FAQ
Status: 22.10.2022 06:07 a.m
In order to fill the German storage facilities before winter, THE company bought natural gas on behalf of the federal government. High prices were sometimes paid on the spot market – too high? Answers to some questions.
Before the start of winter, the current filling level of the gas storage facilities is already above the statutory target of 95 percent, which is to be reached on November 1st. The Federal Network Agency announced that under certain conditions Germany could get through the cold season without a national gas shortage. However, media such as “Handelsblatt” and “Spiegel” recently reported that this successful filling could have been bought at a high price.
Trading Hub Europe, a company commissioned by the state to buy gas, has not only driven up prices through its actions, it has also failed to hedge against falling prices on the futures market – this is the criticism. Which in turn could mean considerable unnecessary additional costs for the taxpayer. How does gas trading and gas purchasing work? What do experts say about the procedure for filling German storage facilities? Answers to some questions.
What is Trading Hub Europe (THE)?
Trading Hub Europe (THE), as a joint venture of the German long-distance gas pipeline network operators, is responsible for the gas market organization in the German supply area. The company was founded on June 1, 2021 through the merger of eleven transmission system operators.
The task of THE is, among other things, to ensure that the supply and demand of gas, the feeding in and out of the network, is balanced in the market area. THE compensates for any imbalances in the market area with so-called control energy. THE procures the gas quantities required for this and also acts as a trader in this capacity.
“Until now, they only played an important role in the area of balancing energy, which is not comparable in volume to the gas storage volume,” said Andreas Schröder, industry expert at the energy analysis company ICIS tagesschau.de.
Who are the players in the gas market?
Natural gas is largely imported from abroad by the large gas producers. Companies such as the Norwegian group Qquinor, BP, Shell and OMV are active on the seller side. In the past, a large part of the gas came from the Russian Gazprom group.
These companies deliver the gas to the next level of distribution, the midstream segment. This describes the area of gas trading that deals with transport or gas storage. These so-called intermediaries include companies such as VNG, RWE or the Uniper Group, which has fallen into crisis.
Finally, on the purchasing side, there are local gas suppliers, electricity companies, municipal utilities or industrial customers who need the gas for production, such as BASF or smaller industrial companies.
How does gas trading work?
There are various ways of supplying consumers and industry with gas. On the one hand, the supply of gas is agreed via long-term negotiated contracts. They offer suppliers and customers stability through planning and supply security over a long period of time. “Long-term contracts are popular because they enable large investments in infrastructure and provide financial security. In the LNG sector, long-term contracts cover around two-thirds of global trading volumes,” explains Schröder. LNG is referred to as liquefied natural gas.
As in the financial markets, there is also off-exchange trading between two parties, so-called over-the-counter trading (OTC). According to the industry expert, it also traditionally plays an important role, since it allows more freedom for product specification than stock exchange trading.
What role does stock exchange trading play?
Nevertheless, stock exchange trading, for example on the EEX in Leipzig, has recently become increasingly important. There, buyers can buy gas both on the spot market and on the futures market. On the spot market, market players trade gas that is physically destined for immediate delivery. In a forward contract, on the other hand, the buyer agrees to purchase a specified quantity of gas at a specified price for delivery at a specified future date. The seller undertakes to deliver it then.
Gas exchanges should help market participants to react flexibly and quickly to demand situations – and, for example, to avoid storage costs. Competition via a stock exchange should ideally lead to greater competition between the various providers. The idea is that competition has a price-lowering effect.
What is THE position on the German gas market?
In order to ensure security of supply with gas, the federal government had provided THE with the necessary funds to fill the gas storage tanks as much as possible by the winter and to achieve the desired fill levels. There is talk of up to 15 billion euros that the federal government has provided via a credit line from the state bank KfW. To this end, THE has become active on the gas market – namely on the spot market. “Until the summer of 2022, THE only had a marginal role as a trader in the gas market,” explains Schröder. But that has changed. The fact that THE buys and sells gas on a large scale and fills the gas storage facilities is new, according to expert Schröder. According to the “Handelsblatt”, THE had paid around eight billion euros for the filling of German gas storage facilities by the end of September.
“Even with high prices of over 200 euros, people continued to buy happily, after all, the requirement was to fill the gas storage tanks. Security of supply was the priority,” says Schröder. That is understandable so far, says the industry observer. But the large volume probably moved the market price.
Usually, when supply decreases, high demand leads to an increase in price. It is therefore probable that the purchase of large quantities led to an increase in prices, which in turn had to be paid in order to continue to fill the storage facilities in accordance with political requirements.
What is the criticism of gas purchasing?
The federal government and THE are accused of failing to hedge the high prices on the futures market. “When it comes to injection, storage operators usually also cover withdrawal by selling futures contracts,” explains Schröder. This is part of the hedging strategy – the so-called “hedging”. “Because you don’t want any open positions that can develop insecurely.”
But that’s what appears to have happened now. Since the gas price has recently fallen from its highs on both the spot market and the futures market, this would mean that THE would probably not be able to realize the prices it had paid if it were to be resold – if the price trend continues in this way. There would be losses.
The gas price on the spot market on the Leipzig Stock Exchange is currently around 60 euros; in August the high was more than 300 euros. If THE had already secured withdrawals for the winter during the summer months, they would have secured much higher income, Schröder said tagesschau.de.
What does Trading Hub Europe say about this?
Compared to “Spiegel”, THE co-boss Torsten Frank rejected the allegations: the top priority was initially to fill the storage at all. A sale on the futures market is now the next step. There is also a certain risk of loss in futures transactions. After all, it could be that you have to switch contracts to higher prices if you need more gas yourself, says Frank.
How the storage facilities are filled in the future could also change for another reason: the EU states have plans for joint European gas purchasing. Trading Hub Europe (THE) could become the core of a European procurement company for gas, said Jörg Kukies, State Secretary in the Federal Chancellery, at an event recently.