ARTICLE IN PRESS

Energy Policy 34 (2006) 2762–2778

www.elsevier.com/locate/enpol

Examining market power in the European natural gas market

Rudolf G. Egginga, Steven A. Gabrielb,,1
a
Policy Studies Group, Energy Research Centre of the Netherlands, Badhuisweg 3, 1031 CM, Amsterdam, Netherlands
b
Department of Civil & Environmental Engineering, Applied Mathematics and Scientific Computation Program, University of Maryland,
College Park, MD 20742, USA
Available online 14 June 2005

Abstract

In this paper, we develop a mixed complementarity equilibrium model for the European natural gas market. This model has
producers as Cournot players with conjectured supply functions relative to their rivals. As such, these producers can withhold
production to increase downstream prices for greater profits. The other players are taken to be perfectly competitive and are
combined with extensive pipeline, seasonal, and other data reflecting the current state of the market. Four market scenarios are run
to analyze the extent of market power by these producers as well as the importance of pipeline and storage capacity.
r 2005 Elsevier Ltd. All rights reserved.

Keywords: European gas market equilibrium; Complementary model; Gas market policies

1. Introduction These imports are costly and depend often on countries

Energy supplies are the major prerequisite for
economic development and maintaining the current
welfare standard in modern societies. Growing popula-
tions and increasing economic outputs are drivers of
growing energy use (as attempts for a general decou-
pling of energy input and economic output have not
been too successful). Although renewable and nuclear
sources add significantly to energy inputs, fossil fuels
provide the biggest part of the needed energy. To meet
the growing energy demand, fossil fuels are the most
cost-efficient in the short term. However their negative
impact on climate cannot be neglected. The major fossil
fuel reserves are located in just a handful of countries, so
most countries, industrialized or developing, will have to
continue to import large shares of their fossil fuels.
Corresponding author. Tel.: +1 301 405 3242;
fax: +1 301 405 2585.
E-mail address: sgabriel@umd.edu (S.A. Gabriel).
1
This author was partially supported for this work by the National
Science Foundation grant 0106880 in the Division of Mathematical
Sciences.
in politically unstable regions.
Historically, security of energy supplies (SoS) refers to
the safeguarding of oil supplies starting from the oil
crisis in the early seventies that triggered the formation
of the 3-months IEA oil reserves. Since then, many
situations and research reports have broadened the
scope of the concept of SoS. Today SoS covers a wide
range of issues, involving different timeframes, energy
carriers, infrastructure, geopolitical relations, and mar-
ket power in liberalizing markets. In the past few
decades the role of natural gas has increased. Natural
gas reserves are spread more widely over the globe than
oil reserves, however the majority of reserves are also
located in just a handful of countries.
In 2001 fossil fuels for the European Union (EU)
constituted 78 percent of the energy provided with the
remaining share mainly from nuclear and some hydro-
electric power and renewables. Of this 78 percent, oil
constituted 40 percent, natural gas 23 percent, and coal
15 percent (IEA, 2002a). Recent projections indicate a
stable fossil fuel share in the coming decades but with an
ever increasing allotment to natural gas. The share of
natural gas will increase to about 30 percent, mainly at

