Long-term vs. Short-term Contracts; A European perspective on natural gas

Karsten Neuhoff () and Christian Hirschhausen

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper analyses the economics of long-term gas contracts under changing institutional conditions, mainly gas sector liberalisation. The paper is motivated by the increasingly tense debate in continental Europe, UK and the US on the security of long-term gas supply. We discuss the main issues regarding long-term contracts, i.e. the changing role of the flexibility clause, the effect of abandoning the destination clause, and the strategic behaviour of producers between long-term sales and spot-sales. The literature suggests consumers and producers benefit from risk hedging through long-term contracts. Furthermore long-term contracts may reduce exercise of market power. This was argued to benefit consumers at the ‘expense’ of producers’ profits. Our analysis shows if the long-run demand elasticity is significantly lower than the short-run elasticity, both strategic producers and consumers benefit from lower prices and larger market volume. Some policy implications of the findings are also discussed.

Keywords: contracts; gas; market power; demand elasticity; liberalisation; Europe (search for similar items in EconPapers)
JEL-codes: D43 L22 L95 (search for similar items in EconPapers)
Pages: 22
Date: 2005-09
New Economics Papers: this item is included in nep-com, nep-eec and nep-ene
Note: EPRG 05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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http://www.electricitypolicy.org.uk/pubs/wp/eprg0505.pdf (application/pdf)

Related works:
Working Paper: Long-term vs Short-term Contracts: A European Perspective on Natural Gas (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0539

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