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Market power and spatial arbitrage between interconnected gas hubs ☆

Author

Listed:
  • Olivier Massol

    (IFPEN - IFP Energies nouvelles, IFP School, City University London)

  • Albert Banal-Estañol

    (City University London)

Abstract

This paper examines the performance of the spatial arbitrages carried out between two regional markets for wholesale natural gas linked by a pipeline system. We develop a new empirical methodology to (i) detect if these markets are integrated, i.e., if all the spatial arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a new test for the presence of market power and it is thus able to distinguish between physical and strategic behavior constraints on marginal cost pricing. We use the case of the "Interconnector" pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power. ☆ This paper has greatly benefited from the judicious comments of two anonymous referees. We are also greatly indebted to Michel Le Breton, Derek Bunn and Steven Gabriel for insightful suggestions. We have also benefited from helpful discussions with Frédéric Lantz, Yves Smeers, conference participants at ISEFI (Paris, 2016) and the 9 th Conference on Energy Markets (Toulouse, 2014) and seminar participants at the universities of Cambridge, Paris-Dauphine and Grenoble. Of course, any remaining errors are ours.

Suggested Citation

  • Olivier Massol & Albert Banal-Estañol, 2018. "Market power and spatial arbitrage between interconnected gas hubs ☆," Post-Print hal-01916609, HAL.
    • Handle: RePEc:hal:journl:hal-01916609
    DOI: 10.5547/01956574.39.SI2.omas
    Note: View the original document on HAL open archive server: https://ifp.hal.science/hal-01916609
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    Citations

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    Cited by:

    1. Dukhanina, Ekaterina & Massol, Olivier & Lévêque, François, 2019. "Policy measures targeting a more integrated gas market: Impact of a merger of two trading zones on prices and arbitrage activity in France," Energy Policy, Elsevier, vol. 132(C), pages 583-593.
    2. Elena Argentesi & Albert Banal-Estanol & Jo Seldeslachts & Meagan Andrews, 2017. "A Retrospective Evaluation of the GDF/Suez Merger: Effects on Gas Hub Prices," Discussion Papers of DIW Berlin 1664, DIW Berlin, German Institute for Economic Research.
    3. David Andrés‐Cerezo & Natalia Fabra, 2023. "Storing power: market structure matters," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 3-53, March.
    4. Perrotton, Florian & Massol, Olivier, 2018. "The technology and cost structure of a natural gas pipeline: Insights for costs and rate-of-return regulation," Utilities Policy, Elsevier, vol. 53(C), pages 32-37.
    5. Crampes, Claude & Von Der Fehr, Nils-Henrik, 2022. "Decentralised Cross-Border Interconnection," TSE Working Papers 22-1315, Toulouse School of Economics (TSE).
    6. Keller, Jann T. & Kuper, Gerard H. & Mulder, Machiel, 2019. "Mergers of Germany's natural gas market areas: Is transmission capacity booked efficiently?," Utilities Policy, Elsevier, vol. 56(C), pages 104-119.
    7. Hassan Hamie & Anis Hoayek & Hans Auer, 2020. "Modeling Post-Liberalized European Gas Market Concentration—A Game Theory Perspective," Forecasting, MDPI, vol. 3(1), pages 1-16, December.

    More about this item

    Keywords

    Law of one price; market integration; spatial equilibrium; interconnectors; Natural gas;
    All these keywords.

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