The wholesale gas market
2. Gas pricing and gas markets in Europe
Gas supplies to Europe remain dominated by long term contracts (15 to 25 years) between incumbents, which are the main importers, and producing companies from exporting countries external to the European Union (Gazprom in Russia, Sonatrach in Algeria and Statoil in Norway) or not (Gas Terra in the Netherlands). These contracts include price indexation clauses on crude oil and oil products. LNG imports from other countries, including Nigeria, Egypt and Qatar are also rapidly increasing. In 2007, net imports of France amounted to 480 TWh. France’s main suppliers were Norway (32%), the Netherlands (19%), Algeria (18%) and Russia (14%)18.
Wholesale markets are developing in Europe, the NBP (Great Britain) being the only market place considered mature. Thanks to its liquidity and to the two gas lines connecting the British market to continental Europe (Interconnector and BBL), the NBP highly influences the continental hubs.
Zeebrugge (Belgium) and the TTF (Netherlands) are the two dominant market places on the continent.
Other places are emerging, but their development is hindered by obstacles to cross border gas transit within the EU.
During the first quarter 2009, long term contracts gas prices were largely above market prices. They were at the same level at the end of the fourth quarter 2008.
A. Comparison between long-term contracts prices and NBP day ahead and forward prices
While progressively increasing since April 2008 and after having reached a historic level, long term contract gas prices begun to decrease during the 1st quarter 2009. During the first quarter 2009, these prices decreased by about 17%. At the end of March 2009, the prices of three long term contracts relevant for the French supplies were:
− 24,41 €/MWh for Russian gas entry Germany (Waidhaus) ;
− 25,25 €/MWh for Algerian LNG entry France (Montoir) ;
− 25,94 €/MWh for Norwegian gas entry Germany (Emden).
18Source : Observatoire de l’Energie, DGEMP
Electricity and gas market observatory Q1 2009 39 / 49
Long term contracts prices and NBP day ahead and forward Y+1
5 10 15 20 25 30 35 40
Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08 Feb 09
€/MWh
Day-ahead NBP (monthly average) Russian gas entry Germany Norvegian gas entry Germany Algerian gas entry Montoir NBP Y+1 (monthly average)
Sources: Isic Heren for the prices of the long term contracts and Argus for the day ahead and forward prices
This first decrease occurs within the context of oil prices fall after a period of soaring prices – Brent price increased from more than 90 $/bbl in December 2007 to more than 140 $/bbl at the end of June 2008, and fell at a 60$/bbl level at the end of September 2008 and even 40 $/bbl in December 2008.
Indexation formulas upon oil prices, which include adaptation delays of 3 and 6 months as well as an adaptation at several intervals, explain that the increase in long term contracts prices occurred only during the second quarter 2008 and that these prices have first entered a decreasing phase at the beginning of 2009.
On a monthly average, day-ahead prices on NBP accelerated their fall and reached their level of August 2007, around 12 €/MWh at the end of March 2009. Forward prices Y+1 kept sharply decreasing from 22,2 €/MWh in December 2008 to 18,5 €/MWh in March 2009.
B. Day ahead prices on the three main European markets
Market prices massively dropped during the first quarter 2009, after a slightly fluctuant month of January because of the Russian-Ukrainian crisis. After a peak at 25 €/MWh in January 2009, the prices collapsed to 12 €/MWh at the end of March 2009.
Electricity and gas market observatory Q1 2009 40 / 49
Day ahead prices on the three main European markets
5 10 15 20 25 30 35
janv 08 mars 08 mai 08 juil 08 sept 08 nov 08 janv 09 mars 09
€/MWh
NBP Zeebrugge
Source: Platts (since 09 January 2009) and Argus
Electricity and gas market observatory Q1 2009 41 / 49 3. The wholesale market in France
A. Activity in the over-the-counter market (OTC)
Most of the wholesale activity in the gas market takes place over-the-counter, through direct transactions or through intermediaries (brokers and trading platforms). The volume of OTC transactions is not public.
The deliveries resulting from these transactions take place at Gas Exchange Points (PEGs), which are virtual points allowing the exchange of gas within each balancing zone. The deliveries observed on the PEGs result from:
• transactions OTC concluded between suppliers;
• transactions concluded in the organized market;
• the deliveries corresponding to gas release programs;
• gas supplies to network operators for their own needs.
The following graph shows the day ahead nominations of the actors at the TSOs. So, it does not represent the volume of the transactions observed over the period, but the volume of net deliveries resulting from transactions OTC and organized market.
Volume of net deliveries on French wholesale gas market
0
Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
TWh
Source: TSO – Analysis: CRE Gas supplies to network operators are not included in this chart.
During the first quarter 2009, the volume of net deliveries resulting from transactions OTC decreased by 8% in comparison with the previous quarter. Compared to the levels observed last year, the volumes exchanged have risen by 58%. During the quarter, 61.1 TWh were exchanged.
