Conversion fee extension could widen TTF-NCG spread

The proposed extension of the high-calorific to low-calorific gas conversion fee could widen the spread between the German NCG and Dutch TTF hubs even further, according to traders.

The spread between Day-ahead contracts on the two hubs had already increased since the beginning of 2016, averaging €0.452/MWh through January after new regulation added a multiplier to bookable capacity at transmission points on the German network.

On 27 January the two German market area managers NetConnect Germany and GASPOOL announced that they would request permission to extend the H-gas to L-gas conversion fee for another six months, with the possibility of retaining it permanently. The fee was due to be phased out by October 2016 under the GabiGas 2.0 legislation.

Widening spread

Whether federal regulator BNetzA will grant permission for this is unclear. But if the fee – which is currently €0.30/MWh on the NCG – remains in place, the German hub’s premium over the TTF could grow further.

“We have a combination of added fees for cross-border capacities due to BEATE, dwindling production at Groningen and now it will also remain more expensive to convert H-gas to L-gas,” said one trader active in western Germany.

“The result is that the spread may get even bigger between the two hubs. Whether that spread will be €0.40/MWh, €0.35/MWh or €0.45/MWh I don’t know.”

Prices on the TTF are already lower than at NCG due to the Dutch hub’s higher liquidity, which tends to lower prices by giving market participants more trading opportunities. But this is amplified by the fact that much of the infrastructure in western Germany is adapted to use low-calorific rather than high-calorific gas.

As production of L-gas has fallen sharply due to environmental concerns at the Groningen gas field, German suppliers must either buy what remains of Dutch L-gas and be subjected to an additional transportation fee, or buy H-gas and convert it, which may now continue to be subject to a fee beyond the October deadline.

Priced in

However, the trader conceded that these factors may already be priced in, a view echoed by another trader.

“With Groningen production going down it was obvious that fees would have to continue, it would have been impossible to carry on with the plan. There is not enough L-gas for price parity between the two qualities of gas,” the trader told ICIS.

“So the fact that the fee is staying just means that the spread will stay the same. The announcement should not have any short-term impact because most traders would have expected it.”

The trader suggested that the conversion fee currently in place might eventually be replaced by a levy on the physical, end-user level. This would have no impact on technical trading but would make sales more expensive.

Other traders were more surprised by the announcement. They told ICIS they would now need to adapt their strategy, having planned for a conversion fee cut in October. doug.grant@icis.com