Market Development in the United Kingdom's Natural Gas Industry
46 Pages Posted: 20 Apr 2016
Date Written: March 1998
Experience in the United Kingdom shows that it is possible to move from a monopoly to a competitive environment in natural gas without structural reforms, although it is costly and difficult. Deregulation must be accompanied by the creation of an appropriate regulatory and institutional framework for the sector that shields entrants from the exercise of market power by the incumbent and gives entrants in the gas market equal rights in dealing with the transportation monopolist. Juris shows how, in the United Kingdom, government and industry participants have responded to challenges created by opening the natural gas industry to competition. He concludes that, as a result of cooperation between the government and industry participants, appropriate mechanisms can be established for operating and balancing the system and for trading natural gas and transportation capacity. The deintegrated natural gas industry in the United Kingdom is off to a promising start after a long gestation.
Juris describes the processes of the Network Code, a market-based method for balancing the pipeline system and optimizing transportation by British Gas TransGo (BGT), the transportation and storage arm of British Gas (formerly the publicly owned monopoly transporter and supplier of natural gas). The Network Code is a set of rules that determine how users of the pipeline system cooperate with the system operator when seeking transportation services. The operator uses price signals generated through the flexibility mechanism to choose the balancing measures with the lowest cost to society.
Juris analyzes the four mechanisms used in physical gas markets, describes developments in the U.K.'s financial gas market, and describes pipeline capacity trading in primary and secondary markets and BGT's pricing of capacity and transportation services. The most important issue today, says Juris, is whether industry participants can reach a consensus on how to enhance the existing framework to make markets more efficient. Development of the underdeveloped financial gas market will require cooperation between BGT and the Office of Gas Supply to give the International Petroleum Exchange access to BGT's electronic network, so that it can record and settle transactions. Both BGT and its customers will need to contribute time and resources to developing an efficient tariff structure for pipeline capacity and transportation services in the contract and tariff markets.
This paper - a product of Private Participation in Infrastructure Division, Private Sector Development Department - is part of a larger effort in the department to analyze issues arising from private participation in infrastructure.
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