The Economics of Gas Storage - KYOS€¦ · The Economics of Gas Storage Is there light at the end...
Transcript of The Economics of Gas Storage - KYOS€¦ · The Economics of Gas Storage Is there light at the end...
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The Economics of Gas StorageIs there light at the end of the tunnel?
www.kyos.com, +31 (0)23 5510221Cyriel de Jong, [email protected]
#1 in gas storage, swing &option valuation models
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Business case for gas storage in Europe is poor
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Reuters headlines:
“European utilities are losing billions of euros from gas storage facilities, potentially triggering site closures and divestments in a market suffering from oversupply and weak demand”
KYOS report for Dutch Energy
Market Regulator ACM:
Margins for Dutch storage operators, at current market conditions, are mostly negative
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The graph shows the rolling summer-winter spread based on S+1 and S+2.
Decline from about 12 to 1-2 €/MWh.
Price driver 1: summer-winter spread
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TTF summer-winter spread in €/MWh
Win-18 minus Sum-19 = 3.2 €/MWh
BUTWin-19 minus Sum-19
= 1.3 €/MWh
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Decline from about 100% to 40%.
Price driver 2: spot volatility
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*: High spot prices in first week of March 2018 excluded
*
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• Annual reports of storage operators:
• Billions of euros have been written off
• Some storage operators report profits, based on oldcontracts
• Outcomes of storage auctions:
• Always for specific bundles, not always easy to apply resultsto other storage bundles
• Not very transparent
• Broker quotes:
• Market not so liquid
Analyze storage value with KyStore
How to assess storage profitability / value?
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1. Historical: how much could a realistic trading strategy haveearned? BACKTEST
2. Future: what is the expected storage value, assuming a realistictrading strategy?
Both approaches assessed with KyStore
Future assessments published monthly
Storage valuation approaches
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https://www.kyos.com/gas-storage-swing-
report/
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What is a realistically optimalstorage trading strategy?
KyStore provides trading signals#1 in gas storage, swing &option valuation models
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• Every day, take injection/withdrawal decision based on spot market prices
• Intrinsic approach OR
• Option approach = better (Least-squares Monte Carlo)
• In addition, hedge the price exposures in the forward market
• Intrinsic approach OR
• Delta hedging = better
What is a realistic trading strategy?
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3 storage assets, all with different price signals, depending on:
• Market price levels
• Inventory level
Example: spot trading signal (portfolio)
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Withdraw from slow
storage
Withdraw from fast storage
Inject into fast storage
Front-month price level
Inject into slow storage
Spot price level
Inje
ct
Wit
hd
raw
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How much money could have been made in past years with TTF storage?
Backtest with KyStore#1 in gas storage, swing &option valuation models
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Working volume: 60 MWh
Expected spot trading value: 2.13 €/MWh (127.65 €)
Realized spot trading value: 6.48 €/MWh (388.74 €) -> high winter spot prices
with delta hedging: 2.03 €/MWh (121.54 €) -> more realistic
Example backtest SY2017/2018, 60-120 storage
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KyStore model results on actual
price data
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• Model finds ‘best’ days for injection and withdrawal, based onspot and forward prices of that day.
• Model does not know how prices will evolve later on, butgenerates scenarios to assess optionality
• Prices early winter were not so good, so 1/3 of the gas kept in store until about 20th of February
Example backtest continued
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60/60 storage: • Expected: 5.34• Realized: 5.61
60/120 storage:• Expected: 4.52• Realized: 5.28
2010 was great, butlast 3 years were tough
KYOS backtest results TTF
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What can we expect in the coming years?
Fundamental drivers#1 in gas storage, swing &option valuation models
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• Supply side:
• More storage closures in continental Europe +
• More flex from LNG supplies (or more volatility?) -/+
• Reduction in production flex (Groningen) +
• More flexible supplies (Nordstream 2) -
• Uncertainty around Ukraine as transit route +
• Demand side:
• Less residential demand (heating, winter) -
• More (winter) demand from power sector +
Are we close to a positive turning point for storage?
What can we expect?
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• The past 6-7 years, market conditions for storage have beenvery poor
• Two weeks of high prices in Feb/Mar 2018 has had limited impact on the market’s perception of storage value
• We believe there could very well be some light at the end ofthe tunnel, especially due to the Groningen closure and coal phase-out
• And: with more optimal trading strategies, more value can bederived from existing storage assets, even in current marketconditions
Conclusion
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#1 in gas storage, swing & option valuation models
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