For more than half a century, gas has been inextricably linked to the European energy supply in general and to the Dutch supply in particular. Since the discovery of the Groningen Gas Field in 1959, at the time the biggest onshore gas field worldwide, more than 2000 billion cubic metres of natural gas has been extracted. More than 95 percent of Dutch households use natural gas for heating. GasTerra is the exclusive vendor of the Groningen gas. A large part is supplied to the domestic market and a significant percentage is supplied to foreign customers in Germany, Belgium and France.
In addition to the Groningen gas, which is low calorific gas (in other words, has a relatively lower heating value), GasTerra also trades in a high volume of high calorific gas. This gas mainly comes from smaller gas fields in the North Sea and from imports from Russia and Norway. The high calorific gas is used by industry and also exported to those countries as well as to Switzerland, the United Kingdom and Italy. Unlike the Groningen gas, producers may also offer the gas from the smaller fields to other gas traders, but GasTerra is legally obliged to procure this gas at a market price.
In retrospect, gas is indisputably a success story. In a time of structural and drastic changes, in which the gas trade and the gas transmission-related activities were separated and the market was liberalised, gas has maintained its leading role in energy supply. Yet nothing can be taken for granted. The position and image of gas are under pressure. The positive characteristics of our product, like comfort, clean fossil fuel, flexibility and versatility are at risk of fading into the background. The underlying causes in our region are the earthquakes, which have reinforced the general opinion that in the best case scenario gas is a 'necessary evil' and, recently, the Russian/Ukrainian crisis, which has only strengthened existing doubts about the security of gas supply in Europe.
The earthquakes have an indirect impact on the company strategy. After all, the production ceiling that the Minister for Economic Affairs announced on 17 January 2014 in the draft decision not only restricts the producer of the Groningen gas, NAM, but also the vendor, GasTerra.
The abovementioned developments obviously have a negative impact on the image of gas. While virtually no one in Europe denies the importance of gas in the energy mix, neither now or in the long term, a considerable group has difficulty seeing our product as part of the solution instead of a (co) party in causing problems. In the long run, this situation poses a threat for the gas sector and therefore for GasTerra as well. It is therefore our task to improve the reputation of gas. The reality is that gas worldwide, in Europe and in the Netherlands is indispensable and will remain so in the coming decades. This applies from a security of supply point of view as much as a responsible climate policy. The economic and social value of this wealth of resources may also be overlooked. Even today, fifty years after discovering the Groningen Gas Field, the Netherlands still has in total more than 1000 billion cubic metres of conventional natural gas. Responsible extraction offers society both economic and ecological benefits in the future. This is the background to GasTerra’s slogan and the motto for this annual report: Energizing the future.
Due to various events and developments, the gas market went through quite a few changes in 2014. The European demand for gas was lower in 2014 compared to 2013. On the one hand, this was attributable to the high temperatures in the first and second quarter, resulting in a lower demand for gas among households than anticipated. In addition to this, less gas was yet again used for generating electricity in power plants due to the low coal prices and CO2 emission allowances. Because the demand for natural gas fell behind expectations in Asia, more LNG became available for the European market. The demand for gas was also low because of the hot weather and the storage facilities were filled. This primarily resulted in lower prices on the gas trade markets during the summer months. As the same time, the virtual trading point Title Transfer Facility (TTF) flourished; never before had so much gas been traded than in 2014.
On 17 January 2014, the Dutch Minister for Economic Affairs, Mr .Kamp, announced that a maximum volume had been set for the extraction from the Groningen Gas Field. In addition to this, the production from the clusters around Loppersum, where the strongest earthquakes had occurred, was cut back severely. The decision, which was provisional at that time, referred to a production ceiling of 42.5 billion cubic metres in 2014 and 2015, and 40 billion cubic metres in 2016. During this period, the extraction from the clusters around Loppersum would not exceed three billion cubic metres per annum. On 29 January 2015, the minister announced in a letter to the Dutch Lower House that the total extraction from the Groningen Gas Field will be cut back to a maximum of 39.4 billion cubic metres in 2015 and 2016. On 9 February 2015, the minister announced in a letter to the Lower House that the extraction in the first half of 2015 will be restricted to 16.5 billion cubic metres. This level of extraction, according to the minister, makes it possible as of 1 July 2015 both to maintain the level of 39.4 billion cubic metres and to decide on a further reduction to the level of 35 billion cubic metres for the year 2015.
The fact that a ceiling has been set for Groningen gas is nothing new. A ceiling was imposed on GasTerra in the past for the procurement of Groningen gas, spread over several years. From 2006 up to and including 2015, 425 billion cubic metres of Groningen gas is to be procured. 449 billion cubic metres applies in the period 2011-2020. The transition from a multi-year ceiling for procuring Groningen gas to an annual ceiling for production from the Groningen Gas Field required the necessary adjustments.
GasTerra procured 42.1 billion cubic metres of gas in 2014. In accordance with the draft decision on the Groningen Extraction Plan, NAM produced 42.4 billion cubic metres from the Groningen Gas Field in that year. The difference between the production and the procured volume lies in NAM’s own usage, e.g. fuel gas, and the net withdrawal from the underground storage facilities. Within the restriction that the production ceiling on Groningen is also intended for GasTerra as a buyer, GasTerra has successfully fulfilled its mission to maximise the value of Dutch natural gas.
On 6 September 2013, various parties signed the SER (Dutch Social & Economic Council) Energy Agreement for Sustainable Growth. One of the agreements is that energy consumption in the Netherlands is to be cut back, among other things, by making houses more energy efficient. Many housing corporations put this into practice. More energy efficiency means lower gas sales among households. GasTerra has adjusted its sales expectations in this segment to reflect this.
At the European level, the European Commission established the Framework 2030 in 2014. The Framework 2030 specifies three energy targets for 2030, namely: 40 percent emission reduction in each member state; 27 percent improvement in the energy efficiency compared with 1990 at European level, and a 27 percent share of renewable sources in the energy mix.
Virtual Trading Points
Trading at the Dutch TTF trading point increased in 2014 to a record high with a traded volume of almost 1,400 billion cubic metres. In doing so, the TTF took the lead position from the British trading point, National Balancing Point (NBP) in the Over-The-Counter trade (OTC). With this method of trading, parties do business with each other directly. The fact that trading is effected in Euros at the TTF and parties are not exposed to currency risks may play a role here. The churn rate also rose sharply in 2014. The average churn rate was 18.5 in 2013 and rose to 31 in 2014. During the summer months, the numbers were above the 50. This was due to the warm weather. The demand for gas was relatively low prior to this and the storage facilities were full; consequently, many parties had procured more gas than they could supply. They offered the surplus on the TTF. This had a downward effect on the prices; at the same time, the volatility (price movements) increased, making the market more interesting for more parties.
