Italian-Austrian wholesale price formation in the light of market integration

ARERA and E-Control have been evaluating the possibility of merging the Italian and Austrian gas market areas to a single trading region. The basic idea behind market merging is that two markets can gain wholesale market volumes and better efficiency by combining their demand and supply volumes into a single wholesale market. This structural reform is suggested by ACER in the amended Gas Target Model (AGTM) to improve efficiency and the functioning of gas markets as it improves its liquidity.

To perform a preliminary assessment of the potential impact of such a trading region, ARERA and E-Control have jointly commissioned a study to Frontier Economics and DFC Economics in order to investigate the wholesale gas price formation mechanism in the Austrian and Italian gas market before and after the merger of the Italian and Austrian areas.

The study published today contains the results of the analysis performed by the consultants, which the regulators consider very valuable in order to gain a better understanding of the main drivers of the current and perspective price formation mechanisms in the different European gas hubs, and in particular at CEGH and PSV. The analysis highlights that in the medium to long term scenarios (when the potential merging could in principle be realized) the benefits in terms of increased social welfare are vis-à-vis the planning uncertainty involved and the substantial implementation complexity rather limited.

For these reasons, for the time being, ARERA and E-Control have decided not to move forward with further discussions or technical analysis regarding an integration of the Italian and Austrian gas market, while they will keep investigating potential ways to improve the efficient use of the existing interconnection capacity connecting the two market areas to the benefit of all the market participants and gas consumers

 

ITALIAN-AUSTRIAN WHOLESALE PRICE FORMATION IN THE LIGHT OF MARKET INTEGRATION
A report prepared for ARERA and E-Control
pdf

October 2020