/or economically necessary for providing efficient access to the system for the supply of customers, as well as for the organisation of access to ancillary services.
The basis for our assessment approach is our 2009 open letter . Our consultation explained why we thought that Storengy met the criteria for the MFE to be granted. We summarise our key findings below; you can find more detail in our consultation document.
Our assessment of the application
Technically necessary
We have determined that nTPA at Stublach is not technically necessary for the operation of an efficient gas market. To reach this view, we assessed whether nTPA at Stublach is technically necessary for a peak day and a cold winter. Our test was whether supply capability (excluding Stublach) was sufficient to meet demand over these periods. In all scenarios examined, this was the case.
Economically necessary
We have determined that nTPA at Stublach is not economically necessary for the operation of an efficient gas market. We reached this conclusion after considering a range of indicators. The focus of our assessment was on whether granting the MFE could give GDF Suez market power in the GB gas flexibility market. Our analysis is therefore forward looking.
To a greater or lesser extent, a range of supply sources are substitutes for gas storage in the flexibility market. There is some uncertainty about the future behaviour of flexible gas sources. To address this, we used three possible market definitions, which are designed to account for a range of future scenarios. We calculated market shares for each definition, which showed GDF Suez’s share of the gas flexibility market generally remained below 10 percent. This indicates that it is unlikely that GDF Suez would hold market power in the gas flexibility market if Storengy is granted an MFE for Stublach phase 2.
We also consider the impact of an MFE on concentration in the storage market. We calculated Herfindahl–Hirschman Indices (HHIs) . These suggested that the storage market is not concentrated, and that the construction of Stublach results in a marginal reduction in concentration.
We assessed the potential for market power using pivotality modelling. A player is pivotal if total demand cannot be met from all available sources of supply controlled by other players. Using our base assumptions, GDF Suez was not pivotal. A combination of very high demand and a significant supply outage was required to create a situation of pivotality.
Our assessment concluded that GDF Suez’s position in vertically linked markets would be unlikely to lead to market power in the flexibility market. We also determined that the exemption would not have a detrimental impact on market operation.
We noted that Storengy would still be subject to transparency requirements in relation to the physical operation of the facility. We also welcomed Storengy’s commitment to introduce a use-it-or-lose-it (UIOLI) mechanism and facilitate secondary trading.
Response to consultation
We received one response to our consultation; they supported granting the exemption.
Operating Margins
The respondent raised a general concern about the interaction between exempt storage facilities and National Grid Gas (NGG)’s licence obligation to promote competition in the market for Operating Margins (OM). They were concerned that exempt storage facilities may choose to not participate in tenders for OM services, and that NGG could not necessarily expect exempt facility owners to enter into negotiations for third-party access. The respondent thought this could limit NGG’s ability to obtain the OM services in the most economic manner.
We do not think that the exemption status of a facility would have this effect. In the current OM tender process all storage facilities, whether exempt or not, are free to participate (alongside any other qualified party) to the full extent that they wish. This is a commercial decision for the relevant party. Further, granting an MFE to phase 2 of Stublach does not prevent it from participating in the OM tender process.
Anti-hoarding mechanisms
In our consultation, we asked for views on whether the implementation of anti-hoarding mechanisms should be a condition of the exemption. We did not receive any comments on this issue. After further consideration, we have decided that it should not be included as a formal condition. However, we are supportive of Storengy’s plans to introduce UIOLI and a secondary trading platform. We would emphasise that we have considered Storengy’s plans to introduce these arrangements as part of our decision to grant the exemption.
Our final decision is to grant the exemption
We have considered Storengy’s application, the assessment we have carried out and responses to our consultation on that assessment. Based on this, we have decided to grant the MFE. The formal exemption order is included as an annex to this letter.
It should be noted that our decision on the exemption has been made on the basis of information provided by Storengy in their application. As part of our ongoing market surveillance activities, we will continue to assess the effect of exemptions on the market. If circumstances relating to the exemption change, we may seek Storengy’s consent to an amendment of the exemption conditions. Alternatively, the exemption may be revoked if we consider that the facility has become necessary for the operation of an economically efficient gas market.