Earthquake shakes energy markets

German Cal 12 power ended above 58 euro per MWh today. The disastrous events in Japan have sent ripples across the worldwide energy markets. A brief résumé of the consequences of the earthquake that we currently observe:

1. Oil prices have declined. The Brent traded below 110 dollar per barrel today. Oil traders fear that the economic disruptions due to the earthquake will reduce oil demand in Japan, the world’s third largest consumer of oil. For the moment, it looks like the earthquake has (temporarily?) stopped the bull run in the oil markets.
2. Gas prices increased rapidly. TTF Cal 12 traded above 27 euro per MWh today. Nuclear power production in Japan is out due to the earthquake. It is assumed that the MWh’s not produced by the nuclear facilities will be produced in gas-fired power plants. The extra MWh’s of gas will probably come with LNG shipments from (mostly) Qatar. This sparks fears that the LNG supply to Europe, so important in keeping European gas prices at a reasonable price level, will be reduced.
3. Power prices rallied. This was not only due to the rising gas price. The problems with Japan’s nuclear facility could mean the end of plans to keep nuclear power plants in Europe open for longer than originally planned. Today, German Chancellor Merkel even announced that seven nuclear power plants in Germany would be shut down immediately for safety controls. If other countries would adopt similar measures, we would see a severe shortage of electricity in Europe.

The energy markets have changed completely in less than two months time. Revolution and war in the Middle east and an earthquake in Japan have severely shaken the supply / demand balance. The short term price movements might just be speculation or panic reactions. They could also be the start of a further bull trend. But then the question is: can the recovering economy stand this combination of: 1. Commodity price inflation, 2. Severe disruption of one of the world’s most important economies, 3. A massive switch of insurance money towards the Japanese reconstruction? Is the current crash of stock exchanges the precursor of a new economic crisis looming? Or is it just a panic reaction?

No better illustration of the unpredictable character of energy markets than the past two months. Keep counting on that lack of predictability and spread your buying decisions is the best that we can advise in such circumstances. We have to watch carefully in the next days whether the spot gas prices continue to rise. Because that would clearly indicate that increased Japanese LNG buying is affecting supply to Europe.

For the longer term, it is clear that the Japanese disaster will affect the nuclear power sector. It was the Tsjernobyl disaster in 1986 that inspired European governments to decide to phase out nuclear power production. The 25 years that followed without nuclear incidents inspired those governments to turn back those plans of shutting down nuclear power plants. But what politician will dare to defend expanded lifetimes for nuclear power plants after what has happened in Japan? Let alone decide whether to build a new nuclear power plant. If the nuclear phase-out plans would be resumed, this would inevitably have consequences for power pricing in Europe. But that’s the longer term. No idea what it will bring, as every morning we get up in surprise over a new explosion or fire in the Japanese nuclear power plant.

Filed under: Energy history, Energy policy, Energy technology, Germany, Market analysis, The economy, The market today

Deutsche Börse – NYSE Fusion und der deutschen Energiemarkt

Betrachtet man die aktuellen Schlagzeilen in der deutschen Presse, so liest sich die jüngere deutsche Wirtschaftsgeschichte wie eine Erfolgsstory. Die deutsche Wirtschaft hat sich schneller aus der Krise von 2008 erholt als alle anderen Wirtschaftssysteme. Die ganze Nation scheint durch das neu gefundene  Selbstvertrauen unter einem unbändigen unternehmerischen Esprit zu vibrieren. Dieser wirtschaftliche Erfolg bleibt nicht ohne politische Konsequenzen. Auf dem jüngsten EU-Gipfel sahen sich die  Staatsmänner aus anderen europäischen Ländern mit einem beispiellosen deutschen Durchsetzungsvermögen konfrontiert. Frau Merkel konstatierte deutlich, dass alle anderen Länder die Deutsche Wirtschaftspolitik adaptieren sollten, da Deutschland derzeit das Land  mit der  der besten Wertentwicklung in der europäischen Union ist.

.

Zum heutigen Tage wurde ein weiteres Kapitel in der Erfolgsgeschichte der deutschen Wirtschaft geschrieben. In der belgischen Wirtschaftspresse war heute die  Schlagzeile zu lesen, dass  „die Deutsche Börse  die New York Stock Exchange übernimmt”. Zugegebenermaßen ist diese  Schlagzeile etwas übertrieben, so wie Schlagzeilen nun einmal sind. Die Deutsche Börse übernimmt natürlich nicht den New Yorker Handelsplatz aber mit dieser Fusion werden 10 von 17 Top Arbeitsplätzen der neuen Gesellschaft von  Deutschen Mitarbeitern besetzt und es scheint deutlich, dass Frankfurt der führende Partner in diesem Kontext  sein wird. Wer hätte gedacht, dass die Deutschen sich einmal in einer derartigen Phalanx auf dem Parkett der Wallstreet bewegen würden.

Nach meinem Dafürhalten werden  wir in den nächsten Jahren zahlreiche wirtschaftswissenschaftliche  Publikationen auf dem Markt finden, die uns detailliert erklären werden, aus welchem Grund sich die deutsche Wirtschaft in einem derart rasanten Tempo erholen konnte. Ich erlaube mir kurz, Ihnen meine persönliche Wahrnehmung und Einschätzung zu diesem Thema darzulegen. In den letzten Jahren habe ich zahlreiche Geschäftsbeziehungen in Deutschland gepflegt. Was ich in dieser Zeit an den Deutschen schätzen gelernt habe, ist ihre Balance zwischen Disziplin und Kreativität. Diese Attitüde lässt sich auch in  der  deutschen Wirtschaftspolitik beobachten. Es ist diese effektive Mischung aus disziplinierter Haushaltspolitik  und unternehmerischer Flexibilität, wie wir es z.B. in der  Auflockerung starrer Beschäftigungsbedingungen finden.

