Presentation of the methodology to assess gas infrastructure

Presentation of the methodology to assess gas infrastructure candidate projects and preliminary results Péter Kotek Senior Research Associate, REKK Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 1

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Outline 1. Background 2. Methodology and inputs 3. Modelling results 4. Indicators 5. Conclusions Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 2

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Scope of the project 1. Development of questionnaires and eligibility check 2. Verification of submitted project and market data 3. Market modelling and socioeconomic Cost-Benefit Analysis (CBA) 4. Calculating additional Indicators 5. Case by case evaluation of proposed projects Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 3

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Experiences of REKK with CBA • EU Regulation 347/2013, and adapted and adopted Regulation by the Ministerial Council of the En. C • ENTSOG CBA methodology • ACER opinions • REKK experience with PECI modelling for En. C Secretariat (2013, 2016, 2018) • REKK experience with case-by-case CBA for gas infrastructure projects in CEE region Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 4

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Methodology 1. Eligibility check: cross-border effect crossing two countries 2. Investment cost verification and missing data imputation 3. Case-by-case market modelling • Modelling normal scenario (Market integration) • Identification of SOS scenario (Security of supply) • CO 2 emission effects (Sustainability) 4. Sensitivity analysis • Demand • LNG supply • Project-specific sensitivities Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 5

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Gas model EGMM Wholesale gas price, €/MWh Whole Europe (35 countries) is modelled Competitive prices by countries; price modelled for each 12 months Trade is based on long term contracts and spot trade within the EU and with exogenous countries and global LNG market (NO, RU, DZ, LNG) Natural gas flows and congestions on interconnectors Physical constraints are interconnection capacities (transmission tariffs are also included) Trade constraints: TOP obligations with flexibility Domestic production and storage facilities are included Arrows: modelled gas flows LNG market representation is linked to Asian LNG prices Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 6

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS EGMM main inputs and outputs INPUT OUTPUT Demand by countries (annual quantity, monthly distribution) Wholesale gas price by country Social welfare: • Domestic production (annual quantity, minimum and maximum production) Consumption by countries • • • LTC contracts (ACQ/DCQ), flexibility Infrastructure: Interconnectors, storage, LNG, tariffs MODEL Gas flows on interconnectors • • Storage stock change • • External price: for LTC, LNG, DZ, NO, RU Energy Community Secretariat Import through long term contracts and spot trade EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects Consumer surplus Producer surplus Storage operation profit Storage arbitrage profit Net profit from long-term contracts TSO auction revenue TSO operation profit LNG terminal operator’s profit 7

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Net Present Value of Social Welfare Change Modelling results (95% Normal, 5% SOS) Welfare change in 2020 Welfare change in 2021 … Welfare change in 2030 … Welfare change in 2050 … Welfare change discounted to 2018 Assumed real discount rate: 4 % Welfare change discounted to 2018 … Welfare change discounted to 2018 Net present value of welfare change Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects Year of commissioning + assessed period of 25 years 8

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Modelled scenarios Normal scenario (95%) Security of supply scenarios (5%) 100% cut of Yamal to Belarus for 1 month in January (SOS 1) (for Ukraine. Belarus reverse flow) Likely affected: BY, PL 100% cut of SCP (AZ-GE) for 1 month in January (SOS 2) (for White Stream) Likely affected: AZ, GE Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 9

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivities Common sensitivities D+10 10% higher demand in all modelled countries D-10 10% lower demand in all modelled countries LNG high LNG oversupply on global markets, increased supply to Europe LNG low LNG shortness on global markets, decreased supply to Europe Sensitivity for Ukraine-Belarus reverse flow Belarus elasticity Assuming higher demand elasticity (0. 1 as opposed to 0. 01) to reflect fuel switching in power sector Sensitivities for White Stream high cost TM, AZ gas Assuming higher cost of production for new Azeri and Turkmen gas RO offshore + 4. 4 bcm/y Romanian offshore production Transbalcan reverse flow Allowing reverse flow on the Transbalcan pipeline up to Ukraine Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 10

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS CO 2 effects in Ea. P countries Based on IEA Primary energy statistics 2009 -2015 Unitary increase of gas consumption will crowd out other fossil fuels (coal, oil, etc) in their share at the primary energy consumption from power generation and heating RES and electricity can not be replaced with gas, ie. Increased gas consumption will always result in lower CO 2 emissions CO 2 benefit effects are negligible compared to gas market modelling results Energy Community Secretariat CO 2 emission reduction for 1 TWh of gas consumption, Δ AR kt. CO 2/TWh -64. 5 AZ -74. 5 BY -77. 3 GE -122. 5 MD -89. 5 UA -114. 0 EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 11

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Evaluation criteria Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 12

