LIBERALISATION OF THE ESTONIAN GAS MARKET
two hubs, the main price driver has recently been Germany’s NCG and the Dutch TTF. Prior to this, the main influence on French hub prices was Zeebrugge. B.5.3
Retail markets
In addition to the development of wholesale markets, it is also vitally important that there is the development of a competitive retail market for gas to ensure competition for end users. New suppliers will only consider entering markets if they perceive them to be sufficiently attractive and profitable. Anything that reduces this attractiveness and profit incentive can be considered a potential barrier to entry. However, in considering barriers it is important to account for the complexity of their impact. For example, they may limit some types of entrant rather than preventing entry in total (e.g. requiring a minimum scale of operation or some degree of vertical integration), and they may differ in their materiality on the performance of the market, making some uneconomic and costly to overcome. The main incentive for new suppliers to enter is the headroom that exists between their potential cost of supply and the tariff offered by the incumbent supplier. This headroom arises from the ability of the new entrant, through greater efficiency, flexibility and innovation, to reduce their costs of supply. The cost elements where there is scope for differential costs between new entrants and incumbent suppliers are:
wholesale purchase costs of electricity or gas; and
supply business costs (including billing, metering, customer service, customer acquisition and the supply margin).
B.5.4
Retail supply market models
A critical factor in the development of retail market competition is the dealing with the commercial advantage the incumbent has enjoyed through economies of scale and scope. This advantage relates to the fixed costs of entering markets and in the asymmetric risk exposure of operating with a small, less diversified portfolio. To the extent that this asymmetry can create a fundamental distortion, we consider a number of options that could mitigate this incumbent advantage and help promote competition. Below are two possible options to delivering a fundamental restructuring:
the promotion of a shallow supply model that removes the obligation for providing many of the supply activities that incur set-up costs for new entrants from the supplier and put them on an independent entity; and
mechanisms for divesting market share or targeting market share loss of the incumbent in certain market segments to overcome initial portfolio asymmetries.
Whereas the former is intended to alter the cost structures of supply companies and then rely on commercial decisions to change market structure, the latter mandates a change in structure over a set period. B.5.4.1 Shallow Supply model One of the problems in a small market may be that economies of scale in retail activities are so large that they are a complete barrier to entry for independent suppliers, thereby restricting the market to either the incumbent or a small number of integrated, established market players. If it is possible to restrict the role of a supply company so that it does not have to develop or procure some of these high fixed cost elements independently, then
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