Functioning of European Gas Wholesale Markets Quantitative Study Brussels, 15 May 2014 Dr. Albrecht Wagner Wagner, Elbling & Company Management Advisors Seilerstätte 18-20, 3. OG A-1010 Wien office: +43 664-849 58 00 web: www.wecom.at
Starting points: Functioning of European gas wholesale markets Article 1 of REGULATION (EC) No 715/2009 (gas transmission) says: Outcomes Effects Ultimate Benefits* This Regulation aims at: facilitating the emergence of a well-functioning and transparent wholesale market Functioning gas wholesale markets Ready availability of gas Competitive gas price formation Low transaction cost of gas trading Enabling/fertilizing competition for end user business Efficient gas procurement and related risk management Efficient utilization and risk management of gas-related assets (production, supply, storage, pipelines, power stations, ) Lower cost of gas for end users* Lower (cost of) risk in the gas industry Lower cost of power/heat for end users Transparency of gas price Improved security of supply * All else being equal 2
Study on: Functioning of European gas wholesale markets Phase 1: Questionnaire What do stakeholders require of functioning gas wholesale markets? Phase 2: Measurement To what extent are stakeholders requirements met by today s (2013) traded gas wholesale markets in Europe? Questionnaire was distributed all over Europe via various mailing lists (EFET, Eurogas, ACER, FSR). Feedback was received from about twenty respondents with a variety of backgrounds (producers, wholesalers, suppliers, traders, large end users ). Focus on brokered markets (due to their overwhelming importance) Analysis includes the following gas hubs: Austria VTP Belgium ZEE Belgium ZTP Czech Republic VTP France PEG Nord France PEG Sud Germany Gaspool Germany NCG Italy PSV Netherlands TTF United Kingdom NBP 3
Results phase 1 Questionnaire: Stakeholder requirements Price relevance threshold Minimum number of deals required per product/hub/trading-day so that the price signal can be considered trustworthy. Liquidity threshold Minimum amount of gas simultaneously offered/requested (ask/bid) for a product on a hub so that the product is considered liquid. Liquid trading horizon Minimum time horizon within which trading in gas standard products should be possible with the market being in a liquid state. 15 deals per product/hub/trading-day 120 MW each: bid and ask 36 months liquid trading horizon To what extent are stakeholders requirements met by today s (2013) traded gas wholesale markets in Europe? Source: Responses to ACER questionnaire sent to gas market stakeholders in the beginning of 2014. 4
TWh: 8.239 7.194 UK-NBP and NL-TTF trading volumes are far ahead of other European gas markets Brokered gas trading volumes at European gas markets 2013 Spot Prompt Forward 1.221 785 749 265 208 188 32 3 2 UK NBP NL TTF DE NCG DE GPL BE ZEE FR PEG Nord AT VTP IT PSV FR PEG Sud BE ZTP CZ VTP Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. 5
Share of total brokered hub volume Split of brokered gas trading volumes to delivery months (relative to transaction date) 2013 Spot to 12 th month: 90% of total trading volume* Months 13 24: 9% of total trading volume* Months 25 36: 1% of total trading volume* 60% 50% 40% 30% 44% of total brokered trading volume* is concentrated on gas delivered in the current and the immediately following month 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Relative delivery month AT - VTP BE - ZEE BE - ZTP CZ - VTP DE - GPL DE - NCG FR - PEG Nord FR - PEG Sud IT - PSV NL - TTF UK - NBP Unweighted average Note 1: Relative delivery month means relative to transaction date. Note 2: Volumes per month are summed up over all products (per hub). * Unweighted average of all hubs shown in the diagram. Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. 6
