models for the natural gas market in europe
TRANSCRIPT
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Models for the natural gas market
in Europe
András Kiss
Workshop on the Security of Gas and Electricity
Supply in Central and South-East Europe
June 4, 2010, Budapest
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Outline
• Comparison of 4 existing gas sector models
‣ activities
‣ geographical scope
‣ demand modeling
‣ market structure and behavioral assumptions
• Main challenges in building a Central and South-East
European gas market model
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4 gas sector models for Europe
1. GASTALE
• ECN (Energy Research Centre of the Netherlands)
• Boots, Rijkers & Hobbs (2003)
2. GASMOD
• DIW (German Institute for Economic Research)
• Holz, von Hirschhausen & Klemfert (2005)
3. NATGAS
• CPB (Netherlands Bureau for Economic Policy Analysis
• Zwart & Mulder (2006)
4. Egging/Gabriel
• Egging, Gabriel, Holz & Zhuang (2007)
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Gas market activities in models
1. Production and sales
• Norway, Russia, Algeria, domestic, LNG
2. Transmission
• to Europe
• cross-border within Europe
• domestic
3. Storage
• seasonal
4. Supply
• wholesale
• retail
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Gas market activities simplified
Source: Smeers (2007)
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GASTALE: national supply
Source: Smeers (2007)
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GASMOD: EU-wide supply
Source: Smeers (2007)
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NATGAS: arbitrageurs to counter
destination-specific selling
Source: Smeers (2007)
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Egging/Gabriel: producers sell to
consumption sectors by destination
Source: Smeers (2007)
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Geographical scope
1. GASTALE
‣ Austria, Belgium, France, Germany, Italy, Netherlands, Spain,
UK
2. GASMOD
‣ EU-15 countries, Poland, Czech Rep/Slovakia/Hungary, FYug,
Romania/Bulgaria, Baltics, Turkey
3. NATGAS
‣ EU-15 countries, Eastern Europe
4. Egging/Gabriel
‣ European countries, including Eastern Europe (disaggregated)
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Demand modeling
1. GASTALE
• linear demand by sector with possible price discrimination
(elasticities: 1.6 – 2.2)
2. GASMOD
• constant elasticity demand by country (e: 0.6 – 0.7)
3. NATGAS
• linear demand by country (e: 0.18 – 0.65)
4. Egging/Gabriel
• linear demand by sector (e: „low”)
• No satisfactory model for natural gas demand to apply.
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Market structure and behavioral
assumptions
• Perfect competition
‣ pricing at cost, unless capacity constraints necessitate higher prices to
reduce demand
‣ efficient regulation can also have a similar outcome
‣ transmission, storage, supply
• Strategic behavior
‣ price setting to maximize profits, taking into account demand
adjustment, capacity constraints and competitors’ reactions
‣ different assumptions on competitors’ behavior, all can be similarly valid
• standard Cournot
• generalized Cournot (conjectural variations)
‣ production and sales, supply
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Company behavior in existing models
1. GASTALE
‣ Cournot in production and supply
2. GASMOD
‣ Cournot in production and supply, but differently
3. NATGAS
‣ generalized Cournot in production, competitive supply
4. Egging/Gabriel
‣ generalized Cournot in production, supply disregarded
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Double marginalization vs bargaining
• Initial exposition: monopolies
• Strategic behavior distorts prices from competitive levels
• Two successive monopolies (upstream and downstream) distort
prices twice
• Similar issue with oligopolies: two layers of them are worse than one
in principle
‣ argument behind making supply markets competitive within the EU
• But isn’t it better to have fewer suppliers with stronger bargaining
power against producers?
• No clear idea about how to model bargaining power
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Challenges in building a gas market model
for CSEE
• Purpose
‣ security of supply assessments
‣ investment and policy evaluation
‣ price forecasting?
• Geographical scope
‣ „from Poland to Greece”
‣ inclusion of Austria?
‣ aggregation on the Balkans?
• How to integrate the model into European markets?
‣ price and gas availability scenarios for Western Europe
• Future of long-term import contracts
‣ oil price indexation?
‣ flexibility?
‣ TOP obligation?
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Challenges in building a gas market model
for CSEE
• Access to transmission and storage
‣ effective unbundling?
• Behavior of storage operator
‣ is the price-taking assumption realistic?
‣ regulated or negotiated TPA?
• Demand representation
‣ elasticities?
‣ treatment of universal service?
• Cost parameters
‣ taken from literature, like in the other models
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Challenges in building a gas market model
for CSEE
• Cournot import or exogenous prices?
‣ does it make sense to model the region from the point of view of large
producers?
• Competitive fringe supply
‣ how fast is competitive trade evolving within countries?
‣ effect of gas / contract release programs?
• Government involvement in the sector
‣ e.g. import correction factors, changes in taxation, cogeneration support
schemes
‣ should we try to incorporate any of this?
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Thank you for your attention!
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