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The European gas market: new evidences

  • S.I.: Recent Developments in Financial Modeling and Risk Management
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Abstract

A single price for the European gas market has been the ultimate goal for European countries. Deregulation of the gas market started in Europe in the late 1990s and three European packages for the creation of a single market for natural gas and electricity have already been issued. The aim of this paper is twofold: to verify whether natural gas prices are converging into a single price in Europe and to identify the reference trading hub for the European market. We study the evolution of natural gas prices during the last decade (2007–2017) at various trading hubs with the goal of identifying their level of integration. We examine the integration by testing for the presence of a common stochastic trend among the prices reported at the hubs. In order to detect the reference hub we test for a lead lag relationship between each pair of trading hubs. Our results show a high level of integration among the European trading hubs with the Dutch hub, TTF, playing the role of the reference trading hub.

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Fig. 1

Source: European Commission DG Energy: Market observatory for energy—Quarterly report on European gas market, volume 11(1)

Fig. 2

Source: Elaboration on Bloomberg (OECM) data

Fig. 3

Source: Elaboration on Bloomberg (OECM) data

Fig. 4

Source: Elaboration on Bloomberg (OECM) data

Fig. 5

Source: Elaboration on Bloomberg (OECM) data

Fig. 6

Source: Elaboration on Bloomberg (OECM) data

Fig. 7

Source: Elaboration on Bloomberg (OECM) data

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Notes

  1. See the latest report on the progress towards completing the Internal Energy Market [COM(2014) 634] at: https://ec.europa.eu/energy/sites/ener/files/documents/2014_iem_communication_0.pdf.

  2. For the full list of European gas hubs and their years of establishment see Heather (2015).

  3. The extent of hub-based pricing is not equal across all EU regions. While the gas pricing in Northwestern regions is now predominantly hub-based, in the Southern regions gas prices are still formed, to a great extent, through fixed oil-indexed contracts (Heather 2015).

  4. Explained in more details further in the article.

  5. For more information see http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A31998L0030.

  6. European Federation of Energy Traders is an organisation designed to improve the conditions of energy trading in Europe and to promote the development of a sustainable and liquid European wholesale market.

  7. In further text we refer only to the French hub PEG North, as the reference French gas hub, as it is the main trading gas hub in France.

  8. In the paper we will refer to 1-day ahead gas contract prices and 1-month ahead forward gas contract prices as spot and forward gas prices.

  9. Selected gas hubs will be hereafter referred to as NBP, TTF, ZEE, CEGH, GPL, NCG, PEG and PSV respectively.

  10. The goal of the research and the methods used do not require equal currency unit and the series could be introduced in the analysis in their original currency values. More specifically, we worked with log returns of spot and forward prices keeping them in their original currencies (the NBP and ZEE gas hub price series were introduced in GBP/MWh). However, we performed additional tests with all the price series transformed into Eur/Mwh and the results appear very similar.

  11. Each equation assumes one of the two hub prices from the pair as a dependent variable.

  12. Significance statistics for DCC and GARCH parameters obtained from the correlation calculations are available upon request.

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Authors and Affiliations

  1. Université Catholique de Louvain, Louvain-la-Neuve, Belgium

    Vera Jotanovic

  2. Università Sapienza di Roma, Rome, Italy

    Rita Laura D’Ecclesia

Authors
  1. Vera Jotanovic
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  2. Rita Laura D’Ecclesia
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Correspondence to Vera Jotanovic.

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Appendix

Appendix

See Tables 13, 14, 15, 16, 17, 18 and 19.

Table 14 ARCH LM test statistics for spot prices at European gas hubs.
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Table 15 ARCH LM test statistics for forward prices at European gas hubs.
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Table 16 GARCH conditional variances for spot prices at European gas hubs.
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Table 17 GARCH conditional variances for forward prices at European gas hubs.
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Table 18 Granger causality test statistics for forward prices.
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Table 19 Granger causality test statistics for forward prices.
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Jotanovic, V., D’Ecclesia, R.L. The European gas market: new evidences. Ann Oper Res 299, 963–999 (2021). https://doi.org/10.1007/s10479-020-03714-5

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