This week’s power and gas crunch in California, driving pricesskyrocketing for both, provided a glimpse of what merchant storageoperators need to make their operations more profitable, accordingto the state’s first nonutility underground storage project, WildGoose Storage. More price volatility and closer tracking betweenelectricity and natural gas prices makes merchant storage morevaluable.

Three consecutive warm winters, the failure in the past ofnatural gas prices to match power’s volatility, and someinfrastructure constraints have dampened the market for Wild GooseStorage services, said Alberta-based Ben Ledene, a marketing vicepresident, who noted that the physical operation of the field in adepleted dry gas field has exceeded everyone’s expectations.

Wild Goose currently is paying Pacific Gas & Electric tostudy its transmission pipeline system serving the storage field tosee what operating changes and/or enhancements can be made toimprove the amounts of gas that can be quickly stored or withdrawnat 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,” Ledenesaid. “You get a taste of it (fluctuations and tracking), a smalltaste, like what has come down earlier this week. But that has someextraordinary circumstances (6,000 MW of idled generation capacity)and (interstate gas) supplies are lagging behind. We’re not puttingas much gas in storage, and its just the product of three warmwinters in a row.

“We’ve seen some effect from that, but the reality is that themerchant price (for gas storage) is not in line with power prices.There is still enough gas around and you don’t have full pipescoming into California from the north (PG&E GT-NW), or from ElPaso and the south. It will take a little while to see some of theprice 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 secondCalifornia merchant storage project, Lodi, which gained regulatoryapproval May 18. It is a different operation with lower overallworking capacity but much higher rates of injection and withdrawalthan Wild Goose’s. It also has a much bigger investment in pipelineand related infrastructure.

“What we’ve seen this year is that the market value of storagedoes not create positive economics,” Ledene said. “Think about howmuch infrastructure Lodi is going to have to build, so it begs thequestion of what the future holds for that facility.

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

“It is for short-term, quick high volumes. That kind of storageworks very well when you’ve got an environment where gas prices arefluctuating with power. When you see power go from $40 to $100/MWand gas prices go from $3.50 to $6/mcf, then you have a situationin which a high-cycling contract is going to pay for itself.”

Richard Nemec, Los Angeles

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