Liberalised trade Opening up the natural gas market
In 1993, WINGAS entered the German gas market, and in doing so further stimulated competition. Despite this, until 2005, natural gas trading in Germany was relatively undeveloped, with six importers and four domestic producers dominating the market and distributing the vast majority of Germany’s gas either directly to power stations or to gas suppliers.
In the individual regions, municipal utilities or regional distributors then passed gas on to private customers, commercial enterprises and industry.
To use road transport as an analogy, the gas flowed on motorways from the importer to the gas supply companies, which then transported it on their main roads to the municipal utilities. From there the natural gas then flowed on side roads to the end-users. Households and smaller business customers were particularly constricted, as they had no choice other than to buy their gas from the local utility.
Two gas market areas for the whole of Germany
In 2005, the Energy Management Act (EnWG) was redrafted and the Federal Network Agency became the regulatory authority for electricity and gas. The gas market was liberalised. From then on every end-user could purchase their gas from their preferred provider. In practice, this would only work if the networks were open to all market participants and every gas trader was able to buy pipeline capacity in a simple manner – in the same way that private rail companies that do not own tracks can use the rail lines of Deutsche Bahn AG for their trains.
To open up the market in this way, the transport companies, who owned the pipelines, established two companies – Gaspool Balancing Services GmbH and NetConnect Germany GmbH & Co. KG. The companies then merged their pipelines into two market areas. As well as the gas pipelines, these two companies also provide the gas suppliers and their customers with a virtual trading point. Every day, sellers and buyers report their estimated demand for natural gas for the following day to the trading point. When the end-users turn up the heating due to cold weather, for example, more natural gas flows through the network. The operator of the market area ensures demand and supply are always balanced.
Different price models: constant, indexed or short-term markets
The price for gas is not just determined at the virtual trading point – customers and suppliers will often agree a set fee by way of traditional contract negotiations. The contracts specify the quantity of gas to be delivered and whether the price is constant or linked to an index. The contracts also specify the degree of flexibility available for the customer to purchase gas. In most cases, it is advantageous for the customer to purchase gas based on current demand.
The market participants can also handle the purchase and sale of pre-defined and constant natural gas quantities via exchanges or brokers.
Those who wish to buy additional gas or sell surplus quantities can use an energy exchange such as the EEX in Leipzig, and trade on the spot market for deliveries the next day, or the futures market for deliveries at a later date. Since current prices are always publicly available, the exchange provides a high level of transparency. With the help of contract formulas, it often serves as a reference for pricing between the gas suppliers and their customers, who may be in municipal utilities or in industry, for example.