An Investigation into the Gas Trades across the Interconnector Pipeline between the UK and Belgium: Do Gas Flows Follow Price Spreads?

Mr Chris Cuijpers, CREG

Andreas Tirez, CREG

This paper examines the gas flow efficiency in the only bi-directional gas pipeline between the UK and continental Europe. The physical bi-directionality of the cross-channel Interconnector was rapidly valued by the market for short term trading rather than for cross-border bulk gas transportation. This trading role is further intensified as gas import dependency in the UK is growing and gas demand volatility is increasing due to wind and solar generation. The pipeline is nowadays a vital connection for cross-border gas competition and gas price convergence at the adjacent trading hubs. Cross-border trades are considered to be economically efficient if gas flows from the low priced to the high priced market until transaction costs equal the remaining price spread. If these flow patterns according to price signals are not the case, there may be barriers to trade which are typically addressed by regulators for the sake of efficient market-functioning and security of supply.

Interconnector (UK) Limited (IUK) operates the 235 km cross-channel pipeline running from Bacton in the UK to Zeebrugge in Belgium which became operational in October 1998. Following further enhancement projects, the Interconnector is currently able to transport 20 billion cubic meters per annum (bcm/y) in the forward mode to Belgium and 25.5 bcm/y in the reverse mode to the UK. In other words, the throughput capability of the Interconnector equals a forward supply volume higher (+15%) than the domestic Belgian market and a reverse supply volume of approximately one third of the UK gas market.

There are basically two underlying markets explaining the use of the Interconnector. Firstly, the offer by operator IUK of capacity services which are bought by the shippers determines the access to the Interconnector by traders. Herein are transmission tariff rules and levels of key importance to identify the transaction costs of arbitrage. Secondly, the cross-border gas trading market determines the utilisation and flow direction of the booked capacity. Obviously, the functioning of both markets and the interrelationship ultimately determine the efficiency of the Interconnector. The study of possible anomalies in gas patterns may give evidence of constraints on trading between both ends of the Interconnector: limitations in liquidity or competition in either of the two markets and/or limitations in the ability to transport between both markets. Therefore the capacity sales and the business rules of IUK are of key importance to facilitate cross-border trading and competition as well as security of supply.

IUK has entered into a regulated business since the ‘Third Energy Package’ agreed in European legislation in 2009. The national regulatory authorities in the UK (Ofgem) and Belgium (CREG) are nowadays in charge of regulating and supervising IUK. The regulatory framework foresees European network codes to harmonise the capacity allocation, gas flow nominations and tariff arrangements at interconnection points (IPs) across Europe. These developments will help to remove any remaining barriers for trade and reinforce the role of Interconnector in integrating gas markets in Northwest Europe.

This paper examines whether market anomalies may be observed from the actual use of the Interconnector. If this appears to be the case, remedies will be suggested for further improvement of the regulatory regime for IUK. Flow direction changes and price responsiveness of the gas trades through the Interconnector are investigated by examining flow nominations and actual physical flows for each day between 1 July 2011 and 30 June 2014 using day-ahead gas prices.