Econonomics of Energy and Environmental Policy

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Rethinking Gas Markets--and Capacity

The "U.S. Model" of natural gas markets is based on long-term, point-to-point commercial capacity rights (MDQXY) that reflect the physical capacity of the pipeline and are traded frequently among system users (shippers) in markets independent of the transmission system operator (TSO). When physical capacity is complex and scarce and the gas market is dynamic there are many MDQXY that must be continually reallocated and reconfigured, making trading difficult/illiquid and market outcomes suboptimal. Entry and exit capacities defined separately for a few large zones make trading easy and liquid but operationally problematic. Shipper-only trading would result in such a large gap between market and optimal (or even just feasible) outcomes that the TSO must engage in active capacity and gas trading itself to offset unconstructive/dangerous shipper trades. These conclusions suggest that, at least in some/many complex situations, commercial capacity should be eliminated altogether and replaced with a TSO-operated on-the-day market that prices and allocates physical capacity directly, with financial hedging as an equivalent (or better) substitute for commercial capacity. A simplified version of such a market has been operating successfully in Victoria, Australia, since 1999.
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JEL Codes:L51: Economics of Regulation, L95: Gas Utilities; Pipelines; Water Utilities, Q35: Hydrocarbon Resources

Keywords: Gas market, Capacity rights, Configure, Point-to-point, Entry/exit, Spot market, Victoria/Australia

DOI: 10.5547/2160-5890.1.3.1

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Published in Volume 1, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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