The output from the model includes quarterly and annual forecasts of:

• Wholesale gas prices at borders and hubs
• Supply/demand matches for 25 countries individually and in aggregate
• Gas supplies by country of origin
• Netbacks and economic rent to each of the producing countries
• Gas flows along international pipeline and LNG routings in Europe

The model provides valuable insights into the existing and future gas infrastructure:

• Transportation and Storage
• Where capacity bottlenecks may arise
• Where key investments will be made

Gas Price Projections

Future wholesale prices will depend on both the legacy of long-term contracts and on emerging market forces. The long-term contracts are characterised by take-or-pay and price terms, which escalate in line with oil products and other indices. Prices under these contracts are analysed with reference to assumed price projections for crude oil and oil products.

As markets have liberalised in other areas such as the US and Great Britain, the dependence on long-term oil-indexed contracts has given way to gas-on-gas competition. Prices become more volatile and depend on short-term supply and demand factors. Competitive market prices more closely reflect the costs of production and transportation of the gas to the market.

Under a fully liberalised, competitive market the price of gas will be determined purely by the interaction of supply and demand. The spot price in each national market will effectively be the marginal cost of supply to that market taking into account the supply and transportation and storage costs and the 'opportunity' costs associated with connected markets. The European gas Model determines these marginal prices in terms of the shadow prices, which are calculated by the Linear Programming software.

The model will "clear" the market at the marginal price of gas and all producers will then receive this price, netted back to the country of production by deducting the relevant transportation costs.

Whilst the market is in transition, spot markets will co-exist alongside the long-term supply contracts and the latter may, for a while, continue to be priced in relation to oil product prices. EGM can output the spot prices, contract prices and also produce the weighted average cost of supply taking into account all sources of supply to each of the focus countries.

End User Prices

The wholesale prices output from the model can be used to develop end-user prices for groups of end-users including power stations. The end user prices would depend on a number of different factors including size, location, load factor and the part of the system from which supply is taken. As an additional service, Energy Markets can develop models for end user prices in specific countries taking account of existing tariff structures in each country together with an informed view of how the tariffs may change over time.

Next: Scenarios