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    Traders Back Analysis of Market Approach to EU Gas


Frontier Economics recommends price signals and other mechanisms, rather than tax breaks or levies, to improve gas and power market coupling.

by: William Powell

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Traders Back Analysis of Market Approach to EU Gas

A report that the European Federation of Energy Traders (Efet) commissioned from Frontier Economics (Frontier) will help inform the conversations its members will hold with industry and policy-makers on market coupling, Efet said February 27.

Frontier director Christoph Riechmann said the report "sets out a blueprint for European policymakers for decarbonising the gas sector and the wider economy in a cost-effective manner. It covers a number of issues relevant for the 'European Green Deal', one of the key priorities for the current European Commission.”

The report says that gas has a long-term future, but only if it decarbonises: its inherent flexibility and high energy density makes it irreplaceable for seasonal storage and affordable heating. "Increasing use of power to gas technologies – and other technologies, such as hybrid heat pumps – will result in a closer linking between the electricity and gas sectors than is currently the case."

The report opens: "Unabated natural gas likely has a limited long-term role in a decarbonised EU energy system. However, renewable and other low-carbon gases can contribute to resolving challenges regarding the transportation and storage of energy that are likely to become increasingly relevant in the transition towards a carbon-neutral economy."

So far, reports and studies on sector coupling have focused either on infrastructure planning or on mapping out the regulatory hurdles and gaps that may prevent closer linking of the EU gas and electricity sectors, with little regard to the allocation of the costs this implies.

The new report explores how price signals and the inherent flexibility of the gas system – such as storage and line-pack – can be harnessed to enable the cost-effective decarbonisation of the gas system and efficient coupling of the gas and power sectors. It also considers which timeframe would most effectively reward carbon abatement, or penalise failure, in a market-based, technology-neutral way. 

Policy recommendations set out in the report highlight the key role of a credible harmonised EU-wide carbon pricing scheme as the long term driver for decarbonisation across the economy, pointing to the importance of continued strengthening and expansion of the EU Emissions Trading System (ETS). The report also makes the case for greater harmonisation between any national carbon abatement mechanisms and for their eventual merging with the EU ETS, Efet said.

The report finds that any support mechanisms deemed necessary for the decarbonisation of the gas sector should be time-limited, technology-neutral, avoid handing producers or suppliers fixed, non-market based subsidies, and be open across EU (and third country) borders. Tariff and levy charging structures, as well as taxes and tax breaks, which distort market participants’ choices, should be avoided, it says.