Skip to main content
SpringerLink
Log in

The European gas market: new evidences

  • S.I.: Recent Developments in Financial Modeling and Risk Management
  • Published:
Annals of Operations Research Aims and scope Submit manuscript

Abstract

A single price for the European gas market has been the ultimate goal for European countries. Deregulation of the gas market started in Europe in the late 1990s and three European packages for the creation of a single market for natural gas and electricity have already been issued. The aim of this paper is twofold: to verify whether natural gas prices are converging into a single price in Europe and to identify the reference trading hub for the European market. We study the evolution of natural gas prices during the last decade (2007–2017) at various trading hubs with the goal of identifying their level of integration. We examine the integration by testing for the presence of a common stochastic trend among the prices reported at the hubs. In order to detect the reference hub we test for a lead lag relationship between each pair of trading hubs. Our results show a high level of integration among the European trading hubs with the Dutch hub, TTF, playing the role of the reference trading hub.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Source: European Commission DG Energy: Market observatory for energy—Quarterly report on European gas market, volume 11(1)

Fig. 2

Source: Elaboration on Bloomberg (OECM) data

Fig. 3

Source: Elaboration on Bloomberg (OECM) data

Fig. 4

Source: Elaboration on Bloomberg (OECM) data

Fig. 5

Source: Elaboration on Bloomberg (OECM) data

Fig. 6

Source: Elaboration on Bloomberg (OECM) data

Fig. 7

Source: Elaboration on Bloomberg (OECM) data

Similar content being viewed by others

Notes

  1. See the latest report on the progress towards completing the Internal Energy Market [COM(2014) 634] at: https://ec.europa.eu/energy/sites/ener/files/documents/2014_iem_communication_0.pdf.

  2. For the full list of European gas hubs and their years of establishment see Heather (2015).

  3. The extent of hub-based pricing is not equal across all EU regions. While the gas pricing in Northwestern regions is now predominantly hub-based, in the Southern regions gas prices are still formed, to a great extent, through fixed oil-indexed contracts (Heather 2015).

  4. Explained in more details further in the article.

  5. For more information see http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A31998L0030.

  6. European Federation of Energy Traders is an organisation designed to improve the conditions of energy trading in Europe and to promote the development of a sustainable and liquid European wholesale market.

  7. In further text we refer only to the French hub PEG North, as the reference French gas hub, as it is the main trading gas hub in France.

  8. In the paper we will refer to 1-day ahead gas contract prices and 1-month ahead forward gas contract prices as spot and forward gas prices.

  9. Selected gas hubs will be hereafter referred to as NBP, TTF, ZEE, CEGH, GPL, NCG, PEG and PSV respectively.

  10. The goal of the research and the methods used do not require equal currency unit and the series could be introduced in the analysis in their original currency values. More specifically, we worked with log returns of spot and forward prices keeping them in their original currencies (the NBP and ZEE gas hub price series were introduced in GBP/MWh). However, we performed additional tests with all the price series transformed into Eur/Mwh and the results appear very similar.

  11. Each equation assumes one of the two hub prices from the pair as a dependent variable.

  12. Significance statistics for DCC and GARCH parameters obtained from the correlation calculations are available upon request.

References

  • Asche, F., Misund, B., & Sikveland, M. (2013). The relationship between spot and contract gas prices in Europe. Energy Economics, 38(2013), 212–217. https://doi.org/10.1016/j.eneco.2013.02.010.

    Article  Google Scholar 

  • Bachmeier, L. J., & Grin, J. M. (2006). Testing for market integration: Crude oil, coal, and natural gas. The Energy Journal, 27(2), 55–71. https://doi.org/10.2307/23297019.

    Article  Google Scholar 

  • Bai, J., & Perron, P. (2003). Critical values for multiple structural change tests. The Econometrics Journal, 6(1), 72–78. https://doi.org/10.1111/1368-423X.00102.

    Article  Google Scholar 

  • Council of European Energy Regulators (CEER). (2011). CEER vision for a European gas target model. Conclusions Paper. C11-GWG-82-03.

  • Cuddington, J. T., & Wang, Z. (2006). Assessing the degree of spot market integration for U.S. natural gas: Evidence from daily price data. Journal of Regulatory Economics, 29(2), 195–210. https://doi.org/10.1007/s11149-006-6035-2.

    Article  Google Scholar 

  • Doane, J. M., & Spulber, D. F. (1994). Open access and the evolution of the U. S. spot market for natural gas. The Journal of Law and Economics, 37(2), 477–517. https://doi.org/10.1086/467321.

    Article  Google Scholar 

  • Engle, F. R. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007. https://doi.org/10.2307/1912773.

