Designing the European Gas Market: More liquid & less natural?

Abstract

Designing a gas market is defining how the commodity, the transmission and ancillary services are traded. The European Union has built the commoditization of natural gas through the socialization of several costs of trade. This choice aims at obtaining more liquid markets through the creation of virtual hubs of trade. These virtual hubs ignore most of the network and of the physical gas flows by the creation of entry/exit market zones. Thus the definition of such market zones has tied EU markets inside virtual trading zones (national or sub-national). We show the consequences and the challenges of this European choice, especially at the cross-zone level (often at country cross-border). Once "entry/exit" trade arrangements are preferred, the use of market-based mechanisms for cross-zone decisions like network investments becomes less natural.