Natural Gas Market Integration in Germany Ge a y Christian - - PowerPoint PPT Presentation

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Natural Gas Market Integration in Germany Ge a y Christian Growitsch Rabindra Nepal p Marcus Stronzik Infraday, October 2009 0 Agenda 1. Motivation 2. Previous Literature 3. Methodology 3. Methodology 4. Data 5 5. Empirical Results

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SLIDE 1

Natural Gas Market Integration in Germany Ge a y

Christian Growitsch Rabindra Nepal p Marcus Stronzik Infraday, October 2009

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Agenda

  • 1. Motivation
  • 2. Previous Literature
  • 3. Methodology
  • 3. Methodology
  • 4. Data

5 E i i l R lt

  • 5. Empirical Results
  • 6. Conclusions

1

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SLIDE 3

Motivation

  • EU Regulatory Framework
  • Acceleration Directive in 2003
  • Third legislative energy & gas package in 2007

Third legislative energy & gas package in 2007 EU working towards a single market for natural gas

  • Regulation in Germany
  • German Energy Law (Energiewirtschaftsgesetz) in 2005
  • Introduction of an Entry-Exit-System in October 2007
  • German energy regulator aims at reducing number of Entry-

German energy regulator aims at reducing number of Entry Exit-Zones (and trading hubs) to one single for high caloric (H-) natural gas and one for low caloric (L-) natural gas

2

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Motivation

  • Development and present situation
  • Number of Entry-Exit Zones reduced from 19 (2007)

to 6 (October 2009)

  • Potentially liquid high-caloric natural gas trading hubs
  • ‘Net Connect Germany’ (NCG)
  • Bayernets + E.ON Gastransport
  • since October 1st 2008
  • ‘Gaspool’, until October 1st: ‘GUD’
  • Gasunie Deutschland + Dong + StatoilHydro
  • established August 2006
  • since October 1st 2009: also ONTRAS + WINGAS

3

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SLIDE 5

Motivation

  • Development and present situation (ctd.)
  • July 1st 2008: Dutch Gasunie acquires BEB Transport and

forms GUD

  • July 1st 2007: European Energy Exchange EEX starts

trading of NCG and GUD spot markets EEX t l h l l t di

  • EEX natural gas wholesale trading
  • Prices for NCG and GUD trading points

NCG i li id h GUD

  • NCG is more liquid than GUD
  • Churn-Rate: NCG ≈ 1.5 (vs. NBP ≈ 10)

T i i t k h dl f it (“ d li ht ”)

  • Transmission network: hardly any free capacity (“red lights”)

4

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Motivation R h Q ti Research Question

  • Effect of the Entry-Exit-System on the competitiveness of the German

t l h l l k t natural gas wholesale market

  • Measurement of competitiveness: Analysis of price development to

identify level of market integration identify level of market integration

  • Price cointegration

Price convergence

  • Price convergence
  • Comparison of NCG and GUD
  • Price development within Germany
  • Dutch hub Title Transfer Facility (TTF) as competitive benchmark
  • Market integration of Germany and the Netherlands

5

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SLIDE 7

Previous Literature

  • USA
  • Walls (1994): Cointegration analysis of natural gas prices at different

citygates

  • Ripple (2001): Cointegration analysis of U S West Coast and Gulf

Ripple (2001): Cointegration analysis of U.S. West Coast and Gulf Coast as well as Asia

  • King/Cuc (1996): Analysis of U.S. spot price applying Kalman Filter
  • Europa
  • Asche et al. (2001): Cointegration analysis of Belgium, France and

Germany

  • Neumann et al. (2005): Kalman Filter Analysis of spot market prices

at Zeebrügge and NBP, considering natural gas flows in the Interconnector Interconnector

Increasing market integration over time

6

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SLIDE 8

Methodology

  • Competitive Benchmark
  • Homogenous goods should have identical prices if markets are

efficient (Law of one Price)

  • Price differences should only reflect transportation and transaction

costs in the long run

  • Markets are economically integrated markets if prices are cointegrated
  • Methods
  • Cointegration Analysis following Johansen (1988)

Kalman Filter (Kalman 1960)

  • Kalman Filter (Kalman, 1960)

7

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Methodology

Kalman Filter Kalman Filter

  • Johansen Test: weaknesses
  • Cointegration vector constant over time
  • Cointegration dynamics not considered
  • Limited explanatory power for
  • Short observation periods

p

  • Structural or institutional changes
  • Application of Kalman Filter

pp

  • Allows for a time-varying integration relation
  • Uncovers price formation dynamics

Uncovers price formation dynamics

8

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Methodology

Kalman Filter Kalman Filter

  • Consider a price relationship between two markets X and Y
  • αXY,t : transaction and transportation costs between markets X and Y

t t Y t XY t XY t X

P P ε β α + + =

, , , ,

XY,t

p

  • βXY,t : intensity of price relationship across the markets with constant α
  • Recursive estimation of β

