​Bad market design will undermine the EU internal energy market.

For years the aim of the EU Commission has been to have a competitive European energy market, following in the footsteps for the internal market for goods and services. It is now on its 3rd set of legislation to achieve this, but is in danger of snatching defeat from the jaws of victory. The principles of the internal market are easy to sign up to, a bit like motherhood and apple pie. But the real success of the project will be determined by the rules which allow companies to move gas around the EU using the pipeline networks. Unfortunately regulators and the Commission seem determined not just to put in place rules which enable a market develop, but also to decree exactly how the market will look. This is somewhat ironic – regulators trying to create a free market but not allowing the market, in particular the users of the pipeline grids, to decide how they would like the market to work in practice.

The Commission and regulators want to prevent gas companies from trading at borders and instead force them to trade at the hubs (most of which have yet to be created, by the way). This is a classic case of getting your logic back to front: successful hubs are an outcome of a working market, not something which creates it in the first place. If you make it easy for shippers to move their gas around networks, they will tend to trade at place where there are lots of shippers e.g. hubs such as Henry Hub, the NBP, or TTF. They won’t go there if it is difficult to get there because the grid rules are not right, no matter how much you decree it. By contrast effectively prohibiting trading at borders you will make it difficult for those companies which only want to trade in one country but would like to sell to a company in another country by selling at a border. Trading at the hubs means such a company would have to know and sign up to the rules at both national hubs. It is a shame that regulators have not learnt the lessons of history – both Henry Hub and the NBP, the two most liquid and successful hubs in the gas world, did not come about because shippers were forced to use them, but because it was easy for everyone to access them. And that means sensible grid rules – unlike those proposed by the Commission and ERGEG.