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Assumptions and inputs for Ea. P Demand supply outlooks based on ENTSOG and country submissions Network based on TYNDP and FID project expansion LTC contract pricing based on EUROSTAT Comext Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 13

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Production, consumption and pipelines Production, TWh/year 2015 2020 2025 2030 2035 2040 2045 2050 AR 0 0 0 0 IEA AZ 572 861 1092 1308 1308 IEA BY 7 7 7 7 IEA GE 0 0 1 1 MD 0 0 0 0 UA 208 223 237 251 266 280 295 309 Source GOGC ANRE's Annual Report PECI 2 Consumption, TWh/year Maximum flow Exit Entry UA-PL GWh/d 136 €/MWh 0. 93 €/MWh 0. 71 Third party access (regulated/ negotiated/ no) r. TPA UA-SK 3200 1. 31 0. 45 r. TPA UA-HU 574 1. 26 0. 55 r. TPA UA-RO 879 1. 03 0. 39 r. TPA UA-MD 226 0. 85 0. 17 r. TPA RU-UA 7620 0. 00 0. 47 r. TPA HU-UA 183 0. 39 0. 47 r. TPA PL-UA 45 0. 58 0. 47 r. TPA SK-UA 416 0. 63 0. 47 r. TPA 140 1. 00 855 1. 00 785 1. 00 216 1. 00 119 1. 00 IR-AR 63 0. 50 Exempted from TPA Exempted from TPA No TPA RU-BY 1201 0. 00 No TPA BY-PL 1201 0. 00 0. 29 No TPA Pipeline RU-GE 2016 2020 2025 2030 2035 2040 2045 2050 Source AR 21 21 IEA AZ 111 111 IEA GE-TR BY 185 185 GE-TR 24 30 33 36 41 44 44 44 11 11 12 13 14 14 327 369 368 371 375 394 394 IEA TYNDP 2017/ GOGC Moldovagaz Naftogas from 2016 GE MD UA Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects AZ-GE GE-AR Transmission fee 14

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Storage facilities Storage Market Working gas TWh Krasnopopivske Olyshivske Bohorodchanske Uherske (XIV-XV) Oparske Solokhivske Dashavske Kehychivske Chervonopartyzans ke Bilche-Volytsko. Uherske Proletarske Hlibovske Krasnodarskoye Pribugskoye Mozyrskoye Abovyan Kalmaz Garadagh Capacity Injection Withdrawal Infrastructure fees Storage Exit from Entry to fee TSO from storage €/MWh 0. 42 0 0 0. 42 0 0 Third party access (regulated/negotiat ed/no) UA UA UA 4. 5 3. 3 24. 4 20. 1 20. 3 13. 8 22. 9 7. 4 16. 0 GWh/d 53. 2 22. 2 529. 4 242. 9 221. 6 138. 1 276. 5 94. 7 170. 6 GWh/d 53. 2 21. 2 275. 3 242. 9 221. 6 84. 0 276. 5 89. 5 109. 8 UA 179. 7 1075. 3 1265. 1 0. 42 0 0 regulated TPA UA UA BY BY BY AR AZ AZ 10. 8 11. 0 15. 0 107. 7 44. 0 310. 0 107. 7 49. 5 310. 0 1. 4 48. 0 90. 0 150. 0 0. 42 1 1 1 0 0 0 0 regulated TPA no TPA no TPA Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects Note regulated TPA regulated TPA regulated TPA no tariff data no tariff data 15

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Input data on Belarus Production: 2. 3 TWh/year 2020 -2050 BY-LT 325 GWh/d Demand: 185 TWh/year 2020 -2050 RU-BY 1200 GWh/d BY-PL 1200 GWh/d Storages: Mozyrskoye, Osipovichskoye, Pribugskoye (total 15 TWh working gas) LTC with Russia at price 130 USD/tcm BY-UA 956 GWh/d Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 16

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Input data on Armenia, Azerbaijan, Georgia RU-AZ 392 GWh/d RU-GE 140 GWh/d AZ-GE 1165 GWh/d GE-TR 1000 GWh/d GE-AR 119 GWh/d *note: UA, MD inputs can be found in the report Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 17

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Submitted projects - gas Project GAS_01 GAS_02 Pipeline From To Max flow Trans. fee Entry Exit €/MWh 0. 50 2020 Inv. cost (from) million € 4 Inv. cost (to) million € 0 Year UA-BY reverse flow UA BY GWh/d 1201 White Stream GE RO 490 0. 50 2022 3840 60 (SCP (F)-x) AZ GE 656 0. 50 2022 Not cons. (TCP) TM AZ 656 0. 50 2022 Not cons. *SCP(F)-x and TCP assumed to be part of White Stream to provide sourcing as suggested by the Project Promoter. We have not considered the cost of these infrastructure elements. Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 18

