For the Italian and Austrian energy regulators, we analyzed the effects of merging their gas national tariff zones on natural gas wholesale prices and gas flows. The project involved the following activities:
- Characterize the price formation prevailing in the European gas market. We found evidence that LNG prices drive European spot gas prices and that cross-locational arbitrage conditions appear to constrain relative prices at different European locations;
- Model the effects of the price formation system and compare prices in the target countries in case tariff zones are separate or merged; a by product of this analysis is identification of the marginal, i.e. price-making, route for each country
A distinguishing feature of methodology is that it is based on a least-cost dispatch model for natural gas transportation in Europe, which determines cost minimizing transmission and storage use, with monthly granularity. A following development of that model, based on bi-level optimization, allows modelling the optimal choice of entry points in Europe by Russian suppliers and given that choice, the cost-minimizing choice by European shippers of intra-EU transmission flows.
The study is available at the following link: https://www.e-control.at/documents/1785851/1811597/RPT+-+Italian-Austrian+Wholesale+Price+Formation+-+Final.cleaned.pdf/ac0f2667-e12d-b5eb-a02d-0e72f3a828b0?t=1610704526354
