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CA Merchant Gas Storage Needs Greater Price Fluctuation

CA Merchant Gas Storage Needs Greater Price Fluctuation

This week's power and gas crunch in California, driving prices skyrocketing for both, provided a glimpse of what merchant storage operators need to make their operations more profitable, according to the state's first nonutility underground storage project, Wild Goose Storage. More price volatility and closer tracking between electricity and natural gas prices makes merchant storage more valuable.

Three consecutive warm winters, the failure in the past of natural gas prices to match power's volatility, and some infrastructure constraints have dampened the market for Wild Goose Storage services, said Alberta-based Ben Ledene, a marketing vice president, who noted that the physical operation of the field in a depleted dry gas field has exceeded everyone's expectations.

Wild Goose currently is paying Pacific Gas & Electric to study its transmission pipeline system serving the storage field to see what operating changes and/or enhancements can be made to improve the amounts of gas that can be quickly stored or withdrawn at the field which began operations in April 1999.

"In California today, the norm (for electricity prices) might be $40 to $100 for power, but gas prices go from $3 to $3.50," Ledene said. "You get a taste of it (fluctuations and tracking), a small taste, like what has come down earlier this week. But that has some extraordinary circumstances (6,000 MW of idled generation capacity) and (interstate gas) supplies are lagging behind. We're not putting as much gas in storage, and its just the product of three warm winters in a row.

"We've seen some effect from that, but the reality is that the merchant price (for gas storage) is not in line with power prices. There is still enough gas around and you don't have full pipes coming into California from the north (PG&E GT-NW), or from El Paso and the south. It will take a little while to see some of the price volatility that makes gas storage profitable."

Given Wild Goose's more than a year's operating experience, Ledene is skeptical about the chances for success of a second California merchant storage project, Lodi, which gained regulatory approval May 18. It is a different operation with lower overall working capacity but much higher rates of injection and withdrawal than Wild Goose's. It also has a much bigger investment in pipeline and related infrastructure.

"What we've seen this year is that the market value of storage does not create positive economics," Ledene said. "Think about how much infrastructure Lodi is going to have to build, so it begs the question of what the future holds for that facility.

"Lodi is relatively a higher cycling system that requires a higher rate (for customers). Whether the market is ready to pay the higher rates for the higher cycling is yet to be determined.

"It is for short-term, quick high volumes. That kind of storage works very well when you've got an environment where gas prices are fluctuating with power. When you see power go from $40 to $100/MW and gas prices go from $3.50 to $6/mcf, then you have a situation in which a high-cycling contract is going to pay for itself."

Richard Nemec, Los Angeles

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