The paradox of underground gas storage
Much needed but no market value!
A lot has been written already about the reasons of the currently extreme gas prices:
- Strong economic recovery in 2021, all over the world, leading to higher commodity demand
- Strong competition with Asia for LNG, not many volumes left for Europe
- A colder than average end of winter that left storage sites in Europe emptier at the end of the storage season
- Some disruptions on traditional supplies
- Market prices during the summer that did not incentivise companies to inject as much gas as usual in storage
If we add to this list the political concerns over supply coming from Russia and the psychology of markets, we then have a number of reasons leading to tensions in prices… a combination of rational and irrational reasons.
The focus of discussions is rightly today on the level of gas prices as it has many negative implications on households, industrial customers and power producers.
But we should also have a look at the prices for next summer and next winter. When we do so, we can see, that something is definitely going wrong: the more we need gas storage to reduce volatility on prices, the less we seem to value them.
The spread (the difference in price between summer and winter, right-hand graph) is a major component of the market value of storage capacity. And what this graph tells us is that for market participants, the value of storage next year is currently negative or at best close to zero.
This situation is not new, we experienced it in 2018, to a less extent, just after a cold winter.
In a gas storage sector purely driven by market prices, how do we keep storage in operations and preserve all our options for the future?
Storage is important to balance the gas market, manage price risk, and support the electricity market, providing the fuel used in gas power plants. Gas storage is also important for the development of a decarbonised energy system in the future. To achieve the transformation of our energy system, we need to keep natural gas storage in operations until we finish the transition to green gas.
For that, we need to develop the market mechanisms that will deal with the market paradox I have described above.
There are different solutions, two of them could be implemented in a very short time frame:
- Reduce the costs of operating storage sites by cutting down the tariff paid for the transportation of gas and getting full exemption on levies and taxes paid on electricity supply (EEG-Umlage).
- Create an equivalent of electricity capacity market by enlarging and increasing the range of services procured by transmission system operators from the storage sites. That will bring much needed revenues to compensate for a market that does not always work.
Beyond these solutions, other long-term regulatory measures should be envisaged to secure the existence of large-scale storage. The dialogue launched by the EU around a toolbox of measures should hopefully lead to fruitful recommendations.