ICIS VIEW: Dutch gas storage reform needed

LONDON (ICIS)–The future of the Dutch storage industry will need government intervention as the impending closure of the country’s Groningen field increases the need for additional flexibility sources but narrowing seasonal spreads reduce incentive to inject.

The TTF front summer-winter spread has been squeezed in recent years. The Summer ‘19 product was assessed by ICIS at an average €1.17/MWh discount to Winter ‘19 in the first two weeks of October, compared with an average €1.55/MWh Summer ‘17-Winter ‘17 spread in the same period in 2016.

This is ”barely enough to make money out of seasonal hedging,” one utility trader told ICIS.

The Dutch government has already cited storage operators as having an important role in supply flexibility during and after the Groningen shutdown.

The head of upstream operator the State Supervision of Mines also said in July that the Norg storage site could be topped up in low demand periods during winter to increase flexibility.

Italian example

Italian storage sites operated by Stogit, accounting for around 93% of the country’s 13 billion cubic metres of commercial capacity, are subject to government rules regulating injections and withdrawals. This is in order to ensure continued injections during summer and that a sufficient level remains until the end of the gas winter.

Regulation requires each capacity holder to reach a minimum filling level by the end of each summer month. If they fail to do so, they have to pay a fee for the volumes they failed to inject and they still have to reach the set target for the following month. In summer 2018 the fee was around €0.40/MWh, market sources told ICIS.

As capacity is traditionally sold out, the system ensures that sites are completely filled up at the end of summer regardless of seasonal spreads and near-curve prices.

The strict regulation has optimised the use of storage in terms of security of supply, but it has killed its commercial flexibility, as wholesale prices no longer dictate how much storage gas capacity holders should use when.

As the profitability of storage fell so did the costs of auctioned storage capacity, as shippers price in the lack of flexibility and the higher price of the rules imposed on stocks.

Stogit is also usually prompted to set a low reserve price for storage capacity to incentivise its use.

Seasonal flat storage capacity was sold in March 2018 at a €0.30/MWh weighted average price.

Less drastic action

A less drastic form of intervention is the French model, involving a minimum volume of gas which suppliers must hold at the start of winter and, as of 2018, compulsory auctions. This is still seen as a step too far by many market participants.

In March 2018 the energy ministry increased the minimum winter volume from 1.75TWh/day to 1.99TWh/day for supply security reasons.

A reserve price of zero was also placed on the country’s first ever storage auctions this year, and the ministry said if the capacity sold at auction did not meet the 1.99TWh/day level by the end of March, operators must offer non-standard products in additional auctions to make up the shortfall.

Shippers can cover part of their obligation with gas stored elsewhere in the EU, or in LNG form at France’s four terminals.

However, these reforms have been unpopular with suppliers, as despite the low reserve price the amount of capacity needed has resulted in rising costs for them.

Any intervention will be unpopular with some parties, but in order to maintain storage as a source of flexibility in an increasingly unprofitable landscape, changes are needed.

Additional reporting by: Alice Casagni