The crisis in Russia and the Ukraine had no structural impact on pricing, but did affect the volatility. Political efforts caused an increase in the price and dropped again once an agreement had been reached.
The TTF and the British NBP are frontrunners in Europe as hubs for natural gas. The growth levels on the TTF and the NBP gradually levelled off. Among others, the German trading points, NCG and GasPool are developing further. GasTerra also expanded its trading activities to these German trading points, even though trade is still somewhat limited here compared to the volume that GasTerra trades in the United Kingdom. The TTF remains the most important price marker for long-term contracts and for gas on the other trading points in continental Europe.
Because the demand for natural gas fell behind expectations in Asia, more LNG became available for the European market. For example, particularly Spain and the United Kingdom imported more LNG in 2014 than expected. How the demand for LNG develops in Asia in the coming years is closely related to the economic growth on this continent and the energy choices the countries concerned will make. Japan, for instance, is planning to reinstate a number of nuclear power stations, which had been shut down in response to the nuclear power station disaster in Fukushima in 2011. This will have an impact on the demand for LNG in Japan in the long term.
Partly due to the construction of LNG export terminals in Australia and America, the supply of LNG will grow in the coming years. Australia will be able to tranship 100 billion cubic metres as of 2016 and America 60 billion cubic metres as of 2018. The bulk of this American gas, namely 40 billion cubic metres per annum, has already been contracted by European parties for delivery from 2020 onwards. In addition to American LNG, there is an increase in LNG from Qatar and Russia (Yamal). In addition to these volumes, we have also seen gas from the Shah Deniz gas field in Azerbaijan, which will be transported by pipeline to Italy via countries including Turkey. Contracting LNG does not guarantee that this gas will actually be supplied in Europe. This partly concerns volumes that are supplied in the country of production and which is available for sale on the world market to the buyer of choice. It is also possible to reship LNG supplied in Europe to another market.
Competition from Coal
The price of coal and the price of CO2 emission allowances are still comparatively low at the time of publication of this annual report. Coal-fired electricity generation is therefore still much cheaper compared to gas-fired electricity generation. Various north-western European energy companies have therefore shut down their gas-fired power stations, or have announced that they are planning to do so. In Belgium, gas power stations were also shut down because they were not economically viable. However, some gas power stations have been reinstated because of a risk of electricity shortages due to nuclear power stations in the country being unexpectedly (longer) inoperative. There was also talk of starting up gas power stations in the Netherlands to supply the Belgian market.
In the Netherlands, agreement has been made to shut down the five olds coal-fired power stations as part of the SER energy agreement. However, these power stations are to be replaced by three new more efficient stations (two coal-fired power stations on the Maasvlakte and one power station in the Eemshaven).
The shutdown of gas power stations has consequences for the security of supply and climate goals. Coal may therefore be a cheaper alternative at present, however, coal combustion releases more CO2 than gas combustion. Furthermore, coal-fired power stations are not as easy to connect and disconnect as gas-fired power stations, rendering them less suitable in the transition to sustainable energy supply as a supplement to the frequently unpredictable renewable sources. In this context, various European countries are taking measures to safeguard the security of supply. These so-called capacity mechanisms mean that the reserve capacity that energy companies have to adhere to in order to guarantee the power supply will be reimbursed.
In a European context, there is talk of improving the trading system for CO2 emission allowances. This would lead to higher CO2 prices and thus promote business investments in emission-restricting measures, like the use of gas.
Shale Gas in the Netherlands
The Minister of Economic Affairs is investigating whether – and if so, where and under which conditions shale gas can be extracted. In 2014, governments, organisations and civilians were able to respond to the aim of the PlanMER environmental impact study. The decision-making on shale gas extraction in the Netherlands is expected in the second half of 2015.
GasTerra supplied 81.3 billion cubic metres of gas in 2014, 8 billion cubic metres less than in 2013. This is primarily due to the restricted output of the Groningen Gas Field and the average high temperature. 2013 got off to a cold start, while at the end of the year, the winter of 2014 was mild. The temperatures not only had a downward effect on the supplies, but also resulted in a price reduction. The average price paid per cubic metre in 2014 was 23.9 eurocent compared to 27.1 eurocent in 2013.
Delivery at the connection point
Energy Companies and power stations
In 2014, GasTerra supplied 1.8 billion cubic metres directly at the connection point of energy companies and power stations. Consequently, the direct supply to this market segment was slightly lower than expected. This was due to the average high temperatures in 2014. The lower volume in this segment was, however, largely compensated for by the higher sales of within-year products. This means that the gas is contracted and supplied in the same year.
Wind-dependent gas supply
The wind-dependent gas supply, a product developed by GasTerra in cooperation with energy company Eneco, is a good example of product innovation. Depending on the forecast wind speed, GasTerra supplies more or less gas to Eneco, whereby not only the volume, but also the gas price is linked to the wind speed. This enables Eneco to better control the financial risk associated with the production of wind energy. This product is not only in line with customer needs, but also promotes the use of gas as a transition fuel. Modern gas-fired power stations are highly suitable as back-up for wind power; they are easier to regulate when the wind subsides than coal-fired power stations. Moreover, gas is the cleanest fossil fuel. Two reasons for Eneco opting for this solution.
The positive effect of continuous product development is reflected in the sales contracts for the coming years. GasTerra responded to the strong increase in smaller, and often local energy companies. These parties contract more gas each year, because they see growth in their own customer portfolios. GasTerra benefits from this due to a higher supply to this market segment.
In 2014, GasTerra supplied 3.5 billion cubic metres of gas to its industrial customers. In the first half of 2014, the number of contracts for the coming years was lower than expected. This was compensated for by the increase in the number of tenders and contracts in the second half of the year.
Consequently, the supply was lower than expected. There are several reasons for this. Firstly, the economic circumstances had an impact on production, which led to a lower demand for gas. In addition, customers make less use of their cogeneration systems (CHPs), which generate heat and electricity simultaneously. To many customers it seemed cheaper to purchase electricity instead of GasTerra’s product, resulting in a lower demand for gas on these systems. Finally, the supply in 2014 was negatively influenced by generator failure in the case of a number of big customers because of faults and maintenance.
In spite of the abovementioned developments, GasTerra works hard to preserve and expand the customer portfolio. We continually consult with the customers to ensure that the conditions and products are still in line with the market. This resulted in some product changes being made in 2014.
GasTerra developed a new customer portal for industrial customers in 2014, which will be introduced at the beginning of 2015. Customers can use this portal to order additional volumes, request and accept quotations and examine their contracts and invoices. In a customer satisfaction survey in 2013, customers indicated a need for more information, specifically on market trends and prices. We have been issuing a digital newsletter since 2013 in response to that need. In addition to this, the company organised a well-attended customer networking day in October with lectures on the gas market and a visit to the Gasunie gas treatment plant in Ommen.