Deals per trading-day Price discovery: Deal count per day vs. trading horizon 2013 55 50 45 40 Less developed hubs: Relevant prices generated less than 3 months into the future (far below requirement of 36 months) Stakeholder requirement: Liquid trading horizon: 36 months into the future 35 30 25 20 15 10 5 10 0 6 12 18 24 30 36 42 Trading horizon (full months) AT - VTP BE - ZEE BE - ZTP CZ - VTP DE - GPL DE - NCG FR - PEG Nord FR - PEG Sud IT - PSV NL - TTF UK - NBP Most developed hubs (TTF, NBP): Relevant prices generated only 14-19 months into the future (well below requirement of 36 months) & Stakeholder requirement: Price relevance threshold: 15 deals per product/hub/trading-day Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. 7
Daily max. offered volume (sell-side; MW) 300 270 240 210 180 150 120 90 60 30 10 Availability of gas: Sell-side (offered) volumes vs. trading horizon Less developed hubs: Offer liquidity only for 4 months into the future (far below requirement of 36 months) Most developed hubs (TTF, NBP): Offer liquidity only for 18-19 months into the future (well below requirement of 36 months) 0 6 12 18 24 30 36 42 48 54 Trading horizon (full months) AT - VTP BE - ZEE BE - ZTP CZ - VTP DE - GPL DE - NCG FR - PEG Nord FR - PEG Sud IT - PSV NL - TTF UK - NBP Stakeholder requirement: Liquid trading horizon: 36 months into the future & Stakeholder requirement: Liquidity threshold: 120 MW gas offered per product/hub/trading-day 2013 Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. 8
Sell-side competition: Frequency of only a single offer for the sale of gas visible on brokered gas markets* 100% 75% Visible seller competition frequently low at less developed hubs n.a. 2013 Less visible competition 100% = never more than one sell-side offer simultaneously available 50% n.a. 25% 0% Legend More visible competition 0% = always at least two sell-side offers simultaneously available under the condition that at least one offer was available Legend (per hub): CAL- 14 AT VTP Sum- 13 BE ZEE Win- 13 Q4-13 Q1-14 BE ZTP CZ VTP DE GPL DE NCG * The diagram shows the frequency of only one single offer being available under the condition that at least one offer was available. Not available (n.a.) data points: no offer at all available. Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. FR PEG Nord FR PEG Sud Sud IT IT PSV PSV NL NL TTF TTF UK UK NBP NBP Visible seller competition better at more developed hubs 9
Results Phase 2 Measurement: Interim conclusions Interim conclusions: Stakeholders requirements regarding price relevance threshold, liquidity threshold and trading horizon were not met by any European hub in 2013. Dutch TTF and British NBP score far better than all other hubs (but still fall short of stakeholders requirements). What could be gained from increased market liquidity? 10
Benefits of improved gas market liquidity Ready availability of gas Functioning gas wholesale markets Competitive gas price formation Low transaction cost of gas trading Transparency of gas price The key element of gas trading transaction cost is the bid-ask-spread.* Buyers of gas pay 50% of the bid-ask-spread in addition to the true price of gas. Hence, the higher the bid-ask-spread, the higher the cost of gas. Improved gas market liquidity typically lowers bid-ask-spreads and thus lowers the cost of gas. * The bid-ask-spread is the difference in price between the lowest price for which a seller is willing to sell gas (ask-price) and the highest price that a buyer is willing to pay for it (bid-price) at the same time. 11
Average bid-ask-spreads for various traded products (Euro/MWh) Transaction cost: Bid-ask-spreads on brokered gas forward markets Durchschn. Bid-Ask-Spreads 2013 (Methode 23.4.) für versch. Produkte (CAL-14 CAL-15 CAL-16 Sum-13 Win-13 Sum-14 Win-14 Sum-15 Q2-13 Q3-13 Q4-13 Q1-14 ) 2013 1,00 0,90 0,80 0,70 0,60 0,50 0,40 0,30 0,20 0,10 AT - VTP Savings CZ - VTP DE - GPL H on gas cost* in the range of UK - NBP 30 to 140 Mio. p.a. DE - NCG H just from saved transaction cost** DE - NCG L FR - PEG Nord FR - PEG Sud IT - PSV Lower bid-ask-spreads NL - TTF BE - ZEE BE - ZTP 0,00 0 1 10 100 1.000 10.000 Forward volume per hub (TWh) (Logarithmic scale) Increased gas market liquidity CZ VTP BE ZTP DE NCG- L FR PEG Sud AT VTP IT PSV FR PEG Nord BE ZEE DE GPL H DE NCG- H UK NBP NL TTF * Excl. UK-NBP ** Estimate based on the difference of bid-ask-spreads of various markets/products to the TTF and current traded forward volume on the continent. Source and assumptions: See upcoming study by Wagner, Elbling & Company on gas market functioning. 12
