Cross-Commodity Coupling (Gas–Electricity–Carbon) Markets

1. Introduction

Cross-commodity coupling means the interaction between different energy markets, particularly natural gas, electricity and carbon markets. These markets are legally separate, but their prices and trading decisions are closely connected.

The relationship can be explained simply:

Gas price → Cost of gas-fired electricity → Electricity price → Electricity generation → Carbon emissions → Demand for carbon allowances → Carbon price

For example, if natural-gas prices rise, gas-fired power stations become more expensive to operate. Electricity prices may consequently increase. If generators switch between gas and coal, the quantity of carbon allowances required can also change.

Therefore, regulation of these markets cannot always be examined separately.

2. Meaning of Cross-Commodity Coupling

Cross-commodity coupling does not necessarily mean that gas, electricity and carbon are traded on one single exchange.

Instead, it describes the economic and regulatory relationship between the three markets.

Gas Market

Gas is used as a fuel for electricity generation.

Electricity Market

Electricity producers sell power into wholesale markets.

Carbon Market

Generators covered by the EU Emissions Trading System (EU ETS) must surrender allowances corresponding to their covered greenhouse-gas emissions.

Thus:

Gas → Electricity generation → CO₂ emissions → Carbon allowances

Changes in one market can therefore influence the other two.

3. Gas and Electricity Coupling

Gas-fired power plants are an important link between the gas and electricity markets.

Suppose the price of natural gas increases significantly.

A gas-fired generator's marginal cost rises.

Therefore:

Higher gas price

↓

Higher generation cost

↓

Higher electricity bid price

↓

Potentially higher wholesale electricity price

This relationship became particularly important during periods of gas-market disruption in Europe.

The EU electricity framework seeks to ensure that electricity markets remain based on demand and supply while supporting competition and security of supply. Regulation 2019/943 also requires progressive removal of barriers to cross-border electricity flows. (Eur-Lex)

4. Electricity and Carbon Coupling

The electricity-carbon relationship arises because fossil-fuel generators produce greenhouse-gas emissions.

Under the EU ETS, covered electricity generators must surrender allowances for their regulated emissions.

If the carbon price increases:

Higher carbon cost

↓

Higher cost of carbon-intensive generation

↓

Higher marginal generation cost

↓

Potential electricity-price effect

The strength of this effect depends on the generation mix, fuel prices, electricity demand and the ability of generators to switch between fuels.

5. Gas–Carbon Relationship

Gas-fired generation normally produces less CO₂ per unit of electricity than coal-fired generation, although gas still produces greenhouse-gas emissions.

Therefore, the relative prices of:

natural gas;

coal; and

carbon allowances

can influence which fossil-fuel plants are economically attractive.

This is sometimes described as fuel switching.

For example:

Coal becomes expensive because of carbon costs

↓

Gas generation becomes relatively more competitive

↓

Gas demand increases

↓

Gas prices may be affected

This demonstrates why carbon regulation can have consequences beyond the carbon market itself.

6. The Clean Spark Spread

A useful concept for understanding gas-electricity coupling is the clean spark spread.

It broadly represents the economic margin available to a gas-fired power plant after considering:

electricity revenue;

gas fuel cost; and

carbon costs.

A simplified expression is:

Electricity price − Gas cost − Carbon cost = Clean spark spread

The exact calculation depends on plant efficiency and other costs.

If the clean spark spread is positive, operating the gas plant may be economically attractive.

This concept helps explain why traders and regulators monitor all three commodities together.

7. EU Legal Framework

Cross-commodity coupling is governed by several separate but connected EU legal regimes.

Electricity

Regulation (EU) 2019/943 establishes rules for the internal electricity market.

Natural Gas

EU gas-market legislation establishes rules concerning:

transmission;

third-party access;

network operation;

cross-border trade; and

regulatory supervision.

Carbon

The EU ETS Directive 2003/87/EC, as amended, establishes the emissions-trading system.

Market Integrity

REMIT regulates wholesale energy-market integrity and transparency.

Together these regimes create a framework in which gas, electricity and carbon markets remain legally distinct but economically interconnected.

8. Role of ACER

The Agency for the Cooperation of Energy Regulators (ACER) plays an important role in monitoring electricity and natural-gas markets.

Under its legal framework, ACER monitors wholesale and retail electricity and natural-gas markets, including prices, cross-border trade and barriers to market integration. (Eur-Lex)

This is important for cross-commodity coupling because problems in one commodity market can influence another.

For example, a gas-market disruption can affect electricity prices, while electricity-market conditions can influence gas demand from power generators.

9. REMIT and Cross-Commodity Trading

REMIT is particularly important because electricity and gas markets contain significant cross-border wholesale trading.

Market participants may trade:

electricity;

natural gas;

wholesale energy products; and

related derivatives.

REMIT seeks to prevent:

insider trading;

market manipulation;

false signals;

abusive trading strategies; and

distortion of wholesale energy prices.

Cross-commodity manipulation is particularly important because activity in one market could potentially be used to influence another market.

For example, trading activity in gas may have consequences for electricity prices.

10. Carbon Market Regulation

The EU ETS creates a market for carbon allowances.

A covered electricity generator needs allowances corresponding to its regulated emissions.

Therefore, the carbon allowance price becomes an additional economic factor in electricity-generation decisions.

The carbon market consequently influences the relative competitiveness of coal, gas and low-carbon generation.