We support our industrial customers in promoting sustainable production processes with the Environmental Plan for Industry (EPI). GasTerra uses this programme to support industrial customers in the improvement of energy efficiency, the reduction of emissions and the sustainability of their production processes. GasTerra implemented six EPI projects in 2014. Thus, the objective was achieved. GasTerra also supports the production and trade in green gas. In 2014, two contracts were concluded with new customers. Thus, the objective was also achieved in this area.
Supply on the hub
The trade on the TTF takes place via standard framework agreements. This means that only the price, the volume and the delivery period have to be agreed for each deal. A deal can be effected directly via the exchange, via a broker with a customer, or bilaterally with a customer. GasTerra’s preference goes to the first option. Because many market parties trade via brokers, we often use this channel as well. GasTerra considers it a good development that the number of brokers increased in 2014. This offers market parties more freedom of choice.
Trends in physical and traded volumes TTF
As in 2013, GasTerra supplied 29 billion cubic metres of gas to energy companies, banks and traders via the TTF virtual trading point in 2014. The supply to these target groups was lower than expected. In some respects, this is due to the relatively high temperatures in 2014, resulting in fewer temperature-dependent contracts being concluded. Despite the increase in the number of brokers, the number of parties on the TTF dropped slightly, because a number of financial parties had become less active. In 2014, a total of 44 billion cubic metres were physically delivered via the TTF. GasTerra’s share it this amounted to 66 percent.
On average, the prices that were established on the TTF were lower than in 2013. The annual average day-ahead price dropped by 6.0 eurocent per cubic metre compared with the cold year 2013; the annual average month-ahead price dropped by 5.1 eurocent per cubic metre. The crisis in Russia and the Ukraine had a restrictive impact on the pricing, more specificaly the price volatility. When tensions arose, the price increased, only to drop again after agreement was reached.
Trends in average monthly month-ahead prices
Trends in average monthly TTF prices
In 2014, GasTerra exported 47.0 billion cubic metre of gas to a limited number of big energy companies, which resold the gas to other energy companies or end users. Compared to 2013, export to these customers dropped by 6.2 billion cubic metre. This decrease can mainly be explained by the high temperatures in 2014.
(in billions of m³)
Total excluding the Netherlands
A number of export contracts where renegotiated in 2014. The most important theme is the transition in the market from oil to gas indexed prices. This resulted in the roles of the various parties in the value chain being redefined. Apart from the price, topics that play a role here include contractual flexibility and the point of supply. In many cases, the parties are coming closer together, but this requires a lot of time and effort.
Security of supply
On 17 January 2014, the government announced a draft decision on the maximum gas output from the Groningen Gas Field. This was in response to the earthquakes in the extraction area. This caused uncertainty among export customers concerning GasTerra fulfilling the obligations in the long term. The proposed decision referred to a production ceiling of 42.5 billion cubic metres in 2014 and 2015, and 40 billion cubic metres in 2016. During this period, the extraction from the clusters around Loppersum may not exceed three billion cubic metres per annum. In a letter dated 29 January 2015 to the Dutch Lower House, the minister conveyed that the total extraction in the Groningen Gas Field will be cut back to a maximum of 39.4 billion cubic metres in 2015 and 2016. Despite the production limitation, the company is still able to meet its contractual obligations. On 9 February 2015, the minister announced in a letter to the Lower House that the extraction in the first half of 2015 will be restricted to 16.5 billion cubic metres. This level of extraction, according to the minister, makes it possible as of 1 July 2015 both to maintain the level of 39.4 billion cubic metres and to decide on a further reduction to the level of 35 billion cubic metres for the year 2015.
With regard to concluding new long-term contracts, we abide by the Minister’s wishes. This means that we will not be concluding any new long-term contracts and the existing ones will not be extended or increased in volume.
Conversion from L-gas to H-gas
Due to the declining volume of production from the Groningen Gas Field after 2020, existing users of Groningen L-gas will have to switch over to H-gas. In various European countries, particularly Germany, France and Belgium, the conversion from L-gas to H-gas is an important theme. The conversion will have to commence from 2020 in Germany and from 2024 in Belgium and France. This issue only applies in the Netherlands from 2030. In the meantime, the plans for the conversion in Germany are becoming increasingly more real. The German gas transmission operators have developed a joint plan for this purpose. According to this plan, the conversion will start on a small scale in October 2015 to offset the drop in L-gas production from German fields. The details of the plan are still being worked out. The Belgian and French transmission operators have also announced that they are preparing to cut back import of Groningen gas. In December 2014, GTS announced its plans to increase its nitrogen capacity to safeguard the security of supply of L-gas in the long term.
The current restriction of production has no impact on the conversion; the reduced production from Groningen will, if necessary, be offset through quality conversion of high calorific gas with nitrogen.
Virtual Storage Services
GasTerra provides market operators with options for contracting virtual storage space for gas. These virtual storage services (VSS) are offered in the form of so-called Standard Bundled Units (SBUs), enabling market parties to inject or withdraw gas into or from a virtual storage facility. GasTerra provides this service on the TTF. ICE Endex, the gas and power exchange, auctions the volume as an independent party on instructions from GasTerra, so that purchasers remain anonymous to GasTerra.
In November 2013, market parties signed contracts for 3.7 million SBUs in the form of a one-year product (storage year 2014/2015). GasTerra also offered a five-year product (storage years 2014/2019) in November 2013. Of these, 4.1 million SBUs were contracted. Finally, the remaining 5.4 million SBUs where sold on the auction in February 2014 as a one-year product.
The first auction for the year 2015/2016 was held in November 2014. 4.5 million SBUs were sold at this auction in the form of a one-year product. The remaining capacity (4.5 million SBUs) will be auctioned again as a one-year product in February 2015.
In 2014, GasTerra procured 81.3 billion cubic metres of gas. 81.6 percent of that gas originated from the Netherlands. The remaining 18.4 percent was procured at trading points or imported.
Groningen Gas Field
On 17 January 2014, the Dutch Minister for Economic Affairs, Mr Kamp, announced that a maximum volume had been set for the extraction from the Groningen Gas Field. In addition to this, the production from the clusters around Loppersum, where the strongest earthquakes had occurred, was cut back severely. The decision, which was provisional at that time, referred to a production ceiling of 42.5 billion cubic metres in 2014 and 2015, and 40 billion cubic metres in 2016. During this period, the extraction from the clusters around Loppersum would not exceed three billion cubic metres per annum. On 29 January 2015, the minister announced in a letter to the Dutch Lower House that the total extraction in the Groningen Gas Field will be cut back to a maximum of 39.4 billion cubic metres in 2015 and 2016. On 9 February 2015, the minister announced in a letter to the Lower House that the extraction in the first half of 2015 will be restricted to 16.5 billion cubic metres. This level of extraction, according to the minister, makes it possible as of 1 July 2015 both to maintain the level of 39.4 billion cubic metres and to decide on a further reduction to the level of 35 billion cubic metres for the year 2015.