In diesem Zusammenhang stellt sich natürlich die Frage, ob sich diese positive, vibrierende Entwicklung auch auf den deutschen Energiemarkt übertragen lässt?  Viele würden wohl  argumentieren, dass dies nicht der Fall ist. Nach meinem Dafürhalten steht  der  deutsche Energiemarkt noch  vor zwei entscheidenden Hindernissen:

1. Der „Nicht-Rohstoff-Anteil“  der Stromrechnung, also Netznutzungsentgelte, Steuern, Abgaben und Umlagen sind in Deutschland weitaus  höher als in jedem anderen Land. Wie ich bereits an anderer Stelle in diesem Blog bemerkt habe, hat Deutschland die  grüne Stromproduktion bemerkenswert schnell vorangetrieben. Allerdings mit dem negativen Effekt, dass diese  Energie  35 Euro pro MWh kostet. Darüber hinaus sind die Netzentgelte in Deutschland die höchsten im Vergleich zu allen anderen  westeuropäischen Ländern. Der Grund hierfür  ist relativ einfach. Es gibt eine Vielzahl von verschiedenen Versorgungsunternehmen, welche die Preise ihrerseits  bestimmen. Wir können davon ausgehen, dass der CEO des französischen Netzbetreibers  EFRE, Michèle Bellon ein angemessenes Gehalt für seine Leistung bezieht. Dennoch entrichten die  Franzosen lediglich ein CEO Gehalt für 95%  ihrer gesamten Elektrizitätsversorgung. Die Deutschen hingegen  zahlen unendlich viele CEO Gehälter für die gleiche Dienstleistung.
2. In gewisser Weise ist der deutsche Energiemarkt nach wie vor archaisch strukturiert. Es gibt eine Vielzahl von lokalen Netzversorgern, die sogenannten Stadtwerke, von denen die meißten das  Energieversorgungsgeschäft exklusiv fortführen. Eine Liberalisierung hat nicht wirklich stattgefunden. Wie aber sieht  die Zukunft solcher  Unternehmen aus? Wenn Sie nicht in der Lage sind eine zeitgemäße und  kundenorientierte Produkt- und Dienstleistungspolitik  außerhalb ihrer althergebrachten Traditionen zu  entwickeln, werden Ihre Kunden zukünftig eine leichte Beute für  innovative Mitbewerber sein. Solange in den Aufsichtsräten der ansässigen Stadtwerke  lokale Politiker vertreten sind, wird die Bereitschaft, auch außerhalb der  Gemeindegrenzen Geschäfte zu tätigen, sehr gering sein.

Vielfach konnten wir die negativen Folgen dieser archaischen Marktstruktur bei dem Energieeinkaufsverhalten der Unternehmen beobachten. Ich habe bereits die einzigartige deutsche Mischung aus Disziplin und Kreativität gelobt. Gerät aber diese Balance in Schieflage, so entwickelt sich sehr schnell aus einem zu viel an Disziplin eine gewisse Form von Konservativismus. Gefördert wird diese konservative Einkaufspolitik der Kunden durch die langjährige Bindung an das örtliche Versorgungsunternehmen, deren Dienstleistung und Preispolitik aufgrund der jahrelangen Kundenbeziehung in keiner Weise in Frage gestellt wird. Oftmals sind dies kleinere lokale Firmen, denen die Bereitschaft und Fähigkeit fehlt, die vielfachen  Möglichkeiten des bestehenden, offenen Energiemarktes für einen bestmöglichen Energieeinkauf zu nutzen.  Aus dieser Gewohnheit und Bequemlichkeit  heraus unterzeichnet der deutsche  Energie Käufer weiterhin Verträge mit erdölindizierten Gaspreisen und langfristige Stromverträge mit Festpreisen. Eine fundierte  Analyse der Chancen und Risiken auf den Energiemärkten findet nicht statt.

Nichtsdestotrotz möchte ich den  deutschen Energiemarkt nicht ausschließlich negativ skizieren. Schon allzu oft hat diese deutsche Mischung aus Disziplin und Kreativität in der Vergangenheit zu überraschend schnellen Entwicklungen geführt.

