Barriers remain to the free trade of gas between some of the main European gas hubs, as shown by recurrent price misalignment between relatively large and mature gas consuming zones: between Northern and Southern France, between Germany and Austria and between North West European hubs and the Italian market.
Our analysis aims to explore the driving forces behind such disconnections, and in particular whether these would be present in a fully competitive setting where all gas suppliers to Europe are price takers and the use of cross-border transmission capacity is optimized (i.e. where the existing infrastructure is exploited to the limit to carry out arbitrage activities and the transport costs are minimized).
Our analysis adopts as a benchmark the least cost flow pattern within the European grid determined by the TIGER model created by EWI, for a selected calendar year (2014) once we fix key import/export flows, domestic production and demand at historically observed levels.
By ‘re-running history’, we verified the physical nature of the bottleneck within the French grid and the sub-optimal utilization of transmission capacity on the NCG-Switzerland-Italy route, which in turn contributes to heavy gas flows in the Germany to Austria direction that do not conform to ‘pure economic logic’ and lead to recurrent disconnection of the Austrian market.
In more detail, the presence of long term shipping contracts on the Transitgas route, difficulties in making transmission capacity available to other participants when not nominated by the original owner and insufficiently flexible capacity allocation procedures appear to be obstacles to shipping gas on a spot basis from Germany to Italy, via Switzerland. However, the confidentiality of shipping contract terms and bookings on this route does not allow to us to establish robust evidence for this argument.
The somewhat limited possibility to fully exploit the Transitgas pipeline system creates a case for shipping gas from the liquid gas markets to Italy through Austria. This alternative route to the PSV puts pressure on the Oberkappel IP and increases the need to ship gas eastward from German via Austria. This situation was exacerbated when the cessation of Russian supply to Ukraine in the second half of 2014 led to substantial reverse (eastward) flow. The request to move significant volumes from NCG to the Austrian VTP led to the saturation of the transmission capacity at Oberkappel and hence to physical congestion between Germany and Austria.
Turning to the French case study, the comparison between reality and simulation for gas flow between the two main French market zones corroborates the argument that if more transmission capacity was made available in the North to South direction this would most likely favour the creation of a single price for natural gas within France in times of LNG scarcity in the South of France and high exports to Spain.