The functioning of the EU gas market continued to improve in 2020 despite the “unprecedented” impact of COVID-19 over the economy of the EU, the EU Agency for the Cooperation of Energy Regulators, or ACER, said in its latest annual market monitoring report.
ACER said the improvement was evidenced by an increase in price integration across markets and supply competition, as well as by the rise in liquidity at many gas trading hubs.
“Markets representing three quarters of EU gas consumption are assessed today as well functioning and sufficiently integrated,” ACER said.
“Other jurisdictions with some of the historically less developed hubs are also showing promising signs of progress,” it said in the report, which was developed together with the Council of European Energy Regulators and the Energy Community.
The report concluded that the impact of COVID-19 on gas demand led to a series of supply and demand rebalances throughout the year, which triggered increased trading activity.
“Hub traded volumes reached historical highs, increasing by 14%, as market participants continuously re-adjusted their positions due to the changing supply balance and the high price volatility,” it said.
“In light of record-high price volatility, the price convergence between EU gas hubs increased compared to 2019,” it added.
Abundant supply and availability of interconnection capacity smoothed regional price differences.
“Though full price convergence is not the aim of the internal EU gas market, greater price convergence indicates that market integration is improving,” ACER said.
ACER said that network codes — the common EU rules intended to facilitate the harmonization, integration and efficiency of the European gas market — were producing results.
“For instance, cross-border gas flows are progressively becoming more responsive to hub price signals assisted by the higher flexibility that the codes grant to transport capacity bookings,” it said.
“Also due to EU regulation, the balancing of gas systems has become more transparent and market based. That has also helped to improve the liquidity in some spot markets.”
As of 2020, all gas network codes are also applicable in the Energy Community Contracting Parties — Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Georgia, Moldova, Montenegro, Serbia, and Ukraine.
“However, their implementation advanced only in Ukraine, generating the first beneficial effects on market integration with EU neighboring countries,” ACER said.
Due to some positive regulatory changes, gas trading activity “substantially increased” in Ukraine, it said.
European traders used spare Ukrainian gas storage capacity in the summer of 2020 as EU storage sites filled to capacity.
The report also concluded that while gas has contributed to the EU energy sector decarbonization by replacing higher carbon emitting fuels like coal and oil in power generation in recent years, gas is also a significant source of greenhouse gas emissions “in its own right.”
“Therefore, conventional natural gas needs to be fully replaced by alternative energy sources or by low-carbon and renewable gases in 2050.”
ACER said the supply share of low-carbon gas was still low in the EU despite having doubled in the last 10 years.
Low-carbon gases, it said, accounted for only 3.8% of total gas supply in 2020, chiefly in the form of biogas.
“This is because the cost of the currently cheapest low-carbon gas, biogas, was three to four times higher than the price of conventional natural gas at average 2020 prices,” it said.
A combination of market, technological and policy drivers will determine the reach of each low-carbon gas technology or alternatives in the years to come, it said.