One, two… or many gas markets. What should be the regulatory approach to the them?

How many gas markets should there be and what should be the regulatory approach to them?

50 shades of green… gas (markets)?

FSR Topic of the Month

Week 2

by Ilaria Conti (Head of FSR Gas)

One, two, or many more… how many gas markets should there be and what should be the regulatory approach to them?

After having acknowledged the strong and urgent need for a right taxonomy and terminology describing this “new world” (see article week #1), the next logical question would then be how many different markets shall be needed in order to promote the efficient use of the different gas types and the optimal resource allocation, and what should be the regulatory approach. We recently addressed the question in one of our workshops.

In order to answer this not easy question, we probably need to make a couple of considerations first.

On one side, while the market volumes of renewable and decarbonised gases are still marginal if compared with natural gas’, memories from the fresh past remind us that investments in research and innovation can upscale some pilot projects or nascent technologies very quickly. Therefore, it appears safer, at this stage, to avoid political decisions affecting gas market infrastructure or the future regulatory approach too largely relying on current figures.

Biogas, for instance, is still produced in very limited volumes in the EU (covering less than 5% of total EU demand for gas), but can easily be upgraded into “biomethane”, whose use and physics do not differ much from natural gas. Hydrogen is also another promising resource and can be produced from (curtailed) renewable electricity via electrolysis (green hydrogen); it can also be produced from natural gas (grey and blue hydrogen) with release or capture/sequestration of CO2 or via other processes such as pyrolysis.

‘Technology-neutral’ regulation

That’s why a “technology-neutral” regulation is essential at this stage, as to ensure a fair new gas market design, where any type of potential regulatory support (generation/consumption targets, priority of access, incentives, tradable certificates etc) could favour – or at least does not compromise – an equal level playing field for the development of the new gases.

Secondly, trading in the same market requires a degree of homogeneity of products and even different gases could be traded as one, and/or use the same infrastructure [1].

This leads us to the second assumption: the energy market of the future will not be speaking the same language that we speak. The imagination effort required is double as we will need to abandon our mental structure based on “commodity markets” (oil, gas, electricity) and start thinking in terms of “flexibility value” given by this or that hybrid energy product (or “carrier”, as the new energy dictionary suggests).

What we just described is not total news to those who daily deal with international trading. In fact, traders constantly optimise across commodity markets; what is more important, for them, is rather the “tradability” of a product, whose link with its own physical characteristics is less important. Market operators and traders claim indeed the need to keep one single EU gas market – the current one – which, albeit not perfect, is certainly the positive outcome of 20 years of EU energy liberalisation policies. Unfortunately, though, even the most liquid and competitive market is often unable to correctly promote (and price) values such as sustainability and security of supply, whose logic and benefits are detached from the simple demand/offer mechanism.

How to correctly price these (extra) values? Can the ‘green value’ of a product be priced separately and ‘attached’ to it before delivery? The EU legislator will need to tackle these questions sooner or later, and hopefully, the next EU regulatory package on gas market design will provide guidance on how to harmonise the existing guarantees of origin and green certificates system(s).

This will just be one of the several upcoming challenges in building a new “upgraded EU gas market”.


[1] In the third article of this month’s TOM, we will focus on the relation between new gases and infrastructure

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