1. Der deutsche Gasmarkt  hat sich mit  Lichtgeschwindigkeit entwickelt. Wir finden nun Gaslieferverträge für fast alle Kunden auf der Basis von Hub-Preisen. Durch die bestehenden Spot-Märkte bestehen nun ausgezeichnete Hedging-Möglichkeiten. Wir stellen fest, dass viele Lieferanten sich noch etwas schwer tun, den richtigen Ansatz zu entwickeln aber diese Verträge scheuen keinen Vergleich zu Großbritannien oder den Niederlanden.
2. Gerade als Belgier überrascht es mich, dass  Deutschland über eine Regierung verfügt, die Entscheidungen trifft und Selbige relativ effizient umsetzt. Das ist wahrscheinlich auch einer der Gründe, warum Deutschland sich so schnell aus der Krise erholen konnte. Dies beobachten wir auch auf den Energiemärkten. Eine der wichtigsten Fragen in Bezug auf die Deregulierung des deutschen Marktes ist die Tatsache, dass trotz der hohen Anzahl von Netzbetreibern, der freie  Zugang zu den Netzen gewährleistet sein muss.  Selbst die Transportnetzte sind wiederrum in viele unterschiedliche Netze unterteilt. In den vergangenen vier Jahren haben die deutschen Behörden erfolgreich den Weg geebnet um einen freien Zugang für Dritte sicherzustellen. Auf dem Strommarkt kann inzwischen jeder Anbieter bundesweit jeden seiner Kunden versorgen. Für den Gasmarkt gibt es zwar noch  einige Beschränkungen aber auch hier schreitet die Entwicklung zügig voran.
3. Dank der Vielzahl von Energie-Unternehmen gestaltet sich der Versorgungsmarkt in diesem Land  sehr lebendig und äußerst wettbewerbsfähig. Der deutsche Strommarkt wird nicht wie in Frankreich (EDF) oder  in Belgien (Electrabel) von einem einzigen Anbieter dominiert, sondern wir finden hier vier große Protagonisten  auf dem Strommarkt: E-On, RWE, Vattenfall und EnBW.  Darüber hinaus gibt es eine Vielzahl von lokale Lieferanten respektive Fusionen von kleineren Anbietern, die bundesweit agieren, so z.B.  EWE, MVV, Trianel, N-Ergie, etc. Auf dem Gasmarkt befinden  sich neu gegründete Unternehmen wie natGAS oder Gasag. Dieser lebhafte Wettbewerb hat zur Folge, dass sich neue Produkte,  wie der Tranchen Modellvertrag für den Kauf von Gas auf TTF oder NCG Basis  schnell entwickeln konnten.
4. Die Leipziger Strombörse EEX verfügt über die höchste Liquidität aller kontinentaleuropäischen Strombörsen. Ich bleibe skeptisch ob sich die Energiemärkte letztendlich zu  börsengehandelten oder als OTC-Märkten entwickeln. Falls sich aber ein  börsennotiertes  Modell durchsetzt,  wird die Leipziger EEX ein bedeutender Name in Europa sein. Vergleichbar mit der  Deutsche Börse auf den internationalen Aktienmärkten.

Der deutsche Energiemarkt ist voller Chancen und  ich bin sehr zuversichtlich, dass die deutschen, inspiriert von ihrem  neu gefundenem wirtschaftlichen Selbstvertrauen und Ihrer Kreativität nach den  neuen Möglichkeiten greifen werden.

Filed under: Germany

Deutsche Börse – NYSE merger and the German energy market

“Erfolgsgeschichte”, that’s the beautiful German word for success story. And that is clearly what the recent German economic history reads like. The German economy has recovered more rapidly from the 2008 crisis than any other traditional economy. The whole country seems to be vibrating with a newly found self-confident entrepreneurial spirit. This economic success is not without political consequences. At the latest EU Summit, statesmen from other European countries saw an unprecedented German assertiveness. Miss Merkel’s argument seemed to be: “since Germany is the best-performing economy of Europe, all other countries should adopt our economic policy”.

Today, a next chapter in the success story of the German economy is written. The Belgian business newspaper ran as its headline today “Deutsche Börse takes over the New York Stock Exchange”. The headline is exaggerated as headlines should be. Deutsche Börse is not taking over, it is merging with the world’s most famous trading place on Wall Street. But as 10 of the 17 top jobs in the new company will be held by Germans, it is clear that Frankfurt is the leading dancing partner. So, to continue in hyperbolic language, who would have thought that Germans would once run Wall Street?

I guess that in the next years we will be able to buy many books that explain in detail for what reason the German economy recovered at such a rapid pace. I don’t have the arrogance to share more than an observation with you on this topic. In recent years, I have done a lot of business in Germany. What I have come to appreciate especially in the way Germans do business is their ability to balance discipline and creativity. This can also be observed in the policy adopted by the German government to recover from the crisis, a policy which they would like other European countries to copy. It is a cocktail of budgetary discipline and increased entrepreneurial flexibility, e.g. by relaxing rigid employment conditions.

The question is of course, whether we can see a similar positive, vibrating development in the German energy market. Many would argue that this is not the case. In my opinion, the German energy market is still facing two major issues:

1. The non-commodity part of the energy bill is higher in Germany than in any other country. As I have written earlier in this blog, Germany has developed its green power production remarkably fast. But it comes at a massive cost of now 35 euro per MWh. On top of that, grid fees are the highest of any Western-European country. The reason for that is very simple. There are more than a thousand different grid companies, all of which have fixed costs. Michèle Bellon, the CEO of ERDF, the French electricity distribution grid operator, probably has a decent salary. But the French pay just one CEO salary for having electricity distributed in 95% of their country. The Germans pay a thousand CEO salaries for that same service.
2. To some extent the German energy market remains stuck in archaic structures. There are not only a multitude of local grid companies, the Stadtwerke, most of them also continued to run a supply business after liberalization. What is the future of such companies? If they don’t develop a commercial approach to attract customers outside their traditional supply area, they are sitting ducks, waiting for new suppliers to steal away clients from them. As the Stadtwerke are run by local politicians, they often lack the willingness to expand the business beyond their locality.

In many cases we observe negative consequences of the archaic market structure with buyers of energy. I have already praised the unique German cocktail of discipline and creativity. However, sometimes the discipline takes over and becomes conservatism. This is nurtured by the local supply companies that rely heavily on the decades long relationship that they have with a client to convince him to continue working with him. But when these local companies are small, they often lack the ability or willingness to develop the new energy buying solutions to face today’s energy market challenges and grasp the opportunities. German energy buyers then continue to sign fix price contracts for electricity and oil-indexed gas contracts, out of habit, and not based on a genuine analysis of their risk exposure in the energy markets.

