Does ‘more’ equal ‘better’? – Analyzing the impact of diversification strategies on infrastructure in the European gas market
Introduction
The European natural gas market faces changes in the upcoming decade, mainly driven by two forces. On the one hand, the intensified efforts in transforming the energy system towards more sustainability, institutionalized in the European Green Deal,1 pose the question of the future role of natural gas in a de-fossilized energy system. In particular, efforts on hydrogen strategies increase globally and the penetration of alternative gases will lastingly change the natural gas market. On the other hand, geopolitical concerns about Russia's reliability as major gas supplier for the European Union with its 28 Member States (EU-28)2 give rise to the question whether new infrastructure, i.e. Nord Stream 2 (NS2), will contribute to the European energy security or whether a more diversified supply strategy is needed. While the Green Deal will affect the role of natural gas in the long-term perspective, most probably beyond 2050, gas will be needed at least as a bridge fuel. Compared to lignite or hard coal, natural gas is the fossil fuel that can provide reliable energy supply in the power sector at lowest CO2-emissions. Thus, the security of supply (SoS)3 in gas markets determines the actions of policy makers for the next decade.
Following the objective of improving the gas markets resilience by building one single European gas market, the EC established four Gas Directives.4 One example of the proposed measures is the expansion of cross-border capacities between EU-28 Member States. However, during the last two decades, a series of events stressed the SoS in the EU-28 gas markets. The most critical situation remains the Russian-Ukraine gas dispute culminating in the past in 2006 and 2009, when gas supply disruptions up to 4 months occurred. Since 2014, trilateral talks between Russia, the Ukraine and the European Commission have been established that lead to a gas transit deal for the upcoming period 2021–24 (Pirani and Sharples, 2020). Besides this geopolitical conflict, national initiatives affect the European gas supply options. The Netherlands are one of the most important gas suppliers within the EU-28, but will stop their gas production at Groningen, Europe's largest onshore natural gas field, by2022.5 The Dutch decision increases the future need and dependence on gas imports from non-EU-28 countries. Furthermore, technical challenges are always a risk for SoS and the explosion and failure at the Baumgarten gas station in Austria has shown the vulnerability of the physical gas system. Although no physical congestion occurred, Italians volatility of gas prices increased by the factor of 3 up to 80 EUR/MWh compared to prices before the accident and returned within one day, which was seen as a proof that markets are working (Bros, 2018). These examples illustrate of uncertainties that threaten the reliable supply in European gas markets. Besides resilient markets, diversification of gas suppliers and transport routes are measures to reduce the threat of supply disruptions. Diversification strategies are matter of political disputes on national and European level that aim to create effective instruments for dealing with gas market uncertainties. Result of diversification might imply the building of new infrastructure projects, connecting EU-28 with new gas suppliers, and establishing new transport routes using both, pipelines and LNG shipping.
Against this backdrop, this article investigates the research question of what are the benefits and costs of diversification strategies in the European gas market until 2045, taking uncertainties into account. The analysis focuses on the impact of diversification on expansion and utilization of LNG import terminals, pipelines and storages. Based on a previous deterministic version of the European Gas Market Model (GAMAMOD-EU) a stochastic optimization approach is implemented. Three dimensions of uncertainty are considered: Ukraine transit after 2024, LNG price levels and future gas demand in EU-28. For considering the political dimension of the problem, three diversification strategies are suggested that distinguish between a No Diversification Policy, a National LNG Diversification Policy that implies an LNG import quota, and an EU Diversification Policy with focus on limiting Russian gas supplies.
The outline of the paper is as follows: Chapter 2 discusses the literature. Chapter 3 provides a brief overview about the deterministic model version and explains the implementation of the stochastic optimization approach. Chapter 4 introduces the study setup and discusses assumptions on the uncertainty dimensions that form the base for the twelve scenarios. Furthermore, three diversification strategies are suggested. Chapter 5 presents the results and Chapter 6 provides conclusions and policy implications.
