The European Gas Market: A Reality Check Notes de l'Ifri, May 2013
With the approach of the 2014 deadline for the completion of a truly European liberalized energy market, there is growing concern on the adequacy of the market structure with the changed economic and geopolitical environment. Market-based and short-term approaches have been fostered for both gas and electricity markets. Energy and climate policies have therefore a primary function in designing the basic rules for these markets to develop.
This study addresses two key issues related to the market design envisaged for the gas sector in Europe. The first raises questions about the adequacy of the market design proposed for the gas market with respect to security of supply. In fact, despite a higher dependence to external gas sources, the gas system has been developing all over Europe and it is becoming a key component of the European energy mix, in particular thanks to its back-up role for intermittent electricity generation and its lower content of CO2 emissions with respect to coal.
The external dimension of the gas market is thus taking a greater place in the approach to gas supply strategies. Security of supply is a key component in the gas sector and cannot be ignored in the creation of a European gas market. Moreover, the oligopolistic characteristic of the supply side has to be carefully assessed as it is well recognized that two countries (Norway and Russia) provide up to almost 60% of total external supplies. The study therefore investigates to what extent the gas market design and its implementation rules take into consideration this dimension.
It will be argued that the gas target model envisaged by regulators and the EC, by aiming at increasing the number of market exchanges based on market hubs or virtual exchange points, will not significantly contribute to security of supply. On the contrary, a greater concentration could be an undesired outcome of this process.
The second issue thus relates to the more practical on-going reforms that establish common rules at European internal cross-border interconnection points and their impacts for the actors of the value chain.
In order to understand the transformation started by the setting of these new rules, the study explores different cases. They aim at showing the evolution of the gas value chain and the impacts for the main actors.
The results of this work indicate that:
The oligopolistic nature of the European gas market has specific characteristics that need to be taken into account when constructing a market model, in particular:
- High reliance on external supply;
- Imbalance on the degree of access to the external supplier markets, which are less open to European companies, with the exception of Norway;
The process might foster concentration as new comers will not be able to compete with commercial companies owned by external producers or historical incumbents that are climbing the value chain upstream.
Although the Tariff network code under elaboration tries to cope with the problem of striking the right balance between short-term trades and long-term investments, in particular in infrastructures, the transformation favors short-term trades with a socialization of costs that might eventually be bore by final consumers (be them industrial or residential).
The process tries to harmonize rules and create ‘one-fit-for-all" measures that are not compatible with the various degrees of development of national markets. Regional approaches seem more realistic (as the the Prisma platform initiative among North West region with Austria and Italy shows).