Natural gas, liquefied natural gas and electricity markets

Three empirical chapters related to natural gas, liquefied natural gas, and electricity markets are presented in this thesis. In Chapter 2, we analyze the main natural gas indexes in Western Europe that prevailed after the deregulation of their natural gas markets. The United Kingdom was the first European country to deregulate its natural gas market in the 1980s, followed by continental European countries in the late 1990s. We first examine the integration of natural gas markets in Western Europe by conducting cointegration tests, both in the spot and the forward market, of the main gas indexes. We then revisit the Theory of Storage by analysing the relationship between inventory and the slope of the natural gas forward curve of the two most mature natural gas markets in Europe, namely the United Kingdom and the Netherlands. The results confirm an increased market integration in the spot market as well as in the forward market, with a particular role played by the Netherlands. Lastly, we find a positive relationship between the inventory and the slope of the natural gas forward curves in the United Kingdom and the Netherlands. Chapter 3focuses on the LNG market, in which a growing trading activity in short-term contracts has been observed over the last few years, with long-term contracts being replaced by short-term ones and optionalities granted by suppliers, in a context of a large increase of natural gas production. Flexible LNG contracts give buyers the option to redirect a given cargo if they identify a higher spot price at a point different from the original destination. Firstly, we describe the new outlook of LNG markets, which has become more and more spot-centric, with Asian LNG Futures bringing transparency to spot and forward prices. Secondly, we address the valuation of the rerouting option, a number that must be accounted for by the buyer when assessing the profitability of a given cargo. As an example, we apply the rerouting option valuation methodology to the scenario where the supplier is the United States, the original destination is Germany, and the alternative destination is Japan; we assume the rerouting of the vessel takes place when the cargo reaches the waters of Germany. This approach can be used for any group of three countries by adjusting the transportation costs. The profitability behind the optionality being embedded in a purchase contract as well as its sensitivity to the transportation costs, price volatility and spikes is also exhibited. In Chapter 4, we turn our attention to the new developments in the UK electricity market, related to the government’s decarbonisation targets. Renewable energy has attracted a lot of attention from the public and significant capital from investors since the Paris agreement in 2015. The United Kingdom is one of the pioneer countries in decarbonising its electricity market, with its energy-related CO2 emissions decreasing to the lowest levels since 1888. We present and analyze the new developments in the UK electricity market, where we specifically focus on the valuation of two government support schemes, namely the Contracts for Difference scheme and the Great Britain Capacity Market scheme. We propose a swap valuation methodology for the Contracts for Differences, a scheme which demonstrates the government’s incentive towards low carbon electricity generators. We then suggest a simple, but novel to our knowledge, valuation methodology for the Great Britain Capacity Market, by representing the capacity option as a series of daily European call options