Fat Tails in German Natural Gas Prices

Natural gas is an important energy input for heating and electricity production in Germany. In recent years natural gas prices have soared and volatility has increased. The combination of lower domestic natural gas production in Europe and competition for liquefied natural gas in the global market has made Europe more vulnerable to a shortfall in natural gas deliveries. The tail index estimator is a measure for tail fatness in statistical distributions and gives an indication for the probability of extreme prices. We use the tail index estimator to study the development of the risk of extreme prices in the German natural gas market over time. We find that between 2012 and 2021 the probability of extremely high prices in the German natural gas market increases significantly. Similarly we find that the probability of extremely low prices increase, while to a lower degree. We test these effects for similar temperature conditions in the German winter months and we test if the introduction of renewable energy supply into the German electricity market has an effect in the price distribution for natural gas prices in Germany. Our results suggest that for similar temperature conditions the probability for extreme prices increase over time. We also find that the level of renewable energy supply in the German electricity market adds to explaining more extreme prices in the German natural gas market. The increased likelihood for extreme prices in the German natural gas prices implies that the natural gas system in Germany to an increasing degree struggles to match supply and demand for natural gas. Using daily prices we provide empirical evidence suggesting that the German natural gas system has become more fragile over time