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Gas Storage Optimisation:
Valuation & Trading Benchmarks
Flexible physical assets such as power plants, pump storage and gas storage can contribute
significant value to the portfolio of an energy company.
By Sebastiaan Vallinga
T
raditionally, flexible physical assets are run as part of an a derivative pricing approach that includes calendar spread
integrated business. Gas storage, for instance, can be options and virtual storage to replicate the characteristics of
offered as a grid service to balance variability in the facility, ignore physical and operational constraints which
demand or to cover seasonal swings related to the heating are significant drivers of value. In addition, the forward
season. It can also be used to compensate for the variability in market for products such as virtual gas storage, options and
demand for electricity through supporting the operation of spread options is limited. We propose an alternative approach
gas-fired power plants. Deregulation of energy markets, which is solidly based on market information and captures
resulting in unbundling the storage service from sales and most of the true value of the storage facility.
transportation, and the emergence of liquid traded gas
markets in the US and Europe, has driven the need for analysis Gas Storage Valuation
of gas storage as a separate asset. Storage value is optimised around asset specific costs and
Even for integrated utilities it is essential to separate the constraints such as injection, withdrawal and volumetric
value addition from generation, trading, storage and supply constraints and spot and forward market prices for gas. The
activities through transparent internal pricing and market objective of optimisation routines from an economic standpoint
related benchmarks. Although it is highly desirable from an is to get as close to ideal exercise as possible. This does not
economic point of view, such transparency can lead to mean that the benchmark should be set expecting perfect
considerable consternation in energy companies. For instance foresight, but it is possible to get surprisingly close using a
when, as part of the implementation repeated or Rolling Intrinsic Value
of a sophisticated, integrated ETRM
Deregulation of energy markets ...
method, a Smooth Forward Curve with
system, it becomes apparent that
retail activities are actually loss-
has driven the need for analysis
seasonal variation and Principal
Component Analyses to assess the
making and optimisation activities
of gas storage as a separate asset
dynamics of the forward curve.
are destroying value. This leads to
discussions at board, as well as at department level, about how Types of Gas storage & Seasonal Prices
activities are accounted for, how investment decisions can be There are two main categories of natural gas storage;
made transparent, and about what should be the basis for baseload and peakload facilities. Baseload facilities are used to
pricing, valuation and benchmarking. meet seasonal demand variations and are capable of holding
Especially in the case of gas storage, there are still widely enough natural gas to satisfy long-term seasonal demand
diverging opinions about the true value and the appropriate requirements. Typically, the turnover rate for natural gas in
methodology to calculate it. Direct market benchmarks using these facilities is one year – natural gas is generally injected
60 worldPower 2009
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