The fact that a ceiling has been set for Groningen gas is nothing new. A ceiling was imposed on GasTerra in the past for the procurement of Groningen gas, spread over several years. From 2006 up to and including 2015, 42.5 billion cubic metres of Groningen gas is to be procured. 449 billion cubic metres applies in the period 2011-2020. The transition from a multi-year ceiling for procuring Groningen gas to an annual ceiling for production from the Groningen Gas Field required the necessary adjustments.
GasTerra procured 42.1 billion cubic metres of gas in 2014. In accordance with the draft decision on the Groningen Extraction Plan, NAM produced 42.4 billion cubic metres from the Groningen Gas Field in that year. The difference between the production and the procured volume lies in NAM’s own usage, e.g. fuel gas, and the net withdrawal from the underground storage facilities. Within the restriction that the production ceiling on Groningen is also intended for GasTerra as a buyer, GasTerra has successfully fulfilled its mission to maximise the Dutch natural gas.
In 2014, GasTerra procured 24.2 billion cubic metres of gas from the small fields, 2.1 billion cubic metres less than in the preceding year. In the past decade, the procurement of gas from small fields decreased by about two bcm per annum. This is due to a decrease in the reserves in the small fields. As a result, the pressure in these fields declines, and the production decreases steadily. While reserves are still continuously being found in new small fields, this does not fully compensate for the decrease in production.
The outlook for the coming years shows a further decrease. These projections are based on statements from the producers and assume a stable level of investment.
Procurement from small fields
Improved Terms & Conditions
In 2013, GasTerra and the producers replaced the Buyer’s Request Regime with the Seller’s Nomination Regime. This means that the supply is no longer determined by the demand from GasTerra, but by the production. This allows producers to adjust the supply to the technical facilities of the fields more easily. To this end, they have to indicate the volumes they expect to supply in advance. The producers may indicate a limited share of the volume the day before delivery.
In 2014, as well as taking the initiative to improve the delivery terms & conditions, the company proposed that the producers announce the volume to be delivered a full day ahead. This method of working in line with the market means that GasTerra takes the producers’ requirements into account. In turn, the producers provide GasTerra with non-binding production forecasts for the short, medium and long term. We expect that all producers will automate the forecasts within the course of 2015 and will deliver according to the new terms and conditions.
Procurement from Virtual Trading Points and Overseas Markets
GasTerra procured 15.0 billion cubic metres of gas in 2014. This was effected via virtual trading points and by way of imports, specifically from Norway, Russia, Germany and the United Kingdom. Due to the long-term nature of the import contracts, little changed compared to the previous years.
Approximately 5 percent of the gas procured by GasTerra comes from Russia. This gas is procured based on a long-term procurement contract, wherein the rights and obligations of both parties are set out. Over the past year, the crisis in the Ukraine has put the trading relations between the EU countries and Russia under pressure. However, the gas trading activities have remained outside the scope of the sanctions and have not had any impact on the commercial relations. GasTerra may well have procured less gas from Gazprom in 2014, but this was because the Russian producer needed more gas to fill its storage facilities. This reduction was part of the contractual agreements.
Many of the import contracts where renegotiated in 2014. The most important theme is the transition in the market from oil to gas indexed prices. This resulted in the roles of the various parties in the value chain being redefined. Apart from the price, topics that play a role here include more flexibility and the point of delivery. In many cases, the parties are coming closer together, but this requires a lot of time and effort. The ultimate goal is not only to actualise the contracts such that so they do justice to the existing agreements, but also to adapt to the reality of the prevailing market circumstances. When the negotiating parties are unable to reach agreement, they may submit their dispute to an arbitral tribunal.
In the Netherlands, GasTerra procures the transmission capacity from Gasunie Transport Services B.V. (GTS), operator of the national gas transmission network. The costs for procuring transmission capacity in 2014 were € 569 million. As a result, the transmission costs were € 60 million higher than in 2013, in line with expectations. The GTS rates in 2012 and 2013 included a refund imposed by the regulator NMA (now known as ACM) of approximately € 400 million. With the removal of this refund, the rates in the Netherlands have risen. We expect that the transmission costs will remain more or less stable in the coming years.
In 2014, GasTerra saw an increase in short-term transmission bookings at home and abroad. When booking transmission capacity, the company makes maximum use of the booking platform PRISMA. Gas traders can book and offer transmission capacity with and to various transmission system operators on this platform. Thanks to a modification in the software in 2014, PRISMA is now integrated properly into our systems. GasTerra procured the most capacity on PRISMA via auctions. However, the term of the transmission capacity offered does not always correspond with the term of typical commodity deals. We would like to see these more closely coordinated.
To promote cross-border gas trade within the European Union, European supervisory authorities, market parties and transmission companies are working towards harmonising access to international transmission systems. A number of network codes were implemented in the Netherlands in 2014. For example, a New Balancing System came into effect on 3 June. Consequently, the bid price ladder (BPL) was swapped for trading on the within-day market. With the BPL, GTS made arrangements every day with parties who committed themselves to supplying extra gas or conversely to withdraw gas from the network in case of supply-demand imbalances. Now, if an imbalance occurs, GTS trades on the exchange during the day itself to redress the balance. Up until now, the new regime has been maintained without any problems under mild weather conditions.
Furthermore, the oversubscription and buy back scheme came into effect on 1 January 2014. Under this scheme, GTS can offer more capacity at certain border points than is technically available, on the assumption that not all parties will use the full one hundred per cent of their booked capacity simultaneously. To date, this has not presented any problems for GasTerra.
GasTerra places great importance on responsible supply chain management. In doing so, we focus primarily on the use of our product, because we consider it extremely important that we use gas efficiently. The updated stakeholders dialogue 2013, however, show that there is a lack of clarity among stakeholders concerning GasTerra’s role upstream, particularly as regards the earthquake problems and the procurement of gas from Russia. In order to provide greater insight into this theme, GasTerra has decided to define upstream supply chain management as a material topic in this Annual Report.
GasTerra procures and sells gas and related services. In doing so, we have to deal with various national and international parties. Obviously, we not only have to deal with producers, suppliers and customers, but also, for example, with transmission system operators for the transmission of the gas, market regulators and public authorities who are responsible for (monitoring) legislation and regulations. Within the chain, the trading portion falls within GasTerra’s responsibilities. In addition, we have the public duty to give effect to parts of the Gas Act.
We participate in various joint ventures within the chain. In doing so, the company aspires to achieve various goals like exchange of information, the development of sustainable energy applications, promoting the advantages of gas in the transmission to a sustainable energy supply and improving regulations. Within the context of the latter two topics we are active in The Hague and, primarily via the trade organisation Eurogas, in Brussels. We are also affiliated to the association of Dutch energy companies, Vereniging Energie-Nederland. GasTerra primarily focuses on downstream supply chain management as described above. As a trading company, we only have a limited on upstream supply chain management. GasTerra refrains from introducing political or social discussions, for example, into the contractual relationships that GasTerra has with its suppliers and customers.
