RWE expects gradual growth in German VTP liquidity

German utility RWE believes the soon-to-be-launched single German market area has potential to become Europe's most liquid gas hub, as market confidence steadily grows.

"THE will take over, over time," RWE's chief commercial officer, Andree Stracke, told Argus when asked whether the new German VTP — managed by Trading Hub Europe (THE) — has potential to overtake the Dutch TTF in liquidity.

It will potentially be difficult for the new market area manager at the beginning, given uncertainty about how much firm entry capacity will be available, Stracke said. But Stracke foresees a gradual growth in confidence in the new hub.

Stracke doubts that there will be a delay to the merger, which is scheduled for 1 October — ahead of a 1 April 2022 deadline under German law. There was no mismatch or default when other parts of the European system merged, including when German zones were cut to two from three in 2011.

It will be a "relatively quick adjustment", Stracke said. But until the system is in perfect shape, trading firms will have opportunities to help "stabilise the new normality" by resolving imbalances, he said. Trading houses have the required tools to resolve a situation when there is an overhang of flows, which requires firms to either ship or swap the gas, he said. Market-based instruments are to be used to alleviate congestion issues resulting from the merger.

And the market integration will also create transparency for storage values, Stracke said. It will set up a much better playing field as all storage sites will be treated the same way within Germany, making them more comparable, he said.

One arbitrage opportunity will be lost — the ability to trade the differential between NCG and Gaspool. But while the new German VTP will offer fewer trading opportunities, it will provide easier access to newcomers on the market, as there will be more size and trust behind the German VTP, Stracke said.

And the new German VTP will not start from zero, as it will have a "massive position" to start with, Stracke said. Combined NCG and Gaspool liquidity, while dwarfed by the TTF, is still larger than any other European market aside from the UK NBP (see graph).

But it will take time for the new German market area to gain the trust of non-European market players who typically hedge their LNG supply into the TTF, he said.

The question remains as to whether the German VTP will be a better benchmark than the TTF, Stracke said. Germany has a geographical advantage as it is more central within Europe than the Netherlands, while it has more storage capacity and a greater demand base, he said. But the Dutch hub has the advantage of an LNG terminal already in operation, while the Belgian beach is closer, Stracke said.

Stracke stressed that for RWE it is not crucial whether the TTF stays strong or the German VTP takes over, as the firm has significant positions in the Netherlands as well as Germany. And he added that the general flow of gas within Europe "will not change whatsoever" as a result of the merger.

By Natasha Fielding

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