Europe's gas market: Understanding market mechanisms and developing strategies

What role does gas play in the energy transition and how can it help to balance out the fluctuations of renewable energies? What mechanisms drive price developments in the energy markets – especially in the gas market? How can companies understand market volatility and use it to their strategic advantage? And what measures can purchasers take to secure their energy supply and optimize costs in the face of uncertainties? We answer these and other questions to provide you with orientation and practical approaches for dealing with the challenges of the energy markets.

The role of gas in the changing energy markets and the energy transition

Energy markets have undergone massive upheaval in recent years. Above all, the urgency of reducing CO₂ emissions is bringing gas into the focus of the energy transition. As a relatively flexible energy source, it can not only help solve the intermittency problem of renewable energies, but also constitute an appealing alternative to coal for electricity production.

At the same time, geopolitical tensions are significantly influencing market mechanisms. The Covid-19 pandemic and the war in Ukraine have caused major upheaval in the European gas market, forcing countries to quickly reduce their dependence on Russian supplies.

Europe's gas infrastructure: separating transport and supply

Following the liberalisation of the energy markets in the early 2000s, strict separation was stablished between the management of gas infrastructures (transport, storage, distribution, etc.) and the upply of gas itself. Although the Dutch market is now the most active and serves as a benchmark, each European country has its own place in the market. This is where sellers (producers and importers)  and buyers - gas suppliers such as ENGIE or large industrial consumers - come together.

The role of these wholesale markets is to:

• give a price signal that reflects the balance between supply and demand;
• provide reliable and transparent information to guide future investments;
• make gas exchanges between countries more fluid and secure, by offering suppliers the possibility  of managing their imbalances on a day-to-day basis.

In Europe, natural gas and electricity were historically traded OTC (Over The Counter) through  bilateral agreements, generally with adaptable conditions (volume profile, delivery points, etc.), but  not without credit risk. Large trading platforms (e.g. ICE) have rapidly emerged with standard products (flat profile, hub delivery), transparent price reporting and solutions to cover counterparty risk through collateral and margin calls.

Different gas markets

As with electricity, there are different types of gas markets:

Gas Supply, Transport and Storage

Gas consumers: Households and businesses, electricity producers and manufacturers

Household and businesses

For heating and domestic consumption.
 

Electricity Producers

For power plant supply.Natural gas, in combination with other energy sources, is used to power the power plant’s turbine, which in turn drives an alternator to produce electricity. With the development of new generation power plants, the proportion of electricity produced using this method has greatly increased.

There are two reasons for this:

• natural gas emits half as much CO2 as coal;
• it guarantees stability of the electricity network in the event of consumption peaks or renewable energy insufficiencies.

As a major player in the energy transition, ENGIE has chosen to gradually replace its conventional power plants, which are largely coal-fired, with combined-cycle gas plants and cogeneration units.

What determines the market price?

The gasprice

The price of gas, expressed in megawatt-hours (MWh), is the result of gas supply and demand on the wholesale market. It therefore depends on a number of factors, such as the level of production, the  availability of infrastructure, economic dynamism, weather variations, etc. But the gas price does not depend solely on the wholesale market price. Other costs, such as the cost of transport and use of gas infrastructures, and taxes, are also added to it.

Follow the market trends

Once you have a clear energy strategy, follow market and gas prices closely. Like financial investments, a strategy is only useful if you take advantage of all the opportunities that arise later.

How do you monitor market trends?

• Keep an eye on macro-economic trends and geopolitical developments: this will allow you to anticipate and understand changes in the financial markets, as well as in the energy markets (mainly for oil).
• Follow the financial markets. They are an indicator of economic activity, and therefore of energy demand.
• Watch oil prices. Their price variation influences gas prices. When the price of oil rises, demand for gas, which will have become relatively cheaper, rises - as does its price.
• Save time with expert analysis. At ENGIE, we make sure we share our expertise with you to help you detect opportunities for your business. We have set up a number of free tools for this purpose.

Efficient energy management: Understand the gas market and act strategically

A clear purchasing strategy and regular market monitoring are crucial. Understand the gas market: what factors influence prices? What events have influenced them in the past? This will help you plan ahead better. Developments in the electricity market are also important, as natural gas is central to electricity generation. Energy is a significant cost factor for many companies, and efficient energy management optimizes spending. Let's shape a low-carbon future together!