Behind the scene of energy: Gas markets

After a first part dedicated to electricity markets, Laurent Néry, Co-Head of Global Market Analysis of ENGIE Global Energy Management & Sales, now addresses the specifics of the gas market. This new presentation will undoubtedly provide some much-needed insight!​​​​​​​

What are the main differences between the gas and electricity markets?

Laurent Néry: First major difference: the gas market is global whereas electricity markets are local. International factors – such as the demand for gas in China and Japan, the level of production in the US or the geopolitical context, etc. – can therefore directly influence European gas market prices. Today, we witness this phenomenon in the rise in gas exchanges between the world’s various regions, in connection with the development of Liquefied Natural Gas (LNG).

The second fundamental difference is linked to storage, which is possible for gas and much more complex for electricity. As opposed to electricity, natural gas can be stored in large quantities, allowing to cope with fluctuations in seasonal demand and to meet peak demand in winter. The result: greater flexibility in balancing supply and demand in the gas markets. In general, the more gas there is in stock, the lower the wholesale market prices tend to be.

How is the European gas market organized?

L. N.: Following the deregulation of the energy markets at the start of the 21st century, a notable division was created between the management of gas facilities (transport, storage, distribution, etc.) and the supply of gas itself. In general, there is a marketplace for each country. In Europe, the Dutch market serves as the benchmark and is the most active. These wholesale markets bring together sellers – producers and importers – and buyers, who can be gas suppliers such as ENGIE or large industrial consumers. What is the role of these markets? Facilitating and securing gas exchanges between the countries, by offering suppliers the possibility to manage their imbalances on a day-to-day basis and thus ensuring greater flexibility.

The energy markets were profoundly affected by the ongoing crisis and, in particular, the almost complete stop in Russian gas deliveries. As such, we have witnessed unprecedented price hikes, as well as a massive drop in demand and a sharp increase in LNG imports from not only the US, but also Egypt and Trinidad-and-Tobago, located next to the shores of Venezuela. These two factors have made it possible to avoid any disruption of gas supplies to our clients this winter.

Speaking of which, how are gas prices established and what causes such large variations?

L. N.: The price is the result of the balance between supply and demand, over various periods: daily, monthly, quarterly, yearly, etc. The price is directly influenced by various factors: production level, availability of facilities, demand, which in turn depends on the fluctuations of the climate or economic dynamism, etc. Moreover, the wholesale market price is not the only element that impacts the sale prices offered to the end client. Other factors come into play, such as the operational costs of gas facilities and transport, as well as tax rates.

Within this context, how does ENGIE define the best price for its customers?

L. N.: That’s the role of ENGIE Global Energy Management & Sales, ENGIE’s entity tasked with managing the gas supply for our customers. Our team operates on a daily basis in the markets with the goal of ensuring the real-time balance between our supply and the demands of our customers, all at the best possible price. For example, to cope with the decrease in Russian gas imports, we have obtained additional volumes by negotiating with our partners, notably in Norway, and diversified our sources by importing LNG.

In parallel, we capitalize on our assets (regasification, transport and, storage capacity) to transport the molecule to our clients at the best cost. Thanks to our involvement in wholesale markets, we can adjust the balance between supply and demand, allowing our customers to benefit from a fixed rate.

What is the impact of the energy transition on the markets?​​​​​​​

For one, new market products such as origin guarantees, or energy-saving certificates are appearing.

Additionally, the rise of renewable energy sources will highlight the need for flexible energy systems. The organized energy markets will play an even greater role in the increasingly complex optimization of the balance between supply and demand, at each location and at each moment.

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