Towards efficient and sustainable cost-recovery for the European gas transmission network

The cost of gas transmission networks in Europe is currently covered via the so-called entry-exit tariffs. This tariff methodology is based on charging capacity reservations at both entry and exit points of balancing zones, or entry-exit systems. Current entry-exit systems largely coincide with Member States’ territory. The entry-exit model has supported a smooth transition from the traditional organisation of the European gas industry to a single liberalised European market. However, as the EU gas market develops, the current tariff methodology is now being questioned, on the grounds that it may be unsuitable to achieve the objective of a single pan-European market, with unbiased gas flows and no obstacles to trading. This Policy Brief presents an alternative approach to gas transmission cost recovery that would address most of the drawbacks of the current methodology. The qualifying feature of our proposal is that the entire transmission revenue requirement is met by charging the transmission network’s exit points to distribution networks and to directly connected end-customers. In contrast to the current system, our model requires an explicit mechanism to share the cost of transit networks among consumers connected in different countries. We consider two possible designs for such mechanisms. The first one assesses the share of transit networks’ cost falling on destination countries according to a methodology that mimics current arrangements. This model could be implemented with no or limited impact on the institutional framework currently governing the European gas transmission sector. The second design option allocates ex-ante a share of the overall revenue requirement to each European country. In this approach, the share of transit networks cost falling on destination countries does not depend on the tariffs and realised demand for that networks’ services. This approach would address potential weaknesses of the current regulatory framework in case the trend of declining gas demand does not reverse, and/or if covering most of the cost of (desirable) network upgrades cannot be met by selling long-term transmission rights. Although our proposal is conceived with reference to the entire Union, our approach might entail the first phase of implementation at regional scale.