I am not too negative about the German energy market however. We do see the discipline – creativity cocktail manifest itself in many – surprisingly rapid – evolutions:

1. The German gas market is developing at light speed. We now find gas contracts based on Hub prices available for almost every client. Prices can be spot based with good possibilities for forward hedging. We can see most suppliers still struggling to develop the right approach, but such contracts are almost as good as anything you can find in for example the UK or the Netherlands.
2. Especially as I come from Belgium, I’m surprised to find in Germany a country with a government that takes decisions and implements them relatively efficiently. This is probably why German politics succeeded in coming out of the crisis the way they did. We also observe it in the energy markets. One of the main issues with deregulating the German market is having free access to grids arranged in a country with such a massive amount of grid companies. Even the transportation grid is split up in a multitude of different grids. In the past four years, the German authorities have worked very hard on assuring free third party access and with great success. In the electricity market, any supplier can now supply to any client anywhere in the country if he wants. For gas, some restrictions remain, but they are removed at an extremely rapid pace.
3. Thanks to the multitude of energy companies in the country, the supply market is very vivid and competitive. The German power market, for example, is not dominated by a single large supplier such as EdF in France or Electrabel in Belgium, there are four big players in the power market: E-On, RWE, Vattenfall and EnBW. Next to that there are several local suppliers or conglomerates of local suppliers that have developed a nation-wide business, players such as EWE, MVV, Trianel, N-Ergie, etc. And then there are new players, newly created companies such as Natgas or Gasag in the gas market. One of the consequences of this vivid competition is that new products such as a tranche model contract for buying gas on the TTF or NCG have been developed very rapidly.
4. Leipzig-based EEX is the most liquid of all continental European energy exchanges. I remain skeptical whether the energy markets will develop as exchange-traded or as OTC markets. But if the exchange-traded model prevails, the EEX will be the big name in Europe. A little bit like Deutsche Börse in the stock markets?

The German energy market is full of opportunities. And I am confident that the newly-found economic self-confidence will inspire the creativity in German companies to grasp these opportunities.

Filed under: Energy history, Energy policy, Energy suppliers, Germany, The economy, The market today

Gas markets Europe 2010 – 2011

The past month has been a bit low in blogging activity, due to my being busy creating a report on the European gas market. Research of supply and demand figures brought me some surprising insights. You can read an extract of the report by clicking on the link below. Please read the executive summary of the report below. Contact me at benedict@eecc.eu if you want to receive a full copy of the report.

Executive summary

• ‘Energy can only get more expensive’, is a common belief among energy buyers. However, we have recently seen that natural gas prices remained relatively low, even when the economic activity picked up. Oil prices rose, so the gas prices on the Hubs became structurally lower than oil-indexed gas prices.

 

• The biggest natural gas reserves in the world are to be found in the Middle-East and not in Russia. However, the Middle-East are currently only the world’s fourth largest producer of natural gas, meaning that huge reserves are untapped. Gas production in gas reserves giants Qatar and Iran has started to rise exponentially in recent years. This explains the presence of excess gas volumes in the world markets.

 

• The US has increased its production of natural gas by 16% due to the development of shale gas. In 2009 they were the world’s biggest producer of natural gas, bigger than Russia. We have always known that beyond conventional gas reserves, a lot of gas was trapped in this shale layer. Only, it was always thought that it was impossible to produce gas from these layers without excessive costs. Recently production techniques have been improved, and the energy companies claim that it is now possible to produce shale gas at a cost that is lower than the production of conventional gas. The possibility to economically produce shale gas boosts the gas reserves of the world.

 

• Shale gas production has already had an impact on gas prices, as it made more LNG available to the European market as less was needed in the US. If the US continues to expand its gas production, it might even start exporting LNG. There is also potential for shale gas production in Europe and in China. If all this shale gas production is developed, the world’s gas supply situation will look completely different. However, this whole shale gas development could be turned back due to environmental impact of the shale gas production. It is too early to decide what the further development will be.

 

• As of 2011, the Nord Stream gas pipeline will bring additional gas from Russia to Germany, 22,5 billion m³ of capacity in 2011 and 45 billion m³ in 2012.

 

• Natural gas demand in Western-Europe peaked in 2004 and then started to fall. This is contrary to popular belief that energy consumption is continuously growing.

 

• Although the growth rate of power consumption is slowing down, it is still growing. Deployment of electric cars would speed up this growth of electricity demand. Most of these extra MWh’s of electricity are now produced from renewable energy sources. But the growth of demand is faster than the growth of renewable. This means that extra power plants will need to be built. Plans to shut down nuclear power plants in countries like Germany, Belgium, the Netherlands and UK have been turned back, meaning that fewer power plants will need to be built. How much of the new power plants will be gas-fired will depend on whether new nuclear and (clean) coal-fired power plants can be developed. Which plants will be built is subject to political decisions. It is therefore madness to try to predict how much extra gas will be needed for new gas-fired power plants.

 

• A multitude of factors will determine whether gas supply will continue to grow and/or gas demand will continue to fall. Therefore, it is impossible to predict whether the current situation of over-supply will continue or not. The important news is that it is not unthinkable that we might see some decades ahead with abundant natural gas available to our markets, resulting in lower gas and electricity prices. Therefore, corporate energy strategies based on the adagio that energy can only become more expensive, should be adapted. Guidance on how to do this can be found in the conclusion of this report.