Upstream supply chain management
GasTerra primarily trades in Dutch natural gas, and to a lesser extent, natural gas from Norway and Russia in particular. Supply chain management is understood to mean all activities from extraction to consumption of natural gas. In this respect, GasTerra is responsible for the trading part. Production companies are responsible for the extraction, network managers for transport, and users for the consumption. The division of responsibilities in the chain is contractually determined and parties can only point out to each other any failure in performing contractual obligations. For the procurement of gas, GasTerra mainly does business with Dutch gas producers, who, inter alia, have to meet strict requirements with respect to environmental, safety and good employment practices.
On 17 January 2014, the Dutch government announced the proposed decision on the amended extraction plan, which will restrict gas production from the Groningen Gas Field. This was deemed necessary in response to the increasing frequency and strength of the earthquakes in the extraction area. Under the decision, extraction of natural gas from the field may not exceed 42.5 bcm in 2014 and 2015, and 40 bcm in 2016. Furthermore, the extraction at five production sites in the heart of the earthquake zone, around Loppersum, will have to be reduced by 80% up to a maximum of 3 bcm. The NAM (Dutch National Oil Company) extracts gas from the Groningen Gas Field within the preconditions set by the minister in the product decision. GasTerra has procured the gas produced and resold it.
In addition to gas from the Groningen Gas Field, GasTerra also procures Dutch gas from the small fields. GasTerra promotes the production of this Dutch gas by matching the contract conditions for the small fields to the needs of producers wherever possible. This way, GasTerra gives substance to the small field policy, which states that gas from the Dutch small fields can be produced with priority. GasTerra has the legal duty to procure this gas under normal market terms and conditions.
In addition to Dutch gas, to a lesser extent, GasTerra also procures gas from Norway and Russia. This gas is procured based on long-term procurement contracts. In 2014, the crisis in the Ukraine placed the trading relations between the EU countries and Russia under pressure. However, the gas trading activities have remained outside the scope of the sanctions and have not had any impact on the commercial relations. Approximately 5% of the gas procured by GasTerra comes from Russia. This volume, however, only covers a small share of the export volume from Gazprom.
Security of supply
The European Union has conducted a stress test to define the possible consequences if the supply of Russian gas to Europe via the Ukraine stops partially or in full. This will not have any consequences for the Netherlands, which is self-sufficient and also exports gas. A halt on supply may well present problems in Southeast Europe, Finland and the Baltic States. Finland and the Baltic States are almost entirely dependent on Russian gas, but not on transmission via the Ukraine. They do not have a pipeline connection to the rest of Europe. In addition to gas storage, the new LNG receiving terminal in Lithuania is the only alternative for supplying natural gas, but these options are not sufficient to meet the European demand for gas. To a large extent, Southeast Europe depends on Russian gas supplied via the Ukraine. For the countries concerned, supplies from Western Europe provide an alternative to a certain extent, because ever since the interruption of the Russian supplies via the Ukraine in 2009, more possibilities have emerged in the European gas transmission network for supplying gas from west to east. By making transactions on wholesale markets, GasTerra can make an indirect contribution to supporting supply to Southeast Europe.
Several proposals have been made to reduce the dependency on Russian gas. For example, politicians have been put forward to restrict the import from Russia by importing LNG from the United States. However, this gas is more expensive than Russian gas, particularly due to the transmission costs and because substantial volumes will only become available in a few years.
A thorough risk policy is a prerequisite for the company to achieve its objectives in a controlled manner. Risk management is an integral part of the Management Control System at GasTerra, which involves implementing risk management at strategic, tactical and operational level.
Strategic and tactical levels
Prior to the annual planning and control cycle, GasTerra drafts a strategic plan. This plan is based on the current and anticipated developments on the European gas market and incorporates the strategic long-term choices. The plan also includes a description of opportunities and threats (risks).
GasTerra then translates this strategic plan for the short and medium term into a Business Plan and a budget. In monthly and quarterly reports, the results are compared with the targets set out in the Business Plan. This Business Plan contains a risk analysis at the tactical level. The validity of this risk analysis is assessed a further two times during the year. This analysis includes both specifically named risks and the measures that are needed to manage these risks.
Departments are responsible for risk management at the operational level. This consists of a risk analysis, control measures, documentation and reporting. The assumption is that the line management in all parts of the organisation is responsible for identifying relevant risks and for implementing the appropriate measures.
GasTerra periodically reviews the effectiveness of its risk management by carrying out internal audits. Moreover, activities in this area are assessed within all departments and at all levels on an annual basis. These assessments are summarised in the Document of Representation. All these risk-related activities are supervised by the Audit Committee appointed by the Board of Supervisory Directors.
Risks and Risk Management
By means of regular discussions of risk, we pinpoint the principal risks and uncertainties facing GasTerra. In doing so, strategic, operational and financial risks are examined, as well as risks in the fields of financial reporting, legislation and regulations. The principal risks and uncertainties relate to the following issues:
Production Ceiling Groningen
On 17 January 2014, the Dutch Minister for Economic Affairs, Mr Kamp, announced that a maximum volume had been set for the extraction from the Groningen Gas Field. In addition to this, the production from the clusters around Loppersum, where the strongest earthquakes had occurred, was cut back severely. The decision, which was provisional at that time, referred to a production ceiling of 42.5 billion cubic metres in 2014 and 2015, and 40 billion cubic metres in 2016. During this period, the extraction from the clusters around Loppersum would not exceed three bcm per annum. On 29 January 2015, the minister announced in a letter to the Dutch Lower House that the total extraction in the Groningen Gas Field will be cut back to a maximum of 39.4 billion cubic metres in 2015 and 2016. On 9 February 2015, the minister announced in a new letter to the Lower House that the extraction in the first half of 2015 will be restricted to 16.5 billion cubic metres. This level of extraction, according to the minister, makes it possible as of 1 July 2015 both to maintain the level of 39.4 billion cubic metres and to decide on a further reduction to the level of 35 billion cubic metres for the year 2015.
The most important challenge for GasTerra was and is the evaluation of the consequences of these decisions for the gas market, and to react to them in an adequate manner.
GasTerra is confronted with more and more regulation at national and European level, particularly in the area of energy and finance. We note that the regulations that are relevant for GasTerra are increasingly fragmented. This leads to inefficiencies in the business operations due to the obligation to meet all applicable rules, national and European.
Examples of these fragmented regulations are the introduction of European Regulation No. 1227/2011 concerning integrity and transparency in the wholesale energy market (REMIT), EU Regulation No. 648/2012 concerning OTC derivatives, central counterparties and trade repositories (EMIR) and EU Directive 2004/39/EC concerning markets in financial instruments (MiFID).
