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Germany's NCG natural gas hub lowers trading fees as liquidity rises

15 Aug 2012 23:22:06 | esgm

Trading at Germany's natural gas hub NCG will become more attractive from 1 October, as the hub plans to lower three separate trading charges from this date.

The fees for the conversion between low-calorific and high-calorific gas (L-gas and H-gas respectively), the general transaction fee, and the balancing energy levy are all set to drop with the start of the new gas year, the hub operator announced on Wednesday.

NCG said it is able to lower the charges because liquidity has significantly risen in the past few months. According to the hub operator's data, the NCG H-gas churn rate exceeded a level of 4 for the first time in June, indicating that a product changed hands four times before going into delivery - up from about three times six months ago.

Conversion fee

Traders polled by ICIS on Wednesday said that the biggest improvement expected from 1 October will be the reduction of the hub's conversion fee. NCG will cut the charge for the conversion between gas qualities to €0.70/MWh from the current €0.90/MWh.

According to market participants, the over-the-counter price for L-gas contracts at the NCG hub is currently about flat to the equivalent H-gas products due to a drop in demand during the summer season. But with the start of the winter season, L-gas is expected to once again trade at a premium to H-gas (see ESGM 17 May 2012).

Last year, the NCG L-gas premium went up to well over €1/MWh on days of high demand, sources have said. But because of the reduced conversion fee, these peaks are unlikely to happen next season. Traders expect the reduced fee to narrow the spread between H-gas and L-gas products and lead to higher conversion rates in the NCG market zone from September this year. If the NCG L-gas premium exceeds the €0.70/MWh mark at times of high demand, market participants will start buying H-gas instead and using the conversion service.

Transaction fee

Traders also welcomed the reduced transaction fee, which will be lowered to €0.0011/MWh from €0.0018/MWh from 1 October. The charge has to be paid by the seller as well as the buyer for every transaction made at the virtual trading hub, and generally, traders are strongly opposed to the fee. Sources polled on Wednesday said that the reduction was a step in the right direction but stressed that the charge will continue to act as a market barrier.

Market sources have pointed out that, for instance, the fee disincentivises sleeve trading and subsequently depresses liquidity. Sleeve trading is when two parties agree to a deal without the necessary credit arrangements in place, using a third party that acts as an intermediary. Under the transaction charge, this means that for one deal the hub operator will charge the fee four times.

NCG also announced that its balancing energy levy will drop to €0.60/MWh from €0.80/MWh. The company said it was able to reduce the amount charged after having optimised its balancing energy procurement.

Combined, the reduced fees are likely to support trading activity at the NCG from the start of the new gas year.

The move is also a positive signal for the NCG's role within the European gas market. Traders and analysts consider getting rid of the transaction and conversion charges a significant factor that could help the NCG to surpass the TTF at some point.

The new impulse for trading is urgently needed at the NCG, which has been losing momentum against its neighbouring Dutch market this summer (see ESGM 8 August 2012). Last month, NCG Day-ahead volumes equalled some 55.8% of the Day-ahead volume dealt in the Netherlands, down from an average of 92.5% in the same month last year. Since August 2011, when NCG Day-ahead transactions temporarily exceeded those traded at the TTF, the German hub's volumes have increasingly lagged behind those of the Dutch hub. JR/MH

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