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

Abstract

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.