Intraday gas market: how it works and why the market needs it

Intraday gas market: how it works and why the market needs it

Natural gas market is a priority direction for Ukrainian energy Exchange for the nearest period. This segment is developing upon the support of European partners in accordance to the best European standards.

Within the framework of two signed memorandums between EBRD, Energy Community Secretariat, Ministry of Energy of Ukraine, OGTSU and NEURC the goal was to create a liquid national natural gas market and, in particular, to launch short-term trading.

The daily balancing market has already been launched at UEEX, where participants can independently settle their imbalances and quickly purchase or sell a resource. How the new segment works, why it is the basis for market development and what opportunities it offers to participants – in the author’s column of Inna Shcherbyna, Deputy Head of the Exchange Committee of Ukrainian Energy Exchange.

The way short-term market has become a necessity

Before turning to the technical details, specifics of short-term trading and daily balancing, it is necessary to understand why this segment is necessary for the development of the natural gas market and what problems it solves.

Let's remember the summer events when they were heard from everywhere: market participants speculate on the GTSU operator, creating artificial imbalances. They were pushed to such actions by non-market margin prices of TSO, as a consequence of the fact that the GTSU operator did not purchase short-term standardized products (hereinafter the SSP) on the exchange, as required by the GTS Code, and used ProZorro.Sale for purchases.

The history continued with resistance before the possible introduction of the neutrality charge. The market was appealing to the fact that OGTSU does not have balancing actions within the meaning of the GTS Code (purchase / sale of short-term product) and therefore cannot recover neutrality charge. There were discussions on around reducing the value of the tolerate and increasing the value of the correction in the calculation of marginal prices. At the end, fines for imbalance were increased.

And all this time there were talking about the only thing - we need a market for short-term standardized contracts. This is an axiom, a balancing target model according to Regulation No. 312 (BAL NC). A number of ACER clarifications provide a complete understanding of how the market should function.

European standards

EU regulations provide an exhaustive understanding of how a developed gas market should work. For Ukraine, many necessary mechanisms remain unusual or completely unavailable.

EU standards provide full standardization and unification of market rules, availability of a central counterparty, full clearing and risk management capabilities. BAL NC sets the rules for gas balancing, in particular regarding the payment for imbalances, the settlement process and other features of the network usage.

At the Ukrainian Energy Exchange, we have been implementing these standards for years and accomplish revolutionary projects for the domestic gas market. And it's not just about launching a short-term market, derivatives market or establishing clearing. This is a large-scale process to establish cross-border gas trade with neighboring countries and the EU.

This initiative was supported by the Energy Community Secretariat, EBRD and the Ministry of Energy of Ukraine, which signed a large Memorandum of the development support of UEEX in accordance with European standards.

The second Memorandum, which was also supported by the Energy Community Secretariat, NEURC and OGTSU, was clearly aimed at developing the short-term market. It defines the role that TSOs play in the development of short-term markets. However, it will be possible to fully implement the goals stated in the document only after the second reading of the draft law No. 3176, which will allow OGTSU to purchase gas through the exchange.

The way market should work

  1.  What must happen as a result, in order for BAL NC to be fully implemented and what is our goal in the above mentioned cooperation, is that the definition of margin prices should be in accordance to the indicators of the trading platform on which OGTSU also participates;
  2.  participants should balance their portfolios independently with the minimum need of OGTSU in the final balancing of the GTS.

To implement these provisions, a highly liquid short-term gas market must function. Let's find out why.

The task of OGTSU in balancing is to physically balance the GTS. That is, the operator is guaranteed to get the entrance to or exit from the GTS. In the highly liquid markets, the risks of imbalance of the operator are leveled out and the operator can freely work on the same platform with other participants. In this case, he may not be afraid, for example, instead of gas with a physical input, to buy someone's positive imbalance. Finally, the system will be balanced by the participants themselves - those who have a negative imbalance will inject gas into the GTS, or at least, TSO will apply the balancing service.

Therefore, until the trading platform will not acquire sufficient liquidity, TSO can use the balancing platform, they are always party to the agreement, and the gas is traded as a short-term product with a guaranteed physical entry into or exit from the GTS.

Above there was about our strategic plans. And UEEX is already working actively to ensure that the Ukrainian exchange market provides traders with all the opportunities and benefits that their European collegues have. At the same time, the instrument of the short-term market should have worked already now, as participants have constantly stressed the need for it.

Responded to the market inquiry, at the end of September we have opened Within-Day market. In the near future, the Day-Ahead market, which is already being tested, will also be launched at UEEX.

About the Within-Day market

For now, we are using the name “daily balancing market” instead of Within-Day. This name, as the most understandable for all parties, has remained since March 1, 2019. Then the Ukrainian gas market switched to daily balancing and UEEX was ready to launch a trading platform. However, it was decided to postpone the start of trading, since there was no proper assistance from market participants yet - the level of margin prices was not stimulating for participants. It was easier to get into the financial settlement of the TSO than to independently settle the imbalances on the exchange.

Now, a year and a half later, the need for a liquid exchange trading platform to operate for short-term product trading has become necessary. But liquidity is not come from anywhere, it must be created by trading participants. However, many gas market participants still regulate imbalances in alternative ways, with very limited functionality:

  1.  using the resource of the UGS facility,
  2.  by contacting each other or in Viber groups,
  3.  exchanging gas with each other, incl. at the expense of gas in underground storage facilities.

