Introduction
In 2014 the government set up an interdepartmental working group to examine the regulation of the gas supply sector. The working group's task was to rethink regulation in order to encourage a more competitive gas sector and ensure the efficient and competitive distribution of gas in Denmark. An efficient gas sector is expected to result in lower gas prices for consumers and increase competitiveness.
On February 8 2016 the working group submitted its seven main recommendations to the government. The working group's findings were based on the Committee for Regulation of Electricity's recommendations from December 2014 (for further information please see "Recommendations for new electricity sector regulation").
The working group found that Denmark's production of natural gases will reduce markedly in the long term, and the production of green gases will compensate for this decrease only to a certain extent. In future, gas is expected to come from decentralised sources which future infrastructure planning should take into account. However, the working group found that short-term planning should not take the reduced production of natural gases or the integration of green gases into account.
The working group's recommendations are divided into three focus areas.
Regulation of natural gas distribution
The working group found that the future structure of natural gas distribution should be organised to ensure effective and clear regulation for the benefit of the industry, businesses and consumers. Further, regulation should ensure that the challenges which the gas sector is facing can be solved in a cost-effective manner. To support these objectives, the working group put forward four recommendations.
Cost framework
The existing cost framework is a good tool for ensuring that companies identify potential efficiency improvement. The problem is that much of the cost in this context is beyond the cost framework or benchmark. Therefore, the working group recommended expanding the cost framework to cover all operating costs and depreciations on fixed assets and allowing companies to keep extraordinary efficiency gains for up to five years to ensure that they have an incentive to streamline.
Automatic indicators
The working group recommended the introduction of automatic indicators similar to those that the Committee for Regulation of Electricity recommended to ensure that the cost structure of companies is adjusted as a result of actual changes in business activities.
Return on new investments
Following the recommendations from the Committee for Regulation of Electricity, an expert group was established to determine the level of the weighted average cost of capital (WACC) for new investments, including how to take into account the ownership of energy companies. The expert group is expected to submit its final report in the second quarter of 2016. The working group recommended that the WACC's conclusions should be implemented.
Requirements for cost efficiency
The working group recommended that the existing benchmark be extended to cover a company's entire cost base. This would provide a suitable tool to illustrate the potential cost reductions in the sector.
The working group's report was prepared under the assumption that there would be three natural gas distribution companies in Denmark. A potential change to this structure will have an impact on future recommendations.
Possible consolidation of natural gas distribution
Consolidation should take into account the differences between the three gas distribution companies. However, the working group saw an opportunity to increase efficiency if consolidation can be implemented. Therefore, it recommended analysis to assess the appropriate organisation of the gas distribution sector which focuses on its ownership structure. This could help to identify any consolidation potential by identifying barriers and incentives.
According to the working group, changes must help to promote competition in the retail gas market and be easy to manage and transparent for both consumers and businesses.
Obligation to supply
Although the Danish gas market has been liberalised since 2004, analysis shows that a number of barriers discourage enhanced competition. Thus, the economic gain from switching companies is low and the existing regulation of the obligation to supply is a major factor in this context.
Therefore, the working group recommended that the existing regulation of the obligation to supply be repealed. It also recommended the establishment of free pricing on the gas market and the consolidation of the existing gas price guide. The recommendations are similar to those for the electricity sector and will help to foster greater consistency between the electricity and gas markets.
Wholesale model and data exchange
The working group assessed the possibility of introducing a wholesale model with a data hub solution. It recommended that the introduction of a wholesale model for the gas market should await the results of the wholesale model that will be introduced to the electricity market on April 1 2016. The assessment of the possibilities of such a wholesale model should take place no later than 2017.
The working group did not recommend a data hub solution for the gas market if the decision is made to introduce a wholesale model. Instead, the existing one-to-one data communication between a gas supplier and a distribution company should be extended. Once there is greater clarity on the future structure of the gas market, it will become clearer how a potential deal portal should be designed.
The committee's recommendations will be part of the government's plans for the future regulation of the gas sector.
For further information on this topic please contact Nicolaj Kleist at Bruun & Hjejle by telephone (+45 33 34 50 00) or email ([email protected]). The Bruun & Hjejle website can be accessed at www.bruunhjejle.com.
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