Gas Storage – Always a Good Challenge
Aug 23, 2017
In my book, gas storage is among the most complex types of contracts to implement in an ETRM system. Below, you will find the challenges that an implementation will face when gas storage is concerned.
There are three main aspects of a storage contract:
- Working gas volume (WGV) – how much gas you can have in the storage at any given point during the contract period
- Injection capacity (IC) – how fast you can inject – typically per hour or per day
- Withdrawal capacity (WC) – how fast you can withdraw
Some operators also have additional options or limitations:
- Overrun penalties (balance going above WGV or injecting more per hour or per day than your IC or withdrawing faster than WC)
- Seasonal limitations on IC and WC – depending on technology and whether overall the system is in “injection mode” or “withdrawal mode”. Essentially, if you are going against the flow, it either cannot happen fast enough, you have to pay more for it – or both of these
Capturing the different terms for the payments of the above conditions are typically complex to understand and model – they may be:
- lump sums (typical for WGV)
- volumetric payments – price per injected or withdrawn unit (for IC and WC)
- a combination of the above
- based on a fixed price or indexed to pretty much anything – I have encountered summer winter gas spreads, power indexing against year ahead contract, and a combination of the two
Once the storage contract is captured in a system, the more interesting movements affecting the balance also require some thinking.
To start with, capturing the initial fill level may be a challenge. There are two key items to it. You have to adjust the balance under a specific storage contract, but this is not an injection – gas is already there when you sign the contract – however, if you model the contracts separately in a system, you have to move from one to the other. Also, the value at which it enters the storage is a question – especially for the initial capture of a storage deal that may have ran for years.
In storage transfers are also a topic to consider, which is similar in terms of how it affects the balance – and easier to value. With them, gas is changing hands in the storage facility itself – often done with counterparties as a swap against a hub position to save injection and withdrawal fees. The complexity coming from these is to adjust the balance without adding in the system an injection or a withdrawal. Besides affecting the balance in the facility, the actual transaction with the counterparty has to be captured – and it may be a challenge to do these in one step for some systems.
Normal injections and withdrawals are usually straightforward to capture. The interesting part is what happens when a storage user goes into overrun. Ideally, the ETRM system should automatically calculate the penalty.
For the trading/portfolio management purposes, storage is typically valued as a time spread:
MTM (storage) = (Pwth*Qwth – Pinj*Qinj) – Total Storage Costs
Pwth, Pinj are the market prices at the times respectively of withdrawal and of injection.
Qwth, Qinj are the quantities withdrawn and injected in the storage
Total Storage Costs are the payments for WGV, IC, WC, and overruns and other penalties
Note that for the calculation to make sense, Qwth has to be equal to Qinj – otherwise there is an unaccounted for imbalance between injections and withdrawals. This means that an estimation of when injected gas will be withdrawn has to exist and be marked against a forward curve. This is often counterintuitive – and sometimes an egg or a hen question arises – do you plan injections and withdrawals and then hedge against the plan, or do you buy and sell gas, and then see how storage fits in… Both ways are valid – again, depending on market conditions and company tactics.
In the case when injections and withdrawals are planned after some optimization process, the question of how you arrive at the plan comes up. And is the optimization part of the ETRM system – or a separate tool used for inputs.
Overall, storage is a really good exercise in stretching software capabilities. In my experience, the multiple views you can have on a storage (from the market perspective, an injection is a short position, but from the storage perspective, it increases the balance), and the complexity of the contractual terms and volume movements are not covered in any system completely.
Written by Ventsislav Topuzov
- ETRM: WHERE’S THE FUN IN NATURAL GAS? (1,354) views
- INTERRELATIONSHIP BETWEEN CONCESSION AGREEMENTS AND… (1,317) views
- GAME THEORY IN WIND POWER CONSTRUCTION CONTRACTS (1,294) views
- CHALLENGES IN CROSS-COMMODITY SYSTEM IMPLEMENTATIONS (1,166) views
- WHAT DOES YOUR ETRM SYSTEM ALLOW YOU TO HEDGE WITH? (921) views
- HEDGE ACCOUNTING OR ACCOUNT FOR HEDGING? (874) views
- WIND DERIVATIVES – A BET OR A HEDGE? (827) views
- ROITI TAKES ITS POWER TO A NEW LEVEL (765) views
- E-WORLD 2015: LESSONS FROM ESSEN (720) views
- EXPERTS PUT SOFTWARE ON TOP OF THE ENERGY BUSINESS AGENDA IN (685) views
- Gas Storage – Always a Good Challenge
- Gas Capacity Medley
- NEW GAS MARKETS FOR ENERGY TRADERS – NEW ETRM TRICKS NEEDED
- WIND DERIVATIVES – A BET OR A HEDGE?
- Achieving a Reliable Front Office Reporting in ETRM systems: Typical Pitfalls
- RES support tenders – increasing competition or emergency brake?
- Navigating the EU State Aid rules, when implementing a capacity mechanism
- Will UK power capacity market face shortage?
- End-Of-Day made simple: Mission impossible?
- HEDGE ACCOUNTING OR ACCOUNT FOR HEDGING?
- OVER SUPPLIED BUT SHORT OF GAS – YOU ARE PROBABLY ITALIAN!
- MAR AND HOW DOES IT FIT IN THE REGULATORY FRAMEWORK OF THE EUROPEAN UNION