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Security of gas supplies in the spanish market:

Is the spanish regulation efficient ?

Ibrahim ABADA, EDF R&D, IFP, Univ. Paris X CNRS,

Overview

Security of natural gas supplies plays a critical role in Europe. This concern has always playedan important role since the 1970s. Several structural factors are at work to explain the rekindling debate on security of gas supplies in Europe. Firstly, on the supply side: a growing reliance on imports over longer distances is observed and a significant increase in the concentration of foreign supplies is expected (Costantini et al., 2006). Secondly, speculations about the future behaviour of the Gas Exporting Countries Forum (GECF) clearly refer to a possible cartelization (Massol and Tchung-Ming, 2009). Thirdly, the recent supply interruptions observed in a number of OECD regions (IEA, 2007; Pirani et al., 2009) clearly suggest that, whatever the causes (international tensions, terrorism or technical hazards impacting unreliable infrastructures), low but strictly positive probabilities of interruption have to be considered for those risks. Last but not least: on the demand side, natural gas plays an ever increasing role. In most OECD countries, natural gas is the fastest growing fuel in the power generation mixes. Given the rigidities of power generation in the short-run, the growing interdependency between gas and electricity raises also concerns about both security and reliability of electricity supplies (IEA, 2007).

Regarding all those previous remarks, the spanish gas market is particularly concerned by all those issues. Indeed, in 1998, Spain was the first European country to set an upper bound on the quantity of gas that can be imported from a single source in order to insure a supply diversification. In Spain, a retailer can not import more than 60% of its gas from a given source. That policy was implicitely designed with the goal to limit the dependence of Spain upon Algerian gas which is its cheaper and closest supplier. In fact, this policy promoted a massive rush on LNG imports from various countries (Egypt, Nigeria, Libya...) and the algerian gas share has been reduced to nearly 38%. Doubts could thus be raised on this policy usefulness. But this last statement could be reappraised because of the future opening of the Medgaz infrastructure (a direct gasline that links Spain to Algeria).

To our knowledge, this policy has never been evaluated with a model-based analysis. This is the purpose of this contribution.

Methods

This paper models the behaviour of Gas Natural, the largest gas retailer in Spain, which is assumed to select its imports from two sources: either Algeria or others LNG exporters. The main difference between these sources concerns the security of supply: Algerian exports are assumed to be risky.Gas natural is modelled as a risk neutral operator that seeks to maximize its expected profit. As we are dealing with security of supply concerns, disruptions are clearly introduced in the model. Both their impacts (the disruption costs) and their occurrences are explicitlydeveloped.

Westudy a hypothetical long-run equilibrium to analyze both market outcomes and import diversification decisions. To be more specific, the model corresponds to a static long-run equilibrium in which costs reflect a typical year. Moreover, my analysis is focussed on long-run aspects so that it can be reasonable to assume that bottlenecks in the infrastructures (transmission networks...) play no role. Infrastructure capacities are assumed to be both sufficient and available and there are ideal access provisions to the infrastructures so that all those infrastructure-related services are offered at regulated and uniform rates which reflect total long-run unit costs, i.e. the owners of the facilities obtain a normal rate of return. Thus, these infrastructure-related issues play no role in the model at hand.

Both Spanish current regulation and alternative ones are explicitely modeled and their impacts on the spanish gas imports are studied.

Results

The theoretical model suggests the existence of an optimal rate that limits the largest importer's share. This optimum corresponds to the maximum social wefare in the Spanish gas market. This results confirms the pertinence of the Spanish currentregulatory regime.

Two different regulations are compared. In the first case, a "laisser faire" strategy is adopted. In this case, retailers are kept responsible for possible supply interruptions and support all the disruption costs. The second one corresponds to the current Spanish regulation, where a regulatory agency selects the optimum rate predicted by the model. Interesting conclusions about the most suitable regulation (for the social welfare) are drawn depending on the disruption probability.

Conclusions

This analysis shows that a rather simple microeconomic model can provide appealing results to address the possible regulatory methods designed to enhance the security of gas supplies. The model is of course, only a partial representation of reality. But, it captures the significant role that different regulations can play in the strategic decisions of Spanish retailers.

References

Costantini, V., Gracceva, F., Markandya, A. and Vicinia, G., Security of energy supply: Comparing scenarios from a European perspective, Energy Policy, Vol. 35, No. 1, (January 2007), 210-226.

Abada, I. Massol, O. Security of supply, a model-based analysis. Cahiers du Centre Economie et Gestion, frthcoming 2009.

Helm, D., Energy policy: security of supply, sustainability and competition, Energy Policy 30 (2002), 173-184.

International Energy Agency, 2007. Natural Gas Market Review. OECD/IEA, Paris.

Kruyt, B., van Vuuren, D.P., de Vries, H.J.M., and Groenenberg, H., Indicators for energy security, Energy Policy, Accepted Manuscript (March 2009).

Markandya A., Pemberton M., Energy security, energy modelling and uncertainty, Energy Policy, Accepted Manuscript (March 2009).

Massol, O., and S. Tchung-Ming, 2009. Cooperation among liquefied natural gas suppliers: is rationalization the sole objective.Cahier 06.03.64, Centre de Rechercheen Economie et Droit de l'Énergie (CREDEN), Université de Montpellier, France.

Percebois, J., 2006. Dépendance et vulnérabilite: Deux façons connexes mais différentes d'aborder les risques énergétiques. Cahier 06.03.64, Centre de Rechercheen Economie et Droit de l'Énergie (CREDEN), Université de Montpellier, France.

Pirani, S., Stern, J., and K. Yatamava, 2009. The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment, Oxford Institute for Energy Studies, NG 27, Oxford.