Economic Survey in a Case of Presumed Market Dominance
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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.