The Polish gas exchange is already eight years old. After strengthening the country’s energy security and contributing to developing the market, it may support the energy transition as well – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.
What is the history of the Polish gas exchange?
Twenty years ago the Day-Ahead Market was established, which made it possible to trade energy on the spot market on the Polish Power Exchange (TGE). It was the starting point for our energy and gas exchange. On the anniversary of this event it is worth taking a look at how the gas exchange grew as part of TGE. Gas trading on TGE started on 20 December 2012 when the Commodity Forward Instruments Market was launched on the basis of an agreement between TGE and Poland’s gas grid operator GAZ-SYSTEM. Since then, TGE has been posting nominations to the operator informing about the volume of transactions concluded on the exchange. This is how wholesale gas trade started in Poland. On 31 December 2012 the exchange launched the Day-Ahead Market and on 30 July 2014 the Intraday Market. On 11 September 2013 an obligation to sell gas through the exchange was introduced, at first at the level of 30 percent and then at 55 percent. One could argue that the natural gas market on TGE evolved faster thanks to the experience acquired on the power exchange. This pertains especially to the obligation, whose goal was to liberalize both markets. It was first successful on the power exchange and then was introduced into the gas market. The leapfrogging strategy paid off in this instance. The goal of this approach is to modernize an area of activity quicker by omitting a path of development from the past and instead immediately reaching for the most innovative solutions available on the market. “TGE’s experience on the power exchange made it possible for us to offer gas solutions to market participants. The trial we had blazed earlier turned out to be the right one, but it does not mean we should only rely on the competencies we have already acquired. New markets and new products often force us to reconsider our approach or introduce customized solutions. The ongoing infrastructural projects and the growing importance of gas across the world are forcing TGE to keep on developing our offer” – Piotr Zawistowski, TGE President of the Management Board, said.
Despite the fact that at the beginning PGNiG and its retail subsidiary PGNiG Obrót Detaliczny were the market makers, today the number of companies trading on the gas exchange is growing. In 2019 the natural gas volume on TGE was 146 106 097 MWh, which is a 2 percent increase in comparison to 2018, which yields the best result in the history of trading this commodity on TGE. The exchange is developing hand in hand with the gradual liberalization of the gas market in Poland. On the 1st of January 2017, new regulations of the energy law entered into force and abolished the supervision of the Energy Regulatory Office (URE) over wholesale tariffs, LNG and CNG trading and purchases in virtual points, tenders and public procurements. As of October 2017 the obligation imposed on URE to approve tariffs on high‑methane and nitrogen‑rich gas delivered to customers other than households was lifted. The tariffs for households will be in force until the end of 2023 and will be abolished after that date.
The number of transactions where gas providers are changed increases systematically. In the first quarter of 2020 it was 256 461 according to the number of recipients and 303 413 according to measuring systems. At the end of 2015 these indicators were 30 749 and 35 145 respectively. Therefore, the momentum is growing, which means it has become increasingly easier to find an alternative offer on TGE and clients often use it. The Energy Regulatory Office explains that “a number of important factors impact the liberty to choose the seller, those include the clients’ awareness and their motivation to change the seller, as well as the level of complications that the change involves and the number of competitive offers available on the market.” Perhaps this is why a similar dynamic of changing energy sellers is not visible in 2019. The number of consumers in households who changed their sellers in December was 657 223, which is an increase of 8.7% since the beginning of the year. Industrial customers changed their provider 209 935 times, which is a 4.4 percent increase in comparison to the beginning of the year. However, it is worth pointing out that the majority of changes to the industrial tariffs A, B and C took place in January 2019 (5,733 times). After that the changes took place a lot more seldom and did not exceed the amount of 460, which was recorded in April. In December only 66 changes took place. In January 2020 industrial clients changed their providers 3,043 times and in February – 346, in March 337. The final recipients are not aware of the difference between gas and power exchange markets thanks to the availability of offers on TGE. Still, it looks like they use the freedom on the gas market increasingly more often, which could be caused by the factors enumerated above by URE. Therefore, further liberalization of the blue fuel market will multiply the number of transactions on this market.
