Market Power and Spatial Arbitrage between Interconnected Gas Hubs

32 Pages Posted: 18 Oct 2016  

Olivier Massol

IFP School - Center for Economics and Management; IFP Energies Nouvelles; City University London - Department of Economics

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Date Written: October 15, 2016

Abstract

This paper examines the efficiency of the arbitrages performed between two regional markets for wholesale natural gas linked by a capacity-constrained pipeline system. We develop a switching regime specification to (i) detect if the observed spatial arbitrages satisfy the integration notion that all arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a test for the presence of market power and it is thus able to distinguish between the physical and behavioral constraints to marginal cost pricing. We use the case of the “Interconnector” pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power.

Keywords: Law of One Price, Market Integration, Spatial Equilibrium, Interconnectors, Natural Gas

JEL Classification: D43, F14, F15, L95, Q37

Suggested Citation

Massol, Olivier and Banal-Estañol, Albert, Market Power and Spatial Arbitrage between Interconnected Gas Hubs (October 15, 2016). USAEE Working Paper No. 16-281. Available at SSRN: https://ssrn.com/abstract=2853633 or http://dx.doi.org/10.2139/ssrn.2853633

Olivier Massol (Contact Author)

IFP School - Center for Economics and Management ( email )

228-232 avenue Napoléon Bonaparte
Rueil-Malmaison, 92852
France

HOME PAGE: http://www.ifp-school.com/Olivier-Massol---/250

IFP Energies Nouvelles ( email )

1 à 4 avenue de Bois Préau
Rueil-Malmaison, 92852
France

HOME PAGE: http://www.ifpen.fr

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

HOME PAGE: http://www.city.ac.uk/arts-social-sciences/academic-staff-profiles/dr.-olivier-massol

Albert Banal Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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