A risk analysis for gas transport network planning expansion under regulatory uncertainty in Western Europe

The natural gas industry in Western Europe went through drastic changes induced by the unbundling of the national companies, followed by the liberalization of gas trade and the regulation of gas transmission. Natural gas transmission is operated through a network of interconnected grids, and is capacity constrained. Each of the grids is locally regulated in terms of price limits on transportation services. Local tariff differences may induce unnatural gas routing within a network, creating congestion in some part of it. This phenomena is referred to as the Jepma effect. Following Jepma [2001. Gaslevering onder druk. Stichting JIN. Available at: www.jiqweb.org (52pp) (in Dutch)] this may lead to misguided investment decisions. In this paper a multi-stage linear program is used to simulate the repartition of the natural gas flow in an interconnected grid system on a succession of contracting periods. By this simulation, the risk linked to infrastructure investment is assessed. The risk measured can be seen as the probability of a negative present net value for the investment. The model is applied on an example of two grids that are on alternative routes serving same destinations. When applied to a specific situation of North-West Europe (Germany and The Netherlands), the model clearly demonstrates that the risks turn out to be too high to invest: there are hardly any scenarios under which an acceptable ROI will be realized. Given the current tariff policy and current publicly available forecasts of demand and supply, it is unlikely that market forces will attract additional investments in transportation capacity. This reluctance to invest can be prohibitive for further growth of supply if the demand would increase significantly.