However, none of this would be possible without expanding the infrastructure that provides access to alternative fuel sources. Diversifying Poland’s gas supply made the exchange more liquid and concentrated the market in Poland and in the region. New gas connections with our neighbors and access to new sources of gas, like the LNG terminal and Baltic Pipe, will enhance the appeal of the Polish gas exchange and offer lower prices, so that in the future it could become a benchmark across Central and Eastern Europe. This is also an opportunity to develop the liquid gas market, which is especially interesting considering the growing share of spot markets in gas trading across the world and the increasingly more competitive prices spot has to offer. These changes allow the LNG spot market to compete against long-term contracts on gas supply via pipelines. The continued development of the LNG market in Poland, i.e. the expansion of the LNG terminal from 5 to 8.3 billion cm capacity a year and the purchase of an FSRU unit that will be located in the Bay of Gdańsk, will only improve the gas exchange liquidity at TGE. This is how Poles are closing in on the goal included in the Strategy for Responsible Developement proposed by the government, which talks about, among others, the necessity to develop a gas hub, i.e. a regional benchmark on the blue fuel market. Poland will also undergo a further liberalization of the gas market after 2022, once the historical burden in the form of the rigid Yamal contract between PGNiG and Gazprom expires. When Poland is no longer dependant on one source of supply, it will be able to use the tools offered by the gas exchange more often. New players will arrive and prices will go down.
The growing number of links between the Polish gas market and its neighbors justifies the comparison of the development of market exchange in individual points commonly known as ‘gas hubs’. Europe’s biggest gas exchange – the Dutch TTF reached a volume of 1,523 TWh in 2019 and grew by 41.6 percent between 2016 and 2019. Germany’s NCG registered 340 TWh and an increase by 14.2 percent. Also in Germany, Gaspool had 201 TWh and an increase of 70.3 percent. France’s PEG volume in 2019 was 162 TWh (25.2 percent). TGE’s volume was 146 TWh in 2019, which meant an increase by 27.6 percent between 2016 and 2019. This means Poland’s domestic gas exchange is growing quickly in comparison to the counterparts from Western Europe, despite its relatively young age. Its potential may expand further.
It is also worth mentioning that the Polish gas market is quick to introduce changes that determine its level of liberalization. The legal and functional unbundling of the gas grid and gas production and supply had already happened, whereas in other countries, such as Latvia, this process has been concluded only recently. New entities have access to the gas grid and are able to use it thanks to electronic platforms, like in the case of the so-called Yamal pipeline, i.e. the Polish section of the Yamal-Europe gas pipeline. The rules for balancing, nomination procedures, imbalance charges and settlement procedures related to imbalance, have been defined in the network code written on the basis of a resolution of the European Commission from 26 March 2014 and introduced in Poland on 1 October 2015. Marcin Sienkiewicz, PhD, enumerates four kinds of freedom available on a liberalized gas market: infrastructural, contractual, trade and exchange trading. The above examples show that the domestic gas exchange ensures most of them, while the infrastructural freedom is provided by the diversification processes led by Polish transmission and trade companies. The next stage of liberalization that will become available once the process of supply diversification ends in 2022, will be the diversification of entities that trade gas in Poland. It should be acknowledged that at this point domestic trade is still dominated by the market maker.
Will the exchange become part of the energy transition?
The creators of the gas exchange on TGE wanted to build a secure and profitable market with a settlement service at a European level, which was ensured by Izba Rozliczeniowa Giełd Towarowych S.A. Since its conception, the exchange has always prioritized the transparency of turnover and at the same time guaranteed equal access to its offers to all interested parties. Today it is a benchmark for those investors who, based on what is happening on the exchange, are able to make their own business decisions. This is especially important in the face of Poland’s plans to conduct energy transition with the help of gas, which is to be used as a transition fuel. Poland wants to build new gas power plants that will stabilize renewable energy sources, such as offshore wind farms. These kinds of investments can be planned on the basis of gas prices, just like in the past, the profitability of coal-fired power plants was indexed to the price of the raw material used in the plant. Therefore, TGE has advanced on the path to becoming an important element of Poland’s energy transition.
The article was written in cooperation with the Polish Power Exchange (TGE).