Efficient mechanisms for access to storage when competition in gas markets is imperfect

Scarce storage capacity and distortions in access to storage can lead to market foreclosure in liberalized gas markets. We consider rules currently adopted in Europe for storage allocation, and discuss efficient rationing mechanisms as based on the value of storage, when other flexibility inputs are partially available. We initially analyze productive efficiency issues, without explicitly considering vertical restraints. We then assume imperfect competition in the downstream market for gas supplies, given the availability of storage capacity upstream, and analyze strategic behavior in a two-stage model. In this framework we compare regulated storage tariffs - coupled with a centralized rationing mechanism - with storage auctions. Finally, we consider the allocation of storage that arises from welfare maximization by a benevolent social planner. We find that it is usually optimal to maximize the amount of storage capacity allocated to new entrants in liberalized gas markets. Storage auctions deviate from the optimal mechanism, but still afford greater efficiency than do rules that allocate storage capacity independently of its value. Furthermore, storage allocation appears to be a powerful mechanism with which to improve competition and efficiency in gas markets. (C) 2012 Elsevier B.V. All rights reserved.