Current discussion: Alternative market designs for European gas markets Alternative gas market designs currently discussed for Europe Option 1: Current (national) gas markets are enlarged as far as required so that each and every European end user is located inside (i.e. same balancing zone) a functioning forward market. Option 2: Only a certain number of European end-users is located in 2 to 3 functioning (national) forward markets; all other European end users are located in non-functioning forward markets (i.e. balancing only markets). FFM 1 FFM 1 FFM FFM 3 FFM 5 FFM 2 FFM... BM 1 BM 2 BM 3 BM 4 BM 5 BM 6 BM 7 BM 8 BM 9 BM 10 BM 11 BM 12 BM 13 BM 14 BM 15 BM 16 BM 17 BM 18 BM 19 BM 5 to 7 functioning gas forward (+ spot) markets (in many cases cross-border) for Europe 2 to 3 functioning gas forward (+ spot) markets (typically national) and 20+ balancing only markets (with only short-term products being traded) for Europe Legend: FFW = Functioning forward market (where gas is traded liquidly from short-term to well into the future) BM = Balancing market (where gas is traded liquidly only for spot (and maybe also the current and front month)) 13
Alternative market designs for European gas markets: Impact on gas procurement cost Analysed case: Large end user (or a supplier of small end users) intends to secure fixed price gas for the following year delivered at his home hub Scenario 1: End user located in functioning forward market (i.e. in the same balancing zone) Scenario 2: End user located in a balancing only market Financial hedge of location spread risk Functioning forward market 2C Balancing only market Physical forward contract (fixed price) 1A End user 2B Financial hedge of price risk End user 2A Physical forward contract (spot-indexed) 1A. Margin paid to supplier of fixed price gas in functioning (competitive) forward market Permanent extra cost of gas for end users located in balancing only markets /MWh /MWh /MWh /MWh 2C. Margin paid for hedging location spread risk between functioning forward market and home balancing market 2B. Margin paid for (imperfectly) hedging price risk on distant functioning forward market 2A. Margin paid to supplier of physical gas (spot-indexed) in non functioning home forward market Conclusion: Under market conditions, end users located in home markets without a functioning forward market (i.e. balancing only markets) permanently have to pay a markup for fixing their price of gas. 14
Results phase 1 questionnaire: Stakeholders preferred European gas market design Option 1: Every gas market area should have a liquid spot and forward market* Option 1 67% Option 2: Every gas market area should have a liquid spot market, but forward markets should be concentrated to max. 3 of them Option 2 33% * The questionnaire asked for the goal to be pursued, not for the means to achieve it. According to the Gas Target Model non functioning (spot+forward) (national) gas markets can be developed to functioning (spot+forward) gas markets by fully merging them with other markets (i.e. down to end users) or by merging them on the wholesale level only (Trading Region Model). 15
Conclusions 1. Stakeholders requirements on functioning gas forward markets regarding price relevance threshold, liquidity threshold and trading horizon were not met by any European hub in 2013. 2. Improved market liquidity typically leads to lower transaction cost (bid/ask-spreads) allowing for significant savings on gas procurement cost. 3. End users of gas which are located in non functioning forward markets (so called balancing markets ) face higher cost of fixing their price of gas. (As compared to end users located in functioning forward markets.) 4. The majority of stakeholders prefers a gas market design where every end user of gas is located (same balancing zone) inside a functioning forward (+ spot) market zone. This can be furthered by merging existing market zones to increase market liquidity. 16