Winter Academy 2018 Trading, Sales and Financing in the European Energy Market and Industry. Trading with gas Dr. Helge Fischer

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1 Winter Academy 2018 Trading, Sales and Financing in the European Energy Market and Industry Trading with gas Dr. Helge Fischer 1

2 Agenda Scenarios and developments of production and demand Differentiation between production, trading, consumption Trading hubs, products and volumes Indicators to evaluate market depth and liquidity Cases and examples Opportunities and risks from the political and market environment Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 2

3 Natural Gas: Sources and Pipelines Quelle: ENTSOG Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 3

4 TWh/a TWh/a Domestic Production and Imports Natural Gas Domestic Production in EU28 Natural Gas supplies in EU Netherlands Romania UK Others Algeria (pipeline) Norway (pipeline) Russia Libya Azerbaijan Other pipe LNG Quelle: WINGAS based on IHS CERA Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 4

5 TWh/a Demand Development of Sectorial Natural Gas Demand in EU , , Political Impact on Natural Gas Demand in Europe Political Agenda COP 21/22 (incl. national Implementation) ETS Governance of Energy Union 4000,0 3000,0 2000,0 1000,0 Possible Drivers Nuclear & Coal Phase out Gas to Power Partner to Renewables Fuel Switch in Heating & Transport Possible Threats Energy Efficiency Decarbonisation All-Electric-World Levies on Fossils 0, Total Own use consumption and losses / statistical difference Eigenbedarf/-verluste, Transport statistische Differenzen Power Transport Generation Stromerzeugung Industry Residential Industrie and commercial Quelle: WINGAS based on IHS CERA Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 5

6 Natural Gas: Production, Trading, Consumption Producer Production Lot Size Commodity Marketing Tradingmärkte Tradingmärkte Traded Markets Physical Markt Storage Upgrading Transport Time/Location/Lot Size/Quality Transport Upgrading Trading Storage Time/Location/Lot Size/Quality Marketing (Physical Value Chain) Transport Storage Upgrading Location/Lot Size Time/Lot Size Quality/Lot Size End customers/ utilities Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 6

7 Gas Hubs in Europe Source: OIES, European trade gas hubs, May 2017 Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 7

8 Glossary / Definitions* Volumes: Amount of gas in MWh Capacity: Volumes per hour in MWh/h or MW Flat volumes: Constant capacity over a specific time period, e.g. an 1 MW yearly flat volume with 8760 hours/year has got a volume of 8760 MWh Trayport: Electronic trading platform to connect trader, broker and energy utilities OTC (over-the-counter): Trades directly between two parties rather than on a stock market MtM (Mark to Market): Measure of the fair value of an open trading position which can change over time Trading book: Company's book that shows and accounts for the positions that are purchased and sold by the trading Location spread: Price difference of comparable products at different locations (hubs) Bid-offer spread: Difference between prices to purchase (>bid) and to sale (>offer or >ask) comparable products Mid price: Average between bid and ask price. (Remark: Mid price have been assumed for purchase as well as sale of volumes to simplify the cases calculations) * All definitions are simplified and condensed in the context of this presentation. Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 8

9 Case 1 Task The sales colleagues of your company ( SampleGas SE ) are asking you to procure yearly flat volumes of 5 MW at the 22/12/2017 for a customer in Germany (GASPOOL). Prices for Y+1: [EUR/MWh] TTF GPL Delta 18/12/ ,375 18,415-1,040 19/12/ ,325 18,400-1,075 20/12/ ,45 18,475-1,025 21/12/ ,35 18,400-1,050 22/12/ ,75 18,200-0,450 Transport fee: TTF to GPL 0.5 Task: Which minimal sales price would you quote? Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 9

