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Abstract

This paper examines the performance of the spatial arbitrages carried out between two regional markets for wholesale natural gas linked by a pipeline system. We develop a new empirical methodology to (i) detect if these markets are integrated, i.e., if all the spatial arbitrage opportunities between the two markets are being exploited, and (ii) decompose the observed spatial price differences into factors such as transportation costs, transportation bottlenecks, and the oligopolistic behavior of the arbitrageurs. Our framework incorporates a new test for the presence of market power and it is thus able to distinguish between physical and strategic behavior constraints on marginal cost pricing. We use the case of the "Interconnector" pipeline linking Belgium and the UK as an application. Our empirical findings show that all the arbitrage opportunities between the two zones are being exploited but confirm the presence of market power.

Publication Type:	Article
Additional Information:	Published by International Association for Energy Economics in Energy Journal, Vol 39, Special issue 2.
Publisher Keywords:	Law of one price, market integration, spatial equilibrium, interconnectors, natural gas
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce
Departments:	School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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