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Investment cost verification Cost of Ukraine-Belarus reverse flow is GAS_01 Total compress or power (MW) New Expansion Sokal 78 Compress or cost (m€, real 2018) average price 169. 7 Cost of White Stream is low compared to TS Koval 92 200. 1 193. 3 146. 2 131. 1 Dolyna 80 174. 0 168. 1 127. 1 114. 0 Cost of onshore sections between TM, AZ, GE not SUM 543. 8 525. 4 397. 2 356. 3 considerably higher if new compressor station or expansion is considered (340 -540 M€) as opposed to submitted investment cost (4 M€) Compressor cost (m€, real 2018) median price 163. 9 Compress or cost (m€, real 2018) average price 123. 9 Compres sor cost (m€, real 2018) median price 111. 2 included in modelling GAS_02 Due justification and detailed cost assessment is Technical data Investment cost (m€, real 2018) average price Investment cost (m€, real 2018) median price 1138 km (for the longer option) 1250. 7 1195. 9 115 km 173. 8 164. 5 350 MW 761. 3 735. 6 2185. 8 2096. 0 needed from project promoter’s side – why the lower costs? Offshore pipeline 32" Onshore pipeline 48" Compressor station SUM Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects Total submitted CAPEX (m€, real 2018) 3900 19

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Reference case, modelled prices €/MWh 2050 2020 €/MWh AR AZ BY GE MD UA Normal, 17. 9 year 22 10. 6 22. 9 24 22. 5 Normal, 17. 2 January 22. 2 10. 1 23. 2 24. 4 23 SOS 1, 17. 2 January 22. 2 1139 23. 2 24. 5 23. 1 SOS 2, 17. 2 January 10. 1 2 008 25 23. 6 Normal 17. 9 10. 1 10. 9 21. 7 23. 2 21. 7 Normal, 17. 2 January 10. 1 10. 4 22. 6 23. 6 22. 2 SOS 1, 17. 2 January 10. 1 1139 22. 6 23. 7 22. 2 SOS 2, 17. 2 January 10. 1 10. 6 1 984 24 22. 6 Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 20

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Results – gas (modelled region) Total modelled Normal Welfare (m€) SOS Welfare (m€) Total Welfare (m€) CO 2 benefit (m€) Total investment costs (m€) NPV (m€) PI* GAS_01 Reference 0 111182 5559 23 4 5578 1431 GAS_02 Reference 24636 91861 27994 94 3900 24187 7 GAS_01 NPV PI* GAS_02 NPV PI* • • Demand +10% Demand -10% LNG high LNG low Belarus elasticity 5578 1431 7142 1832 4030 1034 5493 1409 high cost RO Transbalcan TM, AZ gas offshore reverse flow Demand +10% Demand -10% LNG high LNG low 28770 19364 17348 28532 13046 22751 24164 8. 38 5. 97 5. 45 8. 32 4. 35 6. 83 7. 20 Both projects are beneficial *Profitability index=Benefit/cost ratio Results are robust for sensitivities Ukraine-Belarus reverse flow (GAS_01) • UA-BY reverse flow has huge SOS impact in Belarus as it ends isolation. Project is beneficial even with low probability of SOS (0. 003%) • UA-BY reverse flow is less useful when BY demand response is available (power sector gas substitution) • Very low cost of the UA-BY reverse flow ensures the profitability of this project White Stream (GAS_02) • White Stream has huge market integration impact on a wider region • White Stream depends on the availability and pricing of TM gas and transport route via AZ (costs of these projects were not considered!) Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 21

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivity – Ukraine-Belarus reverse flow • Project has welfare effect only in SOS 1 case (complete cut of Yamal) • Investment cost is really low, compared to ACER benchmarks (4 M€ vs estimated 340 -540 M€) • • The project is not affected by LNG supply to Europe, being located in an isolated, land-locked country Higher demand is beneficial while lower demand decreases the positive effects. Still, project is highly positive in all cases Demand elasticity assumptions highly affect the NPV and PI Still, Project Promoter was only referring to the UA side and no indication was given on the BY side Energy Community Secretariat Total SOS Total CO 2 investm Welfare benefit ent (m€) costs (m€) NPV (m€) PI Modelled region Normal Welfare (m€) Reference 0 111182 5559 Demand +10% 0 142985 Demand -10% 0 80227 LNG high 0 23 4 5578 1431 7149 -3 4 7142 1832 4011 22 4 4030 1034 109446 5472 25 4 5493 1409 LNG low 0 109459 5473 24 4 5493 1409 Elastic demand in Belarus 0 12552 628 23 4 646 167 Investment cost 0 111182 5559 23 540 5042 10 Hosting Normal Welfare (m€) Total SOS Total CO 2 investm Welfare benefit ent (m€) costs (m€) NPV (m€) PI Reference 0 100819 5041 24 4 5061 1299 Demand +10% 0 84399 4220 3 4 4219 1083 Demand -10% 0 79752 3988 22 4 4006 1028 LNG high 0 103596 5180 25 4 5201 1335 LNG low 0 101917 5096 25 4 5117 1313 Elastic demand in Belarus 0 7340 367 23 4 386 100 Investment cost 0 100819 5041 24 540 4525 9 EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 22