Filed under: Belgium, Energy demand, France, Germany, Market analysis, Natural gas, UK

German Court deals a (small?) blow to oil-indexed gas pricing

It was a long ride yesterday from Berlin back to Frankfurt, and my German colleague Arne and I threatened to run out of conversation topics. But then the radio news gave us a topic that kept us busy for the remaining two hours. A courthouse in Karlsruhe has decided against oil-indexed gas pricing practices by two German suppliers, Rheinergie from Cologne and Stadtwerke Dreieich from Hessen. I’ve heard about this court case in Karlsruhe a month ago and was watching anxiously for its results. The court ruling isn’t the definitive blow to oil-indexed gas pricing that some had hoped for. The judge hasn’t outright forbidden oil-price indexation for gas. That’s probably for the better. Where do we go when judges decide upon micro-economic realities such as gas price indexation? The ruling, to my opinion, will not be without consequences, like some German papers imply this morning.

Before we go into the details of the ruling some background. When we started consuming natural gas in large quantities in the 1960′s, two different market models developed:

1. In the United States and the United Kingdom, pricing systems were created that we call ‘Hub markets’ or gas-to-gas pricing today. The principle is simple and economically wise. Supply and demand of the natural gas itself determine the price. Such pricing obviously calls for a competitive gas market on the supply side to avoid misuse of market power to push up prices. It is therefore not surprising that the first liberalized gas markets developed in the US and the UK. Such a market model demands a fundamental (Anglo-Saxon?) believe in the powerful force of markets. Security of supply is guaranteed by open access to markets in this model and not by political protection of energy rights. (Although the role of the UK and the US in the Iraq war shows that they are not always such firm believers of this principle either.)

2. In continental Europe, belief in the power of open markets has always been much less. Therefore, a different model was developed, that of the long-term oil-indexed pipeline gas deals (what a mouthful). European politicians of the consuming countries, such as Germany, France, Belgium, Austria, Spain, Italy, etc., negotiated long term supply contracts with the producing countries such as Russia, Norway, the Netherlands or Algeria in the South. Large pipelines were constructed to which only the companies that had invested in them had access rights. Long term contracts were made, guaranteeing the off-take of certain minimum (take-or-pay) quantities of natural gas for up to 30 – 40 years. If you make such long term contracts, you obviously don’t want to go for a fixed price. And as no liquid market with gas prices was available, the habit grew of linking the price of gas to the ‘first nearby’ energy product: oil. There was even some economic logic for doing this. At that time, natural gas was still fighting for its place as a substitute for heating oil. By linking the gas price to heating oil prices, the producers and resellers in the countries of consumption could ensure that the gas price was developing unfavorably compared to the competing heating oil.

In the then regulated markets, the official tariffs reflected the underlying costs of the monopolistic suppliers, i.e. of the prices going up and down with the oil prices. So we have all grown accustomed to the fact that our gas prices rise, not because of supply and demand dynamics of the gas itself, but because of what is happening in the oil markets. But if you think about it, it isn’t exactly logic. It’s a little bit like selling potatoes for the price of tomatoes. They are both vegetables, but if the growing season for tomatoes goes wrong, this doesn’t necessarily mean that the growing season for potatoes was also a failure. So if you have linked your potato price to the tomato price, you will inevitably find yourself sooner or later in a situation where you find yourself paying a high price for a product that is in abundant supply (i.e. when the tomato and not the potato growing season went wrong).

Since the middle of 2008, we find ourselves in exactly that situation in the gas markets, which brings oil-indexed gas pricing in an increasingly difficult situation. Whereas the oil prices have doubled after hitting their lowest point in February 2008, the gas prices on the Hubs have fallen since the middle of 2009. The gaspool Hub price for German gas published by www.eex.de has fallen by 63% compared to June 2009. This falling gas-to-gas price reflects fundamentals, namely the increasing inflow of LNG into the UK and the increasing supply of gas to the world markets due to the shale gas developments in the US. Many observers cite decreasing demand due to the economic crisis as a main reason, although that isn’t completely correct. We come out of a winter with record high demand due to the cold weather, and in that winter the spot price for gas never was much higher than 17 euro per MWh. This clearly shows that increased supply is an important gas price driver at the moment.

Now let’s go back to the Karlsruhe court case. This is a clear case of consumers complaining that they get potatoes sold at the price of tomatoes. And of course, a judge cannot outright forbid the practice. But the ruling does say that oil-indexation cannot be used as a justification of price rises if the underlying costs for the suppliers haven’t risen equally as much. This could have some important ramifications. Gas suppliers currently win a lot of money on oil-indexed vs Hub-indexed gas arbitrage. For example. If the Hub price is low, as it currently is, they only buy their minimum obligation (take-or-pay volume) from the gas producer. If the total sum of consumption of their clients is larger than that take-or-pay level, they buy the extra gas on the Hub and sell it against oil-indexed prices to their clients. The Karlsruhe court ruling puts such money spinning based on oil-indexed end contracts in question.

Moreover, the big German gas suppliers seem to have understood that the current decoupling of gas and oil prices could continue. They have therefore renegotiated their Gazprom contracts and the Russian gas giant is now indexing part of its gas prices to the Hub prices. However, in the retail market, the big suppliers continue to encourage clients to buy gas at oil-indexed prices. Isn’t that another example of what the Karlsruhe court ruling calls a price rise based on oil-indexation that is not supported by the real cost structure of the suppliers?