Some European regulations, such as Regulation 715/2009, which governs the conditions for access to the natural gas transmission networks, as well as the subsequent procedural rules for congestion management (CMP), are not introduced simultaneously in all Member States. Finally, this regulation creates mechanisms for the allocation of transmission capacity on cross-border transmission links (CAM). This type of European regulation also requires the necessary representation of interests by GasTerra. You can read more about these regulations in the Compliance chapter.
We control the aforementioned risk in two ways:
The close tracking of regulatory developments at European level and at national level in the countries where we are active. Where possible, we try to influence the developments. New regulations are implemented on time.
In discussions with government and EU leaders, GasTerra emphasises the need for a univocal European energy policy to reduce fragmentation between EU member states.
In the course of its normal business activities the company uses financial instruments that exposes the company to market risk including foreign currency rate risk, interest rate risk, credit risk, liquidity risk. The company uses derivative financial instruments to manage risks. The company does not trade in derivative financial instruments.
The credit risk consists of the loss that would be generated if customers or counterparties were to remain in default and fail to fulfil their contractual obligations. The company has drawn up guidelines with which customers or counterparties must comply. These guidelines limit the risk associated with possible credit concentrations and market risks. If customers or counterparties fail to comply with these guidelines, they will be asked to furnish additional security such as bank guarantees. This prevents the company from running any major credit risks in respect of any individual customer or counterparty. Long-term relations have been built with the majority of customers and counterparties. They fulfilled their payment obligations in 2014.
Interest rate risk
The interest rate risk is limited to potential changes in the market value of funds withdrawn and issued. It is company policy not to use derivative financial instruments to manage fluctuations in interest rates (on an interim basis or otherwise). Given the short-term nature of deposits, the interest rate risk for the year 2014 did not exceed € 100,000.
The company monitors its liquidity position through liquidity forecasts. The management ensures that the company always has sufficient liquidity available to meet its commitments. To limit the liquidity risk GasTerra has at its disposal a commercial paper programme of €1.0 billion as at year end 2014 (year-end 2013: € 1.0 billion). This programme ended as at 1 January 2015. GasTerra concluded a Deposit and Loan agreement with NAM and EBN in 2014.
Foreign currency risk
From 2013, GasTerra is following a policy of controlling currency risks on receivables and payables in the balance sheet using a bandwidth. Currency risks are only – and fully – hedged by short-term foreign currency contracts, if the unrealised results of those risks fall outside a range set by the company.
As a trading company with few fixed assets and without inventories, GasTerra has a limited borrowing requirement, and only in the very short term, often for only a few days. This borrowing requirement is met by either issuing GasTerra’s commercial paper, with a maximum of €1.0 billion Euros unused in 2014, or financing by means of short-term bank loans. (which was also not necessary in 2014). The commercial paper programme was terminated as of 1 January 2015.
GasTerra attaches great importance to safeguarding the quality and integrity of the staff’s actions. To this end, a code of conduct outlining standards and values has been established. All GasTerra staff subscribe to the code of conduct on joining the company. Attention is also regularly drawn to the code of conduct within the organisation, e.g. via the intranet and the annual compliance programme. In addition, various supplementary rules and procedures have been drawn up, which are designed to ensure compliance with external legislation and regulations. The objective of this is to make staff aware of the importance of the duty to adhere to legislative and other regulatory requirements applicable to GasTerra. That is why this topic is designated a material topic. The internal auditor regularly vets each department to check whether they are complying with all procedures. Results of all audits are discussed with Board of Management and the auditor, as well as the Audit Committee. No reports of staff having not complied with the code of conduct and/or supplementary procedures were received in 2014.
Competition Compliance Programme
The code of conduct explicitly states that staff must comply with the Dutch and European competition regulations. GasTerra elaborated these regulations into an integrated Competition Compliance Programme. A Compliance Officer has been appointed who is responsible for implementing the programme. Part of the Compliance Programme includes an annual compulsory compliance course for all staff. The objective of this is to make staff aware of the importance of the duty to adhere to legislative and other regulatory requirements applicable to GasTerra. The course material addresses topics like ancillary activities, the anti-bribe and anti-corruption procedure and the REMIT procedure. Potentially problematic situations are pinpointed and the staff learn what they ought and ought not to do in these situations. In 2014, 97% of employees took the compliance course.
We also continually assess whether the code of conduct and procedures need to be adapted or supplemented. Within the framework of the European Financial Regulation EMIR, with effect from 12 February 2014, market parties are obliged to report specific gas deals that are concluded on the exchanges to the so-called Trade Repositories. GasTerra has changed the internal procedures to comply with this. Another adjustment will likely be necessary when this regulation is worked out in more detail. Application of other European legislation, the MiFID regulations in particular and further elaboration of the sector-specific REMIT Regulations, is also expected to lead to changes in the code of conduct and/or procedures.
REMIT prescribes that market parties having information that might constitute insider information are obliged to publish it as quickly as possible. If GasTerra has information that might constitute insider information, all trading activities will be stopped immediately for reasons of security. The trading activities will only be resumed when the information has been published on the website. In 2014, GasTerra placed such a publication on its website nine times.
Whistle blower scheme
A whistle blower scheme has been in force at GasTerra. Employees who uncover severe abuses and whose reports fall on deaf ears within the organisation can report these in confidence to the Chair of the Board of Supervisory Directors. By doing so, they need not be apprehensive about repercussions or unfair treatment. In 2014, nobody availed of this scheme.
Violations and fines
No fines were imposed on the organisation in 2014.
The European Union wants to promote cross-border gas trade by implementing univocal regulations for the transmission of natural gas, which applies to all member states. The European supervisory authority and transmission companies are setting out the details of these regulations in the so-called European Network Codes. In 2014, progress was made in the Netherlands with the implementation of various network codes. For the greater part, the Dutch supervisory authority, ACM, and the national transmission system operator, GTS, have indicated their preference to implement these regulations as soon as possible. In some cases, a start has already been made with this prior to the European network code being approved. However, premature implementation may have drawbacks, given that the network code may be changed later. In that case, changes already implemented will have to be reversed and adapted. We therefore believe that it is better to wait for the definitive regulations before proceeding with (possibly premature) implementation.
Another regulation, Congestion, concerns contractual congestion issues. Parties must pre-book the transmission capacity they anticipate using with transmission system operators. Sometimes one party will have a shortage of booked capacity whereas other parties are not making full use of their pre-booked capacity. The Congestion Management Procedures (CMP) Guidelines are intended to resolve these contractual congestion issues. Upon implementing this regulation, EU member states will have to opt for an oversubscription and buy back scheme from the TSO, possibly combined with re-nomination restrictions in the short and long term. In the Netherlands, ACM and GTS have not seen any need for implementing re-nomination restrictions in the short term. This means that as of 1 January 2014 GTS could offer more capacity at certain border points than is technically available, on the assumption that not all parties will use the full one hundred per cent of their booked capacity simultaneously. Despite the differences in interpretation and implementation in the EU member states, this has not presented any problems for GasTerra to date.
