Example projects

Economic Survey in a Case of Presumed Market Dominance

Situation:

A foreign European operator of a gas power plant had concluded a long-term natural gas supply contract under which it purchased gas for its facility. At the time of conclusion of the contract, the seller was the largest provider of natural gas to wholesale and large end customers in the country of the buyer. As competition in the gas market intensified and market transparency increased, the buyer saw indications that, when concluding the contract, the seller may have abused a dominant market position to impose contractual conditions which unreasonably disadvantaged the buyer.

In addition, it was no longer possible to operate the power plant profitably at the gas price level under the supply contract so that an adjustment of the contract became necessary. The buyer thereupon entered into negotiations with the seller about possible contract adjustments, but also considered its legal options, inter alia with regard to competition law. Thus, it had to be clarified whether the seller held a dominant market position in the relevant market at the time of conclusion of the contract. For further questions, e.g. as to whether the seller had abused its dominant position to the detriment of the buyer and how to determine any resulting damage, it was to be demonstrated how such assessments should be done. The buyer asked TEAM CONSULT to conduct the necessary research and analyses and to prepare a respective survey.

Solution:

The starting point of the survey was a description of the natural gas market of the country in question. The focus was on the level of competition in the market for supply of natural gas to power plants and the development of the market since the conclusion of the contract at issue. The market was analysed in detail with respect to its structure along the value chain (import, wholesale, retail, transport, storage, distribution) and the prevailing circumstances (regulation and liberalisation, development of grid access, interconnection with adjacent gas markets). For the aspect of market dominance, this was the basis to determine the relevant market (product market and geographic market).

The next step was to investigate the role of the seller in the relevant market at the time when the contract was concluded. For this, the standard indictors of competition and criteria for establishing a dominant position in a market were examined. As a result, the existence of a dominant position could be clearly demonstrated. Furthermore, it was assessed which of the standard approaches for proving an abuse of market dominance (comparable market concepts, as well as cost-based approaches) was suitable. Finally, a calculation method was developed to quantify any damages resulting from an abuse of the seller’s dominant market position.

Contract Negotiation of a Gas Sales Agreement

Situation:

Our client would like to put into operation a new gas-fired combined heat and power plant to complement the existing plants for the generation of power and district heat. The plant is to be supplied with gas through a new supply contract with a large incumbent gas supplier. The new agreement will completely replace the old contract.

TEAM CONSULT was asked to analyse and assess the supplier’s existing bid for the new power plant gas supply contract as part of upcoming contract negotiations. In addition, the economic viability of power and heat production should be improved.

Solution:

The solution to the problem was in three stages. First, the supplier’s bid for the new contract was assessed and analysed and the supply relationship described, taking into consideration all side letters and the following points: contract type, quantities, price and price indexation, flexibility, duration and delivery point. These analyses led to the commercial analysis of the revision and profitability clause, as well as the general assessment of the contract. The next step was a detailed economic analysis of the client's electricity and district heating production (comparison between actual situation and new installation). The operating mode of the various and complex installation components was described and analysed using the following parameters:

  • Determination of the technical characteristics of the new installation
  • Derivation of the average district heating demand
  • Specification of performance data, utilisation rate, etc. for the new installation’s typical operating modes
  • Determination of energy flows per quarter
  • Development of a computer model for calculating contribution margins
  • Optimisation of operating mode

As a result of the project, concrete recommendations for changes to the supplier’s proposal for a new gas supply contract were worked out that enable an economical and flexible operation of the new installation, taking into consideration the market environment. TEAM CONSULT successfully accompanied the client in contract negotiations which resulted in a successful implementation of our recommendations.

Arbitration Proceeding of a Gas Sales Agreement

Situation:

Arbitration proceedings are currently among the most exciting and demanding projects in the European natural gas sector. In the project presented, we supported a European gas supplier who was taken to an arbitration tribunal by the buyer of the gas for adaptation of the contractual price regulations. Our work consisted of drawing up several expert reports in different phases of the process and strategically advising our client, as well as finally defending our position before the tribunal.

