The Economics of Natural Gas Storage: A European Perspective PDF
Preview The Economics of Natural Gas Storage: A European Perspective
The Economics of Natural Gas Storage Anna Cretì Editor The Economics of Natural Gas Storage A European Perspective (cid:65)(cid:66)(cid:67) Dr.AnnaCretì BocconiUniversityandIEFE (CentreofResearchonEnergy andEnvironmentalEconomicsandPolicy) viaRoentgen,1 20136Milan Italy [email protected] ISBN:978-3-540-79406-6 e-ISBN:978-3-540-79407-3 DOI:10.1007/978-3-540-79407-3 LibraryofCongressControlNumber:2008940966 (cid:176)c 2009Springer-VerlagBerlinHeidelberg Thisworkissubjecttocopyright.Allrightsarereserved,whetherthewholeorpartofthematerialis concerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation,broadcasting, reproductiononmicrofilmorinanyotherway,andstorageindatabanks.Duplicationofthispublication orpartsthereofispermittedonlyundertheprovisionsoftheGermanCopyrightLawofSeptember9, 1965,initscurrentversion,andpermissionforusemustalwaysbeobtainedfromSpringer.Violations areliabletoprosecutionundertheGermanCopyrightLaw. Theuseofgeneraldescriptivenames,registerednames,trademarks,etc.inthispublicationdoesnot imply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevantprotective lawsandregulationsandthereforefreeforgeneraluse. Coverdesign:WMXDesignGmbH,Heidelberg Printedonacid-freepaper springer.com Contents 1 Gas Storage in Europe: Toward a Market-Oriented Approach ...................................................................... 1 AnnaCret`ı 2 Expected Vs. Observed Storage Usage: Limits toIntertemporalArbitrage.................................................. 13 AnneNeumannandGeorgZachmann 3 NaturalGasStorageandMarketPower................................... 31 EdmondBaranes,Franc¸oisMirabel, andJean-ChristophePoudou 4 TheRegulationofAccesstoGasStorage.................................. 55 AlbertoCavaliere 5 GasStorageandSecurityofSupply........................................ 85 AnnaCret`ıandBertrandVilleneuve 6 FinalRemarksandPolicyRecommendations............................. 113 MonicaBonacina,AnnaCret`ı,andAntonioSileo v Contributors EdmondBaranes Faculte´ desSciencesEconomiques,Universite´ Montpellier1, EspaceRichter,av.delaMer,CS79606,34960Montpellier,France, [email protected] Monica Bonacina IEFE (Centre of Research on Energy and Environmental EconomicsandPolicy),BocconiUniversity,viaRoentgen,1,20136Milan,Italy, [email protected] Alberto Cavaliere Universita` degli Studi di Pavia, Facolta` di Economia, ViaSanFelice,5,27100Pavia,Italy,[email protected] AnnaCret`ı IEFE(CentreofResearchonEnergyandEnvironmentalEconomics andPolicy),andBocconiUniversity,DepartmentofEconomics,viaRoentgen,1, 20136Milan,Italy,[email protected] Franc¸oisMirabel Faculte´ desSciencesEconomiques,Universite´ Montpellier1, Espace Richter, av. de la Mer, CS 79606, 34960 Montpellier, France, [email protected] AnneNeumann DIW(DeutschesInstitutfu¨rWirtschaftsforschung), Mohrenstraße58,10117Berlin,Germany,[email protected] Jean-Christophe Poudou Faculte´ des Sciences Economiques, Universite´ Montpellier1,EspaceRichter,av.delaMer,CS79606,34960Montpellier,France, [email protected] AntonioSileo IEFE(CentreofResearchonEnergyandEnvironmentalEconomics andPolicy),BocconiUniversity,viaRoentgen,1,20136Milan,Italy, [email protected] Bertrand Villeneuve Universite´ de Tours, CREST (Paris) and Laboratoire de Finance des Marche´s d’E´nergie, CREST – J320, 15 boulevard Gabriel Pe´ri, 92245Malakoff,France,[email protected] GeorgZachmann LARSENLaboratoired’AnalyseEconomiquedesRe´seaux et des Syste`mes Energe´tiques, Universite´ Paris, Sud 11, 27 avenue Lombart, 92260FontenayauxRoses,France,[email protected] vii Foreword I remember that the idea of this book emerged first in Toulouse, during the Third ConferenceonEnergyMarkets–3yearsagonow.AnnaCret`ıgaveatalkonamodel dealingwithseasonalgasstorageintheUSA,andChristianVonHirschausenwas her discussant. Both of them were devoting their efforts to understand the natural gas market in Europe and the relevant liberalization process. I found their interest instorageratheroriginal,soIencouragedAnnatocollectthemostoriginalcontri- butionsonthistopic. Back in Milan with this idea in mind, she organized a working group at IEFE- Bocconi University, where she works. Then, during the following year, she ex- changed ideas and organized several meetings with the book’s contributors. She regularlyinvitedthemostimportantItaliangassectorrepresentativestothesemeet- ings,tomakesurethattheeconomicmodelswerewellsuitedtotackletheissuesat