Spatial Integration of Natural Gas Markets: a Literature Review

Purpose of Review The purpose of this paper is to clarify the definition of an integrated market and to provide a commented overview of the different empirical methodologies that have been proposed to assess the degree of spatial integration of natural gas markets. Recent Findings In recent years, the methodologies assessing gas market integration have evolved from simple empirical works based solely on price data analyses to more complex ones based on the theoretical notion of spatial equilibrium capturing the effects of both price and non-price data. Summary A number of liberalization reforms have stimulated the emergence of spatially diverse markets for wholesale natural gas interconnected through spatial arbitrage, which plays a crucial role in the determination of local prices. In recent years, a vast and rapidly growing empirical literature has emerged to examine the degree of integration of these markets. A close examination of this literature has shown that only a handful of studies pay attention to the theoretical notion of market integration and account for the role played by trade flows, capacity constraints, and unit transaction costs.