The impact of regulatory changes on trading activities. Platts European Gas Summit September 29 30, 2014 Kempinski Hotel Bristol Berlin, Germany

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1 The impact of regulatory changes on trading activities Platts European Gas Summit September 29 30, 2014 Kempinski Hotel Bristol Berlin, Germany Twitter

2 A significant number of new regulations is about to transform the way of conducting business on gas markets Main objectives Gas market oriented rules 3rd energy package framework guidelines (European commission) and network codes (Balancing, capacity allocation mechanism, congestion management procedure, tariff, interoperability, investment,.) European or national security measures and rules (storage obligations for end consumers, etc.) Harmonization & integration of a single European Market Transaction oriented rules EMIR (European Market Infrastructure Regulation) MiFID II / MiFIR (Markets in Financial Instruments Directive and Regulations of derivatives) REMIT (Regulation Energy Market Integrity Transparency) Reach efficient, transparent & properly regulated markets (financial and commodity instruments) This presentation aims at giving you an overview on challenges lying ahead, how they could impact your daily business and what are your options to address those constraints, turning them into competitive advantage. 2

3 After a long period of preparation and discussion, new balancing rules have been published earlier this year: they must be applied by October 1 st 2015 Global timeline September 2007 Adoption of 3 rd package of legislative energy proposals October 2012 First draft of balancing Codes by ACER reviewed and worked on by ENTSOG and EC April 2014 Publication by the EC (and entry into force )of the final gas balancing network code October Application of the balancing code by TSOs : any delays should be justified to ACER and a reporting done by relevant regulators. October 2011 Framework guidelines set by ACER and approved by the EC Today Implementation of interim measure : according to each member state or TSO (a progressive reduction of balancing tolerances and evolution towards target marginal price) You probably have only one year left to ensure compliance with new balancing rules! 3

4 New balancing rules introduce systematic imbalance penalties Every kw/h imbalance will be made up for by the TSOs, per balancing horizon (hourly / daily): excess volumes are sold to TSO deficit volumes are sold to the shipper These buy or sell operations shall be executed by the TSOs at the most unfavourable price for the shipper between: the highest or lowest price of TSO interventions on market exchanges, the Daily Average Price (DAP) + an adjustment of maximum +/-10% At the end of a defined period, say a month, the financial result recorded in the imbalance account is re-distributed by the TSO according to an allocation key: if account presents a positive balance, profit is redistributed to all shippers if account presents a negative amount, loss is billed to all shippers Imbalance account Simplified billing example of a shipper in gas deficit at the end of the day 4 TSO imbalanced 3 Gas Market Exchange Platform Other shippers Shipper 1 Shipper 2 imbalanced 1 balanced Shipper 1, which is originally balanced, sells X MWh to Shipper 2 that presents a X MWh imbalance. TSO buys X MWh on the exchange to make up for global system deficit of X MWh At the end of the day TSO bills Shipper 1 for their imbalance (in our case TSO sells X MWh at marginal price) The financial transactions made by TSO are stored in an imbalance account (in our example, a X MWh volume x price difference bw. exchange and marginal price) 2 balanced 4

5 Is it possible to limit the impact of imbalance penalties for a shipper? Financial impact of imbalance penalties depends on factors that are not at shippers hand, such as the TSO account global balance or the selected allocation rules (subscribed capacity vs. delivered volumes). Nevertheless, each player can take actions to limit their individual contribution to global imbalance account by playing on two levers: Marginal price Volume/ Frequency of imbalance the closer to daily average prices your orders are, the lower the impact of financial penalties (marginal price of TSO interventions) might be lobbying with national regulators could also help to limit, at the lowest possible level (0%), the adjustment added to DAP to calculate marginal price balancing might be complicated by external or environmental factors such as weather, price & spark spread levels etc. that are not at shippers hand. but efficient forecasting processes and Intra-day (ID) / Day ahead (DA) strategies can significantly reduce volume & frequency of imbalance Given the combination of internal and collective influencing factors it is difficult to globally assess impacts of this change. One thing is sure, the more efficient your balancing, the lower the penalties. 5

6 Key success factors for actually limiting the impact of financial penalties Optimization of flexibility sources Enhanced cooperation between teams All flexibility sources, both on supply & demand sides, should be used to optimize marginal balancing: on the supply side: markets (OTC and Exchanges), storages, LNG terminals according to their actionability / reactivity and their economic value on the consumption side, postpone demand (probably less actionable): CCGT, energy curtailment (consumption is shifted in time) An efficient articulation between procurement, marketing, trading and balancing teams is crucial to ensure that: long and medium term strategies are optimized short-term (ID / DA) needs are limited to an optimum level Procu rement Trading Forecasts Marke ting Balancing Efficient use of new data from TSOs Under new rules, TSOs* shall have to provide more frequent, precise and quality consumption data : day ahead forecasting on various consumer segments daily or intraday consumption measurements Regulators can take incentives to secure qualitative and timely delivery of this data to Gas shippers. A balancing framework in line with sourcing mix More important short term supply can mean greater exposure in volumes and marginal price if balancing actions are not managed efficiently 0% Long Medium Short 100% Medium Short Those 4 KSF have in common to require a large volume of data (flowing in and out) and advanced analytics engineering * Both either done by DSO (relayed by TSOs) or directly by TSOs 6

