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The economic impact of price controls on China's natural gas supply chain

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  • Rioux, Bertrand
  • Galkin, Philipp
  • Murphy, Frederic
  • Feijoo, Felipe
  • Pierru, Axel
  • Malov, Artem
  • Li, Yan
  • Wu, Kang

Abstract

Despite significant progress made by China in liberalizing its natural gas market, certain key areas such as market access and pricing mechanisms remain controlled by the government. To assess how such distortions impact the market, we have developed a Mixed Complementarity Problem model of China's natural gas industry, with a novel representation of price caps associated with supply obligations. The model is used to assess how government pricing policies and restricted third party access to midstream infrastructure impacted the supply logistics of China's profit maximizing natural gas firms in the year 2015. We find that lifting the price caps for regulated natural gas demand sectors could yield a 4.7% (1.4 billion USD) reduction in total system cost and reduce the national average of marginal supply costs by 14%. Improving third party access to the pipeline and regasification infrastructure would result in an additive total cost saving of 7.6% (2.2 billion USD) and a 16% reduction in average prices, due to replacing domestic and imported LNG with pipeline imports. The LNG industry would be negatively affected by the reforms investigated in this study, as market players would gain more flexibility in their logistics and would utilize lower cost supply pathways.

Suggested Citation

  • Rioux, Bertrand & Galkin, Philipp & Murphy, Frederic & Feijoo, Felipe & Pierru, Axel & Malov, Artem & Li, Yan & Wu, Kang, 2019. "The economic impact of price controls on China's natural gas supply chain," Energy Economics, Elsevier, vol. 80(C), pages 394-410.
    • Handle: RePEc:eee:eneeco:v:80:y:2019:i:c:p:394-410
    DOI: 10.1016/j.eneco.2018.12.026
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    More about this item

    Keywords

    Natural gas; China; Price cap; Third party access; Mixed complementarity problem;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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