Abstract
This chapter discusses markets for natural gas, biogas, and hydrogen. While the markets for biogas and hydrogen are still in their infancy, natural gas ranks third globally among primary energy sources (after crude oil and hard coal). One of its advantages are technologies with high fuel efficiencies which release relatively little carbon dioxide (CO2). Another advantage is the fact that existing infrastructure can be used for distributing gas from new, unconventional reserves. On the other hand, its transportation calls for a capital-intensive and geographically inflexible network of pipelines which cannot be used for other purposes and is therefore factor-specific . This raises several questions concerning the properties of natural gas markets:
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Are pipeline investments economically viable without long-term contracts?
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Can market liquidity for gas be achieved without abolishing long-term contracts?
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How can supply be secured in the absence of long-term contracts?
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Is vertical integration along the value chain economically beneficial or not?
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Can liquid natural gas (LNG) play the role of a game changer, making consuming countries less dependent on suppliers with monopoly power and political clout?
In many regions of the world, the highly seasonal demand for space heating determines the sales of natural gas. As gas customers usually lack storage capacities, deliveries by suppliers must track demand closely. This raises further questions that will be discussed in this chapter:
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How can volatile demand be met?
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What role could gas storage capacities play?
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Regarding the potential for substitution between natural gas and heating oil, what are the implications for retail gas pricing?
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- 1.
The combustion properties of gases are reflected by their Wobbe number . Gases with the same Wobbe numbers are considered substitutable. Low-energy (L) gas has a Wobbe number of 12.4, high-energy (H) gas, of 15.0.
- 2.
The data exclude natural gas which is flared or reinjected into gas deposits.
- 3.
Nearly all biomass can be fermented, with the exception of lignin.
- 4.
The pressure in a pipeline declines primarily due to frictional losses. In addition, it needs to be managed if elevation changes.
- 5.
While implying that returns to scale are exhausted sooner or later, this assumption guarantees the existence of a single equilibrium.
- 6.
This comparison is flawed, however, as LNG vessels may have to travel longer distances around continents while pipelines can use the direct path. This difference does not obtain if deep oceans have to be crossed. Yet pipelines have not been competing against the LNG chain across deep oceans up to present.
- 7.
Some long-term contracts use other pricing factors, e.g., the wholesale prices of heavy oil or coal. Such arrangements are designed to keep gas competitive in power generation.
- 8.
As both time series are cointegrated of degree one, a cointegration equation should be estimated. The pertinent methodology is explained in Sect. 9.3.2: however, it does not affect estimation results in the present case.
- 9.
Distributors charge a so-called gas netback price which contains a markup on their purchase price. This markup is stable as long as the prices of gas and heating oil move in parallel. Due to the advantages of natural gas in terms of cleanliness and comfort, a certain markup over heating oil can be enforced in retail markets.
- 10.
Liquidity can be measured using the so-called churn rate , defined as the ratio of traded volume to physically delivered volume.
- 11.
In U.S. units, one thousand cubic feet (cbf) of natural gas contain an energy equivalent of eight gallons of heating oil. Therefore, one would expect eight gallons of heating oil to fetch the same price as 1000 cbf of natural gas (which is not true, see Fig. 9.2.)
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Zweifel, P., Praktiknjo, A., Erdmann, G. (2017). Markets for Gaseous Fuels. In: Energy Economics. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-53022-1_9
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