Polish gas and electricity exchange: lessons for the CESEC region.

At the heart of Central European power and gas trading

Jarosław Ziębiec, TGEDirector, Strategy and Project Office

CESEC Gas Plenary and Working Group, Brussels, October 08, 2019

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TGE group operates in the field of commodity trading, clearing and settlement services

Multifunction center

Multifunction center

Multifunction center

TGE is a pioneer in the implementation of innovative solutions in the field of commodities trading

IRGiT is an institution responsible for physical delivery, financial settlement of transactions and guaranteeing safe trading on the exchange

InfoEngine provides services for participants of the electricity market. It is the largest Polish independent Trade Operator and the Balance Responsible Party

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Guarantee of safe tradingThe gas market run by TGE guarantees full security of trade. The implemented system solutions and control procedures effectively protect market participants against risks related to financial condition of counterparties, manipulation and unfair trading practices.

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Market information providerThe gas exchange provides market information for all market participants, who, relying on the published data about prices, volumes and the respective dynamics can make informed business decisions. TGE gas market data are available among others in Bloomberg, Reuters and Montel.

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Price IndicatorTGE, thanks to the concentration of trade in one place, is able to indicate the gas price on the wholesale market, which is determined under fully competitive conditions. Such price stands as a transparent reference for other bilateral transactions concluded on the gas market. It is also the basis for the calculation of gas indices.

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Market IntegratorTGE concentrates supply and demand in one place – because of that it is possible to do business within a competitive market environment. TGE fulfils the role of a wholesale trading center in Poland and provides the opportunity to trade on clearly defined terms. Thanks to the gas exchange, new realities have been created, under which the expectations of its participants are monitored and addressed.

TGE Group Roles of the TGE Group on the Polish market

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The history of establishing centralized commodity trading platform in Poland dates back to 1999

CO2

Natural gas

Electricity & Financial

Instruments

Property rights and guarantees of origin

Carbon dioxide emission

allowances20182005 2010 20152000

• TGE, as a single entity, offers an exchange for various products

• Today, the members of TGE may trade electricity, natural gas, property rights which are an instrument supporting renewable energy sources, co-generation and energy efficiency as well as guarantees of origin and carbon dioxide emission allowances, at a single marketplace

• TGE operates both a forward market and a spot market for electricity and natural gas

• In 2015 TGE was granted a licence to operate a regulated financial market

2000 Electricity

Day-ahead

market

2005 Property rights and guarantees of origin [RES]

2006Carbon dioxide emission allowances

2007 Property rights and guarantees of origin [CHP]

2008Electricity

forward market

2012 Gas day-ahead

market and forwards

2014 Gas intraday market

CommentKey milestones Current TGE offer Primary area of activity – Poland

2015NEMO in Poland Member of MRC

2017PCR coordination & MRC operator

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TGE field of activities

The rising role on the Polish electricity market

TGE has had major role on Polish electricity market since 2010. Other important part of Polish wholesale market areOTC bilateral deals, that can be concluded directly between companies or via trading platforms.

In 2013 trading volume on TGE has exceeded net domestic production for the first time.

Minister of Energy announced raising the level of electricity selling obligation on the 31st of July 2018. The percentilelevel of obligation will be raised from 30 to 100. Nonetheless, there is still a large amount of electricityproduction excluded from this 100% obligation, e.g. from Renewable Energy Sources, CHP, plants launched after01.07.2017 and connected with OTC deals already concluded.

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TGE operates the largest gas exchange in CEE

TGE volumes 2013-2018

Natural Gas consumption in Poland (bcm)

Source: TGE, ERO, Eurostat

Operation of the gas market:➢ for high-methane gas (2012)➢ for low-methane gas (2018)

Growing number of participants:➢ 31 entities operating directly➢ More than 70 entities operating

through brokerage houses

Broad range of products and services “under one roof” (spot and forwardmarket), Trading & clearing

Market activity supervised by the Polish Financial and Supervision Authority and Energy Regulatory Office

Compliance with national and EU regulations (MIFID II, REMIT)

20.12.2012 Opening of the gas exchange

* Exchange Clearing House operated by IRGiT concerning Commodity Exchange

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Development of the gas exchange in Poland required close cooperation with key stakeholders to establish a competitive and robust gas market

Members of Exchange Clearing

House*

Polish Financial Supervision Authority (KNF)

Exchange Members

Gas TSO (Gaz-System S.A.)

IRGiT’s Payer Bank

IRGiT’s Members’ Payer Banks

Energy Regulatory Office (URE)

Obtaining a consent to operate the gas market, through the approval of exchange rules, amendment of the Act of Parliament regulating the operations of the exchange to enable direct participation by energy companies, and the introduction of provisions facilitating brokers’ access to the market by introducing broker certification by the exchange. All risk management models applied by IRGiT are approved by the PFSA (Polish Financial Supervision Authority).

At the market-organization stage, consultations were held with the Energy Regulatory Office and the Transmission System Operator to make appropriate changes to the gas market being then in place in Poland, which consisted in the adaptation of the Transmission Network Code to the needs of exchange trading.

