CHAPTER 36
The Natural Gas Market in the United Kingdom
Chris Harris, Ph.D.
Head of Industry, Networks and Agreements
RWE npower
This chapter describes the natural gas market in the United Kingdom from the perspective of gaining an understanding of the drivers of the principal traded commodity, which is physical and financial gas at the national balancing point (NBP). We pay particular attention to the relationship between the fundamentals of production, transportation and consumption, and the market and institutional arrangements. We find that while gas consumption has high weather sensitivity and potentially high elasticity, prevailing arrangements greatly reduce this elasticity, with a consequential elevation of price volatility. Efforts to improve demand side management are likely to change the demand fundamentals, and the related industry changes may increase the basis risk at the NBP. We also examine the high level relationships between gas and other commodities such as coal, oil, and carbon dioxide. These relationships are accessible in economic terms, but econometric analysis is challenging, as the relationships are periodic and variable as well as complex.
BASICS
To understand the movement of prices, we need to understand the basics of physical operations, the market mechanisms, and the elements of supply and demand. We do this here.
Physical
Production Natural gas is mainly methane with some higher hydrocarbons. It is formed through anaerobic decay of organic matter. ...
Get The Handbook of Commodity Investing now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.