Modeling Coal and Natural Gas Markets

Abstract

Coal and natural gas market modeling has seen an impressive upsurge in the last decade. After a long period with a focus on optimization models, complementarity models have been developed since the 1980s and seen a renaissance after 2000. Such models are also called equilibrium models as they allow representing a market game and its equilibrium solution. First versions of complementarity models of the coal and natural gas markets were used to analyze the market structure of the international commodity trade. While they confirmed an oligopolistic market structure in the European natural gas market, the global coal market has been found to be competitive. Moreover, infrastructure analyses are carried out with such models that allow detecting bottlenecks and, in multiperiod models, computing cost‐efficient capacity expansions. Other recent advances besides multiperiod modeling are the modeling of multilevel games and stochastic models. Emerging topics are related to computational methods and a better understanding of both energy sectors. Among the challenges to the modeling community are the ongoing shortcomings of publicly available data and an improved understanding of the mathematical modeling and solution approaches by economists. Finally, both sectors are subject to a climate policy constraint which may well lead to a considerable shift in the importance as well as in regional consumption patterns of coal and natural gas and, hence, require improved modeling analysis.