stakeintheEuropeangasindustry. Nowthattheideaofthisbookhasbecomereal,Iamveryhappy.Thepictureof the European gas industry that emerges from the collected work shows that there are still many issues to be solved before we reach the goal of a truly liberalized gas market. The models on storage and their applications to some very large gas consumingcountriestellusthatEuropeismidwaythroughtheprocess.Theinstitu- tionalframeworkattheEClevelisnearlycompleted,butitstranspositionintoeach MemberCountryisdifficult.Tomakethingsworse,thedependencyonforeigngas suppliesisnotexpectedtodecrease. I wish to congratulate Anna Cret`ı and all the book’s contributors on their ex- cellent work. I believe that this book really deserves to be read by energy (and non-energy) economists. I also recommend it to graduate students who like In- dustrialOrganizationappliedmodels.Finally,practitionersandpolicymakerswill appreciatetheefforttoadaptmodelstosomeveryimportantEuropeancasestudies. Jean-MichelGlachant,DirectoroftheLoyoladePalacioProgrammeonEnergy, FlorenceSchoolofRegulation ix Acknowledgements There are many people without whose help this project would have never come to be. I wish to thank Jean-Michel Glachant and Christian Von Hirschausen for giving me the idea of writing a book on gas storage; Clara Poletti, Director of the CenterforResearchonEnergyandEnvironmentalEconomicsandPolicyatBocconi University, for trusting me when deciding to fund this project; my colleagues, the book’s contributors, who agreed to work with me for more than 1 year, coming regularlytoMilan;myothercolleagues,whodidnotcontributetothebook,butwere patient enough to delay our meetings on different projects because I was working ongasstorage. If I look at the origin of my interest in natural gas storage, I have to thank the members of the Institut d’Economie Industrielle (IDEI), at the University of Toulouse,whereseveralyearsagoIstartedworkingonenergy.Atthattime,Iwas involvedinaprojectongassectorliberalization.ThecontactswithGaztheFrance, and in particular with Corinne Chaton, gave me a wonderful opportunity to think about how Industrial Organization models can be used to understand modern gas industry. Bertrand Villeneuve worked with me enthusiastically in Toulouse, Milan andParistowriteourmodels.Iowethedevelopmentofthemostimportantinsights ongasstoragethatIcannowdiscussinthisbooktoCorinneandBertrand. InMilan,myyoungresearchteam,MonicaBonacinaandAntonioSileo,worked very hard with me on the IEFE funded project “The Economics of Natural Gas Storage”. This project has been very well managed also thanks to the help of IEFE’ssecretariesandadministrativeteam:LiaBertoglio,DanielaCereda,Pinuccia GandaandDoraMilanesi.Iwishtothankallofthem.IamalsogratefultoAngela MezzanotteandMichelRolandwhohavepatientlyproof-readthisbook. TheItaliangasindustryrepresentativescontributedgreatlytothedevelopmentof myideas.Theyhavebeenverypatientindiscussingwithmeandtheotherauthors of this book equations, results and contradictions between the theory and the real situation of the gas markets. In particular, Andrea Stegher and Gianluca Iannuzzi at Stogit and Valentina Infante at Edison Stoccaggio are to me the best examples of how firms which aggressively compete in the storage market are interested in cooperativelydiscussingeconomicmodels. xi xii Acknowledgements Iknowthatmyparentswillbedeeplymovedonlookingatthisbook.Theylive farfromme,buttheyhavealwayssupportedmydecisions,evenwhentheydonot agreewithme. Ithinkthatthisworkwillmakemyhusbandveryhappyandproudofme:hehas neverceasedtoencouragemesincewemetduringmyPh.D.Hehasfoughtagainst mypessimismandobstinacy,buthehasalwaysfoundtherightwaytotellmewhen Iwaswrong.IfIamself-confident,itisbecauseofhislove. Finally, this book is dedicated to my son, my first and unique fan. He is only a childnow,lateronhewillunderstand. Chapter 1 Gas Storage in Europe: Toward a Market-Oriented Approach AnnaCret`ı Storageisindispensabletotheoperationofthegassector,sinceconsumption,which is strongly influenced by weather, is seasonal and supply is relatively inflexible. Storing gas thus helps to avoid oversized extraction and transportation infrastruc- tures,aswellastolimitexcessivepricefluctuations. Seasonal gas storage allows to inject gas during the summer, when demand is low,andtowithdrawitduringthewinter,whendemandincreases.Giventhispat- tern,storagecapacityisusuallymeasuredbytheamountofworkinggasthatcanbe usedthroughouttheyear.1Storagealsohelpsgassupplierstofaceunpredictablede- mandfluctuations,includingpeak-daysrequirementsexceedingtheaveragewinter