7 New balancing rules are only one of the numerous regulatory evolutions on Gas markets New network codes EMIR, REMIT and MiFID II, to only name a few, aim at establishing efficient, transparent and regulated markets 7

8 like the creation of trade reports and strengthening of various other risk mitigation measures A B C EMIR REMIT MiFID II / MiFIR Regulator in charge ESMA* ACER* ESMA Date of implementation Launch : 16 August 2012 For energy players : 1 st January 2014 Launch : 20 January 2012 Trade reporting : allegedly end 2014 Applicable : January 2017 Intent Improve transparency of the overthe-counter (OTC) derivatives market Prevent from market abuse manipulation and the use of inside information on wholesale energy markets Make EU financial markets more transparent and more efficient Improve investor protection Strengthen supervision Trade reporting measures Other measures All derivative transactions shall be reported, either executed on an exchange or traded OTC Daily reporting Clearing : forced clearing of OTC transactions above a certain threshold 3bn of non-hedging commodity derivatives notional value Risk Management : streamline operational processes on OTC deals *ESMA : European Securities and Markets Authority **ACER : The Agency for Cooperation of Energy Regulators Physical gas & power trades and orders not included under EMIR/ MIFID II/ MIFIR Data relating to the network/physical assets Reporting at each stage of the life cycle (+ pre-trade) Inside information : disclosing inside information via website and sending web feeds to ACER Intragroup contracts : are reportable upon requests Delayed reporting obligations: for non-standard contracts 1 year after implementation act entry into force All financial products (including commodity derivatives listed on exchanges or not (OTC)) Real-Time reporting Enhanced scope : extension in terms of instruments and firms covered Trade restrictions : position limits on the trading of commodity derivatives Additional rules on trade execution, investor protection and governance 8

9 So much data to handle, so many reports to produce in order to ensure regulatory compliance What are the keys to efficient compliance? Assess compliance with current rules Anticipate forthcoming regulations Big data 9

handle huge volumes of data, flowing in and out throughout the organization to run advanced analytics engine to properly process and report added-value information In this context,

10 How can Big Data help you face this new challenge? Big Data Quality Centralisation Exogenous data Depth Exhaustiveness «Real time» data «Data storage» As previously seen, regulatory compliance requires, among other things: to be able to handle huge volumes of data, flowing in and out throughout the organization to run advanced analytics engine to properly process and report added-value information In this context, designing a Big Data strategy is a musthave to secure regulatory compliance, with 2 major attention points: a robust infrastructure with continuous upgrade in hardand software to handle increasing volumes state of the art analytics engine to face increasing complexity But Big Data goes much beyond sole regulatory compliance 10

Process-oriented issues It can take industrialization of data processing to a whole other level Watch Tower To support KYC, AML, rogue trading and more generally anti-fraud process, detection of

11 Process-oriented issues It can take industrialization of data processing to a whole other level Watch Tower To support KYC, AML, rogue trading and more generally anti-fraud process, detection of abnormal variations (exposures P&L risk indicators) Data Tagging Secure trade capture through identification of duplicates or abnormal data Financial Data Management Advanced risk and P&L indicators, income attribution, VaR back-testing On-demand data mining in Risk & P&L indicators 11

12 Business-oriented issues and more importantly, Big Data can also help you identify and select new business opportunities Trading Analytics Pre-trade decision support Choose between locational/ geographical spreads, time spreads on storage etc. Systematic Trading Automatically executed quantitative processes or High-Frequency-Trading Take advantage of possible arbitrage situations that may arise and being quick to react Forecasting Optimize client consumption and production forecasts (gas to power plants) Optimize your sourcing mix Optimize your portfolio of physical assets Hedging Strategy Real-time optimization of day-ahead and intra-day position Price risk hedging Design optimal hedging strategies (physical or financial) over different time horizons 12

13 A good time to seize the opportunity to be more reactive to a changing environment Regulatory changes clearly offer an opportunity to better steer the boat Optimize your organization, through the technology, people & process lenses, and develop a better view on real time exposures, positions and opportunities Efficiently manage transition by factoring response to regulatory requirements, given considerable costs and change management effort at stake Big Data, a powerful lever for today s and future competitiveness Extract the useful information from data flowing in and include them into your strategic and operational decision-making processes Ensure long-term regulatory compliance through scalable and flexible reporting framework 13

Roadmap to the French Balancing Target System

Roadmap to the French Balancing Target System Vincent de Laharpe 1 Agenda 1 2 3 Regulatory context Roadmap to the target Information provided to the market 2 Regulatory context 3 Timeline for European