The complex project management and coordination with all persons involved, both internally and externally, and strict adherence to deadlines because of the short time limits before each submission date, posed a particular challenge. There was also a special, almost game-theoretic element because the possible reactions of the counterparty had to be anticipated in advance in developing the strategy and working out the expert reports.

Solution:

As regards the subject matter, our expert report was about historic developments on a European energy market and their effects within the contract-specific issues, for example effects on the value of the gas and current problems concerning risk management and hedging topics. As a result of our broad competence on the subject of natural gas, we were able to fully grasp the issues and successfully solve all problems so that we very successfully completed the project for the benefit of our client after a period of over two years.

Evaluation and Optimization of Gas Storage Products Situation

Situation:

Facing an increasingly oversupplied gas storage market, a storage operator saw the necessity to enhance its efforts in the commercialization of its storage capacities and to develop further its portfolio of gas storage products. The storage operator planned to market a substantial share of the capacity of one of its salt caverns in the form of an index product.

TEAM CONSULT was asked for its expert opinion on the suitability of the approach to sell index products and to identify the critical success factors. In addition, the commercial value of the index product under current and (likely) future market conditions was to be determined.

Solution:

We examined the new marketing approach in detail. The new product was compared to the client’s other storage products and to other storage products in the market with regard to the main characteristics – such as bundle size (working gas volume, injection and withdrawal capacity), term and price structure. Thereafter, the product was thoroughly evaluated from a buyer’s perspective. Apart from the price level – the competitiveness of which was to be ensured by selling through auctions – the market price risk was identified as a crucial factor for market success.

Particular attention was paid to the price provisions of the new product (indexation to the summer-winter spread of hub prices) combined with the contract term of several years. Slight modifications of the price provisions and the bundle size made the product particularly attractive and risk-free to buyers with a certain user profile. The client succeeded in marketing all bundles of the new product.

The commercial value of the product was determined via back-testing, i.e. a test of the revenues the product would have yielded if it had been marketed in the past. The result was that the product would have been of equal or higher commercial value to the client compared to other products with fixed prices. Nevertheless, TEAM CONSULT gave the recommendation to not fully abandon fixed prices from the product portfolio for distribution of risks and in order to keep the portfolio diversified.

Arbitration Proceeding in the Area of Renewable Energies

Situation:

Evaluations in the field of renewable energies represent an important part of TEAM CONSULT’s consultancy activities. This is illustrated by an example from the biogas sector, where we accompanied one of our clients in arbitration proceedings. Our client, an operator of a biogas plant, was in charge of producing and selling the biogas to a certain buyer under a long-term contract.

However, because production conditions had changed substantially, our client requested a price adjustment from the buyer. We were involved in these proceedings in the function as experts.

Solution:

In our expert role, we investigated the price and procurement conditions of the necessary substrates, as well as other factors affecting the profitability of the plant. In our expert report, we particularly took into consideration the effects of changing the substrate mix for biogas production, the technical properties of substrates(e.g. bio gas yield), but also the contractual risk allocation between the parties. Based on our expertise in the biogas market, and our many years of experience in arbitration proceedings, we were able to support our client so that the arbitration proceedings were successful.

Price Revision of a LNG Contract

Situation:

Our client, an international LNG company operates as a seller under a long-term contract (LTC) and delivers the contracted LNG volumes to a European buyer. The buyer either uses the LNG in its home market or – if the price situation is favourable and as far as the terms of the LTC allow – diverts the shipment to receiving facilities in another market to seek arbitrage opportunities.

The buyer triggers the price revision clause and requests a lower contract price under the LTC, based solely on alleged changes in circumstances and price levels in its home market. The seller wants to evaluate the claim of the buyer for a price reduction and to establish its own assessment of the appropriate price level. Further, our client wishes to achieve an amicable settlement and to avoid arbitration proceedings but at the same time wants to build a legal case provided that no settlement can be reached.

Solution:

As a first step, we carry out a commercial assessment of the trigger conditions and the benchmarks for the contract price set out in the price revision clause. In particular, the value of natural gas in the home market of the buyer is assessed. Further, import prices for LNG into the buyer´s home market and into neighbouring European markets are analysed. The result is a realistic evaluation of the bargaining position of our client under the price revision clause.

