Table Of ContentINTERNATIONAL ENERGY AGENCY
FLEXIBILITY
IN
NATURAL GAS
SUPPLY DEMAND
AND
INTERNATIONAL ENERGY AGENCY
FLEXIBILITY
IN
NATURAL GAS
SUPPLY DEMAND
AND
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FOREWORD
Flexibility of natural gas supply is essential for efficient operation of the gas
industry. Gas companies have developed various flexibility tools to harmonise
the variations and fluctuations in gas demand with the relative rigidity of gas
supply. These tools mainly work on the volumes of supply and demand.
Market liberalisation is changing the traditional landscape. It brings a new
market-driven approach to flexibility. In competitive markets, new market
mechanisms are available to bring gas supply and demand into line, for example
in marketplaces where both gas and flexibility services are traded. However,
inelastic demand by non-interruptible customers still needs to be covered as
it arises. Traditional flexibility tools remain important for this purpose.
This book surveys the impact of market opening on flexibility tools and
mechanisms. The experience in competitive markets demonstrates the changes
which are taking place. It is important to keep track of these developments in
newly opened markets and this book suggests some developments that
governments should particularly monitor: the parallel opening to competition
of the electricity and gas sectors and the possible impact on gas supply and
demand of the arbitrage between gas and power; the increased volatility of prices;
and the responsibility of the different players.
This book is one part of a more general review by the International Energy
Agency of the security of natural gas supply in OECD countries.
This book is published under my authority as Executive Director of the
International Energy Agency.
Robert Priddle
Executive Director
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ACKNOWLEDGEMENTS
The main author of this book is Sylvie Cornot-Gandolphe. Ralf Dickel, Head
of the Energy Diversification Division, directed the project and provided
valuable input and advice. The Director of the Long-Term Office, Olivier
Appert, provided support and encouragement throughout the project. Special
thanks to all other IEA colleagues who provided comments on the analysis,
statistical data and editorial oversight.
Comments and suggestions from various delegates to the Standing Group on
Long-term Co-operation as well as from key experts of the gas industry are
gratefully acknowledged.
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TABLE OF CONTENTS
Foreword ............................................................................ 3
Acknowledgements .............................................................. 5
Table of contents .................................................................. 7
Executive Summary ............................................................. 13
■ Gas demand and supply do not always react to market signals
in ways typical of other commodities..................................... 13
■ How flexibility requirements are evolving to meet supply and
demand trends in the OECD ............................................... 15
■ Traditional flexibility tools .................................................... 18
■ The role of flexibility is evolving with market liberalisation .. 20
■ New flexibility patterns in the LNG market ......................... 22
Recommendations ............................................................... 25
■ Ensure the working of the new markets ................................ 25
■ Ensure the provision of the flexibility needed by non-
interruptible customers that lack fuel-switching capacity ...... 26
■ Monitor investment performance and take action, if needed 27
1. Introduction .................................................................. 29
■ Why flexibility is needed ...................................................... 29
■ Large variations in demand; a certain rigidity in supply ........ 29
■ Different flexibility requirements by sector ........................... 33
■ Changes that come with market liberalisation ....................... 35
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2. Supply and Demand Trends in OECD Regions and
Their Impact on Flexibility ....................................... 37
■ Introduction ......................................................................... 37
■ OECD North America ......................................................... 38
Market overview ............................................................ 38
Regulatory reforms in gas and electricity ....................... 39
Gas demand trends. ...................................................... 41
Gas supply trends .......................................................... 42
Impact on flexibility ...................................................... 42
■ OECD Europe ..................................................................... 43
Market overview ............................................................ 43
Regulatory reforms in gas and electricity ....................... 44
Gas demand trends ....................................................... 45
Gas supply trends .......................................................... 46
Impact on flexibility ...................................................... 50
■ OECD Pacific ...................................................................... 51
Market overview ............................................................ 51
Regulatory reforms in gas and electricity ....................... 51
Gas demand trends ....................................................... 53
Gas supply trends .......................................................... 54
Impact on flexibility ...................................................... 54
3. Flexibility Tools in Traditional Markets .................... 57
■ Introduction ......................................................................... 57
■ Flexibility of supply .............................................................. 58
Flexibility in gas production and imports ...................... 58
Access to spare capacity at import and transportation
facilities.......................................................................... 63
■ Storage ................................................................................. 64
Functions and characteristics ......................................... 64
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Storage development in IEA .......................................... 65
Line-pack ...................................................................... 68
Storage at LNG terminals .............................................. 68
■ Demand side measures ......................................................... 69
Interruptible contracts. .................................................. 69
Fuel-switching ............................................................... 70
Demand-side reaction to price signals ........................... 73
■ Conclusion on the current state of flexibility ........................ 75
4. Market Liberalisation: A New Context for Flexibility .......... 77
■ Introduction ......................................................................... 77
■ The emergence and development of gas trading .................... 78
Marketplaces: new hubs ................................................ 78
Spot and futures markets ............................................... 81
Emerging trends in Continental Europe ........................ 85
■ New forms of flexibility and the changing role of gas storage .. 88
Unbundled services ....................................................... 88
The new functions of underground gas storage ............. 90
Forces favouring storage use – the US and
UK experiences ............................................................. 92
Storage and liberalisation in Continental Europe .......... 93
■ Electricity-gas arbitrage at hubs ............................................ 95
5. The role of LNG in Flexibility .................................. 99
■ Introduction ......................................................................... 99
■ International LNG trade ...................................................... 99
Global trends ................................................................ 99
Regional trends .............................................................101
■ Deregulation of Asian and European LNG markets ..............103
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