A multilevel model of the European entry-exit gas market

In entry-exit gas markets as they are currently implemented in Europe, network constraints do not affect market interaction beyond the technical capacities determined by the TSO that restrict the quantities individual firms can trade at the market. It is an up to now unanswered question to what extent existing network capacity remains unused in an entry-exit design and to what extent feasible adjustments of the market design could alleviate inefficiencies. In this paper, we offer a four-level modeling framework that is capable of analyzing these issues and provide some first results on the model structure. In order to decouple gas trading from network congestion management, the TSO is required to determine technical capacities and corresponding booking fees at every entry and exit node up front. Firms book those capacities, which gives them the right to charge or discharge an amount of gas at a certain node up to this capacity in every scenario. Beyond these technical capacities and the resulting bookings, gas trade is unaffected by network constraints. The technical capacities have to ensure that transportation of traded quantities is always feasible. We assume that the TSO is regulated and determines technical capacities, fees, and transportation costs under a welfare objective. As a first step we moreover assume perfect competition among gas traders and show that the booking and nomination decisions can be analyzed in a single level. We prove that this aggregated model has a unique solution. We also show that the TSO’s decisions can be subsumed in one level as well. If so, the model boils down to a mixed-integer nonlinear bilevel problem with robust aspects. In addition, we provide a first-best benchmark that allows to assess welfare losses that occur in an entry-exit system. Our approach provides a generic framework to analyze various aspects in the context of semi-liberalized gas markets. Therefore, we finally discuss and provide guidance on how to include several important aspects into the approach, such as network and production capacity investment, uncertain data, market power, and intra-day trading.