    Article  Google Scholar 

  • Engle, T. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. The Journal of Business & Economic Statistics, 20(3), 339–350. https://doi.org/10.1198/073500102288618487.

    Article  Google Scholar 

  • European Commission. (2018). Quarterly report on European gas markets. Market observatory for energy 11(1). DG Energy.

  • Geman, H., & Liu, B. (2015). Are world natural gas markets moving toward integration? Evidence from the Henry Hub and NBP spot and forward markets. Journal of Energy Markets, 8(2), 47–56. https://doi.org/10.21314/JEM.2015.125.

    Article  Google Scholar 

  • Growitsch, C., Stronzik, M., & Nepal, R. (2013). Price convergence and information efficiency in German natural gas markets. German Economic Review, 16(1), 87–103. https://doi.org/10.1111/geer.12034.

    Article  Google Scholar 

  • Harmsen, R., & Jepma, C. (2011). North West European gas market: integrated already? Elektor. 27th January 2011. Retrieved September 10, 2014 from www.europeanenergyreview.eu.

  • Heather, P. (2010). The evolution and functioning of the traded gas market in Britain. The Oxford Institute for Energy Studies. NG 44.

  • Heather, P. (2012). Continental European gas hubs: are they fit for purpose? The Oxford Institute for Energy Studies. NG 63.

  • Heather, P. (2015). The evolution of European traded gas hubs (p. 104). NG: The Oxford Institute for Energy Studies.

    Book  Google Scholar 

  • Heather, P., & Henderson, J. (2012). Lessons from February 2012: European gas “crisis”. The Oxford Institute for Energy Studies. Oxford Energy Comment, April 2012.

  • Hjalmarsson, E., & Osterholm, P. (2007). Testing for cointegration using the Johansen methodology when variables are near-integrated. IMF Working Paper WP/07/141. Retrieved October 10, 2018 from https://www.imf.org/external/pubs/ft/wp/2007/wp07141.pdf.

  • Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian Vector Autoregressive Models. Econometrica, 59(6), 1551–1580. https://doi.org/10.2307/2938278.

    Article  Google Scholar 

  • Kuper, G. H., & Mulder, M. (2013). Cross-border infrastructure constraints, regulatory measures and economic integration of the Dutch - German gas market. SOM research reports. 13001-EFF.

  • Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), 347–370. https://doi.org/10.2307/2938260.

    Article  Google Scholar 

  • Neumann, A., & Cullman, A. (2012). What is the story with natural gas markets in Europe? Empirical evidence from spot trade data. In Conference proceedings of the ninth international conference on the European Energy Market (EEM), IEEE, 10th–12th May 2012.

  • Neumann, A., Siliverstovs, B., & von Hirschhausen, C. (2006). Convergence of European spot market prices fornatural gas? A real-time analysis of market integration using the Kalman filter. Applied Economics Letters, 13(11), 727–s732. https://doi.org/10.1080/13504850500404258.

    Article  Google Scholar 

  • Petrovich, B. (2013). European gas hubs: How strong is the price correlation? The Oxford Institute for Energy Studies. NG 79.

  • Pindyck, R. S. (2004). Volatility in natural gas and oil markets. The Journal of Energy and Development, 30(1), 1–17.

    Google Scholar 

  • Stern, J., & Rogers, H. (2014). The dynamics of a liberalized European gas market: Key determinants of hub pries, and roles and risks of major players. The Oxford Institute for Energy Studies. NG 94.

Download references

Author information

Authors and Affiliations

  1. Université Catholique de Louvain, Louvain-la-Neuve, Belgium

    Vera Jotanovic

  2. Università Sapienza di Roma, Rome, Italy

    Rita Laura D’Ecclesia

Authors
  1. Vera Jotanovic
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Rita Laura D’Ecclesia
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Vera Jotanovic.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 13, 14, 15, 16, 17, 18 and 19.

Table 14 ARCH LM test statistics for spot prices at European gas hubs.
Full size table
Table 15 ARCH LM test statistics for forward prices at European gas hubs.
Full size table
Table 16 GARCH conditional variances for spot prices at European gas hubs.
Full size table
Table 17 GARCH conditional variances for forward prices at European gas hubs.
Full size table
Table 18 Granger causality test statistics for forward prices.
Full size table
Table 19 Granger causality test statistics for forward prices.
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Jotanovic, V., D’Ecclesia, R.L. The European gas market: new evidences. Ann Oper Res 299, 963–999 (2021). https://doi.org/10.1007/s10479-020-03714-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10479-020-03714-5

Keywords

JEL Classification

Search

Navigation