Press Release 17/2017

 

 

The Portuguese Competition Authority (Autoridade da Concorrência - AdC) has identified barriers to entry and expansion in the natural gas market likely to have an impact on the competitive conditions of supply to industrial consumers and to undermine the likelihood of more competitive bids arising and disciplining the price-setting strategies in the market.

 

The AdC assessed the performance of the supply of natural gas to Portuguese industrial consumers and developed an in-depth analysis of the sector in order to identify potential bottlenecks to competition which could hinder the performance and competitiveness of the supply of natural gas to Portuguese industry.

The AdC decided to carry out an analysis of this sector due to its relevance for the competitiveness of Portuguese industrial activity, given the high share of natural gas in the cost structure of several Portuguese industries.

 

The AdC found that, between 2010 and 2016, natural gas prices, before taxes and levies, paid by Portuguese industrial consumers were consistently amongst the highest of the 28 Member States of the European Union (EU-28). Despite a decline towards the EU-28 average price level for the higher consumption bands in 2016, natural gas prices in Portugal remain amongst the highest of the EU-28 for industrial clients with a lower consumption.

 

In terms of market structure, Galp is the operator with the highest market share in the supply of natural gas to industrial clients, followed by EDP. Galp is also the historic importer of natural gas in Portugal. The AdC report shows that the supply of natural gas to industrial consumers is characterized by a high degree of concentration, with the two main operators accounting for more than 70% of the market.

 

Galp has a leading position both in the import of natural gas and in the secondary market of natural gas. Furthermore, Galp has contractual ties at the wholesale level with some of its competitors in the retail market.

 

In the Report the AdC highlights a set of other aspects likely to constrain the efficiency of the market, namely the lack of integration between the Portuguese and the Spanish markets and the double application of transmission network access tariff in the cross-border trade between Portugal and Spain. The AdC has also found that small-scale operators face high access costs to the Liquefied Natural Gas (LNG) Terminal in Sines.

 

The combined effect of these barriers restricts the ability of retailers to import natural gas through pipeline at competitive prices and limits the use of the Sines LNG Terminal, thereby affecting the competitiveness and performance of the Portuguese Natural Gas System and thus the final prices paid by industrial clients.

In addition to these structural factors, the AdC Report shows that there was an increase in network access costs as well as an increase in import costs in 2013/2014, which coincided both with a strengthening of the trading activity of the historic importer following the Fukushima nuclear disaster and with a change in the way the historic importer managed its supply portfolio. The increase in network access costs was stronger for the medium and low pressure networks, and was partially driven by a contraction in demand.

 

With the aim of fostering competition and reducing barriers to entry and expansion, the AdC recommends the strengthening of intergovernmental cooperation between Portugal and Spain, so as to implement high-level measures capable of granting the extension of the Iberian Natural Gas Market (MIBGAS) to Portugal as well as eliminating the double application of transmission network access tariff in the cross-border trade between Portugal and Spain.

The evolution towards an internal natural gas market in the European Union and, in particular, a deeper integration between the Spanish and Portuguese wholesale gas markets would allow a more competitive natural gas price-setting, an increase in the number of players active in the Portuguese Natural Gas System and a greater diversification of the sources of supply of natural gas in Portugal.

 

The AdC recommends measures to foster the use of the LNG Terminal in Sines by small-scale operators

While the extension of MIBGAS to Portugal is still pending, access to the LNG Terminal in Sines is the key option to foster competition in the natural gas market in Portugal.

 

As such, the AdC recommends to the Energy Regulator the consideration of additional measures so as to promote the access of new entrants to competitive imports and to reduce the burden of infrastructure costs for the entry of natural gas into the National Gas System (Sines LNG Terminal and pipeline interconnection with Spain), as follows:

 

• The adoption of market-based LNG auctions with a delivery point at the Sines LNG Terminal, granting small-scale competitors the opportunity to acquire LNG at competitive conditions.

 

In the past, ERSE already implemented LNG auctions, but these did not elicit the expected interest from market players. This recommendation defines a delivery point, contrary to what happened in the past, and also emerges under a different market context, with several new retailers having entered the Portuguese Natural Gas System.

 

• The adoption of regulatory solutions that allow the exchange of natural gas between different delivery points of the National Gas System (swaps between locations), namely between the Sines LNG Terminal and the interconnection with Spain through pipeline at Campo Maior, providing smaller competitors with more options regarding the destination for the LNG received at the Sines Terminal.

 

The auctions and swaps herein recommended aim at (i) attracting the entry of more retailers, namely those that are active in the Spanish market; (ii) increasing the number of operators using the LNG Terminal in Sines; and (iii) increasing the flexibility of usage of the LNG Terminal, namely in terms of the destination for the LNG therein received.

 

  25 October 2017