Section snippets
Literature
There exist a wide range of literature about SoS in the European gas markets focusing on gas transport disruptions (Bouwmeester and Oosterhaven, 2017; Hecking et al., 2014; Holz et al., 2017; Richter and Holz, 2015) and on Russia's opportunities of using gas supplies as a political instrument (Bilgin, 2009; Sziklai et al., 2020; Vatansever, 2017). Supply diversification might be one measure that reduce the threat of gas supply disruptions and cutting the market power of major suppliers, e.g.
Methodology
The stochastic approach extends the deterministic model version that is introduced briefly. Using a bottom-up modelling approach, GAMAMOD-EU6
Data assumptions on gas demand, infrastructure capacities, and investments
The application of GAMAOD-EU.sto focus on a time frame up to 2045 with one interim step in the year of 2030. The assumption of continuous investment decisions holds in order to keep the model linear. The spatial resolution of the input data refers to country specific data, due to our network topology. The model considers natural gas demand for EU-28,11 as well as Belarus, Bosnia and Herzegovina, North Macedonia, Norway, Serbia, Switzerland, Turkey and Ukraine. Production
The value of perfect information and the value of stochastic solution
A common way for dealing with uncertainties is to solve the expected value problem (EEV) by using the expected value of the scenarios in deterministic optimization models. Compared to this, stochastic optimization problems cause efforts in terms of data collecting for building the scenarios and implementing the stochastic optimization approach, also called recursive problem (RP). The Value of Stochastic Solution (VSS) is one indicator to evaluate the additional modelling effort (cf. Birge and
Conclusion and policy implications
The paper discusses gas infrastructure in the European gas market until 2045. The stochastic optimization model GAMAMOD-EU.sto is proposed for dealing with further gas market uncertainties, namely the availability of Ukraine gas transit, LNG gas price levels, and the gas demand in EU-28 Member States. The investment and dispatch decisions are investigated against the backdrop of three diversification strategies with focus on no additional diversification restrictions (No Diversification Policy
Data availability
A data documentation of GAMAMOD-EU.sto and datasets related to this article can be found at http://doi.org/10.5281/zenodo.3923862, an open-source online data repository hosted at ZENODO (Scharf et al., 2020).
CRediT authorship contribution statement
Philipp Hauser: Conceptualization, Methodology, Software, Data curation, Investigation, Validation, Visualization, Writing – original draft, preparation, Writing – review & editing.
Declaration of competing interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Acknowledgment
This research was funded by the German Federal Ministry for Economic Affairs and Energy, project acronym: Erdgas-BRidGE (FKZ: 03ET4055A). Special thanks go to the project partners from The Institute of Energy Economics at the University of Cologne (EWI), for discussing the methodological approach and the results. The author thanks the following list of people for fruitful discussions and helpful advices during the model developing process and writing the paper Hendrik Scharf, Carl-Philipp Anke,
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2023, Energy PolicyCitation Excerpt :Furthermore, Henderson and Sharples (2018) assert that Europe's growing gas import demand cannot be satisfied without the Ukrainian system, even if Nord Stream 2 and Turk Stream are built. Hauser (2021) asserts that both Nord Stream 2 and Ukraine transit are needed to ensure a cost-effective supply for the European gas market. In historical context Per Högselius argued that the increasing dependency on “red gas” was discussed in Europe and Germany from the beginning of the first deliveries in 1968, but the political perception of the threat was more related to potential abuse of market power of Russia by e.g. overflooding Europe with natural gas and thereby threaten the domestic (coal industry) than by considering a “use of gas as a weapon”.
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2022, Applied EnergyCitation Excerpt :The prevailing strand of analysis is deterministic in nature, deploying scenario and sensitivity analyses or (n-1) stress tests to incorporate uncertainty. More recently, model-based analyses have begun to adopt a stochastic approach in order to handle ranges of uncertain manifestations of relevant parameters (e.g., [41–44]). A tabular overview of such studies and their individual structures and representations of uncertainties is provided in Table D.1 in Appendix D.