This creates an indirect legal connection between:

EU ETS law

and

electricity-market regulation.

11. Market Coupling and Renewable Energy

Cross-commodity coupling is also important for the transition to renewable energy.

As renewable electricity increases:

Wind + Solar generation increases

↓

Demand for fossil-fuel generation may change

↓

Gas demand from power plants may change

↓

Carbon allowance demand may change

This can affect the prices and behaviour of all three markets.

However, renewable generation is variable. Gas-fired plants may continue to have a role in providing flexibility when wind or solar production is low.

Therefore, gas and electricity markets remain connected even during decarbonisation.

12. Cross-Border Dimension

The issue becomes more complicated when the markets operate across national borders.

For example:

Country A gas market

↓

Gas-fired generator in Country B

↓

Electricity exported to Country C

↓

Carbon allowances surrendered under applicable ETS rules

One commercial chain can therefore involve several jurisdictions.

This creates questions concerning:

regulatory jurisdiction;

market surveillance;

transmission capacity;

trading platforms;

taxation;

carbon compliance;

information sharing; and

cross-border enforcement.

13. Relevant Case Law

Commission v Belgium, Case C-767/19

The CJEU considered Belgium's implementation of EU rules concerning the internal markets for electricity and natural gas, particularly the independence and powers of national regulatory authorities. (Eur-Lex)

Relevance

The judgment is relevant because cross-commodity coupling requires effective and independent regulation of both electricity and gas markets.

If electricity and gas markets are economically connected but regulatory authorities lack appropriate independence or powers, effective market integration can be weakened.

BNetzA v ACER, Case T-485/21

The General Court considered an ACER methodology concerning the sharing of costs for redispatching and countertrading in the electricity market. (Eur-Lex)

Relevance

Although this is principally an electricity case, it demonstrates the importance of cross-border electricity-market methodologies and ACER's regulatory role.

These methodologies can influence the availability and cost of electricity transmission and therefore affect the relationship between electricity and gas generation.

RTE v ACER, Case T-472/21

This case concerned the Core electricity region and an ACER methodology relating to redispatching, countertrading and legitimate loop flows. (Eur-Lex)

Relevance

The case demonstrates that cross-border electricity-market arrangements can involve complex network constraints.

These constraints matter for cross-commodity coupling because electricity-market conditions affect the dispatch of gas-fired power stations and therefore gas demand.

Case C-66/13, Green Network / Alcoa-type renewable-electricity external competence litigation

The CJEU considered the EU's external competence concerning arrangements relating to renewable electricity and guarantees of origin. The Court emphasised the importance of preserving the uniform operation of EU electricity rules where external agreements could affect those rules. (Eur-Lex)

Relevance

The case illustrates a broader principle relevant to cross-border energy markets: external arrangements must not undermine the coherent functioning of EU energy-market rules.

14. Competition Law Issues

Cross-commodity markets can create competition concerns.

A large energy company may operate simultaneously in:

gas production;

gas supply;

electricity generation;

electricity trading; and

carbon-related trading.

This creates potential concerns about:

market dominance;

information advantages;

discriminatory access;

strategic withholding;

vertical integration; and

manipulation across related markets.

Competition law and REMIT therefore complement sector-specific energy regulation.

15. Data and Market Monitoring

Cross-commodity markets require regulators to examine information from different markets.

For example, regulators may need to compare:

Gas trading data

with

Electricity generation data

and

Carbon allowance trading data.

This can help identify unusual relationships between commodity prices and trading behaviour.

Effective monitoring therefore requires cooperation between:

energy regulators;

financial regulators;

competition authorities;

carbon-market authorities; and

market operators.

16. Main Legal Challenges

1. Separate Regulatory Frameworks

Gas, electricity and carbon are governed by different legal regimes.

2. Cross-Market Manipulation

Manipulation in one market may affect another.

3. Regulatory Coordination

Different regulators may supervise connected markets.

4. Market Data

Regulators need timely information from several markets.

5. Cross-Border Jurisdiction

A single transaction may involve multiple countries.

6. Energy Security

Gas shortages can rapidly affect electricity markets.

7. Decarbonisation

Carbon pricing changes the economics of fossil-fuel generation.

17. Importance for Energy Law

Cross-commodity coupling demonstrates that modern energy law cannot treat each commodity as completely isolated.

The relationship can be summarised as:

Gas price

↓

Gas-fired generation cost

↓

Electricity price

↓

Generation dispatch

↓

CO₂ emissions

↓

Carbon allowance demand

↓

Carbon price

↓

Future generation choices

This creates a continuous interaction between energy security, electricity-market regulation and climate law.

18. Conclusion

Cross-commodity coupling of gas, electricity and carbon markets describes the economic and regulatory interaction between three major components of the energy system.

Its principal legal issues include:

gas-market regulation;

electricity-market design;

EU ETS carbon pricing;

REMIT market integrity;

cross-border transmission;

market monitoring;

competition law;

regulatory cooperation;

energy security; and

decarbonisation.

The cases concerning Belgium's electricity and gas regulatory framework, BNetzA v ACER, and RTE v ACER demonstrate the importance of effective cross-border regulation, independent regulatory institutions and coordinated electricity-market methodologies. (Eur-Lex)

For PhD-level energy law, the central issue is how law can coordinate three economically interconnected but legally distinct markets, so that gas supply security, electricity-market efficiency, carbon reduction and market integrity can be addressed together without eliminating the separate regulatory purposes of each market.