The end of the long-term contracts era: which consequences for the EU Gas Market?

19 May 2017

FSR Regulatory Policy Workshop Series 2016-2017

Long-term contracts (LTCs) were the most commonly used supply agreements in the gas sector and also generally considered necessary to guarantee the security of supply. EU gas infrastructures were often developed taking into account the existing LTCs in place.

In the past 10 years, the EU gas market has gone through profound structural changes: the elimination of national barriers and the greater liquidity enhanced by market opening and liberalisation gradually started de-linking the gas price formation from oil indexation and turning towards European hubs’ price reference. Furthermore, gas demand has become more variable – and its fluctuation depends on a number of additional and external dynamics – in primis the subsidisation of renewable energy.

While on one side the shift towards short-term contracting in the gas market was a successful outcome of the EU energy market reform, it might also become soon a concern to TSOs, as the phase-out of long-term contracts might create more uncertainty regarding their future revenue streams. According to a recent analysis performed by the European Commission, the existing long-term commodity contracts are expected to terminate in the course of the next 20 years.

Will this trend have a fundamental impact on the future of the EU gas market?
To what extent will it affect TSOs revenues and, consequently, transportation tariffs?
How important is the actual flow of gas (rather than the contracted capacity) and the forecast of gas demand?
Are long-term commodity contracts the only way of guaranteeing the security of supply?
Can well-diversified sources and liquid hubs provide an equivalent guarantee?

The Workshop will try to answer these questions investigating the impact of the reduction in transportation capacity contracted long-term on the revenues of TSOs and the level of network charges; as well as exploring the way more liquid hubs and greater market integration can replace long-term commodity contracts in providing security of gas supply.

This workshop is exclusively open to national regulators, representatives from public bodies and associate & major donors of the FSR Energy area.