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Indicators Ukraine-Belarus reverse flow (BY) Without project With project Project effect Comment N-1/SRI 0. 342 1. 605 1. 263 Highly increased system reliability IRD 10000 4287 -5713 Supply diversification 9876 4260 -5616 Number of sources 2 4 2 Increased sources, but only for SOS Bi-directionality 0 1 1 Total bi-directionality Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects Based on capacities high effect (but no realistic due to prices) 23

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivity – White stream • Project is positive in all sensitivity cases • The project is primarily a market oriented investment • • Higher LNG supply has negative effect on the NPV, a tighter LNG market has positive effect Without the upstream investments in AZ, TM, the sourcing of the project is not ensured Normal Welfare (m€) SOS Welfar e (m€) Total Welfar e (m€) CO 2 benefit (m€) Total inv. Cost (m€) NPV (m€) PI Reference 24636 91861 27994 94 3900 24187 7 Demand +10% 28873 102846 32568 102 3900 28770 8 Demand -10% 20118 81275 23181 84 3900 19364 6 LNG high 17732 85653 21118 130 3900 17348 5 LNG low 28952 96687 32357 75 3900 28532 8 high cost TM, AZ gas 13528 80469 16869 77 3900 13046 4 RO offshore 23192 90550 26558 93 3900 22751 7 Trans-Balkan reverse flow 24611 91871 27970 94 3900 24164 7 Norma l Welfar e (m€) SOS Welfar e (m€) Total Welfar e (m€) CO 2 benefit (m€) Total inv. Cost (m€) NPV (m€) PI Reference 13411 82758 16887 34 3900 13020 4 Demand +10% 16819 92738 20633 40 3900 16773 5 Demand -10% 14800 27 3900 10927 4 Total modelled Hosting • • • Cost of newly sourced gas affects the outcome highly Romanian production has limited effect Trans-Balcan reverse flow has no effect Energy Community Secretariat 11705 73352 LNG high 4975 75419 8497 38 3900 4635 2 LNG low 21552 89612 24958 29 3900 21087 6 high cost TM, AZ gas 5324 73945 8768 33 3900 4901 2 RO offshore 11027 80346 14494 32 3900 10627 4 Trans-Balkan reverse flow 13371 82749 16849 34 3900 12983 4 EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 24

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS White Stream with TCP and SCP(F)-x expansion benchmark costs included Project GAS_02 From Pipeline To Max flow Trans. fee Entry Exit €/MWh 0. 50 2022 Inv. cost (from) million € 3840 Inv. cost (to) million € 60 Year White Stream GE RO GWh/d 490 (SCP(F)-x)* AZ GE 656 0. 50 2022 - 1047 (TCP) TM AZ 656 0. 50 2022 - 3000 (source for costs: ENTSOG TYNDP 2018 PROJECT-SPECIFIC COST-BENEFIT ANALYSIS, page 456. TRA-N-339 TRA-F 1138) GAS_02 Total modelled Normal Welfare (m€) SOS Welfare (m€) Total Welfare (m€) Reference 24636 91861 27994 Total CO 2 benefit investment NPV (m€) costs (m€) 94 7947 20141 PI* 3. 5 • White Stream sourcing is not possible without further the expansion of SCP(F)-x* (not confirmed capacitites) and new TCP capacities • Investment cost benchmark increases to nearly 8 Bn € Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 25

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Indicators White Stream (RO) Without project With project Project effect Comment N-1/SRI 2. 547 3. 308 0. 761 Higher SRI IRD 4940 3556 -1385 More imports, more competition Supply diversification 3560 2747 -813 More imports, more competition Number of sources 4 5 4 Additional Azeri source Bi-directionality - - Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 26

BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Conclusions Both projects proved to be beneficial Ukraine-Belarus reverse is a SOS investment No-regret option, small investment with huge SOS effect Caveats: Belarus involvement is missing Cost of the project is exceptionally low White Stream is beneficial on a market basis Caveats: Upstream investment SCP(F)-X and TCP are needed, enabling the project- the cost of this investment is not reported by the promoters Sensitive to global market, cost of gas and demand Huge investment project with multiple stakeholders and countries crossed. By the time it is realised, European gas demand may fall due to deep decarbonisation agendas Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 27

Thank you for your attention! peter. kotek@rekk. hu Energy Community Secretariat EU 4 Energy Workshop on Energy Governance Community Secretariat Assessment of Energy Infrastructure Projects 28