Journal
EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 273, Issue 3, Pages 1097-1108Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ejor.2018.09.016
Keywords
Natural gas markets; Nonconvex equilibrium models; Uniqueness; Multiplicity; Fundamental welfare theorems; Perfect competition
Funding
- Deutsche Forschungsgemeinschaft [Sonderforschungsbereich/Transregio 154]
- Bavarian State Government
- Emerging Field Initiative (EFI) of the Friedrich-Alexander-Universitat Erlangen-Nurnberg
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This paper provides a first approach to assess gas market interaction on a network with nonconvex flow models. In the simplest possible setup that adequately reflects gas transport and market interaction, we elaborate on the relation of the solution of a simultaneous competitive gas market game, its corresponding mixed nonlinear complementarity problem (MNCP), and a first-best benchmark. We provide conditions under which the solution of the simultaneous game is also the solution of the corresponding MNCP. However, equilibria cannot be determined by the MNCP as the transmission system operator's (TSO's) first-order conditions are insufficient, which goes back to nonconvexities of the gas flow model. This also implies that the welfare maximization problem may have multiple solutions that sometimes do not even coincide with any of the market equilibria. Our analysis shows that, even in the absence of strategic firms, market interaction fails to implement desirable outcomes from a welfare perspective due to the TSO's incentive structure. We conclude that the technical environment calls for a market design that commits the TSO to a welfare objective through regulation and propose a design where the market solution corresponds to a welfare maximum and vice versa. (C) 2018 Elsevier B.V. All rights reserved.
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