Pricing short-term gas transmission capacity: A theoretical approach to understand the diverse effects of the multiplier system

Eren Çam and Dominic Lencz ()
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Eren Çam: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)
Dominic Lencz: Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

No 2020-2, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

Abstract: In the European Union’s (EU) gas transmission system, transporting gas requires the booking of transmission capacities. For this purpose, long-term and short-term capacity products are offered. Short-term capacities are priced by multiplying long-term capacity tariffs with factors called multipliers, making them comparably more expensive. As such, the level of multipliers directly affects how capacity is booked and may significantly impact infrastructure utilisation and welfare—an issue that has not received attention in the literature so far. Using a theoretical approach, we show that multipliers equal to 1 minimise costs and maximise welfare. In contrast, higher multipliers are associated with decreasing welfare. Yet, policymakers may favour higher multipliers, as we find that multipliers greater than 1 but sufficiently low can maximise consumer surplus by leading to reduced hub prices and lower regional price spreads on average. These findings are expected to hold for the large majority of the EU countries. Nevertheless, we also identify situations in which capacity demand can become inelastic depending on the proportion of multipliers with respect to the relative cost of transmission versus storage. In such cases, varying multipliers are found to have no effect on infrastructure utilisation, prices and welfare.

Keywords: gas transmission networks; entry-exit tariffs; multipliers; NC CAM (search for similar items in EconPapers)
JEL-codes: L51 L95 Q41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-08-17
New Economics Papers: this item is included in nep-ene
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2020_002

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