consumption.Dailydemandfluctuationscanbedealtwithstorageinsidepipelines, knownaslinepackandtraditionallyprovidedbythenetworkoperator. Precautionary gas storage is used instead to manage the risk of supply disrup- tions, due to accidents or geopolitical reasons. The amount of storage devoted to thelastpurposeisalsoknownasstrategicstorageandconsistsingasstocksoften managedunderspecificGovernmentrules. InallEuropeancountries,storagecapacitywasdevelopedtocovertheneedsofa monopolisticmarket,andsincethenithasremainedunchangeduntilthegassector wasopenedtocompetition.Inthecurrentcontextofanevolvingglobalmarketfor naturalgasandrestructuringeffortsintheEuropeanmarket,naturalgasstorageis gainingimportance. A.Cret`ı IEFE (Centre of Research on Energy and Environmental Economics and Policy), and Bocconi University,DepartmentofEconomics,ViaRoentgen,120136,Milan,Italy e-mail:[email protected] 1Duetopressurereasons,theamountofpeakcapacityguaranteedbystoragecompaniesdecreases withthetotalamountofgasstoredundergroundandisthereforetypicallylargeratthebeginning ofthewinterseasonandsmallertowardstheendofit,wheninventoriesarelower.Thevolumeof gasneededasapermanentinventorytomaintainadequatereservoirpressuresanddeliverability ratesthroughoutthewithdrawalseasoniscalledcushiongas. A.Cret`ı(ed.),TheEconomicsofNaturalGasStorage:AEuropeanPerspective, 1 DOI:10.1007/978-3-540-79407-3 1, (cid:2)c 2009Springer-VerlagBerlinHeidelberg 2 A.Cret`ı From a legislation viewpoint, in the first Gas Directive (98/30/EC) the regula- toryregimeintroducedinthestoragesectorwasunclearandlenient.Toencourage market competition, in 2003 the second Gas Directive (2003/55/EC) clarified the originally ambiguous provisions for access to storage and introduced the concept of storage that is subject to third party access (henceforth TPA) or an open access regime. The recent third Energy Liberalization Package (2007) further introduces legal and functional unbundling to the TPA storage sector. With this trend, there is no doubt that storage in liberalized gas markets has some features beyond the traditionalones,suchasseasonalbalancingandsecurityofsupply. Insuchamarket-orientedapproach,storinggasbecomesaninstrumentforprice arbitration. Price differential can be exploited in a tighter timeframe than the sea- sonalone(withdaily,monthly,quarterlyinjectionsorwithdrawals)orbetweenthe electricity and gas markets. In the latter case, if price soars at power exchanges, utilitiescanobtainrentsfromgasfiredpowerplantsbyresortingtogasinstorage instead of buying it in the spot market at a higher price, provided that the cost of accesstostorageisnottoohigh.Moreover,inadecentralizedgassystembasedon marketexchanges,anyutilitywithaccesstothetransmissionnetwork(shipper)must fulfillcommercialbalancingobligations.Thenutilitiescanusegasstoragetoavoid payingpenaltiesforbeingunbalanced. Mostimportantly,storagecanbeusedasa strategictoolintheimperfectcompetitiondynamicsthatcharacterizetheEuropean gassector,stilldominatedbyformernationalmonopolists. Themodelsonstorageintheeconomicliteraturearenotwellsuitedtoaddress the economic issues that have emerged in this sector in the aftermath of the gas marketliberalizationinEurope,astheywerewrittenbeforethispath-breakingmar- ketreform.Thereisanextensiveliteratureonstorage(ofanyprimarycommodity) to smooth market prices; and on strategic stocks to face oil supply disruptions. I believe that these traditional models are worth summarizing, as they represent awell-establishedviewonstorageandformthenecessarybackgroundtothisbook. I will survey them in the next Section and underline their weaknesses in address- ing key issues on storage in the modern gas industry. In Sect.1.2 I will argue that the complex set of storage usages in liberalized gas markets calls for a renewed theoreticalframework.Theobjectiveofthisbookistofillthisgap. 1.1 StorageintheEconomicLiterature Theseminalmodelsthathavefocusedontheroleofstockpilingtostabilizeprices are the pioneering studies of Waugh (1944), Oi (1961) and Massel (1969). In a model where supply shifts occur with equal probability, Waugh showed that con- sumersarebetteroffwithfluctuatingpricesthanifpricesarestabilizedtotheirsim- plearithmeticmean(correspondingto“fullstabilization”policies).Usingthesame framework,Oiconstructsamodelinwhichacompetitivefirmearnsgreatertotalre- turnswithunstablepricesthanwithstableprices.Theapparentdiscrepancybetween the results of Waugh and Oi has inspired Massel to write a linear model in which
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