0301-4215/$ - see front matter r 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2005.04.018
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778
the expense of coal which is projected to drop to 10
percent accompanied by a slight decrease in oil use
(www.eia.doe.gov).
One of the main drivers for the projected increase in
use of natural gas in Europe is the Kyoto protocol
(UNFCCC, 1998) and its reduction goals for carbon
dioxide emissions. Natural gas has a lower carbon
content than coal and oil, about 50 percent lower than
coal, and 25 percent lower than oil, which makes gas a
favored fuel from an environmental perspective (IPCC,
1995).
Besides environmental reasons another important
factor for natural gas usage is the longer term supply
situation. Currently, the EU imports 45 percent of the
natural gas that it uses, whereas the import share of oil is
as much as 75 percent (IEA, 2002a). Both import shares
will increase in the near future given the limited reserves
within the EU (BP, 2003). Indeed, at the current level of
production the reserve/production ratio translates to
around 67 years worldwide for natural gas and 41 years
for crude oil. The main external natural gas suppliers to
the EU are Russia, Norway and Algeria. In 2001 these
three countries delivered 80 percent of all gas imports to
the EU. In particular, Gazprom (Russia) delivered 30.7
percent, Sonatrach (Algeria) 20.5 percent and GFU
(Norway) 19.4 percent, while Netherlands-based Gasu-
nie delivered 17.1 percent. Thus, four companies
accounted for 87.7 percent of all imports in 2001
(Cedigaz, 2002a).
As for internal suppliers, the major EU producers are
the United Kingdom and the Netherlands. Reserves
from the United Kingdom are declining rapidly as
indicated by the reserve production ratio of only 6.8
years at the end of 2002. The UK will become a net gas
importer within a few years leaving the Netherlands as
the only country in the EU with significant reserves. At
the current level of production, the Dutch reserves will
last for 25 years (BP, 2003). Clearly the EU dependency
on external suppliers for gas will grow in the coming
decades. Nearby suppliers as Russia, Norway and
Algeria hold, respectively, 30.5, 1.4 and 2.9 percent of
world reserves, and a relatively nearby country as Iran,
14.8 percent, so there are plenty of potential supplies
relatively nearby. The large and ever-increasing depen-
dency of external supplies has led to a need for measures
to manage supply risks and secure supplies. Broader
energy supply security is addressed in the so-called
‘‘Green Paper’’ (EC 2000-769, 2000a) as well as the
European Commission (EC) directive 2004/67/EC con-
cerning measures to safeguard security of natural gas
supply.
Besides the issue of external supply security for
natural gas the liberalization process induced by the
EC as formulated in Directive 2003/55/EC (EC 2003-55,
2003) concerning common rules for the internal market
in natural gas has resulted in strong positions for some
2763
big energy multinationals. For example, the top four
companies account for almost 50 percent of the total
production in the EU, whereas the production of the top
ten is 80.7 percent (Cedigaz, 2002b). Both in the external
supply situation as well as the internal supply, just a few
entities have a big share in supply (either imports or
production). Oligopolistic market behavior could give
rise to market power by these firms.
Several legislative, informative and infrastructural
measures have been taken to secure the supply of
natural gas to EU consumers. Legislative measures
include the legal splitting of gas sellers and network
operators and legislation for obligatory Third Party
Access to transmission, distribution, storage and LNG
capacity (EC 2003/55/EC, 2003). An informative mea-
sure is the setting up of a Monitoring Agency that
should develop a database of production volumes,
demand estimates and stock levels. Regarding infra-
structure developments the EC has set up lists of priority
projects (EC, 2000b). This list contains projects for
introduction of natural gas into new regions, connection
of isolated gas networks to European interconnected
networks, increasing LNG reception and storage capa-
cities, and increasing transmission capacities. Examples
of options are: more and extended LNG terminals in
countries such as France, Spain, Greece and Italy, as
well as better interconnection of United Kingdom and
Ireland, and connection of the UK to the mainland.
As stated above the 87% of all exports to EU
countries are supplied by only four companies. There
clearly is a risk that certain players in the European
natural gas market can be considered as strategic
relative to their potential exercise of market power. In
the model presented below, producers are modeled as a
combination of strategic players who can affect end-use
prices by their production levels as well as price-takers
via their conjectures about their rivals’ production. By
contrast, the storage operators and transportation
operators are taken to be perfectly competitive with no
market power. In effect, all the players are depicted as
solving separate optimization problems whose joint
solution, taken together with market-clearing conditions
gives rise to a market equilibrium expressed as a
nonlinear complementarity problem (NCP) (Harker
and Pang, 1990).2
Previous efforts for modeling natural gas markets
have either concentrated on non-game-theoretic ap-
proaches such as maximizing total surplus (Takayama
and Judge, 1971) and/or have not included the level of
market detail contained in the current work.
Some of the earlier efforts at characterizing various
aspects of the European natural gas market include
Tzoannos (1977) who modeled the domestic British
market based on maximizing the social welfare function.
2
Alternatively, a variational inequality (VI) approach can be used.
 ARTICLE IN PRESS
2764 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778
Later, Haurie et al. (1987) developed a stochastic
Nash–Cournot model and considered long-term pro-
duction contracts. Mathiesen et al. (1987) also consid-
ered the European natural gas market in their work
which discussed market power on the selling side. De
Wolf and Smeers (1997) chose a Stackelberg game
perspective for their work on the European natural gas
market with one producer as the leader and the others as
followers. The stochastic equilibrium approach was also
used by Gürkan et al. (1999) who employed a sample-
path perspective. Breton and Zaccour (2001) concen-
trated on analyzing a duopoly of producers but in
abstract form. More recently, Boots et al. (2004)
constructed Gas mArket System for Trade Analysis in
a Liberalizing Europe (GASTALE), a much more
detailed version of the European natural gas market.
That model, based in part on the work by Golombek et
al. (1995, 1998) used a successive oligopoly perspective.
The current work is an extension of GASTALE in that it
additionally considers storage operations, seasonally
varying demand, explicit incorporation of restricted
transmission and LNG terminal capacities. Other
differences are no successive oligopoly approach, and
producers are countries, producers produce in only one
country. Due to its level of detail and behavioral
assumptions, our model will give insights and therefore
be useful to planners and regulators for the European
natural gas market.
The model we propose is a short-term one simulating
the European natural gas market for one year’s time. As
such, no build/no build decisions are considered
facilitating the computation of market equilibria. How-
ever, by comparing the outcomes of the model using
different assumptions on pipeline transmission capaci-
ties (and other parameters), one can simulate the effects
of capacity expansion.
Natural gas market models have also been developed
for other parts of the world. For example, a wide variety
of models for the North America market have appeared
in the literature. Notable examples include the early
work of O’Neill et al. (1979), GRIDNET (Brooks,
2003), the Natural Gas Transmission and Distribution
Model of the US Department’s National Energy
Modeling System and its predecessors (Ahn and Hogan,
1982; Murphy, 1983, 1988; EIA, 1998; Gabriel et al.,
2001), the Gas Systems Analysis Model (Gabriel et al.,
2000, 2003), and a Nash–Cournot approach wherein the
marketers exert market power (Gabriel et al., 2004a,b,c).
There are two main research goals that this paper
attempts to answer. First, analyze possible strategic
behavior of producers with respect to rival supplies in a
liberalized European Natural Gas market to determine
the extent of this market power. Second, assess the
impact of transmission and storage capacities on
producer market power. The rest of this paper is
organized as follows. In Section 2, the optimization
problems faced by the players in the European natural
gas market are described along with market-clearing
conditions. Section 3 outlines the market scenarios that
were considered and presents numerical results of using
the NCP model described in the Appendix to analyze
market power issues. Section 3 concludes with an
explicit link of our results to recent EC policy
documents regarding the internal market and security
of supply, thus validating the significance of our model.
Lastly, Section 4 provides a summary of the value of this
research and anticipated future work.
2. The European natural gas market
2.1. Overview
Worldwide production of natural gas in 2002 equaled
2528 bcm (billion cubic meters, 109 m3). The total
production in the 15 EU countries3 was 209 bcm or 8.3
percent of the global amount. Fig. 1 shows the major
producing countries in the EU. Production levels for
2002 were as follows: United Kingdom 103 bcm, the
Netherlands 60 bcm, Germany 17 bcm, and Italy
15 bcm. Of the total Russian production of 555 bcm
about 100 is exported to the EU, of the total Algerian
production of around 80 bcm about 30 is exported
to the EU.
EU15 consumption of natural gas was 386 bcm or
15.2% of world total consumption. Depicted in Fig. 2
are the major EU consuming countries: the UK with
95 bcm, Germany at 83 bcm, Italy 64 at bcm, France at
43 bcm, Netherlands 39 bcm, Spain 21 bcm. With the
accession of the 10 countries on May 1, 2004, the import
dependency has even increased. In 2002 these 10
countries consumed about 40 bcm, and produced only
about 8 bcm. Of the new member states, only Poland
and Hungary have significant own gas production,
covering respectively, one third and one quarter of their
consumption.
The current self-sufficiency in terms of natural gas is
about 50% for EU25. However, the natural gas reserves
are depleting with only the Netherlands having sig-
nificant reserves. Also, among the countries that export
much natural gas to the EU, there are big differences in
the reserves base. The Russian reserves are ten times as
big as the reserves of EU25 and Norway together, and
five times the reserves of EU25, Norway, and Algeria all
combined. Fig. 3 shows the reserve positions.
3
EU15: Austria (AU), Belgium (BE), Denmark (DK), Finland (FI),
France (FR), Germany (GE), Greece (GR), Ireland (IR), Italy (IT),
Luxembourg (LU), Netherlands (NL), Portugal (PR), Spain (SP),
Sweden (SE), United Kingdom (UK). May 1, 2004 ten countries joined
the EU. These new member states (NMS) are: Cyprus, Czech Republic
(CZ), Estonia, Hungary (HU), Latvia, Lithuania, Malta, Poland (PO),
Slovakia (SK), Slovenia. EU25 includes these countries plus EU15.
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778 2765

Fig. 1. Production 2002, bcm, (Source: BP stats, 2003).

Fig. 2. Consumption 2002, bcm, (Source: BP stats, 2003).

The European natural gas market that is modeled
consists of producers, pipeline companies, storage
operators, and end-use consumption sectors. These
sectors are designated as s ¼ 1; 2; 3, respectively, for
industrial (ind), and electric power generation (pg) and
residential/commercial (res). Typically the demand can
vary by season (less so for the industrial sector) with the
winter having the highest demand. As shown in Fig. 4,
to satisfy the higher levels of consumption in the winter
timeframe, gas can be extracted from storage (stor) to
complement gas from producers delivered over the
pipeline grid.
Conversely, in the non-winter period, gas is injected
into storage for later use. Thus, storage can be
considered as the fourth consumption sector but only
for the non-winter. Fig. 5 shows how the final delivered
prices to each sector are determined (in the perfectly
competitive case).
An underlying pipeline network is used to model the
natural gas market in which the set of nodes N refers to
 ARTICLE IN PRESS
2766 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

Fig. 3. Reserve levels 2002, Tcm (Source: BP stats, 2003). Tcm ¼ trillion cubic meters.

