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Security of supply and retail competition in the European gas market: Some model-based insights

  • Abada, I.
  • Massol, O.

In this paper, we analyze the impact of uncertain disruptions in gas supply upon gas retailer contracting behavior and consequent price and welfare implications in a gas market characterized by long-term gas contracts using a static Cournot model. In order to most realistically describe the economical situation, our representation divides the market into two stages: the upstream market that links, by means of long-term contracts, producers in exporting countries (Russia, Algeria, etc.) to local retailers who bring gas to the consuming countries to satisfy local demands in the downstream market. Disruption costs are modeled using short-run demand functions. First we mathematically develop a general model and write the associated KKT conditions, then we propose some case studies, under iso-elasticity assumptions, for the long- short-run inverse-demand curves in order to predict qualitatively and quantitatively the impacts of supply disruptions on Western European gas trade. In the second part, we study in detail the German gas market of the 1980s to explain the supply choices of the German retailer, and we derive interesting conclusions and insights concerning the amounts and prices of natural gas brought to the market. The last part of the paper is dedicated to a study of the Bulgarian gas market, which is greatly dependent on the Russian gas supplies and hence very sensitive to interruption risks. Some interesting conclusions are derived concerning the necessity to economically regulate the market, by means of gas amounts control, if the disruption probability is high enough.

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File URL: http://city.eprints.org/1458/1/Security_of_supply_and_retail_competition.pdf
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Paper provided by Department of Economics, City University London in its series Working Papers with number 11/04.

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Date of creation: 2011
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Handle: RePEc:cty:dpaper:11/04
Contact details of provider: Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk

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  1. Manne, Alan S. & Roland, Kjell & Stephan, Gunter, 1986. "Security of supply in the Western European market for natural gas," Energy Policy, Elsevier, vol. 14(1), pages 52-64, February.
  2. Albert L. Nichols & Richard J. Zeckhauser, 1977. "Stockpiling Strategies and Cartel Prices," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 66-96, Spring.
  3. Frederic H. Murphy & Michael A. Toman & Howard J. Weiss, 1987. "A Stochastic Dynamic Nash Game Analysis of Policies for Managing the Strategic Petroleum Reserves of Consuming Nations," Management Science, INFORMS, vol. 33(4), pages 484-499, April.
  4. Markandya, Anil & Pemberton, Malcolm, 2010. "Energy security, energy modelling and uncertainty," Energy Policy, Elsevier, vol. 38(4), pages 1609-1613, April.
  5. Helm, Dieter, 2002. "Energy policy: security of supply, sustainability and competition," Energy Policy, Elsevier, vol. 30(3), pages 173-184, February.
  6. Giorgio Vicini & Francesco Gracceva & Anil Markandya & Valeria Costantini, 2005. "Security of Energy Supply: Comparing Scenarios From a European Perspective," Working Papers 2005.89, Fondazione Eni Enrico Mattei.
  7. repec:mop:credwp:09.02.82 is not listed on IDEAS
  8. Vickers, John & Yarrow, George, 1988. "Regulation of privatised firms in Britain," European Economic Review, Elsevier, vol. 32(2-3), pages 465-472, March.
  9. D. W. Bunn & M. M. Mustafaoglu, 1978. "Forecasting Political Risk," Management Science, INFORMS, vol. 24(15), pages 1557-1567, November.
  10. Massol, Olivier & Tchung-Ming, Stéphane, 2010. "Cooperation among liquefied natural gas suppliers: Is rationalization the sole objective?," Energy Economics, Elsevier, vol. 32(4), pages 933-947, July.
  11. Lefèvre, Nicolas, 2010. "Measuring the energy security implications of fossil fuel resource concentration," Energy Policy, Elsevier, vol. 38(4), pages 1635-1644, April.
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