While gas trading at the German hub is growing, it has a long way to go to catch up with the TTF, writes Oscar Mahony
Gas trading at the German virtual trading point Trading Hub Europe (THE) has risen less than expected since its launch and still holds far below activity at the Dutch TTF despite its stated aim of becoming Europe's central gas hub.
"Thanks to its central location, high service quality and our customer-friendly implementation, THE will be the central starting point for further cross-border connections between the individual European gas markets," market area manager THE said when Germany's two previous hubs, NCG and Gaspool, merged to form the single German virtual trading point in October 2021.
Yet nearly three years later, the TTF remains by far Europe's most liquid hub. Aggregate THE liquidity — combining over-the-counter (OTC) data from the London Energy Brokers' Association with figures from the European Energy Exchange (EEX) — totalled 4.17PWh in 2023, up from 3.68PWh a year earlier and the combined NCG-Gaspool liquidity of 3.33PWh in 2020.
This was still well below the combined 17.3PWh of TTF contracts that changed hands OTC and at the EEX last year, which was up from 14.8PWh a year earlier, although short of the 2020 peak of 28.5PWh. But the bulk of TTF trading activity appears to take place at the Intercontinental Exchange (Ice), where TTF liquidity rebounded sharply to 43.7PWh last year from 29.0PWh a year earlier and 30.4PWh in 2021. By contrast, THE trading activity at the Ice is limited, with the TTF accounting for 80pc of all EU natural gas traded volumes at the exchange, while NBP is "roughly 11pc" and the rest is split among other European hubs, "of which THE is the largest",Ice's senior director of utility markets, Wouter De Klein, says.
In the OTC market, THE liquidity is still lagging behind pre-merger levels. Traded volumes of 2.47PWh in 2023, while higher than 1.93PWh a year earlier, are still short of the combined NCG-Gaspool peak volumes of 3.04PWh in 2019. But this probably stems from a broader migration of trading activity towards exchanges observed at most European hubs, most likely a reaction to the extreme volatility seen in recent years.
EEX THE liquidity of 1.7PWh in 2023, while down from 1.75PWh a year earlier, is still much higher than the pre-merger peak of 540TWh in 2019. Similarly, TTF OTC liquidity totalled 13.7PWh last year, up from 11.5PWh a year earlier but still short of the 2020 record of 27.1PWh, while trading activity on EEX and the Ice has risen sharply. The trend has continued into this year, with THE traded volumes totalling 709.2TWh in the first quarter of this year, well below 4.12PWh at the TTF.
But the German hub could still be poised to overtake the UK's NBP as Europe's second most-traded hub OTC, as NBP traded volumes have continued to fall steadily since 2011, with the exception of small year-on-year increases in 2014 and 2022. NBP liquidity at the Ice totalled 4.61PWh last year, well above EEX THE trading, although it has fallen from a high of 8.74PWh in 2018.
Stability despite Russian supply drop-off
The slow ramp-up in liquidity has not dented the market area manager's confidence in the long-term potential of the German hub. THE is "positive about the development of trading participants and traded volumes", it tells Argus.
Bilateral energy trading platform Enmacc chief executive Jens Hartmann was similarly upbeat about the longer-term prospects of the German hub, as he pointed to the increasing share of THE derivative trading at the EEX. While THE liquidity on the EEX fell last year, there was a shift away from spot to derivative trading, with spot volumes declining to just under half of the total in 2023 from 63pc a year earlier. THE stands out for firms interested in trading contracts at the back of the curve or that have physical positions, Hartmann says.
The firm said that while liquidity is not "far beyond its expectations", it is "very stable", a sign it considers positive given the dramatic changes that occurred in the German market in recent years, particularly the sharp drop in transit volumes following the curtailment of Russian deliveries, which has had an impact on the market development, it says.
Market participants similarly have pointed to the sharp drop in Russian flows transiting the country as one of the reasons behind the slow ramp-up in liquidity, alongside the introduction of a storage levy on all gas exiting the German grid, to consumers and at cross-border interconnection points, which is spurring foreign firms to seek alternative supply routes to Germany. THE makes it much more costly to source gas from or through Germany, particularly for central and eastern European countries that are seeking to replace lost Russian volumes.
Trading activity at the German hub could pick up more rapidly if the levy was decreased or removed, market participants say. THE introduced the levy to recoup the cost of purchasing 50TWh of gas in summer 2022 on the spot market, without hedging it forward. The firm has announced it will raise the levy further, to €2.50/MWh for July-December from €1.86/MWh in the previous six months.
US LNG backs TTF
While the curtailment of Russian supplies is seen as one of the reasons for the muted growth in THE liquidity, the resulting reconfiguration of gas flows within Europe appears to have benefited the Dutch hub, which has attracted increasing trading activity by international firms.
"The hedging and portfolio optimisation of global LNG has played a role in the increase in TTF traded volumes on Ice," according to De Klein. The Dutch hub is also being used to hedge LNG deliveries to Asia because of its higher liquidity compared with Asian markets. More generally, the TTF has benefited from a sharp increase in global interest in gas trading, with growing participation in the market from "all kinds of firms and different geographies, with US firms particularly active", De Klein says.
He expects interest in TTF trading to continue to grow. "April set a record for total traded volumes, while average daily traded volumes had set a record in the first quarter. And open interest is mounting across the whole curve, with the first calendar 2032 trade having occurred last year," he says.
‘A long way to go'
The German gas market's evolution might provide scope for further and faster growth in THE liquidity in the coming years. But the idea that the German hub in future could supplant the TTF as the region's predominant gas trading point might be "too optimistic", THE chief executive Sebastian Kemper admits.
Kemper previously had pointed out that the phase-out of Germany's coal-fired generation fleet and plans to build hydrogen-ready gas-fired generation units are set to support gas demand, in turn boosting THE traded volumes. While lower than in recent years, German demand remains the highest in Europe, with combined high and low-calorie consumption having averaged 2.28 TWh/d last year. The country has a total storage capacity of 247.4TWh, according to the GIE transparency platform, higher than any other EU member state.
The country's strong gas demand and extensive gas infrastructure, which includes the largest storage capacity in the EU and rapidly increasing LNG import capacity, make the THE hub "a European market outside of the TTF that has potential for growth", De Klein says. Yet he agrees that the German hub "still has a long way to develop into a market with the size and liquidity depth of TTF".
