Interaction between gas and power market designs

• We study the costs of increasing liquidity by reducing network services in the market.
• Pricing fewer services in one market affects transmission use in the other market.
• The design of short-term markets has a significant impact on long-term signals.
• Free network services may weaken localization signals for power plant investment.
• Lack of design harmonization may create artificial needs for network investment.

Both gas and electricity market designs depend on how the network use is regulated. Those regulations tend to promote contracts that simplify some of the network specificities in order to increase market thickness. However, those simplifications often come at the cost of distorting network use and investment signals. This problem and the consequences of different designs have been studied for each industry separately. This paper contributes by showing the cross-industry interactions. From this view, distortions depend not only on network simplifications in one market but on the particular combinations of market designs, i.e. choices about network simplification in both markets. Therefore, policy makers concerned with gas and electricity market designs should take into account the results of network rules interaction. We use simple auction designs to represent both markets, and we analyze how players are expected to respond to different network rules. Thus, looking from the perspective of gas-fired power plants, we study the incentives given by the designs for the use of each network. We also identify long-term investment effects of such design strategies.