Based on this evaluation, we then develop commercial arguments in favour of our client’s position and by this assist in building the legal case. At the same time, we identify potential counter-arguments (“devil’s advocate”). Another purpose of our work is to identify potentials for win-win solutions. A win-win solution could be achieved if not just the price provisions are changed but if other terms of the LTC are changed such that the value of the LNG delivered under the LTC increases and the additional value is shared between the seller and buyer. Additional value can be achieved by additional flexibility in the LTC to deliver the LNG into markets with higher price levels. The client therefore identifies potential changes he would be willing to make to certain contract terms.

In a next step, we carry out an analysis of the market situation and of price levels for LNG in markets in which the LNG could be sold instead of the home market of the buyer. This is a prerequisite for the subsequent assessment of the additional value of potential changes to the contract terms. The final result is a recommendation for the option that maximizes the value of LNG sold under the LTC and allows for a commercial settlement of the dispute which is attractive for both parties.

Economic Evaluation of a Gas-Fired Power Plant

Situation:

In the context of the German energy transition, the power generation market has become subject to substantial changes. The operator of a gas-fired power plant in Germany had to evaluate the economically viable operation of its plant under changing market conditions.

Accompanied by the phase-out of nuclear energy and the continuing growth of renewable energies, the power plant operator experienced a decrease in full load hours of its gas-fired power plant, in particular as the renewable capacities (e.g. hydro, wind and solar) are defined as “must-run” capacities , which always have priority over fossil fuel power plants.

Solution:

TEAM CONSULT supported the power plant operator in evaluating the economic viability of its gas-fired power plant. We were able to include energy sector and technical aspects in our assessments. This was important because the power plant is a complex system. Electricity is generated in cogeneration with heat that is supplied to different sales segments (with different load profiles). As part of the project, we evaluated the power plant’s gas supply contract, which represents an important factor for economic viability. On the basis of these results, we supported the power plant operator to renegotiate its gas supply contract, contributing our knowledge of contractual conditions. Our commercial and energy industry expertise made it possible for us to evaluate the economic viability of the plant under different scenarios. As a result, the power plant operator was able to improve profitability of the plant under aggravated economic conditions.

Strategy Development for a Large Gas Supply Company

Situation:

A midstream gas company was exposed to substantial changes in the gas market. The entirely gas-focused company faced the crucial question how the gas market would develop in the long term and how the company’s business model should be adjusted to these developments to ensure its competitiveness and economic success.

For one thing, the problem concerned the development of the supply/demand balance in the gas market. Especially the impacts of the energy transition (such as a decreasing heat demand due to better insulation, a growing use of alternative heating technologies, a changing residual load in the power sector etc.) had to be taken into account. For another thing, fundamental changes in the structure of the gas value chain had to be analysed, like e.g. the emergence of new specializations and services, an increasing commoditization of flexibility services as well as growing interdependencies with other sectors of the energy industry.

TEAM CONSULT was asked to develop a consistent strategy for the midstream gas company which had to work out under different future scenarios.

Result:

As a first step, conclusive scenarios regarding the market development and economic framework conditions of the energy industry were developed in close co-operation with the client. These developments depicted inter alia the global supply and demand situation, the progress of the EU single market integration regarding the energy sector, the role and development of different trading markets as well as the development of import, storage and transport capacities. For each scenario, the impact on the client’s business was identified.

On this basis, TEAM CONSULT carried out an analysis of the client’s market position including a detailed examination of the market behaviour of the most important competitors as well as a SWOT analysis for every single business unit and the company as a whole. This laid the foundation for the following development of possible strategies. Thereafter, a valuation model was developed based on criteria determined and weighted by the client. The model was the applied to the different strategies, leading to a clear recommendation which was adopted by the client’s supervisory board in the end. The selected strategy was successfully implemented by the client. Under the new strategy, the client stabilized and expanded its market position.

Contract Negotiations for a Regional Energy Supplier

Situation:

In the context of the changing importance of gas hubs in Germany and a changing competitive environment, a leading regional energy supplier was forced to initiate gas supply contract negotiations with the respective gas supplier.

