[GGP] Central European gas market congestion analysis
The following is the introduction and summary to a report by ewi Energy Research & Scenarios.
The Nord Stream 2 pipeline project is currently the focus of various analyses in scientifc, business and political contexts. A recent study by ewi ER&S (2017a) shows that Nord Stream 2 has a decreasing effect on European gas prices, since Nord Stream 2 brings more Russian gas to North Western Europe at lower costs, implying intensifed competition with LNG. LNG prices will hence decrease, and lower LNG prices result in lower wholesale prices in Europe. Not only does Nord Stream 2 imply lower prices in Europe on average, but every single country in the EU benefts from lower prices at a similar level.
There are several studies which come to a different result from ewi ER&S (2017a). Those analyses, e.g. Bruegel (2017), REKK (2017), FSR (2017), raise an interesting question: would Nord Stream 2 enable Gazprom to cause bottlenecks in the West-East direction to separate Eastern European gas markets from the rest of Europe in order to gain market power in Eastern Europe? After the European Union’s (EU) energy directives have been implemented, it is relevant to ask wether the current gas market design is robust enough to preclude such a market separation strategy. Bruegel (2017) argues that there is a capacity limit of 110 bcm in the West-East direction along a line within Germany, while 145 bcm of residual import gas demand East of this line can only be imported either from the area West of the line or from Russia. According to Bruegel (2017), this yields a critical import demand of 35 bcm that can only be served by Russia for the countries East of the line creating market power for Gazprom.
The study at hand is intended to verify whether or not Nord Stream 2 could bring about a market separation of the Eastern European gas market from the rest of Europe by creating congestion in the West-East interconnections.
The study finds that such a strategy is not feasible for various reasons:
1) It is not possible for specifc gas suppliers to create congestion along specifc pipelines, since gas suppliers can only book entry / exit capacities into specifc market areas while physical fows are determined by the unbundled and regulated transmission system operators based on capacity bookings and fow nominations at entry and exit points. This holds especially when taking into account virtual fows. This means that a line separating West and East as in Bruegel (2017) is not a viable concept when applied to the EU gas market, which is based on entry exit market zones.
2) Even without taking into account of 1), fooding Western Europe with cheap gas while exerting market power in Eastern Europe would be restricted by existing contractual relationships with specifed delivery points, especially at Baumgarten: in other words large volumes of Russian gas cannot be fexibly routed to Western Europe in order to realize a price discrimination strategy against Eastern Europe.
3) Additionally, even ignoring points 1) and 2), the fact remains that there is not suffcient physical capacity to ship enough Russian gas to Western Europe to create congestion in the West-East direction.
4) What is more, regardless of 1), 2) and 3), even if one could create West-East congestion the gas infrastructure in Southern and Eastern Europe would still have suffcient spare capacities (over and above West-East capacity) that could be used for additional imports from third suppliers. Thus, creating a WestEast congestion would not enable a market power strategy.
5) Only when constructing a hypothetical extreme scenario in which demand is higher in Eastern Europe, production is lower compared to 2015, and spare capacities are restricted in the area East of the line, would there be gas demand that could only be served by Russian gas. However, the amount would be rather low at 14 bcm.
6) Even in such an extreme scenario, a price discrimination strategy would not a long term economic equilibrium, as the price in the East would need to increase substantially in order to compensate for lower prices in the West, and this would trigger investments in infrastructure extensions. 7) Given the high investment costs of Nord Stream 2 and the relatively small time horizon in which the price segmentation strategy would be possible, it is not plausible that Gazprom would invest in Nord Stream 2 to pursue a market separation strategy.
In conclusion, the current design of the European gas market consisting of entry exit market zones where physical fows are determined by TSOs is robust enough to preclude a market separation strategy. Even if this were not the case, there is suffcient capacity to ensure that any market separation strategy would not be viable.
By Dr. Harald Hecking, Martin Hintermayer and Florian Weiser
Read the Central European gas market congestion analysis in full
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