Natural gas pricing: how does it work?

Since the 1960s, the gas price has been fixed according to the oil products rate. The French authorities have regulated gas price to minimize the impact of that linkage. Now that the French market for the supply of gas has been liberalized, there are alternative suppliers free to offer you their gas products at their own prices.

Current statutory and regulatory provisions

Gas prices in France are governed by the following laws and regulations:

• The Natural Gas (Regulated Tariffs) Order dated 21 December 2009, concerning the sale of natural gas supplied from Engie (former GDF-Suez) public distribution grids.
• The Natural Gas (Regulated Tariffs) Order No. 2009-1603 dated 18 December 2009, abrogating Order 90-1029 dated 20 November 1990).
• Article 7 of the Price Control Act (Law No. 2003-8 of 3 January 2003): regulated tariffs to be set by the public authorities.
• The Natural Gas (Regulated Tariffs) Order dated 21 December 2007, concerning the sale of natural gas by ELDs and Tegaz.

Indexing the price of natural gas on the oil price

Natural gas is an energy source for which other sources can be substituted. In order to develop its use, European producers and importers agreed in the 1960s to index its price on that of oil, and so ensure that the price of gas would not rise above that of its competitor fuels.

The oil products used in the indexation formula are domestic heating oil and heavy fuel oil. The formula also takes into account the exchange rate between the euro and the US dollar and – since 2008 – the price of Brent crude.

In order to diversify risk, natural gas procurement contracts are made for long periods (10 or 20 years, etc.). The importer accordingly bears the “quantity” risk by undertaking to pay even for quantities in excess of those consumed. In return, the producer bears the “price” risk, the price of gas being indexed on oil products.

Due to this indexation of gas prices on oil products, any change in the price of those products will have an impact on the procurement cost of France’s natural gas imports, though with a few months’ delay. That impact may, however, be lessened if the EUR/USD exchange rate changes, absorbing some of the rise in the price of oil products (which are quoted in USD).

The regulated tariffs for natural gas

Since the Order of December 2009, these regulated consumer tariffs have been set by the Energy Regulator (CRE) which may issue a binding opinion in response to an application from Engie (former GDF-Suez) for a price review. Previously these tariffs had been set by the Minister for Economic Affairs and the Energy Minister, after consulting the CRE for an advisory opinion.
Only Engie (former GDF-Suez) and the 22 historic local suppliers are authorized to sell natural gas at the regulated tariffs.
There are two kinds of regulated tariff, applied according to the type of consumer. Those known as “public distribution” regulated tariffs apply to domestic consumers and small businesses (some 11m premises at present). The approximately 1500 “industrial” premises, most of them connected directly to the main gas transport pipelines, get the “subscription” regulated tariffs.
The “public distribution” regulated tariff for domestic consumers is calculated from various kinds of cost in fixed proportions, as follows:

• Natural gas procurement costs, indexed on oil prices (55% of the tariff);
• The fees for use of the gas transport networks, set by the CRE (5% of the tariff);
• The cost of storage needed to cope with the seasonal nature of demand: these are given by the prices offered by the two storage operators, Engie (former GDF-Suez) and TIGF. (5% of the tariff);
• The fees charged for use of the distribution grids, set by the CRE (25% of the tariff);
• Marketing costs, which depend on the supplier’s own organization (10% of the tariff).

The price of gas must change at regular intervals to take changes of procurement costs into account; but since the oil price is so volatile – affected by random weather behaviour and by economic, environmental and geopolitical developments, French governments have wanted to smooth out the changes in the purchase price of natural gas.

This price smoothing is done under what is known as the “6-1-3 principle”. Price changes may be made every three months; when this is done, the procurement costs are calculated on the basis of the mean oil price over the six months preceding the current one. The new tariff then applies for the next three months. For instance, the tariff applied from January to March will have been set during December, calculated from the mean oil price for the period June to November, inclusive.

Unregulated prices or “market price” products

Since the natural gas market was opened to competition, new suppliers have been allowed to offer natural gas products at prices they set at their own discretion without any intervention by the public authorities. The “historic suppliers” – Engie (former GDF-Suez) and the ELDs – are likewise free to offer unregulated-price products alongside their regulated ones.
These unregulated prices are determined on the basis of the same criteria as regulated tariffs, in that they take the following into account:

• Gas procurement costs;
• Fees charged for using the gas transport pipeline network and distribution grids;
• Storage costs;
• Marketing costs.

The fees charged for using the natural gas transport pipeline network and distribution grids are set by official Order on the CRE’s recommendation. They are levied on all suppliers of natural gas under the same terms and conditions.
Price competition will accordingly rest on the relative success of the various suppliers in controlling their procurement and marketing costs.