Market structure in non-winter periods Market structure in winter periods

Russia ………..Algeria Russia ……….Algeria

.
TSO TSO

Germany ………Czech Rep Germany ………Czech Rep

stor stor

stor stor
pg pg pg pg
ind ind ind ind
res res res res

Fig. 4. Market structure and the role of gas storage in different periods.

individual countries. For a typical node n 2 N, JðnÞ
denotes the set of neighboring nodes, i.e., those
countries that are directly connected by pipeline to
node n. Additionally, Nðf Þ is the set of nodes where
production firm f 2 F can produce gas. Whereas in
this paper we consider countries as producers, the
model formulation allows for different (commercial)
producers with production in several countries, as is
usual for the big gas companies, like Shell, BP and
Total. As an example N(Shell) would contain at least
{Netherlands, United Kingdom} and N(Total) e.g.
{France, Netherlands}.
To account for the important differences in demand
by season, three time periods P ¼ f1; 2; 3g are used. The
first time period is the low demand season (April–Sep-
tember) with periods 2 and 3 referring, respectively, to
the high demand season (February, March, October,
November) and the peak demand season (December and
January). The number of days in each period p is given
by d p where d 1 ¼ 183; d 2 ¼ 120; d 3 ¼ 62. Lastly, two
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778 2767

Non-Winter Winter

10 , production unit cost 15 , production unit cost

producer producer

5 , transmission unit cost 5 , transmission unit cost

15 , border cost 50 , 20 , border cost

50 , country country
dist. cost
dist. cost 5 , dist. cost
65 70
Residential Residential 20 , dist. cost
Storage 20 50
/Commercial 30 , dist. cost /Commercial 30 ,
dist. cost 20 dist. cost
, dist. cost
30
Power Power
Industrial dist. cost
Generation 35 Industrial Generation 40

45 50
Sectors: bold is delivered price 20
dist. cost

Fig. 5. Cost components for gas deliveries. Storage delivers gas to the industrial sector at h 50/1000 m3. In non-winter the storage operator buys gas
at h 20. These h 20 are built up from h10 production costs, h 5 transmission costs and h 5 distribution costs.

P
sets, I and X , refer respectively, to the periods when defined as q
fsnp ¼ f 0 af qf 0 snp and the extraction of gas
injection and extraction of gas from storage can occur from storage as ensnp .7 The balancing equation is thus8
with I ¼ f1g; X ¼ f2; 3g.
csnp
Exogsnp ¼ qfsnp þ q
fsnp þ esnp ,
2.2. Consumption
8s 2 S; n 2 N; p 2 P. ðC 2Þ
Consumption of natural gas may vary both by sector
For this paper, the inverse demand function is taken to
(s ¼ 1; 2; 3) as well as by period p, and is described by
be affine and passing through the reference point
separate inverse demand functions4
fp0snp ; c0snp g with elasticity Zsnp o0. The resulting function
psnp ¼ D
1
snp ðcsnp
Exogsnp Þ, (C 1) is given by
where csnp is the (nonnegative) amount of gas consumed
psnp ¼ IIDsnp þ SIDsnp  ðcsnp
Exogsnp Þ, (C 3)
by sector s and node n in period p5 and Exogsnp is the
(nonnegative) amount of exogenous production with
where
csnp XExogsnp and is taken as a fixed parameter.6
For most consuming countries, exogenous produc-
IIDsnp ¼ ð1
1=Zsnp Þ  p0snp , (C 4)
tion is zero or very small. The net consumption
ðcsnp
Exogsnp Þ, must be satisfied by sales and extraction
from storage (in periods 2 and 3). The sales from each
SIDsnp ¼ p0snp =ððc0snp
Exogsnp Þ  Zsnp Þ, (C 5)
production firm f are denoted as qfsnp with rival sales
4
The storage sector demand is determined by the storage system
where IIDsnp ; SIDsnp are the intercept and slope,
operator’s optimization problem. respectively.
5
Consumption and other quantity variables are expressed in millions
of cubic meters (mcm) per day, prices and costs are in h per 1000 m3, 7
The asterisk ‘’ denotes that a variable is an exogenous constant
unless otherwise stated. determined by other players.
6 8
The total exogenous production in each country was (arbitrarily) Note that in the injection season (p ¼ 1) or for the sector for
split based on the consumption sector shares. storage (s ¼ 4), the extraction term is absent.
 ARTICLE IN PRESS
2768 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

2.3. Production COfnp ¼ 1, the firm acts strategically since it can

manipulate prices by altering sales accordingly so that
Each producer f is modeled as maximizing revenue in (P1) the exogenous price psnp drops out. The
from sales less (within-country) distribution costs, combined wellhead price for periods 1, 2 and 3 and
production costs and (long-distance) transmission ser- the non-storage sectors is thus given by
vice costs. This net profit is also subject to certain
engineering constraints and economic behavioral as- ð1
COfnp Þpsnp þ COfnp fIIDsnp þ SIDsnp
sumptions. In particular, producer f decides on how ðq
fsnp þ qfsnp þ esnp Þg
much gas to produce yfnp , how much to sell qfsnp , and
how much to transport tfnmp from any node n to a noting that for all producers only one of these two
neighboring node m 2 JðnÞ in order to achieve the schemes is in effect for a given scenario for the analysis
highest net profit. The producer will receive revenues in this paper,10 since just perfect competition and
based on the market price of gas in the sector, node, and conjectured supply prices are used in this paper.
time period in question, multiplied by the amount of gas For gas sold in period 1 to storage to be injected, a
sold. To determine the wellhead price of gas, two different price, p4n1 is used. This price is determined by
schemes are used. One involves taking the price market-clearing conditions for the storage market
determined using a perfect competition assumption. described in a later section so that no market price
The second scheme to determine prices posits that each manipulation is possible in this sector.
producer conjectures how rival sales at node n will Besides the revenues, each producer incurs distribu-
change if the computed price changes from its equili- tion costs, DC sn ðÞ, production costs, CY fnp ðÞ and
brium value as a result of firm f shifting its sales (Day et transmission costs11 with exogenously determined unit
al., 2002; Hobbs and Rijkers, 2004; Hobbs et al., 2004; costs wtnmp . Consequently, each producer f has the
Lise et al., 2006). For example, if one assumes that the following objective12
competitors’ sales diverge linearly from their equili- 8 P P 9
> ½ð1
COfnp Þpsnp þ COfnp >
brium value if price psnp ¼ D
1 snp ðÞ is changed from its
>
>
> s¼1;2;3 n2N >
>
>
equilibrium psnp , the resulting equation is >
> >
>
>
> fIID þ SID ðq þ q þ e
Þg >
>
>
>
snp
P
snp
fsnp
P
fsnp snp >
>
>
> >
>
>
> q
½DC sn ðq Þ >
>
q
fsnp
½q
fsnp þ SF C
fnp  ðIIDsnp þ SIDsnp  ðq
fsnp >
<
fsnp fsnp
>
=
X P
s¼1;2;3;4 n2N

þ qfsnp þ esnp Þ
psnp Þ ¼ 0, MAX dp
CY fnp ðyfnp Þ

>
> >
>
p¼1;2;3 >
> n2Nðf Þ
P P >
>
>
> >
>
where q
fsnp and psnp represent the equilibrium sales and >
>
wt 
 t fnmp >
>
>
>
nmp >
>
prices, respectively. It is important to note that q
fsnp >
>
n2N
P
m2JðnÞ >
>
>
>  >
>
and q
fsnp are two different items. The first one is an >
: þd 1 p4n1 qf 4n1 : >
;
n2N
endogenous variable as part of the producer problem
measuring what the producer thinks the rival sales are. (P 1)
The second one is exogenous to the particular producer This objective function is optimized subject to a set of
being determined by what the optimal values are for the constraints. First, the production is bounded above by a
other producers. In this conjectured supply function capacity ȳfnp representing limited resources and/or
approach, the larger the coefficient SFC
fnp is, the equipment13
greater the supply response that firm f anticipates from
other firms. In this sense, the producers are strategic yfnp pȳfnp ðmfnp Þ 8n 2 Nðf Þ; p 2 P. (P 2)
Nash–Cournot players since by modifying their sales
appropriately, they can potentially manipulate prices A transshipment constraint defines firm f’s gas sales at
(Shy, 1995). This approach also subsumes a pure node n as equal to the production of f at n less the net
Cournot model.9
To combine these two schemes, an exogenous binary 10
A generalization of the binary index COfnp is one taking on values
parameter COfnp is used. Our approach is based to some in [0,1] so that a convex combination of price-taking and conjectured
extent on the methodology described in Hobbs and supply function behavior is assumed in which producers are assumed
Rijkers (2004) and implemented for the European to have market power.
11
electricity markets in Hobbs et al. (2004) but relevant If marketers were in the model, they would pay for the
here. If COfnp ¼ 0, then the firm behaves competitively transmission charges which would then be passed on to the
consumption sectors. Since no marketers are modeled explicitly, these
since it takes the exogenous price as psnp ; see (P1) costs are borne by the producer with an equivalent effect on the
determined by the market-clearing conditions (KM1). If consumption sector delivered prices.
12
The extraction term esnp is not used in period 1.
9 13
Note that if the coefficient SF C
fnp ¼ 0, then a pure Cournot Greek symbols in parentheses represent the Lagrange multipliers
approach results with q
fsnp ¼ q
fsnp . for each constraint.
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778 2769