Solution:

TEAM CONSULT was tasked with the preparation of an expert report on the developments of the German gas market prior and throughout the revision period. Important aspects of this report were the developments of the regulatory framework and the development of competition on the gas supply market and within the various end customer segments of the energy supplier.

On the basis of the developments outlined in the expert report, proposals for contract adjustments were derived. For the ongoing negotiations TEAM CONSULT provided supporting arguments so that at the end a commercial settlement between the parties was reached.

Data Compilation to Evaluate Cartel Relevant Implications for a Merger of Two Leading Energy Suppliers

Situation:

During the merger proceedings of two leading energy suppliers, the EU Commission was concerned that this merger could result in a dominating market position in different member states. One of the companies in question had to produce a data set under time pressure which i.a. contained relevant energy industry data.

Solution:

TEAM CONSULT was tasked with researching, compiling and preparing the required data. This included i.a. the market shares of the energy supplier in question in various European countries, relevant competitors in these countries as well as data on the role of the supplier along the value chain. The data provided by TEAM CONSULT enabled the supplier to reasonably assert its position vis-a-vis the EU Commission, which in turn was able to assess the antitrust implications of the merger.

Tendering of a Gas Delivery Contract

Situation:

A local distribution company (municipal utility) was faced with the upcoming expiration of an important gas supply contract it needed to supply residential and commercial customers. The company had already procured some base load volumes under standard hub contracts for the time after the expiration date of its contract. Therefore, it intended to conclude a new contract for the residual volumes, i.e. the volumes above the base load volumes required to meet the demand. In addition, the provision of add-on services (like for example volume flexibility and the variation of daily volumes depending on temperature) was a requirement.

TEAM CONSULT was asked for advice about how to proceed in the selection of a supplier. Our recommendation was to invite pre-selected potential suppliers to bid in a tender. The client followed this recommendation and charged Team Consult with conducting the tender, evaluating the bids and making a recommendation for which supplier to select.

Solution:

TEAM CONSULT closely cooperated with the client in determining the required contract specifics (such as residual volumes, flexibility specifications, price structure etc.) and drafting the invitation to bid. Subsequently, potential suppliers were identified and requested to submit their bids. In a first assessment of indicative bids, TEAM CONSULT checked whether formal criteria and contract specifics were met. In case of discrepancies suppliers were requested to rework their offers. Directly after the deadline for submission of binding offers, the final evaluation and comparison of bids was carried out. The client was able to finalize and sign the new gas supply contract with the best-rated supplier on the same day. As a result of the project, a significant improvement in the terms and conditions, compared to the previous gas supply contract, was achieved.

Study on Security of Gas Supply and Recommendation of Measures for Improvement

Situation:

In the wake of changed energy market conditions and a European debate on security of gas supply, the subject of a potential lack of supply security and suitable measures for improvement were also discussed in German politics. The government had already begun to work on political measures, and respective studies had been commissioned. The companies of the gas industry, as well as the respective industry associations also took part in the discussion and assigned TEAM CONSULT together with its cooperation partner DBI Gas- und Umwelttechnik to prepare a study. The aim of the study was to identify any need for additional backup under different scenarios and to propose a mechanism which could provide the required backup.

It was particularly important to our clients to demonstrate under which scenarios (like e.g. low gas storage inventory, a cold spell, outage of import capacities) a lack of security of supply might occur and to what extent. In addition, several measures under discussion in politics and in the market, ranging from a national strategic gas reserve (similar to the petroleum reserve) to obligations for gas companies to hold certain amounts of gas in storage, were to be evaluated.

Solution:

As a first step, a survey was carried out in which the current emergency procedures and the present allocation of roles between market participants were described and analyzed. Moreover, realistic emergency scenarios were defined based on historical data, like e.g. a cold spell at the end of a winter or, in addition, a failure of an important cross-border interconnector for gas imports.

In the next step, any gap in security of supply under the different emergency scenarios was identified and quantified. For this, a model was developed which compares the maximum demand for capacity (peak load of gas consumers) with the available supply capacity (imports, withdrawal capacity of gas storages). The outcome was a residual need for flexibility, i.e. the need for a reserve. This need for a reserve was not only determined for Germany as a whole, but also separately for different regions in order to identify local bottlenecks.