Another network code that transmission system operators have to observe and that influences GasTerra is the network code, Capacity Allocation Mechanism (CAM). This stipulates that entry and exit transmission capacity will have to be offered at auction via the central platform (PRISMA) as a single bundled product rather than as two separate products. As a result, the gas can no longer be supplied at the border points, unless the necessary transmission capacity is already contracted. Transmission system operators must comply with this code by 1 November 2015. GTS implemented the new rules ahead of schedule as of 1 January 2014. Germany also opted for early implementation. This presents problems for the various technical capacity calculations on both sides of the border. The transmission system operators are in consultation to solve this problem.
In addition, ENTSOG (European Network of Transmission System Operators for Gas) submitted a proposal for changing this network code in 2014. This concerns the method of assigning new incremental capacity to be developed. ENTSOG’s objective is that new and incremental capacity can be offered to the market via integrated auctions (together with the annual capacity auctions). ENTSOG’s proposal, however, enables the TSOs to offer new capacity projects via the Open-Season method. The Open Season is a procedure that TSOs use for developing supplementary transmission capacity via binding long-term capacity requests from market parties. We have tried to obtaine clarity about the costs for this expansion. The transmission system operators’ viewpoint is that parties first commit to an investment, after which information about the exact costs can be provided later. This is an important point of discussion in the network code Tariffs.
Another development in 2014 is the implementation of the new balancing regime on 3 June 2014. This was introduced by GTS, whereby the bid price ladder was swapped for trading on the within-day market. With the BPL, GTS made arrangements every day with parties who committed themselves to supplying extra gas or conversely to withdrawing gas from the network in case of supply-demand imbalances. Now, if an imbalance occurs, GTS procures and sells on the within-day market during the day to redress the balance. Up until now, the new regime has been maintained without any problems under mild weather conditions.
Collaboration and Communications
The network code Interoperability describes operational, technical, business and data exchange regulations that are designed to facilitate communications and gas transmission between the various transmission system operators. This code will officially come into effect as of 1 May 2015 and had no impact on GasTerra’s business operations.
The only network code that has not yet been completed should prescribe how tariffs for gas transmission are established. Following a public consultation, the transmission system operators jointly presented a proposal to the European supervisory authority, ACER, at the end of 2014.ACER is expected to comment on the submitted network code in March 2015. The concluding implementation process between the European member states is expected to start in September 2015. GasTerra would like the market parties to be aware of the reference price before the capacity auctions for the new year commence. In addition to this, GasTerra has been working towards stipulating the right to establish tariffs for the market parties before the booking period. This is an important condition for market parties, to continue booking long-term capacity. Once the member states have approved the network code, they will have to implement it before 1 October 2017.
As a result of the global financial crises, the European Committee is currently revising the financial regulations. EMIR (The Regulation on OTC Derivatives, Central Counterparties and Trade Repositories – also known as the European Market Infrastructure Regulation) came into force in 2012. This means that with effect from 12 February 2014 market parties are obliged to report specific gas deals that are concluded directly on the exchanges to the so-called Trade Repositories. These parties pass the deals on to ESMA (European Securities and Markets Authority, the framework for European financial regulators). The underlying intention is that EMIR counteracts market manipulation. We have adjusted the internal systems and procedures to meet these European regulations. Because GasTerra is a commodity party, the company has obtained exemption from certain reporting obligations within EMIR. Consequently, GasTerra does not have to apply certain risk-mitigation techniques, like prompt confirmation of deals and portfolio reconciliation. The European Commission will evaluate EMIR in 2015.
The European Commission approved a sector-specific regulation in 2011 for the energy sector – Regulation in Energy Markets Integrity and Transparency (REMIT). This sector-specific regulation includes a ban on insider trading and market manipulation. GasTerra has set up a compliance programme to prevent trade with insider knowledge and market manipulation. The European Commission would like to expand this further by making it compulsory to report deals that are not concluded directly on the exchanges. These reporting obligations imposed on ACER (Agency for the Cooperation of Energy Regulators, the European supervisory authority of the gas market) were expected to come into force during the second half of 2014. However, this deadline was not met. The European Commission passed the Implementing Acts on 3 October 2014. The official publication in the EU paper followed mid-December and ACER provided an explanation of the interpretation of definitions in the Implementing Acts. Market parties are now obliged to report standard deals as of 7 October 2015, followed by the wholesale contracts that are not concluded on an organised market point (non-standard deals) as of April 2016.
The Ministry of Economic Affairs initiated a project to merge the Gas Act and the Electricity Act. The objective of this legislative project, called STROOM (POWER), is to streamline, modernise and optimise the Dutch and European legislation to reduce administrative burdens for companies, supervisory authorities and the government. Among other things, this concerns the increase in sustainable energy and decentralised energy production in the energy mix. At the beginning of February 2014, the ministry consulted the market parties and other organisations like the Vereniging Energie-Nederland to establish the boundaries. This led to a consultation on the draft legislation by the end of August. Some chapters from the current Electricity and Gas Act have been adapted in this proposal; other parts have been taken over temporarily as policy-neutral items. GasTerra has responded to both consultation rounds. This part of the draft legislation is expected to come into force at the beginning of 2016. A similar project will be underway mid-2015 for the components that have been taken over one for one for this first draft legislation. The entire new legislation is expected to come into force at the beginning of 2017.
Given the current trends on the gas market, GasTerra subscribes to the modernisation of the Electricity and Gas Act. As a member of the Vereniging Energy-Nederland (VEN), GasTerra has already responded to the restrictions of the procedures for objecting to the code decisions of the ACM (these decisions are used to established the transmission tariffs). In the current draft legislation, this topic is not addressed in any detail. This shall be done during the next phase of the STROOM project, in the summer 2015.
Sustainable energy for everyone. That is not only Eneco’s mission, but also the vision of Kees-Jan Rameau (52), member of Eneco’s Board of Directors. Rameau is responsible for an extensive portfolio of wind, solar, biomass and gas-fired power stations, gas storage and trading. Since 2014, the network companies – Stedin and Joulz – have been added to that. With a broad base – Rameau studied Applied Physics in Delft and holds an MBA from INSEAD – he contributes both a managerial and technical vision.
Determining a nice role for gas in the rapidly shifting energy landscape; that’s the big challenge for the gas industry
The theme of GasTerra’s annual report is Energizing the future. This is the slogan of GasTerra that sums up our vision that natural gas plays an important role as a transition fuel. How does Eneco view this?
