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The Development of a UK Natural Gas Spot Market

This paper examines parallels between the evolution of spot markets jor oil during the 1980s, particularly Brent, and what is now happening in the UK gas industry. The structure of supply, formerly within the control of British Gas, is breaking up under antitrust and regulatory pressures, and the short-term balancing needs of the system are being externalised. This is giving rise to a spot market. This paper identifies four stages in the development of a spot market, of which the UK market is presently in the first and second stages (physical balancing and the development of price transparency). Feedback effects on prices are already apparent, and the fourth stage, the development of risk management tools, is being discussed. This scenario was drawn up three years ago, based upon the experience of oil before the existence of a gas spot market was acknowledged. It has so far not missed a step. According to this analysis, the question over the extension of this logic to the gas markets in Continental Europe is not whether, but when?

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation

JEL Codes:
G13 - Contingent Pricing; Futures Pricing; option pricing
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Natural gas, spot markets, UK, gas prices, gas industry, risk management

DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No2-1

Published in Volume17, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.