Policy measures targeting a more integrated gas market: Impact of a merger of two trading zones on prices and arbitrage activity in France

Under way to a European integrated energy market, policymakers need to find efficient measures aimed at increasing liquidity in local natural gas markets. The paper answers the question whether a merger of gas trading zones contributes to the development of liquid trading activities through a more efficient allocation and pricing of natural gas and an increased competition between market players. We analyse the effects of a policy decision to merge two gas trading zones in France on the observed degree of spatial market integration and the efficiency of the spatial arbitrage activity between the northern and southern French gas markets. An extended parity bounds model confirms a positive impact of the zone merger on the market's spatial equilibrium and indicates the causes of remaining market inefficiencies. The model offers a tool for the assessment of the efficiency of policy decisions in the context of policy initiatives to create an integrated and liquid natural gas market in Europe. •We investigate the impact of a policy decision to merge gas trading zones in France.•We find an increased market integration and spatial efficiency after the zone merger.•The policy measure removed unexplained barriers to trade between the markets.•Infrastructure expansion is needed to achieve perfectly integrated markets in France.•Zone mergers allow a more efficient allocation and pricing of natural gas.