Increased quantities delivered in the French PEGs on the last quarter of 2008 can be explained by the netting of Take or Pay19 clause included in long-term contracts. Furthermore, the management of peak cold and needs associated balancing may increase the activities of suppliers. Finally, the wholesale price is below the price of long-term contracts indexed oil since the fourth quarter of 2008, this may impulse purchases on the wholesale market.
19 See glossary for Take or Pay definition
Electricity and gas market observatory Q1 2009 42 / 49
B. Activity on organised markets and international comparison
The organized market in France launched on 26 November 2008, called Powernext Gas gives shippers the opportunity to buy and sell gas in PEGs in a transparent and anonymous way. The trading platform offers spot contracts on the three PEGs (North, South and South West) and Futures contracts (on North PEG) and allows shippers to buy or sell gas for a period ranging from within-day to the next three seasons.
Volumes exchanged on Powernext Gas Spot in the first quarter 2009 represent 636 GWh for 720 transactions.
Average monthly volumes of transactions on organised markets in France (all maturities combined)
Powernext Gas Futures PEG Nord Powernext Gas Spot PEG Nord Powernext Gas Spot PEG Sud Powernext Gas Spot PEG Sud Ouest
Source : Powernext – Analysis : CRE Average monthly volumes of transactions on main European power exchanges
– first quarter 2009 –
Sources : Powernext, APX, EEX –– Analyse : CRE
Electricity and gas market observatory Q1 2009 43 / 49
4. Prices on the French wholesale market and European comparison
As prices of bilateral trading are not public, this section use prices from exchange or public indexes.
In the first quarter of 2009, the day-ahead prices quoted on Powernext showed an average of 19.0
€/MWh on the PEG North, 20.0 €/MWh on the South PEG and 21.5 €/MWh20 on the PEG South West.
The prices decreased about 4.9 €/MWh over the same period last year. Compared with major hubs in Europe, the day-ahead prices remained higher of 1.29 € / MWh in relation to Zeebrugge for example.
The French day-ahead prices during the first quarter of 2009 were above prices of the main European hubs.
Day-ahead prices on the main European hubs – weekly averages –
avr.-07 mai-07 juin-07 juil.-07 août-07 sept.-07 oct.-07 nov.-07 déc.-07 janv.-08 févr.-08 mars-08 avr.-08 mai-08 juin-08 juil.-08 août-08 sept.-08 oct.-08 nov.-08 déc.-08 janv.-09 févr.-09 mars-09
€/MWh
Sources: Argus, Powernext – Analysis: CRE Spread between day-ahead prices on the main European hubs
– weekly averages –
avr.-07 mai-07 juin-07 juil.-07 août-07 sept.-07 oct.-07 nov.-07 déc.-07 janv.-08 févr.-08 mars-08 avr.-08 mai-08 juin-08 juil.-08 août-08 sept.-08 oct.-08 nov.-08 déc.-08 janv.-09 févr.-09 mars-09
€/MWh
Diff PEG Nord - NBP Diff PEG Nord - Zeebrugge
Sources: Argus, Powernext – Analysis: CRE
20 The price at South West PEG is not representative given the low liquidity of the market, which accounts for only 4 days of transactions in the entire first quarter of 2009.
Electricity and gas market observatory Q1 2009 44 / 49 5. Concentration of the French gas market
At the end of the first quarter 2009, 38 actors were active on the French wholesale gas market. Among them, 12 were active on Powernext Gas Spot, and 13 Powernext Gas Futures.
A. Concentration of the French PEGs
The graph below shows the Herfindahl-Hirschman Index (HHI)2122 which is used for the different French wholesale market segments.
HHI concentration index – Sales on PEGs - first quarter 2009 -
Sources : GRTgaz, TIGF – Analysis : CRE HHI concentration index – Purchases to PEGs
- first quarter 2009 –
Sources : GRTgaz, TIGF – Analysis : CRE
21 The HHI equals the sum of the actors’ market shares squared, and measures market concentration (the higher the index, the more concentrated the market). Generally, a market is considered to be weakly concentrated if its HHI is below 1,000, and highly concentrated if it is over 1,800.
Given the specificities of the gas market, this index should only be used cautiously as an indicator of the competition level.
Indeed, regarding the gas market, concentration and competition are not as directly linked as in most markets.
22 Erratum: Due to an error on the charts of indices of concentration of the PEGs to quarterly monitoring of markets in the fourth quarter of 2008, they have been updated and are available on the updated version of the fourth quarter 2008).
Electricity and gas market observatory Q1 2009 45 / 49 B. Concentration of the French interconnections
The following graphs show the concentration of the imports and exports.
Exports are particularly concentrated, whether incumbent suppliers are included or not.
HHI concentration index – Imports/exports - First quarter 2009 -
Sources : GRTgaz, TIGF – Analysis : CRE
Electricity and gas market observatory Q1 2009 46 / 49