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Price Adjustments and Transaction Costs in the European Natural Gas Market

Abstract:
The presence of long-term contracts indexed to oil prices is a key feature of the evolution of the European natural gas industry. During the 2000's, the European Commission (EC) promoted reforms to establish a single and integrated natural gas market, leading to the development of short-term regional markets based on hubs. This paper tests the hypothesis that asymmetric price responses in the continental European hubs derive from transaction costs. By applying linear and nonlinear error correction models, it assesses the price transmission dynamics and the degree of integration between the German, the Belgium and the Dutch spot markets. The models identified cointegration relations, price asymmetries and transaction costs in these markets. Results show a high degree of integration across regions, with prices converging rapidly to their long-run equilibrium. However, asymmetric price adjustments reveal the presence of transaction costs in the German regional hub.

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Keywords: Natural gas prices, Market integration, Threshold Vector Error Correction Model, Transaction costs

DOI: 10.5547/01956574.40.1.rgar

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Published in Volume 40, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.