It remains to be seen whether the court ruling could have any short term practical consequences for industrial consumers that are frustrated with their oil-indexed gas contracts.  But I am convinced however that it could have some longer term consequences:

1/ As large European gas resellers try to renegotiate terms with Russians and Norwegians to include Hub components in the gas price indexations, the court ruling will help them in stating their case,

2/ It draws consumers attention to the ambiguity of oil-indexed gas pricing, which many large industrial consumers, especially in Germany, take for granted. They are easily convinced by suppliers’ arguments that oil-indexation is ‘safer’. Many think that the Hub market is a spot market. IT IS NOT ! You can buy gas for 2013 today based on Hub pricing. That’s not exactly my idea of a spot market. Still, today, in almost every German newspaper I read, I find that the Hub markets are described as spot markets and spot markets are more risky. The raw facts, however, are there. If you have chosen an oil-indexed gas contract 12 months ago, you pay a lot more than if you have chosen that ‘risky’ Hub price. Moreover, if you had chosen a Hub contract five years ago, you would have suffered spikes that never went much higher than oil-indexed price spikes and your average gas price over those five years would have been substantially lower. The Karlsruhe court ruling might help consumers to have a fairer assessment of hub prices. I found out at least one German client today where the articles on the court ruling were being mailed around.

3/ It will draw politicians attention to the problems of continuing with oil-indexed gas prices if Hub gas prices stay where they are. The papers cited several German politicians that pleaded for ending the oil indexation, the long term contracts along with it and go for a fully liberalized gas market. That is very remarkable in a country where a former chancellor hammered out the North Stream pipeline deal (all very long term and very oil-indexed contracts) and was rewarded with a top job at the company constructing it.

The decoupling of gas and oil prices is an extremely interesting event. We are not predicting that it will continue. However, if you look at reserves of natural gas and oil, you cannot deny the potential of it continuing. If it doesn’t, it is because somebody blocked the import of extra quantities of gas into Europe. Long term oil-indexed pipeline gas deals are an excellent instrument for doing so. The Karlsruhe court ruling could be an important milestone in fighting such blocking of the markets by oligopolies. Let’s hope it will turn out to be so.

Filed under: Energy history, Energy suppliers, Germany, Natural gas

The future of European natural gas supply

 

The ‘Berliner Zeitung’ of yesterday had an article on the availability of Hub gas in Germany. ‘Cheap gas attracts German customers’ was the title and the subtitle ‘The big suppliers have bought too expensively’. Surprising to see that this popular newspaper warns residential consumers that they should buy their gas on the currently much cheaper Hubs. In recent months, I have met with many large corporate gas consumers in Germany that ignored the existence of Hubs and preferred to stick with their traditional oil-indexed gas contracts.

This corresponds with an almost philosophical divide in approach of the ‘security of supply’ issue regarding natural gas for Europe. German policymakers believe that supply should be secured by long term gas deals between states. They want Mrs. Merkel and Mr. Putin to sit together and negotiate Germany’s gas supply for the next forty years. French energy policy is similar, but as France is less dependent on gas in its energy mix, French long term energy policymaking is more aimed at (nuclear) electricity. The logistical counterpart of a long term gas deal is a pipeline, creating a rigid market between producing and consuming countries. The financial counterpart is a long term gas pricing formula based on oil prices. This is the way continental European has functioned for decades. And it is the way most traditional European gas companies wish to continue functioning. Italian gas giant Eni announced this week that they will invest 20 billion in the South Stream pipeline that will bring Russian gas to Italy via Bulgaria. And a consortium of German and Russian companies headed by former German prime minister Gerhard Schroeder is building the North Stream pipeline that will bring Russian gas to Germany via the bottom of the Baltic Sea.

Opposed to this vision on security of supply is the Anglo-Saxon version. If you would ask somebody in the US what he thinks about having politicians negotiating gas contracts, he would probably ask if you are crazy. In their opinion, politics is a threat to security of supply, not a support. They believe that the best guarantee for security of gas supplies is a well-functioning, transparent and liquid open market. They have created ‘Hub’ markets which are easily accessible to a multitude of players both on the supplying and the receiving site. On these Hubs, the prices of gas are determined by the dynamics of demand and supply of natural gas itself. If demand rises, e.g. due to a cold winter, or if supply falls, e.g. due to falling production, the price will rise. This will give a signal to producers of natural gas to ship extra gas to that market. You don’t need a politician to meddle in this. Politics will only create imbalances and inefficiencies. The logistical counterpart of such a market organization is LNG infrastructure, the financial counterpart is a normal market with spot and forward prices determined on a daily basis by the forces of supply and demand.

As demand has dropped due to the economic situation and supply has increased due to new LNG infrastructure, prices in the UK Hub market have fallen. At the same time, oil prices have risen. This creates a strange market situation in continental Europe. On the one hand, the traditional suppliers have large quantities of gas for which the price is rising. This is their traditional portfolio gas, the gas that they are to take from the producers under the long term agreements. But they are suffering competition from the cheaper gas brought in from the Hubs. In Germany, Dutch gas suppliers challenge the big German suppliers by importing cheap gas from the Netherlands.

