An LP Based Market Design for Natural Gas

Many electricity markets are now cleared using Linear Programming (LP) formulations that simultaneously determine an optimal dispatch and corresponding nodal prices, for each market dispatch interval. Although natural gas markets have traditionally operated in a very different fashion, the same basic concept can be applied. Since 1999, the Australian state of Victoria has operated a gas market based on an LP approximation to the underlying gas flow optimization problem. Here we discuss market design issues, using a formulation derived from the key gas flow equations. Dual variables on key constraints imply prices which vary by location, as for electricity markets, but also by time. But gas is both delayed and stored within the transportation system itself. This raises a number of operational, pricing, and hedging issues which could be ignored in the case of electricity, but become important when operating this kind of market for gas, or other commodities, such as water, in a supply network where there are delays and storage.