gas exported by f from the same node n14 It is not necessary to explicitly enforce mass balances at
X X the nodes of the transmission network for the znmp as
qfsnp
yfnp þ ðtfnmp
tfmnp Þ ¼ 0; ðyfnp Þ
these will automatically be satisfied because of the firm
s¼1;2;3;4 m2JðnÞ
level mass balancing equation (P 3) and the market-
8n 2 N; p 2 P. ðP 3Þ clearing constraints (MCC 3) described below. Lastly,
A conjectured supply function given as (see footnote 8) one could also add transmission losses to the actual
flows but for clarity we have omitted these losses.
q
fsnp
½q
fsnp þ SF C
fnp  ðIIDsnp þ SIDsnp  ðq
fsnp
þ qfsnp þ esnp Þ
psnp Þ ¼ 0; ðbfsnp Þ
2.5. Storage
8n 2 N; s 2 f1; 2; 3g; p 2 P. ðP 4Þ
In addition, there are nonnegativity constraints for the Similar to the transportation market for natural gas,
production, sales and flows of firm f.15 the storage market is assumed to be perfectly competi-
tive. As such, a price-taking storage system operator
yfnp X0 8n 2 Nðf Þ; p 2 P, (P 5) (SSO) is used to model the storage market. The SSO can
profit from buying gas in the low demand (and thus
qfsnp X0 8n 2 N; s 2 S; p 2 P, (P 6)
low price) periods, storing it, and selling it to end
user sectors in the high demand periods. The SSO’s
tfnmp X0 8n 2 N; m 2 JðnÞ; p 2 P. (P 7)
profit is the difference between the selling prices
and the purchase prices minus storage and distribution
costs.17
2.4. Transportation (
X X X
MAX d p ðpsnp esnp
DC sn ðesnp ÞÞ
In contrast to the production sector, the transporta- n2N p¼2;3 s¼1;2;3
tion of natural gas is taken to be perfectly competitive.16 )
This perspective allows one to use an ‘‘omniscient’’
d 1 ðp4n1 in1 þ CS n ðin1 ÞÞ , ðSTOR 1Þ
transmission system operator (TSO) whose optimization
problem simulates the market-clearing for transmission
capacity by maximizing the value of transmission where CS n ðÞ is the operational costs of storage and in1 is
services. The corresponding objective function for the the injection rate into storage for the injection season
TSO is thus ðp ¼ 1Þ. The SSO maximizes this objective function
X X X given the operational limits of the storage facilities. The
MAX dp ðwtnmp znmp
CZ nm ðznmp ÞÞ, first constraint (STOR 2) is a mass balance restriction
p2P n2N m2JðnÞ that enforces that total extraction from storage equals
(TSO 1) total injection within a year, so no losses. However that
where wtnmp
is an exogenous pipeline tariff determined could easily be incorporated.
by market-clearing conditions, CZ nm ðÞ is the cost of X X
d p esnp ¼ d 1 in1 ; ðsn Þ 8n 2 N. (STOR 2)
operating thePinter-country flow from node n to node m, p¼2;3 s¼1;2;3
and znmp ¼ f 2F tfnmp is the total inter-country flow
across firms from node n to node m during period p. The constraints (STOR 3)–(STOR 6) refer to the
These flows are subject to simple upper bounds, physical operation of the storage facility. The injection
representing the available transmission capacity z̄nmp rate of storage in country n is bounded above by the
limitations of the compressors that are used. Specifi-
znmp pz̄nmp ; ðcnmp Þ 8n 2 N; m 2 JðnÞ; p 2 P
cally,
(TSO 2)
in1 pīn ; ðan Þ 8n 2 N, (STOR 3)
as well as lower bounds of zero
znmp X0 8n 2 N; m 2 JðnÞ; p 2 P. (TSO 3) where īn is an upper bound on the injection rate. The
extraction rate is bounded above by the maximum
14 withdrawal rate ēn
Note that the production term yfnp is only defined for n 2 Nðf Þ.
15
(P 6) and the definition of q
fsnp force this variable to be
X
esnp pēn ; ðlnp Þ 8n 2 N; p ¼ 2; 3. (STOR 4)
nonnegative and thus nonnegativity conditions for q
fsnp are not
s¼1;2;3
explicitly needed in this optimization problem but could be included in
deriving the optimality conditions shown in the Appendix.
16 17
EU regulations (Global Competition Review, 2003) aim at fair This formulation assigns transportation charges and distribution
competition between market players in both the transportation and costs to get the gas from the production nodes to the gas storage
storage markets. For that reason an assumption of perfect competition facilities to the producers. This is an arbitrary choice but does not
is reasonable. affect the SSO’s profit.
 ARTICLE IN PRESS
2770 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

Additionally, more gas cannot be extracted than the variables ðp4n1 Þ are the market-clearing prices for the gas
working gas volume available v̄n storage sectors
X X
d p esnp pv̄n ; ðon Þ 8n 2 N. (STOR 5) X
s¼1;2;3 p¼2;3 in1
qf 4n1 ¼ 0; ðp4n1 Þ 8n 2 N. (MCC 4)
f 2F
Lastly, injection and extraction rates must be nonnega-
tive.
0pin1 ; esnp 8n 2 N; s ¼ 1; 2; 3; p ¼ 2; 3. (STOR 6)
3. Numerical results for the European natural gas market
2.6. Market-clearing conditions 3.1. Description of input data
In addition to the optimization problems presented The data for the scenarios analyzed in this paper are
above, market-clearing conditions are needed to equili- taken from (Van Oostvoorn, 2003). We have trans-
brate supply and demand. The first set of market- formed all volume data (such as production and
clearing conditions is simply the definition of the inverse production capacities and consumption levels) from
demand function. However, in the high demand periods bcm/year to mcm/day by multiplying the values by the
(p ¼ 2; 3) not only direct sales from producers to end- factor 1000/365 and have applied euro-inflation rates
users determine the equilibrium price, but also the gas (IMF-WEO, 2003) to have all prices in 2002 Euros. The
that is extracted from storage. applied inflation rates were: 1.135 for production costs,
psnp ¼ IIDsnp þ SIDsnp  ðcsnp
Exogsnp Þ 1.049 for consumer prices, 1 for transmission costs and
1.075 for distribution costs. The distributional costs of
8n 2 N; s ¼ 1; 2; 3. delivering gas to the storage sector is as expensive as
what is used for the power generation sector. To vary
Also, the equilibrium price psnp must equal the
the demand of user segments by season, we have
anticipated price:
determined relative load factors. The yearly average
psnp ¼ psnp 8n 2 N; s ¼ 1; 2; 3. load factor is 100%. For the residential sector we have
used the so-called Weighted Heating Degree Days
These two equations can be combined and in light of (C method.20 The usual Dutch weight factors are used:
2) the resulting equation is 1.1 for January, February, November, December, 1.0,
! for March and October, and 0.8 for other months.
X For power generation we have used the Dutch

