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Gas Pricing and Regulation

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Gas Pricing and Regulation PARTNER COUNTRY SERIES Gas Pricing and Regulation China’s Challenges and IEA Experience Gas Pricing and Regulation China’s Challenges and IEA Experience In line with its aim to meet growing energy demand while shifting away from coal, China has set an ambitious goal of doubling its use of natural gas from 2011 levels by 2015. Prospects are good for significant new supplies – both domestic and imported, conventional and unconventional – to come online in the medium term, but notable challenges remain, particularly concerning gas pricing and the institutional and regulatory landscape. While China’s circumstances are, in many respects unique, some current issues are similar to those a number of IEA countries have faced. This report highlights some key challenges China faces in its transition to greater reliance on natural gas, then explores in detail relevant IEA experience, particularly in the United Kingdom, the Netherlands, the European Union, and the United States. Preliminary suggestions about how lessons learned in other countries could be applied to China’s situation are offered as well. The aim is to provide stakeholders in China with a useful reference as they consider decisions about the evolution of the gas sector in their country. PARTNER COUNTRY SERIES Gas Pricing and Regulation China’s Challenges and IEA Experience Anne-Sophie Corbeau, Dennis Volk, Jonathan Sinton, Julie Jiang Jiang Ping, Tammy Teng, Li Boshu and Yue Fen INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its primary mandate was – and is – two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply, and provide authoritative research and analysis on ways to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The IEA carries out a comprehensive programme of energy co-operation among its member countries, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency’s aims include the following objectives: Secure member countries’ access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions. Promote sustainable energy policies that spur economic growth and environmental protection in a global context – particularly in terms of reducing greenhouse-gas emissions that contribute to climate change. Improve transparency of international markets through collection and analysis of energy data. Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy effi ciency and development and deployment of low-carbon technologies. Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international organisations and other stakeholders. IEA member countries: Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea (Republic of) Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic © OECD/IEA, 2012 Spain International Energy Agency Sweden 9 rue de la Fédération 75739 Paris Cedex 15, France Switzerland Turkey www.iea.org United Kingdom Please note that this publication United States is subject to speci c restrictions that limit its use and distribution. The European Commission The terms and conditions are available online at also participates in http://www.iea.org/termsandconditionsuseandcopyright/ the work of the IEA. Page | 3 © OECD/IEA 2012 Gas Pricing and Regulation China’s Challenges and IEA Experience Table of Contents Acknowledgements ................................................................................................................. 6 Executive summary ................................................................................................................. 7 Page | 3 1. Introduction ...................................................................................................................... 16 2. Key challenges in pricing and regulatory reform in China's gas market ................................ 18 Pricing ...................................................................................................................................... 19 Pricing level ...................................................................................................................... 19 Pricing structure ............................................................................................................... 21 The new pricing reform ................................................................................................... 22 Investments along the gas value chain .................................................................................... 23 Upstream sector .............................................................................................................. 23 Developing import infrastructure .................................................................................... 25 Developing midstream infrastructure ............................................................................. 27 Planning and co-ordination ............................................................................................. 28 Market structure ..................................................................................................................... 28 Regulation ................................................................................................................................ 30 Regulatory entities ........................................................................................................... 30 Regulating access to and planning of infrastructure ....................................................... 31 3. Gas market liberalisation: objectives and key aspects ......................................................... 32 Gas market liberalisation and why some items require regulation ........................................ 32 The gas market value chain ............................................................................................. 34 Key principles of open and competitive gas markets ...................................................... 36 4. The North American and European experience with gas market liberalisation ..................... 43 Gas market liberalisation in the United States ........................................................................ 43 The pre-liberalisation phase ............................................................................................ 44 First stages of liberalisation ............................................................................................. 44 Recent developments and current picture ...................................................................... 46 Gas market liberalisation in Europe ........................................................................................ 47 The First Directive ............................................................................................................ 47 The Second Directive ....................................................................................................... 48 The Third Package ............................................................................................................ 50 Security of supply directive .............................................................................................. 51 Gas market liberalisation in the United Kingdom ................................................................... 52 First step towards liberalisation ...................................................................................... 52 Enforcing competition ..................................................................................................... 52 Improving security of gas supply ..................................................................................... 53 5. Price discovery and trading in North American and European markets ................................ 55 Understanding gas trading ...................................................................................................... 56 Physical versus virtual hubs ............................................................................................. 56 Gas Pricing and Regulation © OECD/IEA 2012 China’s Challenges and IEA Experience Bilateral trade and exchange-based trading .................................................................... 57 The North American gas model ............................................................................................... 59 Current situation .............................................................................................................. 59 Evolution of the US pricing system .................................................................................. 60 The European gas market: a hybrid of oil indexation and gas-to-gas competition ................ 62 Page | 4 The origins of oil indexation in Europe ............................................................................ 62 The United Kingdom’s experience in pricing ................................................................... 63 Managing the transition from contracts to spot markets ....................................................... 66 The United
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