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Rethinking Gas Markets--and Capacity

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  • Larry E. Ruff

Abstract

The "U.S. Model" of natural gas markets is based on long-term, point-to-point commercial capacity rights (MDQXY) that reflect the physical capacity of the pipeline and are traded frequently among system users (shippers) in markets independent of the transmission system operator (TSO). When physical capacity is complex and scarce and the gas market is dynamic there are many MDQXY that must be continually reallocated and reconfigured, making trading difficult/illiquid and market outcomes suboptimal. Entry and exit capacities defined separately for a few large zones make trading easy and liquid but operationally problematic. Shipper-only trading would result in such a large gap between market and optimal (or even just feasible) outcomes that the TSO must engage in active capacity and gas trading itself to offset unconstructive/dangerous shipper trades. These conclusions suggest that, at least in some/many complex situations, commercial capacity should be eliminated altogether and replaced with a TSO-operated on-the-day market that prices and allocates physical capacity directly, with financial hedging as an equivalent (or better) substitute for commercial capacity. A simplified version of such a market has been operating successfully in Victoria, Australia, since 1999.

Suggested Citation

  • Larry E. Ruff, 2012. "Rethinking Gas Markets--and Capacity," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 3).
    • Handle: RePEc:aen:eeepjl:1_3_a01
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    References listed on IDEAS

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    1. Makholm, Jeff D., 2012. "The Political Economy of Pipelines," University of Chicago Press Economics Books, University of Chicago Press, number 9780226502120, December.
    2. Makholm, Jeff D., 2012. "The Political Economy of Pipelines," University of Chicago Press Economics Books, University of Chicago Press, number 9780226502106, September.
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    Cited by:

    1. Fodstad, Marte & Midthun, Kjetil T. & Tomasgard, Asgeir, 2015. "Adding flexibility in a natural gas transportation network using interruptible transportation services," European Journal of Operational Research, Elsevier, vol. 243(2), pages 647-657.
    2. Miguel Vazquez & Michelle Hallack, 2013. "Interaction between gas and electricity market-based trading in the short run," RSCAS Working Papers 2013/42, European University Institute.
    3. Jean-Michel Glachant & Michelle Hallack & Miguel Vazquez, 2014. "Gas network and market diversity in the US, the EU and Australia: A story of network access rights," RSCAS Working Papers 2014/33, European University Institute.
    4. Miguel Vazquez & Michelle Hallack & Jean-Michel Glachant, 2013. "Gas Network and Market: à la carte?," RSCAS Working Papers 2013/73, European University Institute.
    5. Glachant, Jean-Michel & Hallack, Michelle & Vazquez, Miguel, 2014. "Gas network and market “à la Carte”: Identifying the fundamental choices," Utilities Policy, Elsevier, vol. 31(C), pages 238-245.
    6. Miguel Vazquez & Michelle Hallack, 2013. "Short-term allocation of gas networks in the EU and gas-electricity input foreclosure," RSCAS Working Papers 2013/41, European University Institute.
    7. Vazquez, Miguel & Hallack, Michelle, 2015. "Interaction between gas and power market designs," Utilities Policy, Elsevier, vol. 33(C), pages 23-33.
    8. Vazquez, Miguel & Hallack, Michelle, 2013. "Need and design of short-term auctions in the EU gas markets," Energy Policy, Elsevier, vol. 63(C), pages 484-493.

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