Understanding the Dynamics of the Prices of Natural Gas as an Important Step in Energy Transition
The natural gas seems to be an attractive supplement to renewable energy sources in energy transition towards low carbon emissions. Given its flexibility to transmit and store, the natural gas offsets the variability of the renewables. Understanding the formation of natural gas prices is crucial to evaluate the costs of energy transition, in particular the return to investment into natural gas infrastructure. To study the natural gas prices dynamics in Poland, we develop a vector error correction model for prices in the US and in Europe. The VECM setup allows us to analyze the interactions among non-stationary prices and investigate how disturbances specific to the discussed markets pass on within the system. By exploring impulse response functions and forecast error variance decompositions we show that the European natural gas prices are not affected by shocks in the American gas market, but they are determined by shocks specific to the European natural gas market. Additionally, the natural gas prices in Poland are highly correlated and responsive to other European prices.
Natural gas market; Natural gas prices; Energy transition; VECM