Developing, in co-operation with the TSO, a market model for gas trading and implementation of that model in the TSO’s TNC. Signing a co-operation agreement with the TSO to regulate the rules for the exchange of information and physical delivery of transactions concluded through the exchange.

Key stakeholders

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Our efforts to launch the gas exchange in Poland concentrated in four main areas

Developed internal regulations concerning the organizational rules for the management of the gas market, including, e.g.: participation rules

1. Business continuity plan2. Market abuse procedures3. Trading session procedures4. Settlement procedures

In

tern

al

ru

les

Drafted market regulations for market participants, setting forth organization rules for the gas market:

1. Participation rules2. Admission to the market3. Trading rules4. Clearing and settlement rules5. Fee structure

Exte

rn

al

ru

les

Implemented an IT system for the operation of the gas market, which included:• Co-operation with the software provider to adapt the IT system for the

implementation of the instruments intended for the gas market;• Adapting the applications enabling efficient information exchange for

the quantitative and financial settlement of transactions concluded, necessary reporting to the supervisory authorities;

• Completing tests with market participants and all entities with whom the exchange shares information.

Tech

no

log

y

Defined the list of entities whose consent or permission was needed to launch the gas market, and approached them.

Str

ate

gy

TGE’s activity at the market-launch stage

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Planned infrastructure will help to develop liqudity on TGE

RussiaLithuania

Czech Rep.

Slovakia

Ukraine

Bela

rus

Germ

any

Planned to 2022

Interconnectors

Baltic Pipe – 2022, import 10

bcm/y, export 8 bcm /y,

Ukraine – 2020, import/export 5

bcm /y

LNG Siwnoujscie extension, 2021

+2,5 bcm/y, 2024 + 2,5 bcm/y

(total 10 bcm/y)

Czech Rep. 2022 (Stork II), import

6,5 bcm/y, export 5 bcm /y

Slovakia 2021 - import 5,7 bcm/y,

export 4,7 bcm/y

GIPL (Lithuania) 2021 - import 1,7

bcm/y, export 2,4 bcm/y

Gulf of Gdansk 2025 - new FSRU

Source: Report on the results of monitoring the security of gas supply for the period from 1 January 2017 to 31

December 2017, Ministry of Energy, Warsaw 2018, p. 22.

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Polish gas hub is rising in EFET gas hub study

There is still room for improvements for TGE gas market … and we know it …

2018 score - 9,5

2014 score - 4,5

… PL had historical improvements in hub design, but liquidity in now more negativelyaffected by wider trading conditions, reflected in reduced score…

Source: Presentation „Gas hub scorecard 2018 update” p. 11, Doug Wood , Member od the the EFET Board,

TGE example – changing market structure do to MIFID II and clients expectations – Remit carve out

/OTF way

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Regulations and gas markets - MiFID II case

Commodityexchange

Regulated market

• DAM gas/electricity• IDM gas/electricity

• Property Right market

CO2 allowances (spot)

OTF

• Forwards (gas/eletricity) –remit carve out

• Forward (green certificates) -financial instruments

Gas market

MiFID II position limits regime issues - limits restricting the development of fast growing energy markets,

markets have suffered from restrictive limit as open interest increases

Possible solutions

To impose position limits only on a restricted number of benchmark contracts to prevent market abuse and

excessive speculation; contracts with the same physical underlying, where there is a larger overall financial

derivatives market for the same or an equivalent contract.

MIFIR pre-trade transparency regime - for commodity derivatives, the methodology for calculating the Large in Scale (‘LIS’) waiver and Illiquid Instrument (‘IL’) waiver thresholds has proven unworkable in practice.Possible solutions – revision of RTS 2

Replace the current methodology for calculating LIS and IL waiver thresholds for commodity derivatives with a

product-specific approach based on well-established practices of trading venues.

A ‘quick-fix’ approach, whereby the current thresholds for commodity derivatives are to be recalibrated in order to

better reflect the actual market conditions.

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What is happening in the Baltic region ?

INTEGRATIONPROCESSES

Creation of a common

balancing zone in the

western part of the Baltic

Sea (Denmark and

Sweden). Similar

integration measures are

also being undertaken in

the eastern direction:

Lithuania, Latvia, Estonia

and Finland

SECURITYBUILDING

There are already 2 LNG

terminals in operation in

Poland and in Lithuania –

the total regasification

capacity is 9 bcm annually.