psnp ¼ IIDsnp þ SIDsnp  qfsnp þ esnp
f 2F
monthly electricity consumption levels (http://statli-
ne.cbs.nl) to deduce relative load factors and applied
8n 2 N; s ¼ 1; 2; 3. ðMCC 1Þ them to North Western European Countries and
Central and East European countries. In these regions
A consistency condition determining that in equilibrium
the number of day light hours is an important factor in
the by firm f conjectured sales equal the actual sales of
electricity consumption. Mediterranean countries also
firm f’s rivals is given as follows.18
have cooling and air-conditioning as major drivers for
q
fsnp ¼ q
fsnp 8s 2 S; 8f 2 F ; 8n 2 Nðf Þ; 8p 2 P. energy consumption. UCTE (www.ucte.org) data sug-
gest that the upward effect of these drivers in summer
(MCC 2)
more or less outweighs the upward effects of day light
Also, the transmission services need to match the flows hours in winter. (So France, Spain, Italy and Turkey
resulting from producers’ actions.19 have an all year load factor of 100% for power
X generation). For the industrial sector, the gas input
znmp
tfnmp ¼ 0; ðwtnmp Þ 8n 2 N; m 2 JðnÞ; p 2 P. levels barely vary by season and so we take 1.0 as the
f 2F relative load factor in all seasons (Table 1).
(MCC 3) We have set the maximum injection rates equal to the
peak output rates. Injection costs of storage (besides
Lastly, the injections in gas storage equal the total sales distribution costs towards storage and distribution costs
to the storage system operator (in period 1). The dual from storage to end user segments) are set to
18
h5=1000 m3 (Table 2).
(MCC 2) is actually redundant, as the equality is already enforced
by (P 4) and (KM 1).
19
It is just the producers’ actions, as bringing the gas from gas
20
storage facilities to market sectors involves distribution networks only, See for an explanation: www.eia.doe.gov/neic/infosheets/degree-
and we consider (long-distance) transmission services here. days.htm
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778 2771

Table 1
Relative season load factors per consuming country

Season Sector

Residential Industries Power generation

Low High Peak Low High Peak Low High Peak

Country
Austria 0.22 1.52 2.31 1 1 1 0.93 1.04 1.14
Belgium 0.36 1.45 2.04 1 1 1 0.93 1.04 1.14
France 0.28 1.52 2.12 1 1 1 1.00 1.00 1.00
Germany 0.31 1.47 2.13 1 1 1 0.93 1.04 1.14
Italy 0.16 1.46 2.59 1 1 1 1.00 1.00 1.00
Netherlands 0.39 1.41 2.02 1 1 1 0.93 1.04 1.14
Spain 0.19 1.55 2.33 1 1 1 1.00 1.00 1.00
United Kingdom 0.34 1.42 2.13 1 1 1 0.93 1.04 1.14
Czech Republic 0.12 1.55 2.56 1 1 1 0.93 1.04 1.14
Hungary 0.03 1.42 3.08 1 1 1 0.93 1.04 1.14
Poland 0.09 1.58 2.59 1 1 1 0.93 1.04 1.14
Romania 0.03 1.45 3.02 1 1 1 0.93 1.04 1.14
Slovakia 0.06 1.46 2.91 1 1 1 0.93 1.04 1.14
Turkey 0.09 1.46 2.80 1 1 1 1.00 1.00 1.00

Table 2 3.2. Analysis of market scenarios

Storage costs and capacitiesa,b

Country Year Working gas Peak output To analyze the European natural gas market, we
(bcm) rate (mcm/day) constructed four market scenarios. The first one
assumed that the producers were in perfect competition
Austria 2000 2.82 28
(PC) with each other relating to COfnp ¼ 0. For the
Belgium 2000 0.71 20
Bulgaria 2000 0.20 2 remaining scenarios, COfnp ¼ 1, indicating that the
Czech Republic 2000 2.06 40 producers were strategic Cournot players with the
Denmark 2000 0.81 24 ability to influence prices. The second market scenario,
France 2000 10.49 182 denoted as Strategic Base Case (SBC), assumed that the
Germany 2000 19.10 438
data values specified in the previous section were in
Hungary 2000 3.29 44
Italy 2000 12.75 236 force. The third scenario, designated as Strategic Extra
Netherlands 2000 2.48 175 Pipelines (SEP), allowed for three extra pipelines serving
Poland 2000 1.26 23 the UK market as shown in Fig. 6 and described in
Romania 2000 1.57 11 Table 3. The fourth scenario, labelled Strategic No
Slovakia 2000 2.74 33
Storage (SNS), considered the effect of the storage
Spain 2000 1.41 11
Turkey 2000 0 0 sector on the whole market.
United 2000 3.63 138 These four scenarios led to three comparisons as
Kingdom shown below (the reference cases are underlined).
a
Source is (IEA, 2002b).
b
The peak output rate of the Czech Republic is adjusted upwards I. Effects of Market Power: Perfect Competition vs.
based on recent information
Strategic Base Case.
II. Effects of Transmission Capacity: Strategic Base
Case vs. Strategic Extra Pipelines.
We have transformed the yearly exogenous produc-
III. Effects of Storage: Strategic Base Case vs. Strategic
tion levels into daily numbers, according to their relative
No Storage.
load factors.21

The first comparison analyzed the market inefficiencies

21
It turned out that the Romanian daily exogenous production level
is about 1% higher than its low demand period reference consumption
level. We shifted 1% of the Exogenous Production from the low
demand to the high and peak demand periods to solve this issue.
due to producers having market power and driving up
prices by withholding production. The second compar-
ison measured the gain to the UK system if extra
pipeline capacity were added in strategic markets. The
last comparison measured the importance of the storage
 ARTICLE IN PRESS
2772 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

Fig. 6. Extra pipelines in Scenario 3.

Table 3
Transmission capacity extensions scenario 3 (bcm/year)

From To Current capacity Extension Reason Due:

Norway United Kingdom 12 +12 Ormen Lange field 2007

Netherlands United Kingdom 0 +12 Balgzand Bacton line 2006
Denmark Netherlands 0 +5 Tyra field July 2004

sector to the whole EU market by contrasting it with no
storage.
3.2.1. Comparison I: Perfect Competition vs. Strategic
Base Case
When producers are able to exercise market power
from a Cournot perspective, they dramatically change
the market. In particular, production drops by 20%,
and average price levels increase by 86%, resulting in a
drop in consumer surplus of 28%; the production by
country is shown in Fig. 7. The magnitude of the change
in production levels was not the same by country. In
particular, the lower the marginal production cost, the
greater the withholding of production.
The increase in prices is felt in all market sectors and
countries as shown for the major countries in Fig. 8. The
producers, SSO, and TSO reap enormous profits as
compared to the perfect competition case, with respec-
tively, increases of 345%, 4483%, and 45%.22 Part of
the rationale for the extreme price increases is due to the
fact that as modeled, all three of the market sectors
exhibit low elastic demand, so that producers raising
22
See the Appendix for a clarification of the profit increases of the
SSO and the TSO.
prices will lead to higher revenues. Of course, one needs
to also consider the cost side but this is strong
motivation for producers exercising market power.
Libya and LNG World, included in ‘‘Other’’ producers
in Fig. 7 start producing in SBC. In the perfect
competition case, they were not able to compete, but
with the higher price levels they can.
3.2.2. Comparison II: Strategic Base Case vs. Strategic
Extra Pipelines
In contrast to the previous analysis, this comparison
concerned two cases in which the producers were
strategic. The market inefficiencies brought about by
producers exerting market power, were, to some extent,
mitigated by this extra pipeline capacity. The result was
that more gas was available in the system that led to
dramatically lower prices for the UK (see Table 4) and
generally lower prices overall.
These new pipelines as well as the existing ones were
at or near capacity in most seasons. In particular, 41.8
out of a total of 44.8 bcm of pipeline capacity into the
UK was used on an annual basis. This extra capacity
was also beneficial to the EU’s consumer surplus causing
it to rise 3% over the Strategic Base Case. Of course,
with this extra capacity, a greater level of production (a
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778 2773

Production levels
300

PC SBC
250

200
bcm
150

100

50

0
EU15 Norway Russia Algeria Other

Fig. 7. Production levels from comparison I.

