Challenges Still Lie in the Creation of Liquid Forward Markets

Although regulators strive to create a framework that enables liquid spot and forward markets to develop, there are still challenges.
Published: Thu 18 Sep 2014

No doubt, EMART Energy conference attendees will want to know how trading opportunities have developed over the last year. We asked Bernhard Painz, head of the gas department at Energie-Control, Austria, who will be a regulator at the upcoming conference, to give us an overview.

Forward trading still illiquid

Painz explains that in the context of the Gas Target Model 2014 update (its focus being on measures that could improve forward market liquidity), ACER carried out an in-depth analysis of the Over the Counter markets in the European Union (EU). The results show that forward trading is still very illiquid at all hubs except for the National Balancing Point and the Title Transfer Facility.

From a regulatory point of view, liquid forward markets are important to enable lower transaction cost (bid/ask-spreads) allowing for significant savings on gas procurement cost to the benefit of EU customers.

As far as expectations for 2015 are concerned, Painz points out that because the first Network Codes - Capacity Allocation Mechanism (CAM) and Gas Balancing of Transmission Networks (BAL) - are to become binding by the end of 2015, there will most likely be an increased (early) implementation activity especially by those member states which have yet to implement proper entry-exit systems with virtual trading points.

Mergers are effective tools to reach targets

We asked Painz where mergers could take place and he suggests that these will occur in those parts of the EU where well-functioning gas wholesale markets do not yet exist. He adds that concrete projects have been announced between Belgium and Luxembourg, PEG South (known as the gas exchange point in the south – it is one of the 3 current virtual trading points or hubs and balancing areas for gas in France and was created in 2004 and rationalised in 2009. It covers the southern half of France except the south west region.) and TIGF (Transport et Infrastructures Gaz France which is which is Total’s gas transportation and storage business) zones.

Further examples could be the Iberian peninsula, Central and Eastern European (CEE) and South East European (SEE) countries. Member states, with a very small gas market, should think about how they could create the benefit of a well-functioning spot- and forward market for their gas customers, explains Painz. The ACER GTM 2014 proposes mergers as an effective tool to reach that target.

With regards to balancing markets, we asked Painz whether this would enhance liquidity across Europe and he said that this would be dependent on how the balancing markets will be set up.

“In Austria, we set up the balancing market in a way that all liquidity is concentrated on the exchange-based spot market at the Virtual Trading Point (VTP). The selling and buying activities of the system operators have significantly enhanced liquidity in the spot market. However, the creating of liquid balancing markets will not automatically deliver liquid forward markets. We prefer a gas market design where every end user of gas is located (same balancing zone) inside a functioning forward (+ spot) market zone. This can be furthered by merging existing market zones to increase market liquidity.”

When asked what the current challenge is in the market, Painz explains that while, as regulators, they strive to create a framework that enables liquid spot and forward markets to develop, the challenges lie in the creation of liquid forward markets.

In conclusion, Painz advises traders to see the positive aspects in market mergers. He expands: “As was the case in Germany, larger market areas lead to more liquid hubs and make risk management much easier. We would therefore welcome the support of traders in market integration projects.”