Institutional and Organizational Designs of Natural Gas Hubs: An Introduction to the Iberian Gas Hub

1. Trading processes and Exchange
platforms
Institutional and organizational designs of the gas hubs in
Europe: An introduction to the Iberian Gas Hub
24th June 2014, Bilbao

2. 2
Exchange trading inside PEGAS
Interactions between gas market participants – role allocation
Preconditions for a positive hub development
Agenda

3. 3
The European wholesale market for gas
Development of European gas hubs in
2013 in comparison to 2012
Hubs Spot market Futures market
TWh Δ to 2012 TWh Δ to 2011
NBP 1,078 +4% 13,765 -15%
TTF 417 +16% 8,126 +6%
NCG 258 +15% 930 +20%
GPL 158 +52% 576 +52%
PEG 137 +30% 270 +35%
ZEE 150 +25% 611 -7%
CDG/AOC ca. 100 TWh
* both OTC and Exchange volumes
Source: Powernext
 Continental European gas markets show the
biggest increase (TTF, GPL, NCG, PEG’s)
 Reduction on NBP due to withdraw of banks
 Strong competition between broker and exchanges
CDG
CDG

4. 4
PEGAS – Pan-European Gas Cooperation
 Bundling of trading interest and volumes on one trading platform
 More than 150 market participants in now 6 gas market areas
 Trading of price differences between gas market (Location-Spreads)
 Clearing and settlement by solely usage of ECC inside PEGAS – Netting
EEX and Powernext enables gas trading in Continental Europe
Powernext
Pan-European Gas cooperation
EEX
PEG’sTTF-FutureTTF-SpotNCGGPL

5. 5
PEGAS Initiative on UK and Belgian hubs
Next steps in 2014:
 9. July - Spot and Futures on Zeebrugge
Trading Point (ZTP) offered by PWX
 9. July - Spot on Zeebrugge Trading
Point L-Gas (ZTPL) offered by PWX
 Q4/14 - Spot and Futures on National
Balancing Point (NBP) offered by EEX
 Q4/14 - Spot and Futures on Zeebrugge
Beach (ZEE) offered by Powernext
New location spreads become tradable:
 ZEE/NBP, ZTP/NCG, ZTP/TTF, ZTP/GPL, ZTP/PEG-N

6. 6
All PEGAS markets inside one screen
 Cross membership without additional costs for joining the other market

7. 7
Volume growth in PEGAS markets in 2014
1.636
3.306
1.020 1.430
4.714
3.258
6.644
9.444
8.865
17.133
28.982
5.350
-
5.000
10.000
15.000
20.000
25.000
30.000
35.000
GPL NCG TTF PEG's GPL NCG TTF PEG's GPL NCG TTF PEG's
Intraday market Spot market
(Day Ahead, Weekend, Individual Days)
Future market
GWh
Jan. 13 - Apr. 13 Increase in Jan. 14 - Apr 14
 Strong increase in all spot markets in 2014, especially TTF
 Sharpest increase in TTF futures, also GPL and PEG’s futures

8. 8
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 2011 2012 2013 2014
34
52
72
92
108
117
138
34
18
20
20
16
9
21
10
Increase of trading participants at the EEX gas market
Member development inside EEX gas markets
New member
Existing member
CEGH-EX (89)
ICE Endex Zee (24)
ICE Endex TTF (53)
ICE Endex NBP (77)
Powernext (45)
Nord Pool Gas (21)
EEX (148)
As of 07. February 2014

9. 9
Exchange trading inside PEGAS
Interactions between gas market participants – role allocation
Preconditions for a positive hub development
Agenda

10. 10
Role allocation inside gas markets 1/3
 Physical player
 Importing companies – provide gas on own hub and supply end customer
 Exporting companies – provide gas on adjacent hubs and supply end customer
 Producing companies – provide gas on hubs and supply end customer
 Storage operator – offers physical flexibility to market participants
 Financial player – usually gas trading without direct end customer supply
 Arbitrage smallest price differences in derivatives between markets/hubs
 Increase significantly trading liquidity and connect wholesale markets
 End customer
 Industrial customer – needs competitive prices, otherwise move to adjacent hubs
 Household customer – needs security of supply and also competitiveness
Several user roles have different claims on gas hubs

