Gas market liberalization impinges on reliability of delivery

Although the gas market liberalization did have a positive effect on prices, it has led to the reliability of the delivery of natural gas coming under pressure. ‘As of yet, nothing has gone very wrong’, according to Menno van Benthem, who will be awarded a PhD by the University of Groningen on 14 January. ‘However, we’re demonstrably more at risk with regard to supply security.’
 

Menno van Benthem researched the effects of the gas market liberalization. ‘Given the intensive energy use of our society today, it’s essential that the natural gas market functions properly’, he comments on his research. ‘I investigated how the gas market should be structured to achieve this aim.’ According to the PhD candidate, the affordability and supply security of natural gas, in particular, are important in this regard. The affordability is dictated by the price, the supply security depends on the degree to which there is a constant supply. In describing the gas market, economists in particular tend to reason from a traditional viewpoint, says van Benthem. ‘They assume that the market functions properly and that supply and demand are always in balance. Due to this assumption, many existing models can not be used to analyse supply security issues.’

Insecurity

The gas market liberalization brought an end to the situation where production, transport and delivery were all in the same hands. Before liberalization, transport and delivery in the Netherlands were Gasunie business. Nowadays, these activities are carried out by various parties. Major oil companies handle production, gas transport is done by Gasunie which also is in charge of the gas network, and selling gas and delivery to businesses and consumers is the business of energy companies such as Essent and Nuon. ‘Those companies work in an insecure field and their behaviour isn’t always well adjusted’, according to Van Benthem. ‘That can’t be helped, it’s a consequence of market liberalization. Companies are unaware of the exact nature of other parties’ plans and are uncertain what their future market share will be. In some cases, this uncertainty can lead to their not making some of the necessary investments regarding supply security.’ Storing gas underground is a case in point. Due to market liberalization, major investments in storage and pipelines have become more of a risk, Van Benthem explains, as it’s unclear when such investments will pay off.
 

Interaction

In order to chart the supply security problem, Van Benthem has developed a new model – ENETSIM (Energy NETwork SIMulator). The model can be used to investigate affordability in conjunction with supply security. The core of this model is formed by the interactions between the individual parties (producer, trader, transporter, storage supplier and end user). These interactions determine how the market behaves. Van Benthem compared the Dutch gas market prior to liberalization with the market afterwards and has developed scenarios for Dutch gas supply in future. He investigated the effects of such trends as the transition to a sustainable energy supply, the integration of European energy markets and the changes in behaviour of market parties due to liberalization. ‘It appears that the market does after all have a regulatory role’, says Van Benthem in summarizing his results. However, before we reach that stage things can go wrong, hampering supply security.’

 

Balance

Market liberalization has its advantages, Van Benthem stresses. ‘Government policy should focus on minimizing the disadvantages. Although it isn’t necessary to renounce the market, it is important to choose measures precisely. A measure may be good for affordability, but bad for supply security. Such consequences need to be charted in detail. In other words, the market needs to be kept on the right track. It’s the balance that’s important.’ Policymakers must therefore develop a coherent vision of the complex, liberalized gas market if it is to function properly, he states. And changes in the gas market need to be carefully carried out in order to guarantee supply security, according to the researcher.

 

Curriculum Vitae

Menno van Benthem (Rotterdam, 1979) will be awarded his PhD on 14 January 2010 by the Faculty of Economics and Business at the University of Groningen. His thesis is titled ’Optimizing the structure of the natural gas market using an agent-based modeling framework’. His supervisors are Prof. C.J. Jepma and Prof. G. Brunekreeft. Van Benthem conducted his research at the SOM research school of the University of Groningen and at TNO. The research was financed by TNO. Van Benthem is currently employed with the energy company E.ON Benelux as natural gas portfolio manager.

 

Contact

Menno van Benthem, tel. + 31  10 289 56 05 (work), e-mail: menno.van.benthem@eon-benelux.com