Liberalisation provides a market-driven framework for gas flexibililty

(Paris) — 2 December 2002

Residential and commercial gas demand is seasonal, temperature-dependent and inelastic. It must be covered as it arises and this requires flexibility in supply. Gas demand in the OECD is expected to increase rapidly in the next 30 years and additional investment will be required to meet the greater volumetric fluctuations in demand. "The gas industry is moving from a situation where gas operators balance supply and demand by using flexibility tools such as supply swing, storage and interruptible contracts, to one where supply and demand are balanced by market mechanisms," said Olivier Appert, Director of the International Energy Agencys Long Term Office. He was speaking at a press conference to launch the publication "Flexibility in Natural Gas Supply and Demand." The term "flexibility" refers to the capability to vary gas supply and demand volumes over defined time-periods. Flexibility enables supply to be adapted to fluctuations in demand, or demand to be modified in case of insufficient supply.

The study examines how flexibility requirements and the instruments to provide flexibility are evolving with market liberalisation and supply and demand trends in IEA Member countries. At present, supply flexibility, storage and interruptible contracts are widely used and provide an adequate basis for matching supply and demand - although the situation differs for individual countries. Case studies of the 26 IEA countries included in annexes of the book illustrate this. These show that flexibility requirements and mechanisms depend on the state of market liberalisation, the demand structure, the share of gas in the energy mix, the existence and size of national gas resources, and the diversification of supply. "Flexibility in Natural Gas Supply and Demand" shows that while market forces will help to balance gas supply and demand, inelastic demand by non-interruptible customers still needs to be covered as it arises. To provide that supply requires a clear allocation of responsibilities and a range of measures to adapt supply or demand. The tools that gas companies have developed over the years will remain vital for this purpose.

The study also analyses developments in the LNG market and concludes that the sector is becoming more flexible and responsive to the market. This is illustrated by the spectacular development of spot and short-term transactions and more flexible terms in LNG contracts. The study examines the parallel opening of electricity and gas markets and the impact this has on flexibility in natural gas supply and demand. In countries where both sectors have been liberalised, opportunities for arbitrage between gas and electricity emerge, so that gas supply and demand can be partially balanced by influencing activity in the electricity sector. "Flexibility in Natural Gas Supply and Demand" recommends that governments should monitor the arbitrage between gas and power, the increased volatility of prices and the implications for security of gas supply, and define clearly the responsibility of the different players. Policy-makers should ensure, in particular, that the new markets are able to work in an unimpeded and efficient way to meet the demand of customers with no price elasticity. They should also monitor the overall operational and investment performance of the gas sector in providing such flexibility, intervening if necessary, by means of market-sensitive mechanisms.

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