/ 1000 m^3 Gas prices PC SBC

250

200

150

100

50

-
FR GE IT NL UK FR GE IT NL UK FR GE IT NL UK
Low Low Low Low Low High High High High High Peak Peak Peak Peak Peak

Fig. 8. Price levels from comparison I.

Table 4 protect some of their own profits, the UK producers

Price changes for the United Kingdom under pipeline capacity hold back production by 10 bcm.
extension

Sector Low High Peak 3.2.3. Comparison III: Strategic Base Case vs. Strategic
No Storage
Industry
18%
21%
15% In this comparison, the value of the storage market,
Power generation
22%
10%
4%
Residential
13%
15%
15%
under Cournot producers is examined. When no storage
Storage
5% market is allowed, both production and TSO profits rise
dramatically, 43% and 41%, respectively. These in-
creased profits are the result of an average price increase
of 15% occurring at lower production and consumption
3% increase) resulted, manifested mainly in Norway, the levels. Also, the disadvantage to the market of not
Netherlands and Russia. This translated to increased having storage decreases the consumer surplus by 13%.
sales to the UK whose market shares, as evidenced in The importance of storage and its effect on consump-
Fig. 9, indicate stronger positions by Norway and the tion is shown in Fig. 10. In particular, we see that by
Netherlands. Higher production but lower prices led to country, storage has different impacts on changes in
lower producer profits by 3.7% as well as decreased SSO consumption. The greater the difference between the
and TSO profits of 4.5% and 5.9%, respectively. To height of the bar (change in storage) and the height of
 ARTICLE IN PRESS
2774 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

1% 2%SBC 3%
4% SEP
9%

16%

16%
UK
NO
51% NL
AL
Other

26%
72%

Fig. 9. Market shares of sales to the United Kingdom (left: Strategic Base Case, right: Strategic Extra Pipelines Case).

bcm Change in consumption related to change in storage capacity

20

18
Change in Storage
16
Change in Consumption
14

12

10

0
AU BE FR GE IT NL SP UK CZ HU PO RO SK

Fig. 10. Relation between change in consumption and storage capacity. RO: Romania.

the point (change in consumption), the less the impact.
E.g., Germany suffers relatively little, whereas Italy is
more affected.
3.2.4. Link of results with recent EC policy documents
As addressed before in the introduction the large and
ever-increasing dependency of external supplies has led
to a need for measures to manage supply risks and
secure supplies. Besides the issue of external supply
security for natural gas the liberalization process in
recent years has resulted in strong positions for some big
energy multinationals. Both in the external supply
situation as well as the internal supply oligopolistic
market behavior could give rise to market power.
Directives EC (2000a, 2003, 2004) provide regulations
to be put in place by EU members states in years to
come, whereas EC (2000b) provides a list with priority
infrastructure projects. However the influence of the
many countries having to find a compromise text to
meet all interests can be seen in the global and abstract
level of the formulated policies. Most policies to be put
in place are national legislation and are formulated by
national governments. Whereas some governments (like
the Dutch) are very willing to have an open competitive
market and have ambitious market opening schemes,
others are only putting the least effort in reaching the
minimum EC requirements.
Our results show that when adequate policies are not
in place, market power abuse may lead to significant
social welfare losses because of lower consumption
levels and higher prices. But the EC market liberal-
ization efforts have been triggered in the first place by
the wish to have lower energy prices as one of the means
to become the most competitive economic world region
in 2010 (‘Lisbon 2010 Agenda’). The different ambition
levels regarding market opening, (or equivalently, the
different attitudes of governments in protecting national
interests) may lead to slower market opening eventually,
as countries will adapt their market opening pace to the
slower movers to not sell out their national interests.
Ownership of infrastructure in the gas market
(transmission pipelines, distribution networks) easily
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778
leads to natural monopolies, therefore Third Party
Access (TPA) is a necessity to allow for competition in
the first place.23 Many of the policies regarding the
internal market rules and security of supply situation
deal with TPA. (e.g. articles 8, 12, 15, 18–22, EC, 2003)
Besides access, the availability of sufficient capacity
is of major importance. EC 2000b provides priority
infrastructure projects regarding the trans-European
Energy Networks (TEN) The selection of the infra-
structure extensions in the SEP case was triggered by
project f02 of EC 2000b and the new Denmark–Nether-
lands line already being in place. Adding only three
pipelines and the relatively isolated position of the
United Kingdom enables a straightforward interpreta-
tion of the results.
Our case SNS shows the impact of available gas
storage facilities in the market. One can imagine that gas
storage facilities owned by producing parties will not
enhance a competitive market situation but would allow
for strategic behavior as well. TPA to storage is a
prerequisite for competition.
Our results for the UK show the importance of
sufficient transmission infrastructure and TPA, which
only increases when the UK becomes a significant net
importer in the coming years. The TEN projects in EC
2000b are meant for the coming decades, however the
document does not prioritize which projects to be
developed first. Quantitative analysis can support
prioritizing of projects, and help monitoring whether
the market invests in the projects thought of most
relevant by the EC.
4. Summary and future work
In this paper we have developed an equilibrium model
for the European natural gas market. This model allows
for both perfect competition as well as Cournot strategic
producers. The other players in storage and transmis-
sion are taken to be in perfect competition. This model
was then applied to four market scenarios to gauge the
effects of market power, increased pipeline capacity to
the United Kingdom, as well as the importance of
storage. The results indicate that extreme market power
by the producers would result in huge market ineffi-
ciencies necessitating strong (possibly EU) regulations
to protect consumers. Additionally, both ample pipeline
capacity and storage are key to favorable market
conditions for consumers. Future anticipated work will
concentrate on allowing stochasticity in the players
problem to better reflect uncertainty in actual markets.
In addition consideration of modeling of forward
markets and capacity investments.
23
Note that we have assumed unlimited infrastructure access.
Limitations in access would allow for more market power.
2775
Appendix
A.1. The nonlinear complementarity problem
The nonlinear complementarity problem (NCP) and
the variational inequality problem (VI) are two very
general problem formats which include the Karush–-
Kuhn–Tucker (KKT) optimality conditions, Nash–-
Cournot games, Wardrop traffic equilibria, as well as
many other examples in economics and engineering
(Ferris and Pang, 1997; Facchinei and Pang, 2003).
Given a function F : Rn ! Rn , the (mixed) nonlinear
complementarity problem NCP(F), is to find a vector
x 2 Rn such that:
xi ¼ ui ) F i ðx Þp0,
l i oxi oui ) F i ðx Þ ¼ 0,
xi ¼ l i ) F i ðx ÞX0, ðA1Þ
where l, u are lower and upper bound vectors,
respectively, and
l i ; ui 2 R [ f
1; þ1g; l i oui ; 8i ¼ 1; 2; . . . ; n.
A.2. Formulating the complementarity model
The mixed complementarity model for calculating the
market equilibrium is constructed by combining the
following set of conditions:
 the first-order KKT conditions for the profit-max-
imization model for each producer f;24
 the first-order conditions for the TSO model,
 the first-order conditions for the storage model; and
 the market-clearing conditions.
The mixed complementarity problem below is a linear
one if the indicated derivatives are affine. The problem is
square (as many conditions as variables).
A.2.1. Producer KKT conditions
For each yfnp:
0pyfnp ? ½CY 0 fnp ðyÞ
mfnp þ yfnp p0 (KP 1)
For each qfsnp, s ¼ 1; 2; 3; p ¼ 1; 2; 3: (KP 2)
0pqfsnp ?
2 3
ð1
COfnp Þpsnp þ COfnp  ðIIDsnp þ SIDsnp
6 7
6 ðq
fsnp þ 2qfsnp þ esnp ÞÞ 7p0
4 5
0

