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Gas market with "virtual trading points"

The business of competing gas traders is to buy gas from importers or domestic producers and sell it to consumers. To be able to supply the gas sold to the customers, they have to book transmission capacities – or, more precisely, entry and exit capacities – with the network operators. The volumes are traded at virtual trading points.

With liberalisation, gas trading increasingly shifted from physical transportation from A to B to virtual trading points – "virtual" because no gas is physically withdrawn or transferred there, but quantities are only calculated and handed over "virtually". For example, a gas importer virtually transfers a quantity of gas X, which he has fed into the market area at a physical point, to a trader. The trader virtually takes over this amount of gas and physically books one or more exit points with the relevant network operators. The network operators settle everything that happens between the entry and exit points among themselves, so the shipper does not have to worry about it. The two market area managers (MAMs) NetConnect Germany and GASPOOL Balancing Services each provide the gas network operators and their shippers with such a "virtual trading point" where buyers and sellers register their expected trading volumes every day for the next few hours, the next day or even longer-term.

Whereas, in the past, gas companies were the owners of the gas and the pipeline infrastructure, transportation and trading are today managed by legally and organisationally independent entities as separate stages of the value chain. These days, all traders can access the gas infrastructure on a non-discriminatory basis, provided they have acquired the necessary transmission capacities. For the pipeline stage this complex process is managed online using the Leipzig-based trading platform Prisma. Through Prisma, 36 European gas network operators trade more than 70 percent of the natural gas required in Europe. The platform is used for both primary and secondary capacities. When purchasing primary capacities, gas traders acquire the right to inject a certain amount of gas into the network, which is then withdrawn by the buyer, consumed by customers or stored in gas storage facilities for later use. Secondary capacity trading allows traders to resell or purchase unused transmission capacity. This avoids capacity bottlenecks in transmission and further intensifies competition in gas trading for the benefit of end users.

Trading transactions are conducted via so-called balancing groups, which balance gas injection and withdrawal. As in the electricity market, gas is treated as if everything were happening at the same time, yet since the physical transmission of gas takes much longer, certain mechanisms have to be used to allow computational balancing. The MAM in charge of balancing group management will check, for example, whether the quantity purchased by a shipper corresponds to the quantity fed into the pipeline network by the producer. This information is provided by the transmission and distribution system operators. Any mismatch in a balancing group will be corrected by the MAM. At the same time, the situation across the entire market area is monitored and mismatches are corrected by appropriate measures. The balancing groups thus represent the link between the virtual and physical worlds of gas trading and energy supply. As an independent regulatory authority, the Federal Network Agency (BNetzA) monitors non-discriminatory network access for all suppliers and thus ensures free competition in trading.

(Central grid control room operated by Nowega GmbH)

There are still two different market areas in Germany (GASPOOL and NetConnect Germany). The market area managers are GASPOOL Balancing Services GmbH and NetConnect Germany GmbH & Co. KG. According to the 2017 amendment of the gas network access ordinance (GasNZV), these two market areas have to be merged into one market area by 2022, the aim being to further simplify contract management and create one of the most liquid gas trading hubs in Europe. The market area managers plan to merge their market areas by 1 October 2021.

Price formation in gas trading

The gas price at the virtual trading point is determined by supply and demand. In addition, however, suppliers often negotiate directly with their customers and agree additional terms and conditions including volumes, flexibilities or price indexation. If constant purchase and sales volumes have been defined, market participants can also trade through an exchange or via brokers. If additional gas volumes are required or if surplus volumes are to be (re)sold, this can be done through an energy exchange such as the EEX in Leipzig. There is a spot market for short-term trading, which provides for delivery the following day, while the forward market is intended for deliveries at a defined later point in time. The current market prices on the exchange are publicly available at all times, which creates a high degree of transparency. Exchange prices therefore often serve as a reference value for price agreements between gas suppliers and their customers.

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