|Issue Number: 105||February 2014|
French gas hubs and price divergence
Last month's MZINE examined the price convergence between two of Germany's emerging gas hubs, NetConnect Germany (NCG) and Gaspool (GPL). It was noted that this price convergence between the hubs was largely the result of a liberalisation of Germany's gas market, and forms part of a wider structural change in European gas markets that has happened over the last decade.
However, not all gas hubs in the EU conform to close levels of price convergence. This month's article examines France's gas market(s), first giving a brief history of its gas industry, and then looking at the contemporary market, where the main gas hubs, PEG Nord and PEG Sud, show worrying levels of price divergence, suggesting a lack of market integration. The French energy regulator, CRE, has expressed concern about the large premium of the PEG Sud spot market where customers are sometimes paying upto €16/MWh more for gas than in the PEG Nord market. Head of CRE, Philippe de Ladoucette, has recently said that the 'situation is very damaging for industrial players in the south of France'. These industries currently consume around 10% of France's annual gas demand .
Brief history of gas in France
In 1998, the member states of the EU set about liberalising their energy markets, opening them up to competition, following the enactment of the First EU Gas Directive (Directive 98/30 of 22 June 1998). Whilst this Directive was transposed into French law in 2003, effective liberalisation did not come about until July 2007 . Natural gas is now bought and sold on the wholesale market, giving way to a transport network of French gas called 'gas exchange points' (PEGs) . As of 1 January 2009, there is a PEG in each of the balancing zones of the French network: PEG Nord and PEG Sud located on the network GRTgaz, and PEG Southwest located on the transport network TIGF. Previously, there were 5 balancing zones in 2005, and 7 in 2003 as figure 1 shows. The merger between the balancing zones has been intended to simplify market access and optimize arbitrage potential for shippers between various gas sources, thus strengthening security of supply.
Figure 1 .
The graph below shows the vast volatility in daily average prices for PEG Sud, compared to the relative stability of daily average prices for PEG Nord. The price differential between PEG Nord and PEG Sud became apparent from around the middle of November 2013, when cold weather set in. The differential was at its peak in the middle of December when PEG Sud prices were around €44/MWh whilst PEG Nord was around €28/MWh, a huge difference of €16/MWh.
Figure 2 
Explaining the price differential
There are three chief factors influencing the price disparity between the two hubs: the global prices of LNG, the North-South link within France, and the gas flow to Spain.
Figure 3 
Figure 3 shows that PEG Sud is more reliant on LNG imports than PEG Nord, and receives gas from the two LNG regasification terminals, Fos Tonkin and Fos Cavaou. But the soaring price of LNG on the global market has resulted in the diversion of ships to countries where more is paid for LNG. In the post-Fukushima era, and the subsequent decline of nuclear power, the Asian market is snapping up LNG .
Figure 4 shows the higher price paid for LNG on the Asian market compared to gas prices for PEG Sud or PEG Nord. French LNG imports in 2012 decreased by 32% compared with LNG imports in 2011, whereas LNG imports in Asia increased by 9.2% in 2012. LNG is being exported to these Asian countries because of the higher price paid.
Figure 4 
This has resulted in a deficiency of gas in the south of France. Players active at PEG Sud have tried to make up its supply of gas by importing from the north of France. The north of France imports gas via pipeline from Norway, Netherlands and Russia, whilst the south of France enjoys no such supply link. The import of gas from PEG Nord to PEG Sud has been hindered by the limited transmission capacity on the north-south link . The low levels of gas in the PEG Sud network has been exasperated by the gas flow from southwestern France to Spain. There is good reason to sell gas to Spain because gas prices are higher there than in France. Spain has also suffered from increasing LNG demand in Asian countries and the diversion of LNG cargoes. Spain has subsequently increased its demand for cheaper gas via pipeline.
There is no hard and fast solution to the predicament. The CRE response is to push for a single balancing region across France (targeted for 2018). The danger with this option however is that the single balancing point would mask the costs in the north-south congestion. GRTGaz claims that whilst in some years the congestion costs are almost negligible, in other years the congestion costs amount to about €85-175 million per annum, though these amounts could be exaggerated .
The large price divergences between the gas hubs is a strong sign to CRE that something must be done. Both suppliers and industrial consumers in the south of France are unhappy with the large premium that comes with the gas. Ultimately, a single gas hub in France is a good long-term aim. But for a proper solution, it is likely that the underlying transmission constraints will have to be fixed first.
Researched and written by MJMEnergy Analyst, Nico Cottrell,
 For further information, see http://www.eni.com/en_FR/products-services/natural-gas/natural-gas-market-france/natural-gas-market-france.shtml
 Or 'Point d'Echange de Gaz'.
 Graph formulated using the data on Powernext spot indices for the last quarter: http://www.powernext.com/#sk;tp=app;n=market;f=listMarketTable;t=layout/gasSpot;fp=system_name:gasSpot;lang=en_US;m=Market_Data