DC sn ðÞ
yfnp þ bfsnp  SF C
fnp  SIDsnp
For each qf4n1:
0pqf 4n1 ? ½p4n1
DC 4n ðÞ
yfn1 p0 (KP 3)
24
A reasonable assumption of concavity of the nonlinear terms in
each objective functions is made so that the KKT conditions are
sufficient for optimality (Bazaraa et al., 1993).
 ARTICLE IN PRESS
2776 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778

For each q
fsnp: For each psnp ; s ¼ 1; 2; 3; p ¼ 2; 3 :

P 9
COfnp  SIDsnp  qfsnp
bfsnp psn1
II Dsn1
SIDsn1  qfsn1 ¼ 0 > (KM 1)
>
>
ð1
SF C
fnp  SIDsnp Þ ¼ 0 (KP 4) f 2F >
>
 >
=
For each tfmnp: psnp
IIDsnp
SIDsnp
( )
0ptfnmp ? ½
wtnmp
yfnp þ yfmp p0 (KP 5) P >
>
>
>
For each mfnp : 0pmfnp ? ðyfnp
ȳfnp Þp0 (KP 6)  qfsnp þ ensnp ¼ 0 >
>
f 2F ;
For Peach yfn1 : P P
qfsn1
yfn1 þ ðtfnm1
tfmn1 Þ ¼ 0 (KP 7) For each wtnm : znmp
tfnmp ¼ 0 (KM 2)
f 2F
s21;2;3;4 m2JðnÞ P
For each yfnp ; p ¼ 2; 3: For each p4n1 : in1
qf 4n1 ¼ 0 (KM 3)
P P f 2F
qfsnp
yfnp þ ðtfnmp
tfmnp Þ ¼ 0
s21;2;3 m2JðnÞ
For each bfsnp; p ¼ 1: (KP 8)
q
fsnp
½q
fsnp þ SF C
fnp A.3. Clarification of SSO and TSO profits in the
ðIIDsnp þ SIDsnp Strategic Base Case
ðq
fsnp þ qfsnp Þ
psnp Þ ¼ 0
For each bfsnp; p ¼ 2; 3: A.3.1. SSO
q
fsnp
½q
fsnp þ SF C
fnp The SSO makes money by buying gas in the low
ðIIDsnp þ SIDsnp demand period and selling it in the high demand period
ðq
fsnp þ qfsnp þ esnp Þ
psnp Þ ¼ 0 for a higher price. As the per m3 costs are constant for
the SSO in our model, the SSO profits depend on the
buying price, selling price and volume. The price that the
SSO pays for the gas is based on the marginal
A.2.2. TSO KKT conditions
production costs of the producers. That is in both the
perfect competition as well as the strategic base cases
For each znmp: (KT 1) (Table 5).
0pznmp ? wtnmp
CZ 0 nm ðznmp Þ
cnmp p0 In the strategic base case the production levels are
For each cnmp : 0pcnmp ? ðznmp
z̄nmp Þp0 (KT 2) lower than in the PC case, and the average price that the
SSO pays for the gas is lower. In the SBC case the winter
prices are higher than in the PC case, so the SSO gets on
A.2.3. Storage KKT conditions average a higher price for its gas that is sold. Also
contrary to what happens in the PC case, in the SBC
For each esnp, p ¼ 2; 3, s ¼ 1; 2; 3: (KS 1) case all storage capacity is used, so the traded volume of
0pesnp ? psnp
DC 0sn ðesnp Þ
sn
on
lnp p0 gas by the SSO is higher. So the buying price, selling
price and volume are all three better in the SBC case
For each in1 : (KS 2)
than in the PC case. So the SSO makes more profit in the
0pin1 ?
pP 
CS 0 ðin1 Þ þ sn
an p0
4n1
P SBC case relative to the PC case.
For each sn : d p esnp
d 1 in1 ¼ 0 (KS 3)
p¼2;3 s¼1;2;3

Pīn p0
For each an : 0pan ? in1
(KS 4) A.3.2. TSO
For each lnp : 0plnp ? ensnp
ēn p0 (KS 5) The TSO profits depend on the difference between
s¼1;2;3
P P transport tariff and transport costs (the ‘congestion
For each on : 0pon ? d p esnp
v̄n p0 (KS 6) tariffs’) and transported volumes. The aggregated
s¼1;2;3 p¼2;3
transported volume in SBC is lower than in PC. The
total period-weighted flows are 644 billion m3 in SBC
A.2.4. Definitional constraints (not part of the
complementarity system) Table 5
SSO summary of profits
P
For each q
fsnp : q
fsnp ¼ qf 0 snp (DC 1) Strategic Base Perfect
f 0 af
Case (SBC) Competition Case
For each ensnp : ensnp ¼ esnp (DC 2) (PC)

