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Interaction between gas and electricity market-based trading in the short run

  • Miguel Vazquez
  • Michelle Hallack

Gas-fired power plants are increasingly used in the production of electricity, which in turn makes them a relevant part of the gas demand. In this paper, we investigate whether the current designs of gas and power markets are robust to the relatively new link between industries. Specifically, we study the cross-industry efficiency losses associated with designs aimed at increasing liquidity by limiting the amount of network services allocated through markets. In the short run, reducing the set of transmission services priced in one market (say gas) affects the use of transmission in the other market (say power). This may result in inefficiencies that should be accounted for when deciding on the network services to be allocated through market arrangements in each industry. We also identify long-term effects of such design strategies: the allocation of gas pipeline storage and transmission services without preference representation may weaken localization signals for power plants investment. In addition, lack of harmonization of market designs may raise barriers to network investment.

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File URL: http://hdl.handle.net/1814/27258
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Paper provided by European University Institute in its series RSCAS Working Papers with number 2013/42.

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Date of creation: Jun 2013
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Handle: RePEc:rsc:rsceui:2013/42
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Web page: http://www.eui.eu/RSCAS/

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  1. Holz, Franziska & von Hirschhausen, Christian & Kemfert, Claudia, 2008. "A strategic model of European gas supply (GASMOD)," Energy Economics, Elsevier, vol. 30(3), pages 766-788, May.
  2. Mulherin, J Harold, 1986. "Complexity in Long-term Contracts: An Analysis of Natural Gas Contractual Provisions," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(1), pages 105-17, Spring.
  3. Vincent Rious & Jean-Michel Glachant & Yannick Perez & Philippe Dessante, 2008. "The diversity of design of TSOs," Post-Print hal-00318518, HAL.
  4. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November.
  5. Miguel Vazquez & Michelle Hallack & Jean-Michel Glachant, 2012. "Designing the European Gas Market: More Liquid & Less Natural?," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 3).
  6. Riordan, Michael H. & Williamson, Oliver E., 1985. "Asset specificity and economic organization," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 365-378, December.
  7. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-93, December.
  8. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
  9. Rious Vincent & Perez Yannick & Glachant Jean-Michel, 2011. "Power Transmission Network Investment as an Anticipation Problem," Review of Network Economics, De Gruyter, vol. 10(4), pages 1-23, December.
  10. Miguel Vazquez & Michelle Hallack, 2012. "Design of auctions for short-term allocation in gas markets based on virtual hubs," RSCAS Working Papers 2012/43, European University Institute.
  11. J-M- Glachant, 2002. "Why regulate deregulated network industries?," Competition and Regulation in Network Industries, Intersentia, vol. 3(3), pages 297-312, September.
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