On this blog and in conferences, we have repeatedly complained about Spain’s reluctance to fix its gas market. For years now, Spanish end consumers of gas are paying more than consumers in other countries. And we can’t see any good reason for that. The Spanish transporation infrastructure and Spanish gas import was drastically expanded in the booming early 2000’s, anticipating a never-ending period of growth of the economy and gas consumption. Instead of that, Spain slumped into a deep recession and in 2015, Spain’s gas consumption was 29% lower than in 2008. As a result, wherever you look in Spain’s gas system, you will find excess capacities. So why on earth doesn’t this result in lower prices?
Many Spanish gas suppliers will point at the limited capacity on the French-Spanish cross-border pipeline. Yes, this means that only small quantities of gas can float directly, through a pipeline, from the cheaper markets in the North to Spain. However, only looking at this pipeline is a very shallow look, especially if you consider that most of Spain (and Portugal’s) gas comes in through LNG ships. As a matter of fact, no other European country has such a large LNG import capacity. Most of the terminals are used at very low percentages of their capacities. And still, lots of LNG ships are sailing past Spain without unloading the gas, taking it to terminals further North to sell it at a price far below what they could get in Spain. They are sailing hundreds of extra, expensive miles to unload at a lower price. In September, the average spot price of gas in Spain was 4,6 euro per MWh higher than in Zeebrugge in Belgium. Why didn’t anyone cash in on that spread by loading gas in Zeebrugge and unloading it in Bilbao? Why isn’t the market with the highest end-consumer price in Europe and the highest amount of unused import capacity flooded with LNG?
Traders answer us: we can get the gas into the Spanish ports, but we can’t get it out. The Spanish government has failed to implement gas market policies that guarantee third party access to the Spanish gas grid. The system makes it possible for incumbent suppliers to sit on unused capacities on key infrastructure just to keep newcomers out. And it creates a lot of risk for traders that don’t have access to huge physical quantities of gas within the country. For a little while we were hopeful that things might change with the introduction of the Hydrocarbon Law in May 2015. It resulted in the launch of Mibgas, a Hub market for gas in Spain. In the middle of this year, we saw prices on this Mibgas drop towards the levels in the North of Europe (TTF). But in the last month, the gap has widened again. Mibgas prices are now trading well above TTF level. In October, the gap was reduced a bit, but that was because of TTF rising, and not Mibgas falling. And, despite the obligation for suppliers to balance their portfolios using the Mibgas spot market since October, volume has picked up only slightly.
Spain is currently without a government that can fix this mess. On behalf of all gas consumers in the Iberian peninsula, we hope that the first thing a new energy administration will do, is book a flight to the North and see what simple but effective measures are necessary to make a gas market work. It is really very simple:
- Make the whole country one entry – exit zone and give the responsibility for managing congestions to the Spanish transport grid operator (Enagas),
- Create an hourly day-ahead market (Mibgas) that is adequately aligned with a balancing system (run by Enagas) that is as simple as possible,
- Implement the use-it-or-lose-it principles that oblige owners of unused capacities to sell it to others.
And while they are there, they might look at power market regulations as well.
In the meantime, the Spanish gas buyers face difficult choices regarding their gas contracts:
- In April / May / June, when Mibgas and TTF were close to each other, we saw some offers in the retail market that were very attractive, will such periods return? It’s more important than ever for buyers in Spain to follow up intensively what suppliers can offer.
- When should you switch to Hub-indexed gas buying instead of oil-indexation? With the low liquidity and lack of forward products, financially swapping an oil-indexed formula to TTF is a better choice than Mibgas. Budget risk customers that need long term price stability can focus on the possibilities for savings and more agile price fixing of the new market realities. Market risk customers for whom energy pricing matters in terms of competitiveness should consider whether their competition is in Spain or in countries that have already switched to Hub-indexation. If you face foreign competition, you better consider a quick switch to Hubs. If you’re competing with Spanish companies, you have to decide whether you want to be a first mover or not.
- Switches to Hub-indexation can come at different add-on costs, depending on the difference between oil-indexed gas and the Hub (TTF) at the moment that you make your contract. From that perspective, you should consider switching an oil-indexed formula in gradual steps towards TTF, which is a complicated hedging operation.
Natural gas is an important input to the economy. It is intensively used by base industries that are the cornerstone of many supply chains. Moreover, it has a lot of impact on electricity pricing. In Spain’s fuel mix, natural gas-fired power stations have the potential of being the marginal power stations, meaning that lower gas prices should result in lower electricity prices. Getting Mibgas fixed should therefore be an important priority for the next Spanish energy minister.
