Gas Capacity Medley

Gas capacity is every time a fun topic. I have tried multiple times to say something along the lines of “the standard approach is…” – and every time it didn’t end well in terms of number of reworks to whatever came in place of the three dots. It is both the simplest and one of the difficult conceptually topics.

The easiest in the sense that you must capture two things:

Ø  How much MWh can you transport?

Ø  How much are you paying?

It is one of the difficult ones for several reasons outlined below.

Figuring out who is responsible for capacity – and where?

When trading gas at a border, a border point is a flexible term. As an example, let’s assume gas is sold at Oberkappel – on the border between Germany and Austria. This usually means that the seller delivers the gas at the “point” after exiting Germany and before entering Austria – in which case the seller is responsible for the exit capacity from Germany only – and the buyer has to take care of the entry capacity into Austria.

In order to handle this scenario a system needs to be able to capture the following information in some manner:

Ø  That a physical trade done at Oberkappel can be on the German side, the Austrian side, or at the point in the middle

Ø  That capacity at Oberkappel can be either entry or exit at either the German side or the Austrian one

If the system is to provide useful decision support information, it should be flexible to provide room for rules of implying capacity needs – i.e. to imply a need for exit capacity if the company has sold at Oberkappel but does not yet have the capacity to exit Germany.

Figuring out the value of capacity

The value of capacity is another topic that can get fairly complicated. Some companies tend to ignore it, assume capacity is sunk cost, as they only buy it when they need it. Others, who buy capacity longer term, however, keep an eye for how much money they can make of the capacity they already have and whether they should plan cross-border trades to take advantage of it or sell it.

Generally the value of capacity for a certain border and direction (to use the same example – from Germany to Austria) would be calculated as:

Value of available capacity = Min Q (Exit_Germany, Entry_Austria) * (P_Austria – P_Germany) – Total Capacity Cost

Where:

–          Min Q (Exit_Germany, Entry_Austria) is the minimum of bought exit from Germany and bought entry into Austria. As they are capacities are bought often at different tenders, they can be different – e.g. if you buy 100 MWh/h exit from Germany and 95 MWh/h entry to Austria, you can only transport 95MWh/h for the period

–           P_Austria – P_Germany is the spread between the Austrian market prices and the German ones, which tells you how much money you are going to make (if any) when you export from Germany to Austria

–          Total Capacity Cost is the total amount of money you paid for the 100 MWh/h exit from Germany and the 95 MWh/h entry to Austria. Essentially, this example shows that you pay for more capacity than you can effectively use.

The bundle capacity tenders are addressing the latter issue, making sure a market participant can buy entry and exit at the same time. However, especially looking at central and eastern Europe, they are not the standard yet.

What if the value goes to zero

The interesting question in the calculation above is how you treat situations when the market price spread is negative.

There are again – based mostly on market liquidity and company specifics – two approaches:

Ø  If Value of capacity drops below zero, then report zero value. Assumption here is that you are not going to transport gas if you are not making any money – and instead you are going to close the positions on both sides of the border

Ø  If it goes below zero – show the negative values as well. The premise here is that there may be trouble closing off positions on both markets (for illiquid markets) and imbalance cost may be higher than the losses incurred.

Takeaway

I guess the main takeaway should be to not leave capacity for last, as it turns out to be a more interesting and twisty topic than it looks at first sight. I have made the mistake a more than once already and am still trying to learn .

Written by Ventsislav Topuzov