I’m not in the forecasting business, but just imagine that this situation continues. Bar a miraculous recovery of the EU economy, it might take a couple of years before gas demand is restored to its pre-crisis levels. And on the supply side, a lot of new gas production and transportation products are coming online. This brings us to a fundamental long term issue. Compared to oil, there is simply much more gas left on this planet that is easy and inexpensive to produce. The United States has seen its recoverable gas reserves increase overnight because engineers have developed techniques to recover shale gas, of which they have huge reserves. How much shale gas can be recovered from the North Sea? Will the North Sea see the earlier predicted decline in gas production? Talking about shale gas, a Dutch newspaper claimed that the Netherlands has a hundred and not twenty years of gas reserves left. This is totally different from the situation in the oil market, where the easy to produce oil is being replaced with more expensive stuff. I’m not saying that it will happen, but it is not unthinkable that the current gap between oil and gas might persist.

If that happens, traditional continental European gas suppliers will find themselves in an increasingly uncomfortable position. They will suffer increasing competition from suppliers that don’t have long term commitments and can source their total portfolio on the cheaper Hubs. Politicians will blame them for charging higher oil-indexed prices to citizens. In the end, the oil-indexed contracts will become obsolete and they will have no choice but to try to renegotiate their long term deals and try to base them on Hub prices also.

That is, if. Reasons why the supply gut might not persist could be:

- a rapid economic recovery,

- continuous cold weather,

- serious disruptions to the upstream supply of gas (e.g. long-term cut-off of gas supplies via Ukraine),

- ‘The gas Opec’ materializes. Gas producing countries unite and agree upon voluntary production cuts to push up gas Hub prices.

We are getting near to the end of an economically horrible year. All of us are hoping for a better economy in 2010. I can imagine that traditional continental gas suppliers wish this even more than the rest of us. They probably even wish for winters that are always as cold as what we currently see.

Filed under: Energy demand, Energy policy, Germany, Natural gas

Transparency & the European gas market

Europe’s continental gas markets are slowly making the transition to a different market model. The Hub market model, known in the UK and the US for decades, is to replace the system of oil-indexed gas deals. Historically, gas in Europe has been sold in long term deals. These deals were between on the one side companies in producing countries, companies that we now know under the names of Statoil from Norway, Gazprom from Russia, Gasterra from the Netherlands or Sonatrach from Algeria. In the consuming countries, (predecessors of) companies such as RWE, E-ON Ruhrgas, Wingas, Gaz de France, Distrigas, Eni, Gas Natural or others were the receivers of these deals. This deal-making implied heavy political interference, as ministers were often directly involved in the negotiations. A famous example is the Belgian minister Willy Claes negotiating the contract that brought Algerian gas to Distrigas in Zeebrugge. The traditional companies in the consuming countries built the network infrastructure necessary to receive, store and distribute the natural gas. When the continental European markets were liberalized, they were forced to create separate grid companies to run this infrastructure. This ‘unbundling’ is supposed to create the necessary independence of interests to allow third parties an open and unbiased access to the grid infrastructure. Such third party access is a necessary condition for gas market liberalization to be a success.

Last week, traders in the continental European markets had complaints regarding that third party access. They specifically blamed lack of transparency regarding available storage and transit capacities for the slow development of continental European Hubs such as Zeebrugge in Belgium, TTF in the Netherlands or NCG in Germany. And indeed there are some solid reasons why transparency regarding storage and transit in these markets is low. The first reason is that some of the infrastructure is still in the hands of certain market participants. The big German gas suppliers are also the owners of the large storage capacities in Germany. The second reason is the fact that many capacities have been blocked by historical rights of certain suppliers. Unlocking these capacities is a difficult exercise. Many years ago, the governments supported companies making long term contracts for the supply of gas. Can those same governments make those contracts obsolete by taking away the capacities that those companies need to honor these contracts?

The underlying difficulty is that it proves extremely hard to transpose the English gas market model – without or with limited long term contracts – to the continent. An important reason for this is the difference in pricing models. The long term contracts have pricing based on oil prices. The Hub markets function with gas-to-gas pricing. It is supply and demand of natural gas that sets the gas price (which is much more logic). Since the summer of 2009, the Hub prices have dropped far below the oil indexed prices. If this trend continues, the holders of historic supply contracts face a huge problem. They will have the obligation to take gas from the producers at higher oil-indexed prices than the Hub prices at which they can sell in their home market. It is therefore understandable that they are not very enthusiastic in developing the Hub markets. Therefore, developing liquid and transparent continental Hub markets is the main challenge for European natural gas market policymakers.

Filed under: Belgium, Energy policy, France, Germany, Natural gas, the Netherlands, UK

Nuclear renaissance?

Proponents of nuclear technology have recently started using the word ‘renaissance’ to describe the renewed interest in nuclear for the production of power. The building of new nuclear power plants in Finland and France and the many plans for building in Eastern Europe are cited as evidence of this. I was therefore surprised this week to read that it is far from clear that the output of nuclear power facilities will rise in the following years: http://www.neimagazine.com/story.asp?sectioncode=132&storyCode=2053966.

I am in Bremen in Northern Germany at the moment where the political debate is heating up ahead of Bundestag elections (‘Wahlkampf’ is the delicious German word) to be held in four weeks. Chancellor Angela Merkel wants to bring together a CDU – FDP coalition of her own Conservatives with the Liberals, the so-called Schwarz-Gelb coalition. Leftist parties are strongly opposed to this perspective. The discussion is on evident themes such as social rights and the presence of German troops in Afghanistan. The German Green Party is adding an energy them to this discussion. As you can see in the picture below, they associate the black and yellow colors of Mrs. Merkel’s preferred coalition with the symbol of nuclear energy. The message is: vote for this coalition and the phase-out of nuclear energy in Germany will be phased back.