11. 11
Role allocation inside gas markets 2/3
 Gas grid operator (LSO, DSO, TSO)
 Operates gas grid system (regulated) – accept transport nomination
 Facilitate VTP by enabling entry/exit regimes
 Advice hub operator for balancing activities inside the gas grid
 Hub operator (e.g. Huberator, GPL)
 Pooling of liquidity inside one market area – one or more TSO as underlying
 Manage extended trading and matching services at the VTP
 Enables title transfer of gas for trading by offering of trade nominations
 Support exchange trading by acceptance of single sided nomination
 Offers back-up/back-down services – every hub trade is “super firm”
 Balance the system on behalf of TSO’s by trading on exchange balancing
markets or own balancing markets
 Act according national regulation rules – How to deal with overlapping hubs?
Grid operator and hub operator can fulfil different roles

12. 12
Role allocation inside gas markets 3/3
 Act as Central Counterpart (CCP) between trading member
 Enable anonymous and free of discriminatory trading between member
 Ensure proper financial and physical clearing/settlement of trades
 Provides Single side nominate services at VTP to member
 Solely nomination of EEX/ECC is sufficient for deal execution – no counter nomination
at VTP by member is needed to confirm exchange trade
 Regulated and licensed by financial authority
 Sophisticated market surveillance and reporting tools
 Publication of transparent references prices for gas hubs/delivery periods
 Act as 24/7 balancing platform for all market participants in the market
Exchanges enable proper trade execution and transparency
Watch out: To give special authority/privileges only to one exchange inside
the gas market prevents level playing fields for competitor (EX, broker).!

13. 13
Exchange trading inside PEGAS
Interactions between gas market participants – role allocation
Preconditions for a positive hub development
Agenda

14. 14
Preconditions for a liquid wholesale market
 Availability of gas volumes
 Availability of gas storage
 Non discriminatory access to
transport and storage
 Interconnection to adjacent
hubs/gas markets
 Apply of entry/exit model
with direct access to VTP
 Support for exchange trading
and simplified settlement
 Market price transparency
Trigger for the development of a Virtual Trading Point
Regulatory pressure:
EU Gas Target Model
Customer pressure:
Competitive gas prices in own gas market
Hub development

15. 15
Stepwise development of hub trading
 Trading on physical points (interconnection points, LNG hubs)
 Bilateral trading with limited number of active counterparts
 Pricing on benchmarks of substitute fuels or regulated price
 Revenues shared between few companies
Traditional gas
world
– without VTP
Transforming gas
world
– with VTP
 Trading on Virtual trading points and temporary limited also on
physical points (cross border, interconnection)
 Bilateral trading with increasing number of counterparts
 Dominant pricing on benchmarks of substitute fuels
 Competition for revenues between more companies
 Trading on Virtual trading points with sufficient liquidity
 Standardised gas trading on an exchange
 Full price transparency based on Exchange prices
 Full competition for revenues between companies
Developed gas
hub
– with Exchange

16. 16
5
10
15
20
25
30
35
Gaspricesin€perMWh
Delivery month
EGIX vs. published oil-indexed German gas import prices
Price transparency – benefit for customer
Import prices published
by German Ministry
EGIX prices
published by EEX

17. 17
Decision criteria for gas trader
 Physical/financial demand for trading -
 Short-term optimisation – usage of spot markets (WD, DA, WE)
 Mid- and long-term optimisation – usage of future markets (M, Q, S, CY)
 Trading venue
 Number of possible counterparts - market participants
 Tightness of Bid/Ask spread for market price based opening/closing of positions
 Market Maker support
 Sufficient liquidity in number of order, trades and volume per product
 Risk affinity:
 Bilateral or Broker trading – Not anonymous (incl. delivery), counterparty risks,
preferred for trading of non-standardized products or young gas markets
 Exchange trading – Anonymous, no counterparty risk, balancing trading
 Transaction cost per trade – incl. Bid/Ask spread, trading fees, clearing fees
 Full price transparency for free – Increase trust of customer in Hub trading
Which criteria triggers order placement and trade execution?

18. 18
Conclusion
 Market size – big enough?
 Member support – strong enough?
 Level playing field for all market player – fair enough?
 Balancing trading at the exchange – transparent enough?
 Price transparency by usage of hub pricing – Relying enough?
Hubs/VTP could be developed under consideration of

19. Any more questions?
More information available under www.pegas-trading.com