Optimal Gas Storage Investments in the European Gas Market

1. Optimal Gas Storage Investments in the European Gas Market A Stochastic Modeling Approach • IAEE International Conference 20.06.2011 | Stefan Lochner

2. Agenda • Research Project • Modeling Approach • Selected results

3. Research Project • Potential infrastructure investment requirements in the European gas market: • Congestion in European natural gas infrastructure (perceived / actual) • Changing supply structures • Security of supply • Economic framework for identification and valuation of congestion and infrastructure elements (Lochner 2011) • Development of stochastic linear program for applied analysis • Efficient investment in pipeline, storage, LNG infrastructure depending on market prices, LNG flexibilities, …? • Which investments in redundant capacities to increase security of supply? • TODAY: Gas Storage Investments

4. Agenda • Research Project • Modeling Approach • Selected results

5. European Infrastructure Model Existing Infrastructure Stochastic Linear Program Cost minimization Infrastructure Investments Infrastructure Expansion Options + Costs Utilisation of Infrastructure / Gas Flows Natural Gas Supply Locational Marginal Supply Costs Natural Gas Demand (stochastic) • Geocoded Database: • Coverage >EU-27 • >600 Nodes • >900 Pipelinesections* • Based on TSO Maps • Capacity / Pressure / Diameter • Nearly all Entry-Points • Major Exit Points • Border point capacities • >200 Storages* • Type • Max. injection / withdrawal • Working Gas Volume • >30 Terminals* • Max. hourly / annual capacity • LNG Storage Capacity Pipeline Storage LNG Terminal *including projects

6. Modeling of short-term demand stochasticity • Regressions of temperatures and household demand • -> Result: functional relationship (sigmoid function) Example: Data for France 2007 to 2010

7. Modeling of temperatures • Based on characteristics of historic temperatures (country specific), temperature model by Cao and Wie (Journal of Future Markets, 2004) • HERE: illustration for France (Paris), 255 simulated annual temperature curves from Monte Carlo simulation

8. Modeling of gas demand • Functional temperature-demand relationships plus temperature model yields demand distribution.

9. Demand distribution functions • What is a high winter demand and what is its probability?

10. Model set-up Source: Wikipedia.

11. Agenda • Research Project • Modeling Approach • Selected results

12. Implication of theoretical considerations • No inherent demand for storages • But demand for flexibility • Flexibility provision options: • Storages • Flexible production • Flexible pipeline / LNG imports • Demand side “flexibility“ • Interdependencies in investments in the different flexibility options

13. General results on storage investments • With current EU demand projection (2010, almost constant, slightly declining gas demand post 2020) almost no additional storage investments required • LNG can replace declining flexibility from domestic production (NL, UK) • Sufficient amount of storage working gas capacity in Europe (DE, AT, IT) • As flexibility from LNG and existing storages not well distributed for geographic and geological reasons, case for interconnection of market areas as much more cost efficient solution • I.e. areas requiring more flexibility of supply can much cheaper “import“ flexibility through connecting with countries which have flexibility from LNG or storages • HOWEVER: Results depend on assumptions on demand and LNG flexibility

14. Storage Investments – High demand projection Pipeline infrastructure LNG infrastructure Storage infrastructure Additions until 2015, 2020, 2025 Source: Wikipedia.

15. Modeling investments for security of supply • Including additional uncertainty: Failure of infrastructure elements • Storage Facility (Rough 2006) • Pipeline (Transitgas line, Switzerland 2010) • Transit country (Ukraine 2009) • Total imports from a country (Libya 2011) • … • Scenarios with a probability alpha of certain “incidents“: • Total loss of imports from North Africa for prolonged time period (1 yr) • Disruption of transits via Ukraine/Belarus for a one month period in winter

16. Investments to increase security of supply • Some investments in pipeline interconnection and storages • Very low in general as many investments already made post 2009 • Distribution between storages and pipeline investments depending on assumed duration and probability of “crisis“ Source: Wikipedia.

17. Conclusions for storage investments • Without increasing gas demand, almost no additional storage investments required: • High LNG import capacities, flexibility in the global LNG market. • Sufficient storage volume in general, improve market integration between them. • If demand increases (less nuclear etc.), storage investments required. • Generally in Spain, UK and Eastern Europe, depend on LNG flexibility. • Still market integration welfare optimal, especially in Central Europe. • Storages for enhanced security of supply? • Rather costly (investment, variable, opportunity cost), only suitable in some cases. • Deepening market integration again much more relevant.

18. Thankyouforyourattention. Youhaveanyquestionsorsuggestions? Stefan Lochner Institute ofEnergy Economics atthe University of Cologne (EWI) Vogelsanger Str. 321 50827 Cologne, Germany Stefan.Lochner@uni-koeln.de Tel. +49 – 221 27729 100

19. Storage Investments – EU (2010) demand projection Pipeline infrastructure LNG infrastructure Storage infrastructure Additions until 2015, 2020, 2025 Source: Wikipedia.