Recursive estimation of β

  • if markets X and Y are fully integrated we expect that

t t XY t XY

θ β β + =

−1 , ,

  • if markets X and Y are fully integrated, we expect that
  • (

) { }

XY Y X t

P P α = −

∞ →

lim

  • {

} 1

lim =

∞ → XY t

β

9

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Data

  • Day ahead Preise (logs)
  • Net Connect Germany (NCG): EEX
  • Gasunie Deutschland (GUD): EEX
  • Gasunie Deutschland (GUD): EEX
  • Title Transfer Facility Hub (TTF): energate
  • Daily day-ahead prices
  • Timeframe
  • October 1st 2007 – April 30th 2009
  • Starting with the introduction of the Entry-Exit System

Starting with the introduction of the Entry Exit System

  • No reliable price information for earlier periods

10

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Data

3.6 3 2 3.4 3.0 3.2 2.6 2.8 2.2 2.4 2.2 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 LGUD LNCG LTTF

11

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Empirical Results

Preliminaries Preliminaries

  • Unit Root
  • ADF and KPSS
  • Time-series are I(1)
  • Time-series are I(1)
  • Granger Causality Test
  • GUD granger causes NCG
  • TTF granger causes NCG
  • GUD and TTF granger cause each other
  • results indicate a stronger integration of GUD and TTF than
  • results indicate a stronger integration of GUD and TTF than
  • f NCG and TTF

12

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Empirical Results

Cointegration Cointegration

Johansen-Test

Vari- ables H0 H1 Maximum eigenvalue (λ ) Critical value ( %) p-value Trace statistics (λ ) Critical value ( %) p-value (λmax) (5%) (λtrace) (5%) GUD TTF r = 0 r = 1 34.46 14.26 0.000 35.58 15.49 0.000 r ≤ 1 r = 2 1.13 3.84 0.288 1.13 3.84 0.288 NCG TTF r = 0 r = 1 41.86 14.26 0.000 42.85 15.49 0.000 r ≤ 1 r = 2 0.99 3.84 0.319 0.99 3.84 0.319 GUD r = 0 r = 1 34.56 14.26 0.000 35.29 15.49 0.000 NCG r ≤ 1 r = 2 0.74 3.84 0.391 0.74 3.84 0.391

  • Pairwise cointegration of prices
  • Long-run equilibrium with constant price difference
  • Differences can be attributed to transaction and transportation costs

13

Differences can be attributed to transaction and transportation costs

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SLIDE 15

Empirical Results

Cointegration Cointegration

Long-run coefficients g

Variables β GUD 1 000 GUD TTF 1.000 NCG TTF 0.957 TTF GUD NCG 0.96

  • Full market integration between GUD and TTF
  • Strong cointegration also between other prices

Strong cointegration also between other prices

  • Confirms Granger-Test results

14

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Empirical Results

Tests for structural breaks Tests for structural breaks

  • Reasons
  • Dynamic regulatory environment
  • Mergers of Entry-Exit Zones
  • Mergers of Entry-Exit Zones

Hypothesis: β not constant over time

  • Cumulative Sum of Squares (CUSUM) Test

Indicates structural breaks

  • Chow-Test: significant structural breaks at
  • July 1st 2008: Take-over of BEB by Gasunie

July 1st 2008: Take over of BEB by Gasunie

  • October 1st 2008: Bayernets and E.ON merge to NCG

15

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Empirical Results

Kalman Filter Kalman Filter

GUD and NCG GUD and NCG

1.2

Announcement of NCG

1.0 1.1

Start of NCG Announcement of NCG

0.8 0.9 0 6 0.7

BEB take-over Price convergence

0.6 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 State Vector ± 2 RMSE NCG GUD

convergence

16

NCG - GUD

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Empirical Results

Kalman Filter Kalman Filter

GUD and TTF

1 2 1.3

GUD and TTF

1.0 1.1 1.2

BEB take-over

0.8 0.9

full integration

0.6 0.7 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1

full integration

State Vector ± 2 RMSE LGUD - LTTF

17

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SLIDE 19

Empirical Results

Kalman Filter Kalman Filter

NCG and TTF NCG and TTF

1 2 1.3 1.0 1.1 1.2

Announcement of NCG

0.8 0.9 0.5 0.6 0.7

BEB take-over β=0.96

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 State Vector ± 2 RMSE LNCG - LTTF

18

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SLIDE 20

Conclusions

  • Increasing integration of the three natural gas markets Net connect

G G f Germany, Gasunie Deutschland und Title Transfer Facility Hub

  • GUD and TTF seem to be a single market (with Gasunie being

joint owner) joint owner)

  • NCG follows GUD/TTF being fairly integrated
  • Structural changes tend to cause short-run desintegration

Structural changes tend to cause short run desintegration

  • German regulatory quest of achieving full market integration

seems to be achievable also with two German hubs

19

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WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH Postfach 2000 Postfach 2000 53588 Bad Honnef Deutschland Tel +49 (0) 2224-9225-88 Tel +49 (0) 2224 9225 88 Fax +49 (0) 2224-9225-68 eMail c.growitsch@wik.org

  • www. wik. org
  • www. wik. org