Security of Energy Supply in Europe

Security of Energy Supply in Europe

Natural Gas, Nuclear and Hydrogen

Loyola de Palacio Series on European Energy Policy

Edited by François Lévêque, Jean-Michel Glachant, Julián Barquín, Christian von Hirschhausen, Franziska Holz and William J. Nuttall

In economic, technical and political terms, the security of energy supply is of the utmost importance for Europe. Alongside competition and sustainability, supply security represents a cornerstone of the EU’s energy policy, and in times of rising geopolitical conflict plays an increasingly important role in its external relations. Within this context, the contributors analyse and explore the natural gas, nuclear, and hydrogen energy sectors, which will be of critical significance for the future of energy supplies in Europe.

Chapter 2: Seeking Competition and Supply Security in Natural Gas: The US Experience and European Challenge

Jeff Makholm

Subjects: economics and finance, energy economics


Jeff Makholm1 INTRODUCTION 1 Many economists and policy makers acknowledge that liberalization in gas and electricity markets is consistent with energy supply security – but only with the important caveat that industry structure and underlying institutions in those markets support genuine competition. The structural questions for natural gas seem easy to assess. Gas is a natural resource (not a manufactured product like electricity), with well-defined production and import sources and major consumers, all interconnected by a highly predictable pipeline network. The institutions that create conditions necessary for efficient and competitive gas markets, however, are not so easy to assess. The contrast between the American and European gas systems is a case in point. In the twenty-first century, both display continent-sized pipeline networks connecting various major sources of supply with large gas distribution, power generation and industrial gas customers. And yet, America displays a freely competitive gas market typified by vigorous spot trading at many hubs nationwide, including a robust forward/ futures trading market. That market has dispensed with the long-term gas contracts typical through the 1980s. The American market also exhibits an unregulated, ‘Coasian’ (what we also call ‘contractualized’) market in gas transport to any part of the existing network – the entirety of which remains, paradoxically, subject to cost-of-service regulation by the Federal Energy Regulatory Commission (FERC).2 Parallel to the growth of an independent, contractualized transport market, the job of the FERC has shifted away from just rate setting to include overseeing the property rights and information flows that make...

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