"Our mission is sustainable energy for all. If it were possible, we would like to replace all fossil fuels, including gas, tomorrow by sustainable energy. But this is not realistic. Only four percent of our energy utilisation is generated sustainably; the remaining 96 percent is fossil. That’s why I prefer to first get rid of the more polluting forms of energy. For the same reason I still see an important role in store for gas in the coming decades. Natural gas is by far the cleanest of the fossil fuels. In addition, gas, compared to electricity, can be transported and stored very efficiently. Finally, gas can play a role in offsetting sharp peaks and troughs in energy production from sources such as solar and wind. In the long run, gas production in The Netherlands will decrease, but by that time there will be more inexpensive options for sustainable energy."
What does the ideal energy mix look like to you?
"In The Netherlands, offshore and land-based wind are the best bet, supplemented by solar and biomass. As a backup, I think gas is the most appropriate partner due to the high quality gas infrastructure. What I’m less happy about, is the role played by coal in the current energy mix. The CO2 savings achieved by replacing fossil fuels with sustainable energy is largely cancelled out by the CO2 emissions from coal-fired power stations. The gas-fired power stations are pushed out of the race by coal-fired power stations and I find that development most unsatisfactory."
What is Eneco doing to arrive at that ideal mix?
"We conserve the energy we provide to our customers by investing (along with customers and other partners) in sustainable production such as solar, wind and biomass. We help customers to generate their own sustainable energy themselves. And develop new products and services to bring sustainable energy a step closer for everyone. One example of this is the product ‘wind-dependent gas supply’ that GasTerra and Eneco worked out together. The chief characteristic of that is that GasTerra supplies more gas at a lower price when there is little wind and the opposite when there are high winds. These prices come into effect on the free gas hub TTF (Title Transfer Facility). I find this very innovative, because it enables us to show in one product what our vision of energy transition is. Namely sustainable energy with gas as its partner for backup and balancing."
Do you think a similar product could also be of value for solar energy?
"That is certainly an option, because the more we shift towards sustainable energy, the more the weather dependency increases. That has always been there, such as an increase in gas consumption when it is very cold. That dependency will only increase with sustainable energy. For that reason, we have for some years employed a number of meteorologists. It makes a difference if you are better able to predict what the weather will be than your competitor and thus be able to adjust your positions: offer just a bit more or less wind or solar energy. Developing innovative products with gas backup really provides added value."
What do you see as the biggest challenge for the energy transition?
"I think it’s important that on the one hand we make seriously progress with sustainability, but on the other hand keep the total cost of the energy transition under control. A large proportion of Dutch households are still connected to the gas network. If these homes are transformed into all-electric homes, then this requires a fair bit of electricity infrastructure. The existing gas infrastructure would then basically no longer be required. But is that sensible? Everyone looks at his own business case and forgets to look at the network costs. If you do take these into account, you have to write off a piece of gas network and invest in reinforcing the electricity network. Do we want that? Sooner or later that will be too expensive for the consumer. I fear that people will then say that sustainable energy is too expensive. This need not be so, but we must ensure that the total energy system remains efficient. Who has the complete picture? Who guides things so that the total costs of the energy transition remain manageable? I think that government must still play a role, with us as energy companies cooperating by providing insight into costs."
A number of major European energy producers such as RWE, the German EON and the Swedish Vattenfall are in search of new revenue models. Thus, RWE wants to offer technological services, media services and perhaps telephony to households. Will we also soon see Eneco pursuing a different revenue model?
"The old adage “cobbler stick to thy last” also applies to us, but of course a lot is changing in energy supply. As an energy company, you used to be the owner of the production capacity. Now you see that much more energy is generated locally and the consumer, with solar panels on his roof, has also become an energy supplier. As an energy company you can then do something about demand-side management. We are undergoing a change from being an energy producer and supplier to being a service provider that enables the customer to implement his own control over his energy supply. That’s where the added value is for energy companies such as Eneco: developing smart applications that allow customers to balance their own energy supply. The customer indicates to what extent he allows demand-side management. This takes place partly automatically with smart meters and all kinds of IT applications such as Toon®. I anticipate that demand and supply management at all levels will take place. That requires many IT applications and processing of Big Data. At present, we have a single data point, the annual meter reading. This is going to change into a large number of data points for balancing the system. And that in turn creates a whole new branch of activity that balances supply and demand of energy at the household level using all kinds of smart IT applications. These services are different from those we offered in the past, but it remains close to our core business: energy."
Do you anticipate that we will also start balancing demand and supply of sustainable energy at European level?
"To me that seems to be a perfectly logical solution. On the one hand, there are more and more opportunities to balance local supply and demand by means of energy storage, demand-side management and exchange amongst energy systems (for example, converting cheap electricity into heat). On the other hand, we can balance across countries. To that end, in Europe, we need to build better physical connections, but also link markets to each other better. Sustainable energy is very environment-driven. In The Netherlands, we have wind on land and sea and a little bit of solar and biomass. But in southern Europe, the mix will certainly be much more solar and in Scandinavia much more hydroelectric energy. If you connect these systems with each other well, then the peaks and troughs average out much more. Then you still have to balance the rest, but much less than if each European member state were to do this individually. That would thus be very sensible. Unfortunately, most European countries find it annoying to be dependent on structurally large-scale imports."
Do you think the recent Ukraine crisis has reinforced this sentiment?
"I think that this worry has always been there. It is not a new topic; look, for example, at the oil crisis in the 70s. That was when we were first forced to see the facts: how dependent we were on importing energy. Russia also proved – even during the Cold War – to be a reliable supplier of gas; there was never anything wrong with that. However high the tensions escalated, the Russian gas supplies were never in danger. That’s a fascinating observation. But the recent developments in the Ukraine will make sure that the discussion about energy dependency flares up again. And along with that the desire to be energy-independent. Sustainable energy can help with that. After all, one of the characteristics of sustainable energy is that the “fuel” does not belong to anyone; nobody can claim it and sit on top of it saying: this is mine."
Despite the sustainability goals for 2020, the competitiveness of gas is under pressure, particularly in the electricity sector. As a result, production processes have become less sustainable; most large companies opt for electricity generation from other sources. What do you think we ought to be doing about this?
"Increasing the CO2 price would help tremendously, but I don’t see this happening any time soon. Moreover, that would still not be sufficient to position the gas-fired power stations in order of merit above the coal-fired power stations. What the government could do about it, is focus on standards much more strictly. How much CO2 may you emit per kWh and how many nitrogen oxides, how much sulphur oxide and particulate matter. Doing this will, of itself, cause the most polluting coal-fired power stations to shut down. Then the cleaner, newer gas-fired power stations will regain the advantage. Furthermore, the gas sector must consider how they can ensure that they are seen as an attractive part of the solution. Surveying the playing field and determining a nice role for gas in the rapidly shifting energy landscape; that is actually the major challenge for the gas sector in the coming decades."