European Union gas market development

Abstract

The recently announced Energy Union by the European Commission is the most recent step in a series of developments aiming at integrating the European Union's (EU) gas markets in order to increase social welfare and security of gas supply. Based on simulations with a spatial partial equilibrium model, we analyze the changes in consumption, prices, and social welfare up to 2022 induced by the infrastructure expansions planned for this period. We find that wholesale prices decrease slightly and converge at Western European levels, the potential of suppliers to exert market power decreases significantly, particularly in the Baltic countries and Finland which are the most exposed countries today, and consumer surplus increases by 15.9 % in the EU. Our results allow us to distinguish three categories of projects: (i) New gas sources developed and brought to the EU markets. These projects decrease prices and increase social welfare in a large number of countries. The only project in this category is the TransAnatolian Gas Pipeline (TANAP) bringing Azeri gas to the EU; (ii) Existing gas sources made available to additional countries. This leads to an increase of social welfare in the newly connected countries, while social welfare drops slightly everywhere else. These projects mainly involve pipeline and regasification terminal capacity enhancements; (iii) Projects with a marginal effect on the market, assuming that it is fully functioning. Most storage expansion projects fall into this category, plus the recently announced Turkish Stream. Our results indicate that if all proposed infrastructure projects are realized, the EU's single market will become a reality in 2019 when Finland is interconnected to the EU markets. However, we also find that social welfare can only be increased significantly for the EU as a whole if new gas sources become accessible. Consequently, we suggest that the EU should emphasize on measures to increase the available volumes, in particular once the integration of the market is completed. At the same time, efficiency gains, albeit decreasing social welfare, help to improve the situation of consumers and decrease the dependency of the EU as a whole on external suppliers.

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