10 Case 1 Illustration Products / Participants Y+1/GPL/895 MW/H-Gas Producer Production Lot Size Y+1/GPL/900 MW/H-Gas Y+1/TTF/950 MW/H-Gas Commodity Marketing Tradingmärkte Tradingmärkte Traded Markets Y+1/TTF/950 MW/H-Gas Y+1/GPL/5 MW/H-Gas Physical Markt Storage Upgrading Transport Time/Location/Lot Size/Quality Transport Upgrading Trading Storage Time/Location/Lot Size/Quality Y+1/GPL/1000 MW/H-Gas Y+1/TTF/1000 MW/H-Gas Market participants: Marketing (Physical Value Chain) Transport Storage Upgrading Location/Lot Size Time/Lot Size Quality/Lot Size Y+1/GPL/100 MW/H-Gas Y+1/TTF/50 MW/H-Gas End customers/ utilities Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 10

11 Case 1 Possible solutions Prices for Y+1: [EUR/MWh] TTF GPL Delta 18/12/ ,375 18,415-1,040 19/12/ ,325 18,400-1,075 20/12/ ,45 18,475-1,025 21/12/ ,35 18,400-1,050 22/12/ ,75 18,200-0,450 Transport fee: TTF to GPL 0.5 Solution: Procurement of 5 MW flat volumes at the 19/12/2017 via trading. 1) Price TTF: EUR/MWh (flat volumes) + risk premium EUR/MWh (transport) or 2) Price GPL: EUR/MWh + risk premium 3) Risk premium mainly reflecting assumptions about tradability and availability of the specific products 4) Minimal price for sales: lower price of TTF and GPL = EUR/MWh Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 11

12 Trading hubs and activities DA (#days with trades) TTF NCG GPL VTP Y+1 (#days with trades) TTF NCG GPL VTP until 23/08/ until 23/08/ DA (MW/flat volumes) TTF NCG GPL VTP Y+1 (MW/flat volumes) TTF NCG GPL VTP until 23/08/ until 23/08/ MA (#days with trades) TTF NCG GPL VTP Y+2 (#days with trades) TTF NCG GPL VTP until 23/08/ until 23/08/ MA (MW/flat volumes) TTF NCG GPL VTP Y+2 (MW/flat volumes) TTF NCG GPL VTP until 23/08/ until 23/08/ Y+3 (#days with trades) TTF NCG GPL VTP Trading products (pegas) TTF NCG GPL VTP Month Quarter until 23/08/ Seasons Year Y+3 (MW/flat volumes) TTF NCG GPL VTP until 23/08/ Source: WINGAS based on Trayport broker screen and Powernext Abbreviations: DA Day ahead TTF Hub in NL MA/M+1 Month ahead NCG Hub in D Y+1 Year ahead GPL Hub in D S+1 Season ahead VTP Hub in A Q+1 Quarter ahead Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 12

13 Case 2 Task A customer would like to split an already procured 10 MW yearly flat volumes into quarterly flat volumes to supply temperature driven households. Allocation and prices: Period Allocation [%] Price GPL [EUR/MWh] Hours per period Y+1 (2018) , Q1 (2018) 40 20, Q , Q , Q , Task: Which minimal price would you quote for the volume shift? Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 13

14 Case 2 Possible solution Prices, capacities, conversion of volumes: Period Allocation [%] Volume [MWh] Hours per period Capacity [MWh/h] Price GPL [EUR/MWh] Price [EUR] Y+1 (2018) , Q1 (2018) ,2 20, Q ,0 17, Q ,9 16, Q ,9 19, Solution: Structuring of volumes of a 10 MW yearly flat into quarterly flat volumes. 1) Distribution from yearly into quarterly flat volumes (percentage distribution based on hours per quarter) 2) Pricing of yearly and quarterly products to buy or sell respective volumes 3) Risk premium mainly reflecting assumptions about tradability and availability of the specific products (esp. with size below 1 MW) 4) Minimal price for structuring: EUR Difference Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 14