Production Lower
Average SSO buying costs Lower
A.2.5. Market-clearing conditions Winter SSO selling prices Higher
Storage capacity All used Not all used
Traded SSO volume Higher
For each psn1 ; s ¼ 1; 2; 3 :
 ARTICLE IN PRESS
R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778
Table 6
TSO summary of profits
TSO Profit PC SBC Absolute Relative
difference difference
LNG 28,918 547,975 519,057 1795%
Pipe 5,113,202 6,898,328 1,785,126 35%
Total 5,142,119 7,446,303 2,304,183 45%
and 670 billion m3 in PC. So the congestion tariffs must
be the explanation for the higher TSO profit in SBC
relative to PC. The TSO can only impose congestion
tariffs on congested pipelines and LNG supply chains
(Table 6).
Over 20% of extra TSO profits results from more
LNG supply chains becoming restrictive. Because of the
higher price levels in SBC more LNG producers enter
the market. Therefore the demand for LNG transport
services is significantly higher than in PC, leading to
capacity of more LNG supply chains to be restrictive in
SBC relative to PC. In SBC the Belgian, Turkish and
Italian LNG regasification terminals and the Libyan
liquefaction terminal are congested in all seasons,
whereas in PC only the Italian LNG regasification
terminal is congested (in all three periods).
The main part of over 75% of the higher TSO profits
results from more pipelines being restrictive in SBC
relative to PC in combination with a much higher
average congestion tariff. The following numbers
illustrate that the pipelines are restrictive. Of all
pipelines in the model and in the three seasons in PC
108 pipeline/season combinations are used. Of these 108
used pipelines 53 are congested. In SBC 263 pipeline/
season combinations are used of which 133 are
congested. Regarding the congestion tariffs there is an
unweighted average congestion tariff of congested pipes
in PC of 19.23 whereas in SBC it’s 67.09 [EUR/1000 m3].
That in SBC more pipelines are restrictive can be
understood by the following line of reasoning. When we
compare SBC with PC we can understand that
producers have an incentive to deliver in more different
markets in SBC than in PC. Take as starting point the
PC outcome. A producer lowering sales levels in the
currently penetrated markets results (as we have seen in
3.2.1) in higher price levels and higher revenues.
However delivering in a ‘new’ market (a market not
penetrated by the producer in PC but to be penetrated in
SBC) will result in lower prices in that market, but these
lower price levels do not affect the newly entering
producer’s own revenues, only that of the competitors
that were already supplying in that market. So
producers deliver in more markets, and as in the PC
situation they supplied to the nearest markets, the newly
penetrated markets need longer transport routes and
(what we do not know a priori, but see as a model
outcome) more transport capacity system-wide.
2777
References
Ahn, B.H., Hogan, W.W., 1982. On convergence of the PIES algorithm
for computing equilibria. Operations Research 30, 281–300.
Bazaraa, M.S., Sherali, H.D., Shetty, C.M., 1993. Nonlinear
Programming Theory and Algorithms. Wiley, New York.
Boots, M.G., Rijkers, F.A.M., Hobbs, B.F., 2004. Modelling the role
of trading companies in the downstream European gas market: a
successive oligopoly approach. The Energy Journal 25 (3), 73–102.
BP, 2003. BP Statistics 2003, www.bp.com.
Breton, N., Zaccour, Z., 2001. Equilibria in an asymmetric duopoly
facing a security constraint. Energy Economics 23, 457–475.
Brooks, R.E., 2003. Optimizing complex natural gas models, http://
rbac.com/articles/informs.htm.
Cedigaz, 2002a. From Energiebulletin 2002, no. 4145, p. 5.
Cedigaz, 2002b. From European Gas Markets, 29 November 2002.
Day, C.J., Hobbs, B.F., Pang, J.S., 2002. Oligopolistic competition in
power networks: a conjectured supply function approach. IEEE
Transactions on Power Systems 17 (3), 597–607.
De Wolf, D., Smeers, Y., 1997. A stochastic version of a Stack-
elberg–Nash–Cournot equilibrium model. Management Science 43
(2), 190–197.
EC, 2000a. COM(2000) 769 final, Towards a European strategy for the
security of energy supply, 29 November 2000.
EC, 2000b. The present list of projects of common interest is available
in the annex of Commission Decision no 761/2000/EC of 16
November 2000, setting out the specifications for projects of
common interest (Decision C(2000) 2683).
EC, 2003. Directive 2003/55/EC concerning common rules for the
internal market in natural gas, June 26.
EC, 2004. Directive 2004/67/EC concerning measures to safeguard
security of natural gas supply.
EIA, 1998. The National Energy Modeling System: an overview. Office
of Integrated Analysis and Forecasting. US Department of Energy,
Washington, DC.
Gabriel, S.A., Vikas, S., Ribar, D.M., 2000. Measuring the influence of
Canadian carbon stabilization programs on natural gas exports to
the United States via a ‘bottom-up’ intertemporal spatial price
equilibrium model. Energy Economics 22, 497–525.
Gabriel, S.A., Kydes, A.S., Whitman, P., 2001. The national energy
modeling system: a large-scale energy-economic equilibrium model.
Operations Research 49, 14–25.
Gabriel, S.A., Manik, J., Vikas, S., 2003. Computational experience
with a large-scale, multi period, spatial equilibrium model of the
North American natural gas system. Networks and Spatial
Economics 3, 97–122.
Gabriel, S.A., Kiet, S., Zhuang, J., 2004a. A competitive equilibrium
model for the natural gas market based on a mixed complemen-
tarity formulation, Operations Research, forthcoming.
Gabriel, S.A., Zhuang, J.-F., Kiet, S., 2004b. A Nash-Cournot model
for the North American natural gas market. IAEE Conference
Proceedings, Zurich, Switzerland.
Gabriel, S.A., Zhuang, J.-F., Kiet, S., 2004c. A large-scale comple-
mentarity model of the North American natural gas market,
Energy Economics, in press.
Golombek, R., Gjelsvik, E., Rosendahl, K.E., 1995. Effects of
liberalising the natural gas markets in Western Europe. The
Energy Journal 16 (1), 85–111.
Golombek, R., Gjelsvik, E., Rosendahl, K.E., 1998. Increased
competition on the supply side of the Western European natural
gas market. The Energy Journal 19 (3), 1–18.
Global Competition Review. 2003. Gas regulation in 26 jurisdictions
worldwide, www.globalcompetitionreview.com.
Gürkan, G., Özge, A.Y., Robinson, S.M., 1999. Sample-path solution
of stochastic variational inequalities. Mathematical Programming
84, 313–333.
 ARTICLE IN PRESS
2778 R.G. Egging, S.A. Gabriel / Energy Policy 34 (2006) 2762–2778
Harker, P.T., Pang, J.-S., 1990. Finite-dimensional variational inequal-
ity and nonlinear complementarity problems: a survey of theory,
algorithms and applications. Mathematical Programming 48,
161–220.
Haurie, A., Zaccour, G., Legrand, J., Smeers, Y., 1987. A stochastic
dynamic Nash-Cournot model for the European gas market.
Technical Report G-86-24, GERAD, Ecole des Hautes Etudes
Commerciales, Montréal, Québec, Canada.
Hobbs, B.F., Rijkers, F.A.M., 2004. Strategic generation with
conjectured transmission price responses in a mixed transmission
pricing system—Part I: Formulation. IEEE Transactions on Power
Systems 19 (2), 707–717.
Hobbs, B.F., Rijkers, F.A.M., Wals, A.F., 2004. Strategic generation
with conjectured transmission price responses in a mixed transmis-
sion pricing system—Part II: Application. IEEE Transactions on
Power Systems 19 (2), 872–879.
IEA, 2002a. IEA Energy Statistics 2001, www.iea.org/Textbase/stats/
index.asp.
IEA, 2002b. IEA Natural Gas Information, 2002 (with 2001 data).
IMF-WEO, 2003. IMF-WEO September 2003.
IPCC, 1995. IPCC Guidelines for national Green House Gas
inventories, 1995, vol. 3, Ref Manual.
Lise, W., Linderhof, V., Kuik, O., Kemfert, C, Östling, R., Heinzow,
T. 2006. A game theoretic model of the Northwestern European
electricity market—market power and the environment, Energy
Policy, forthcoming.
Mathiesen, L., Roland, K., Thonstad, K., 1987. The European natural
gas market: degrees of market power on the selling side. In:
Golombek, R., Hoel, M., Vislie, J. (Eds.), Natural Gas Markets
and Contracts. North-Holland, Amsterdam.
Murphy, F.H., 1983. An overview of the intermediate future
forecasting system. In: Kydes, A.S., et al. (Eds.), Energy Modeling
and Simulation. North-Holland, Amsterdam, pp. 66–73.
Murphy, F.H., Conti, J.J., Shaw, S.H., Sanders, R., 1988. Modeling
and forecasting energy markets with the intermediate future
forecasting system. Operations Research 36, 406–420.
O’Neill, R.P., Williard, M., Wilkins, B., Pike, R., 1979. A mathema-
tical programming model for allocation of natural gas. Operations
Research 27, 857–873.
Shy, O., 1995. Industrial Organization Theory and Applications. The
MIT Press, Cambridge, MA.
Takayama, T., Judge, G., 1971. Spatial and Temporal Price and
Allocation Models. North-Holland, London.
Tzoannos, J., 1977. An empirical study of peak-load pricing and
investment policies for the domestic market of gas in Great Britain.
Applied Economics 9, 133–153.
UNFCCC, 1998. Kyoto Protocol to the United Nations Framework
Convention on Climate Change (COP 3 report, document FCCC/
CP/1997/7/Add.1 (18 Mar 1998)).
Van Oostvoorn, F., 2003. Long-term gas supply security in an enlarged
Europe: final report ENGAGED project, www.ecn.nl/library/
reports/2003/c03122.html.