The debate on whether to invest in new nuclear facilities or not is extremely difficult. On the one hand, the technology looks to splendid not to use it. Producing so much energy from such small amounts of fuel, looks like the solution for all our energy needs. Moreover, a nuclear revival would reduce our dependence on hostile countries for buying fossil fuels. And this raises a thorny issue. More nuclear would also help us to reach our targets for carbon dioxide emission reductions. That nuclear energy is ‘green’ in that perspective complicates the environmental debate.

On the other hand, we have the triple danger factor of nuclear energy:

1. The catastrophic consequences of a disaster, however unlikely those disasters are,
2. The nuclear waste issue, for which no solution has been found yet,
3. The risk of nuclear proliferation, cf. the geo-political trouble with countries such as Iran and North-Korea.

If you would ask the public, I am sure that large majorities in every country (even France) would be opposed to building new nuclear power plants. If you define democracy as implementing the policy agreed upon by the majority of citizens, the nuclear renaissance would be dead. The trouble is that the majority is not considering issues such as long term security of power supply. Politicians are supposed to do that for them (representative democracy).

And that it are politicians that decide on whether to build new nuclear power plants or not is probably the main reason that the nuclear renaissance is stalling in its starting blocks. You cannot win elections on a theme such as nuclear energy. If you could, Green Parties would have much bigger voter shares than they have now. But you can sure lose elections over the theme. The politician that decides to build a new nuclear power plant in Germany will not exactly see his popularity boosted. With elections every four years, it is very unlikely that someone will have the political gut to take that decision.

Filed under: Energy policy, Germany

EPEX launched

‘Towards the pan-European power market’ says the website of the European power exchange that was launched today (www.epexspot.com). It is the result of the merger of the spot market activities of the German EEX power exchange and France’s Powernext. To the policymakers that originally worked on EU energy market liberalization this slogan must sound like music. For one of the original aims was indeed to create the ‘single copper plate’, an EU-wide electricity market. With the creation of Epex, this comes closer. The EU has adapted its policy by aiming for regional markets first and then for a pan-European power market. With Epex, a key regional market is taking shape.

It is not surprising that German and France merge their spot markets. With the improvement of cross-border connections and the allocation of cross-border capacities, we notice since a few years the emergence of a German – French – Belgian – Dutch – Luxemburg market. Prices in these markets have come very close to one another, not just in spot but in forward markets also. And the allocation of short term power plant capacities that is settled in spot power markets, has also become a cross-border affair. Dutch gas-fired plants heat up as unfavorable conditions in Germany cause a drop of wind power output or as French nuclear plants shut down for maintenance.

How important is this development for the end consumer? First of all, we have to understand that these are developments that only affect the wholesale market, not the retail market. The big power suppliers in the region such as EdF, E.On, RWE, Vattenfall, Electrabel, etc. currently have a retail market approach aimed at the separate countries, not at the whole regional market. If they do anything on a regional basis, it is buying companies in one of the other countries to establish a stronger national presence. Think about EdF buying EnBW, RWE buying Essent or Vattenfall buying Nuon. But if you talk to the sales organizations of any of these companies, it is clear that they are organized on a national and not a regional level.

But of course, the wholesale market developments are important, as they determine the price that the industrial consumer will ultimately pay. Creating wholesale markets for larger geographical areas is an important development. It adds liquidity to these markets. Especially in markets with liquidity issues such as Belgium or the Netherlands, such a development is positive.

We should also remark that Epex (for now?) is a spot exchange. Most end consumers buy prices based on forward prices. Both French and German power futures are now traded on the EEX. But it remains two separate prices and markets up until now. We hope that this will change soon.

Filed under: Belgium, France, Germany, the Netherlands

The blessings of energy market liberalization

This week we finalized negotiations of a gas contract which we had started ten months ago. This is the longest period that we have ever spent negotiating an energy contract with a client. It was a gas contract in Germany and due to specific reasons we had no choice but to sign it with the local supplier, a small ‘Stadtwerke’. Making the contract was a painstaking experience. The small concessions that we could negotiate came after repeated, long and painful discussions. The end result is the worst gas contract that we have ever seen and much worse than anything else that we have negotiated for this client. A contract that the client had to sign because nothing better was possible.

This experience has taught me two big lessons.

1. Liberalizing energy markets was supposed to bring consumers two things: lower prices and better service. As far as the lower prices are concerned, it is clear that power market liberalization hasn’t delivered on that promise. Just compare France’s regulated prices to open market prices from elsewhere. About gas prices, I am convinced that prices would have been higher without liberalization, but we can discuss about that. One thing to me is clear: it is impossible to get a good service for e.g. price fixing in a market that is not open. Therefore, the open energy market has clearly improved the service level offered by suppliers.
2. Some German energy suppliers still have a long way to go to develop service levels that are anywhere near what you can get in other (surrounding) countries. Therefore, German industrial customers have more than anyone else reasons to work together with international energy purchase consultants such as us. Bit by bit, we will work towards German energy contracts that come closer to what is standard in other countries in terms of price fixing services and volume flexibility conditions.

If liberalization processes run with large difficulties, like we have seen in many countries, it is easy to call for liberalization to be reversed. Now that Anglo-Saxon liberalism has come under so much criticism due to the credit crisis, the call for a return to the good old days of regulated markets sounds even louder. I think that anyone that would have participated in this negotiation process, would have become convinced that competitive energy markets aren’t such a bad idea after all  …

Filed under: Energy suppliers, Germany