Finally, a suitable instrument was developed together with the project partners to provide for the residual need for flexibility. By introducing additional products for balancing energy, the Federal Network Agency integrated our proposal for a market-oriented flexibility reserve into the regulatory framework of the gas market. The quantity in which the additional products (referred to as Long-Term-Options and Demand Side Management Products) should be contracted is determined by the regulatory body. The market area coordinator then procures these products via tenders.

In this project, the project partners developed a cost efficient and workable instrument to improve security of supply, one that can easily be adapted to changing requirements and that was integrated into the regulatory framework.

Development of New Market Strategy of Gas Storage Facilities

Situation:

An internationally operating company being active in the market for gas storage and flexibility services had to face an increasing competition and an imminent situation of oversupply. In this context, a new strategy for adapting to the market conditions had to be developed.

The following questions arose:

  • How to assess the market for gas storage and flexibility services? What is the company’s position in comparison to its competitors?
  • How have general market conditions and the needs of storage users developed?
  • How attractive are certain development projects?
  • How does the company have to adapt its product range in order to successfully operate in the market in the future?

Solution:

In the first step of the project, a detailed assessment of the company’s current situation was carried out together with the client. This included an evaluation of the existing asset portfolio and of the project pipeline. Experiences on our client’s most recent marketing campaign were also included in the assessment.

In the next step, future scenarios for the storage and flexibility market were developed. Here, TEAM CONSULT could contribute its long-standing experience in the modelling of the European flexibility market and its detailed knowledge of the status quo of different investment projects. In parallel, TEAM CONSULT conducted a survey among potential users of storage and flexibility services. The respondents gave indications on the demand-side requirements that could be expected in the future.

By comparing the results of the assessment of the company’s current situation with the future market conditions and the respondent’s requirements, it became apparent that the initial growth strategy needed to be adapted. In the context of a shift from a seller’s to a buyer’s market, we recommended to forego the originally planned expansion of own capacities. Instead, it seemed reasonable to take an active part in the imminent market consolidation process. The timely strategic reorientation helped our client to position itself well for the future.

Arbitration Proceedings Regarding an International Transport Agreement

Situation:

In this project, our long-standing experience in the international gas industry and our in-depth knowledge in arbitration proceedings played a crucial role.

Our client, a globally operating gas company, contracted transport capacities with a transporter on a long-term basis. The transporter sued our client for an increase of the transport charge and an adjustment of the contractual conditions before an arbitral tribunal. Basically, the claim would have meant a complete rewriting of the contract and it was justified with the characteristics of transport agreements which were concluded under different circumstances and at a different point in time.

Our task was to counter the claimant’s demands with practice-oriented gas industry knowledge and economic arguments, and to rebut the alleged claim during the multiannual proceedings.

It was a major challenge that the contract was designed with regard to a very specific market environment and that the claimant changed its line of argumentation several times. In addition, the proceedings were strongly influenced by the national regulation process in the market of the transporter.

Solution:

During the entire proceedings, it was of great importance to check the counterparty’s line of argumentation, which was theory-driven and based on an international comparative approach, for plausibility and to challenge it by referring to the agreed gas industry terms of the contract.

The starting point was an analysis of the contractual conditions and consequences which the parties – also considering the historic collaboration of the parties – agreed upon when entering into the contract. By this, it could be demonstrated that the parties placed great value on an individual and situation-specific contract design.

In the next step, it had to be proven that the alleged claim could not be applied to the contract at issue. For this, an analysis was carried out focussing on the development of transport charges in different market areas. A further in-depth analysis was provided concentrating on contract relevant issues like foreseeability of the consequences of regulated market conditions or the validity of specific contract terms in relation to European, regulated energy markets. In the analysis regarding the development of transport charges in different market areas, it could be confirmed that the prevailing charge of the contract at issue was at a competitive level.

With our diversified expert team, which has profound process experience and market knowledge, the proceedings could be closed after about two years and to the full satisfaction of our client.

Natural gas

LNG

Gas storage

Energy storage

Energy transition