Summary
The aim of this paper is to study the development of market integration and efficiency in terms of information processing after the introduction of an entry-exit network pricing regime in the natural gas markets in Germany. Therefore, we applied the Johansson method and a time-varying coefficient state space approach (Kalman filter) to test for price convergence. Moreover, the state space model was extended to an error correction model to analyse how fast new information is absorbed and prices turn back to equilibrium.
Analysing price series for the two major German market areas, NetConnect Germany (NCG) and GASPOOL (GPL) as well as data from the Dutch Title Transfer Facility (TTF) hub as a kind of competitive benchmark, we explicitly account for transportation cost in order to evaluate the spatial arbitrage condition. Results of the Johansen approach show a level of price convergence close to one between all three locations with the Dutch TTF - as the more mature market - influencing the price development at both German hubs. However, assuming fixed relations over the considered period of two years, thus not accounting for the changing regulatory environment, the Johansen method seems to overestimate price convergence. The time-varying coefficient model overcomes this drawback and reveals lower levels of convergence. These, however, are still sufficient to provide for an improved processing of new information: Since the mandatory introduction of the entry-exit system information efficiency has increased significantly, especially after the merger of two market zones resulting in the foundation of NCG in October 2008.
Serving as a natural experiment, the conflict between Russia and the Ukraine, resulting in gas shortages in Central and Southeast Europe at the beginning of the year 2009, did not affect information processing between Germany and the Netherlands. The information efficiency of the two German hubs however nearly disappeared. So, the German regulatory quest of achieving full market integration by developing one single large entry-exit zone covering all gas networks seems to be advisable in order to achieve a more robust and competitive market for natural gas. Furthermore, we detect a constant gap between price series not explained by transportation costs. These additional costs, market participants face, indicate capacity constraints which are 2.5 times higher cross the border than between the two German zones. The wholesale market still seems to lack liquidity; the number of market participants might still be too low. One important reason could be blocked or congested transportation capacity (contractual constraints through capacity hoarding). Thus, establishing effective and transparent rules concerning entitlements to open network access for third parties is and stays necessary in order to benefit from a fully liberalised market in Germany.
(Full version only available in German language)
Discussion Paper is available for download.
