Europe’s natural-gas producers are set to do well in the postderegulation era, but wholesalers, transmission companies, and retailers will see their margins squeezed as regulation and fierce competition bring lower end-user prices. This conclusion contrasts with traditional analyses and with the experience of deregulation in many other energy markets in Europe and the United States. Deregulation usually redistributes wealth from upstream players to distributors in the middle (by way of lower producer prices) and to consumers (in the form of reduced retail prices).
McKinsey’s divergent slant on deregulation emerged from a model developed to analyze the structure, dynamics, and price movements of the European gas market. The model is an important tool for assessing the huge investments being considered in Europe’s highly complex gas industry.1
The model assumes rapid deregulation, based on a directive that the European Union implemented last autumn, over the next five years. It takes into account the capacities and costs of 500 current and possible gas sources as well as the quarterly demand curves for industrial, power generation, and household customers in 20 regions. In addition, the model specifies the cost and capacity of pipelines and storage throughout Europe.
Unusually, the McKinsey model allows...