Guangdong province, similar to what has been done in Europe. Guangdong province has a comparable market size, infrastructure conditions, and diversified market participants compared with major European countries, such as the United Kingdom. The construction of "one network for the whole province" in Guangdong province has obtained partial results and preliminarily achieved “multi-source complementarity and interconnection”. In addition, Guangdong province has also carried out price policies, such as the “same price for same network”, and thus can provide valuable experience.

Box 4. Gas market structure in Guangdong

Guangdong province has achieved the phased results of "one network for the whole province” and “same price for same network” and has the basic conditions for the establishment of a regional virtual exchange.

In July 2007, CNOOC, Sinopec, and Guangdong Yudean Group established the provincial pipeline company according to the share ratio, which was responsible for the construction, operation, and management of provincial main gas pipelines in line with the principle of “multiple gas sources supply, one network for the whole province, gas price classification, unified purchase and sale, and government approval”. After CNPC took a stake in the provincial pipeline network company in 2011, the operation mode of the provincial main pipeline network was adjusted operate in line with the principle of “one network, ensuring residential usage and having competition”, and combined with “overall allocation” and “gas transportation”. Under the mode of “gas transportation”, the natural gas resources are transported to the provincial main pipelines, which provide gas transportation services and collects reasonable pipeline transportation fees at the same price for the same pipeline network. Promoted by these reforms, Guangdong province has preliminarily realised “multi-source complementarity and interconnection”, accumulated valuable experience, and has the basic conditions for the establishment of the NBP virtual exchange similar to the in the United Kingdom.

In addition, the natural gas supply capacity of Guangdong province has been continuously enhanced, and a gas supply pattern of coastal imported LNG, onshore trans-provincial pipeline natural gas, and offshore natural gas has been formed. Relatively complete pipelines and LNG facilities can provide a basic guarantee for the supply and demand balance and physical delivery in the exchange. The Guangdong’s financial market has perfect software and hardware facilities, professional management teams, and effective risk-control measures, which can provide mature preparation experiences and strong technical and financial support for the regional natural gas exchange.

Enabling third-party access to infrastructure

Separation of regulated and commercial activities

As third-party access to natural gas pipelines and LNG terminals is the key precondition for the establishment of price signals, the unbundling of the infrastructure was a major step during the

US and European gas liberalisation. During the EU gas reform, it is stated “ownership unbundling as the most effective tool by which to promote investments in infrastructure in a non-discriminatory way, fair access to the network for new entrants and transparency in the market” (BG, 2012). The separation of regulated and commercial activates is also what China is doing now, which will pave the way to fair third-party access.

Defining the shipper’s role

The result of unbundling is the emergence of a specific player defined as the “shipper”. The shipper should be licensed and supervised by the regulator. The shippers should obtain the relevant qualifications to have the right to use the natural gas transportation system. Once the right to use is obtained, the pipeline companies must allow all shippers to use the network without discrimination. The shipper can buy gas from natural gas producers, other shippers, or on exchanges and sign pipeline capacity contracts with pipeline companies.

An “anchor shipper” is a design to find the long-term capacity usage. It can support new pipeline development and could also be used to protect the existing major users with long-term contracts during the transition period, such as the major three NOCs in China. At the same time, certain open session capacity should be allocated for the newcomers to foster competition.

Establishing capacity allocation mechanisms (CAM) and congestion management procedures (CMP)

Capacity allocation mechanisms are used to define the rules of primary access. Pipeline capacity auctioning is a powerful policy tool in the European Union and has been managed through the development of a platform (PRISMA) that enables a high level of transparency for both market players and regulators. A secondary capacity market can be introduced in order to optimise the use of the transmission system capacity and with a view to granting system users the right to freely trade gas transmission capacities.

Congestion management procedures also need to be introduced not only to manage physical capacity issues but also contractual congestion whenever a shipper does not use the capacity it booked in the network. The introduction of the “use-it-or-lose it” (UIOLI) mechanism has been implemented to release unused capacity and prevent contractual congestion, which can result in balancing issues and/or speculative behaviours with proportionate impacts on prices. In the US and the European countries, the dispatch of the physical gas is implemented by the pipeline companies/transmission system operators (TSO).

Tariff setting

Making a simple and clear pipeline tariff will help to encourage more new shippers. In the United States, pipelines are generally divided into several zones, and the pipeline transportation fee is the cost for transportation from one zone to another. In the European Union, there is often a single price for the entire network. A mix of these methods for China maybe more suitable, with a distance based tariff for the trunk line, and single tariff for the local regional market.

The tariff review mechanism and related regulatory guidelines should be established. Transparency in process will also help to set a fair tariff.