15 Case 2 Illustration Products / Participants Producer Production Lot Size Y+1/GPL/900 MW/H-Gas Commodity Marketing Q1(2018)/GPL/6 MW/H-Gas MA(2018)/GPL/6 Q2(2018)/GPL/9 MW/H-Gas MW/H-Gas Q1(2018)/GPL/17 MW/H-Gas DA/GPL/9 Q3(2018)/GPL/8 MW/H-Gas MW/H-Gas Q2(2018)/GPL/4 MW/H-Gas Y+2/GPL/8 Q4(2018)/GPL/7 MW/H-Gas MW/H-Gas Q3(2018)/GPL/8 MW/H-Gas M+3/GPL/7 Y+1/GPL/890 MW/H-Gas MW/H-Gas Q4(2018)/GPL/12 MW/H-Gas Y+1/GPL/890 MW/H-Gas Physical Markt Tradingmärkte Tradingmärkte Traded Markets Storage Upgrading Transport Time/Location/Lot Size/Quality Transport Upgrading Trading Storage Time/Location/Lot Size/Quality Y+1/GPL/1000 MW/H-Gas Market participants: Marketing (Physical Value Chain) Transport Storage Upgrading Location/Lot Size Time/Lot Size Quality/Lot Size Y+1/GPL/100 MW/H-Gas End customers/ utilities Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 15

16 Market Depth and Liquidity Definition Churn Rate (Oxford Institute for Energy Studies): The multiple of traded volume to actual physical throughput [ ] and a measure of a gas hub s commercial success. Indicators for market development: Quelle: OIES, European trades gas hubs, May 2017 Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 16

17 Case 3 Task At the 22/12/2017, the sales colleagues of your company are asking you to procure yearly flat volumes of 10 MW for 2020 (Y+3) for a customer at the VTP. Prices for yearly flat volumes at the 22/12/2017: [EUR/MWh] NCG VTP Delta Y+1 18,250 18,700-0,450 Y+2 18,200 18,400-0,200 Y+3 18,500 no price Transport NCG to VTP (specific, today) 0,700 Task: Which minimal sales price would you quote? Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 17

18 Case 3 Possible solultion Prices for Y+x: [EUR/MWh] NCG VTP Delta Y+1 18,250 18,700-0,450 Y+2 18,200 18,400-0,200 Y+3 18,500 no price Solution (among others) : 1) Price NCG: 18,500 EUR/MWh + risk premium + 0,7 EUR/MWh (for transport) OR 2) Approximated price VTP: NCG + approx. delta NCG-VTP + risk premium 3) Risk premium mainly reflecting assumptions about tradability and availability of the specific products as well as the spread between NCG and VTP. 4) Minimal price for sales:? Transport NCG to VTP (specific, today) 5) Potential hedging strategy ( time and location swap ): a) Buy 10 MW at NCG/Y+3 in order to hedge the price level 0,700 b) Sell 10 MW NCG/Y+2 and buy 10 MW-Band VTP/Y+2 in order to hedge price delta (at first for Y+2) c) At a later stage: Counter deals to a) and b) if Y+3 is tradable and the price delta between NCG and VTP for Y+3 is at the hedged level Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 18

19 Summary: Opportunities & Risks Market risks and opportunities: Massive changes for demand of gas to power (ETS/CO2 price, operation of nuclear power plants ) at trading hubs Shift of volumes and gas flows influenced by LNG imports Decreased production (e.g. Groningen field or North Sea) Change of liquidity and trading activities at hubs (e.g. reduction at ZBH or strengthening at NCG and GPL) Reallocation of domestic import and production volumes (e.g. North Sea to UK) Political risks and opportunities : Merger of markets and hubs (e.g. German Gas Third-Party Access Regulations (GasNZV) to merge NCG and GASPOOL latest 04/2022) Quo Vadis Study Gas Directive Brexit US sanctions Political decisions and conscious changes of the market environment should be taken carefully with enough lead time! Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 19

20 Thank you for your attention! Trading with gas / Dr. Helge Fischer / Winter Academy 2018 in Brussels 20