It is hard to say how long the transition to exchange trading will last. But such transformations must take place in order for Ukraine to become a part of the developed European market.

This does not mean that the OTC will disappear completely. But for a full and competitive market to function, participants must join to its creation. This has already been done by many gas companies, which submit their bids to the exchange on a daily basis.

Opportunities of the intraday market

The intraday direction of UEEX is first of all just a market up to 4:00 of gas day D of day D + 1. Not necessarily imbalances are traded here, but also gas that can be introduced or removed from the system through the submission of renominations.

We often hear information from clients about the alleged impossibility of settling their imbalances on the exchange, as the GTS Operator provides information on the previous daily imbalance and preliminary allocation before 17:00 of the gas day D + 1. This is true and, among other things, our participants do not yet have prompt and accurate information on imbalances, as their European partners. But, in fact, the imbalances of the participants are of two types:

  1. predicted - the participant knows about them, for example, when he received information from customers that consumption will be 300 thousand cubic meters and its projected input of 500 thousand cubic meters. That is, 200 thousand cubic meters - a potential positive imbalance, which he can implement on the trading platform of the exchange.
  2. unpredictable - when, customers from the example will actually withdrawal 100 thousand cubic meters. But the participants also learned to predict this imbalance more accurately by collecting late (night) nominations of clients and settling them on the exchange, which works 24/7. The difference between the total final (unsettled) positive imbalances and the total final negative imbalances will constitute the GTS Operator's need for physical regulation of the system.

But already now the exchange allows to settle the predicted imbalances. With additional calculations, as follows from the example above, it is possible to settle unforeseen imbalances at night.

The way applications are placed and trades takes place

To start intraday trading on the exchange, participants-buyers must have in their escrow account in the bank 100% of the funds to ensure the cost of gas when buying it.

Also, to guarantee the signing of the contract of sale, participants must provide a 3% guarantee deposit on the analytical account of the exchange. Cash is automatically blocked in the clearing system of the exchange for applications. Participants are free to dispose of unblocked funds.

Applications for sale and purchase are submitted to the so-called "exchange glass", where they are ranked by price (at the top of the "glass" will be the most expensive applications and the cheapest for sale).The applications set their validity period: valid until cancellation; valid until date; daily; urgently perform or cancel; perform or cancel.

At the prices of the application can be limit or market, ie must be performed at a price not lower than specified in the application, or at the best market price.

Applications can use the "all or nothing" parameter, which determines the implementation only in full. The minimum volume of execution of the application is equal to 1 lot or 1000 cubic meters of natural gas.

The way agreements are concluded and executed

The conclusion of exchange agreements is carried out by means of metching. That is, agreements are concluded automatically, by comparing the parameters of counter-applications. For example, if the first application for the best price is submitted, for example UAH 5,500, and the best application is submitted later for the price of UAH 5,600, then the agreement will be concluded at the price of UAH 5,500. Conversely, if an application for sale was submitted later, the agreement would be concluded at a price of UAH 5,600. In the presence of lists of exceptions, exchange transactions are concluded taking into account them.

The standard agreement is signed by qualified electronic signatures (QES) in the clearing system of the trading platform of the exchange. The contract template is formed by the clearing system. To fulfill the application, the parties are obliged to sign it.

Based on the signed purchase and sale agreements, the exchange in the next clearing session forms and sends to the Information Platform of the GTS Operator the relevant trade notifications (generalized trade notifications) for the alienation and purchase of natural gas.

If the agreement has not been signed, the exchange does not send a corresponding notification to the Operator. The funds for the settlements are unblocked, and the guarantee is written off as a penalty in favor of the injured party.

The GTS operator, on the basis of the received trade notifications, transfers natural gas between the bidders or does not approve such transfer for the reasons specified by the GTS Code.

The GTS operator processes trade notifications comprehensively during the cycle of their processing. Thus, during one trading session, a participant can make a number of different transactions, both buy and sell.

After the GTS Operator transfers gas from the seller to the buyer, the settlement bank on the basis of registers of exchange transactions submitted by the exchange to the clearing session, transfers or debits funds from the buyer's conditional storage account to the current account of the seller (beneficiary) in the amount of 100% of the total cost of goods. The commission fee is deducted from the analytical accounts of the seller and the buyer in the clearing system of the trading platform.

In case that the GTS Operator does not agree on the transfer of natural gas between bidders and provides a notice to UEEX stating the reasons for disagreement, the buyer's funds are unblocked, and the seller's warranty is charged a fine. Currently, settlements are made according to the light CCP model, but full-fledged clearing of exchange transactions will be provided soon.

On the way to a developed market

Currently, each participant has his own idea of the price of the resource, which may differ significantly from the others. In turn, concentrating of all the price applications for sale and purchase on a single platform will be an effective tool for determining fair, market prices. Even in a situation where the alternative to exchange trading is the use of UGS for balancing, the availability of a daily market allows you to develop market strategies based on the cost of using UGS.

Exchange trade is a way to a developed market. We invite all participants to join it, try new tools and together build a gas hub in Ukraine that will work according to the best European standards.