Another terminal in Estonia

is under consideration. By

the end of 2022, the Baltic

Pipe with an annual gas

transmission capacity of 10

bcm is to be completed

GAS MADE IN THEUSA

First spot deliveries of liquefied gas from the USA have arrived to the LNG terminals in Świnoujście and Klaipeda

LNG BUNKERING VESSEL

This is a market which is still in its

infancy in the Baltic region. It has

a high potential for growth due to

regulations (the so-called Sulphur

Directive), government support

programmes (Blue Baltics project

coordinated by Klaipedos

Nafta),national policy frameworks

for the development of alternative

fuel infrastructure and

dynamically developing coastal

bunkering infrastructure (for

example in Finland bunkering

facilities are being developed in 6

ports)

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Joint Balancing Zone

Joint Balancing Zone

- a project to

interconnect the

Danish and Swedish

gas markets into a

single common

balancing zone

The combined markets of Denmark and Sweden represent in total approximately 3.4 bcm of gas consumption per annum (2.6 + 0.8)

Poland will

establish a

connection with

these markets by

the end of 2022

thanks to the Baltic

Pipe, which will

also enable

supplies from

Poland to Denmark

and Sweden

After 2022, conditions

will be created for the

development of a secure

and competitive gas

trade between Poland

and the Scandinavian

countries

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Integration of the gas market in the Baltic region

Balticconnector

GIPL

Lithuania, Latvia, Estonia and Finland belong to the European Union but their gas

markets are infrastructurally separated from the rest of the Community

The commisioning of interconnector between Finland and Estonia and Poland

and Lithuania (GIPL) will end the state of isolation

Market integration combined with supply diversification measures is underway in the Baltic States

The common balancing zone for 4 countries may cover a total of approximately 5.7 bcm of gas consumed annually

Gradually the conditions for the development of a safe and competitive gas trade between Poland and the Baltic States are emerging

Source: Pipeline Technology Journal

LNG

terminal

LNG

terminal

Sept 16, 2019 - an advisory services agreement was signed between the IRGiT (part of TGE Group) and the Baltic-Finnish Gas Exchange GET Baltic.

The objective of the cooperation is to create an optimal collateral and clearing model as well as a risk management system for spot and forward gas markets operated by GET Baltic.

First stage - jointly develop a clearing concept taking into account the specificity of the Baltic-Finnish Gas Exchange,

Further stages - focus on the implementation of an automated IT system for risk management and streamlining and automating the clearing model

Ukraine as a gas country with high potential

TGE sees Ukraine as a market with high potential for gas trade growth. The key growth

include among other:

No 1 by transit volume of Russian Gas to the EU (93,5 bcm - 2017)

No 1 in Europe storage facilities (31 bcm) with excess capacity,

No 2 in Europe by natural reserves (906 bcm - 2017),

No 4 in Europe by domestic production (20,5 bcm - 2017) with potential to increase,

No 8 in Europe by gas consumption ( 32 bcm - 2017) but only 65% of demand satisfied by

domestic production,

No 14 in Europe by import needs (14,1 bcm - 2017) covered only from EU (2017-2018)

Extensive gas transportation system (entry capacity –304bcm, exit capacity –178.5 bcm) -

potentially linking many market players

In addition:

Market liberalization (which is driving towards competition),

Ongoing Ukrainian / EU negotiations with Gazprom about gas transit after 2019,

15Source: Data according to Ukrainian Gas market. PWC June 2018

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Ukrainian market is developing its legal structure

June 20, 2019 - The National Securities and Stock Market Commission (Ukrainian regulator) published a plan for the

development of commodity markets in Ukraine (inc. energy)

Key issues and concepts raised:

- Ownership – title / title transfer on platforms and OTC - Netting concepts - Transportation

- Requirements for organized spot (exchange) and OTC trading - Licensing systems for venues and trades

- Centalized clearing - Market supervision

- Data storage processing and data control quality rules - Taxation (spot, OTC, futures trading)

Plan includes gap analysis, action points, legistative chcecklist, including implementation roadmap (2q2019–2q2022)

Main conclusions:

➢ Ukraine needs to embark on a cross-commodity solution ensuring sustainability and safe operation of common

markets

➢ Transparency is key

➢ A larger reform process is needed to enable safe and effective commodity markets e.g. infrastructure and data

access could be shared

➢ Once the framework is established, Ukraine will be able to have a better leverage on existing commodities

➢ Best practices of financial sector in the EU should be brought to Ukraine ensuring transparency and efficiency of

the trades

July 15, 2019 - The NSSMC and the Ministry of Economic Development and Trade of Ukraine signed a Memorandum -

developing in Ukraine a modern model of organized commodity trading

Joint ECS-EBRD project - establishment of a gas exchange

Source: https://www.nssmc.gov.ua/international/?leng=eng&testing=true#win4 (in Ukrainian)

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Summary

New interconnectors in the BalticArea and other countries will enable infrastructural connection of neighboringmarkets into a zone with much bigger consumption of gas

In the competitive environment, the ongoing processes of market development never stops

Offering trading and clearing for both eletricity and gas, allows to develop faster

Competitive price offers via LNG supply on a larger scale, will improve the security and enable further market development (e.g. small-scale LNG)

Not only gasregulations influencesthe gas market

Thanks to the legalmarket reform, Ukrainiangas market shouldbecome closer to EU

Cooperation should helpmarkets to be becomebigger and safer

Thank you!

Towarowa Giełda Energii S.A.

Książęca 4, 00-498 Warsaw

tge@tge.pl

T: +48 22 341 99 12

Poland