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European gas storage sites may need subsidies

31 Jan 2018 14:00 GMT
European gas storage sites may need subsidies

Vienna, 31 January (Argus) — Gas storage facilities are a key part of the European network but may need to be subsidised to stave off closure, participants at the European Gas Conference in Vienna said today.

Storage is the "ultimate flexibility" source for the European network, Austrian firm OMV Gas Storage's managing director, Erich Holzer, said.

Gas withdrawals from storage met a third of European demand in the 2016-17 winter, rising as high as 40pc on very cold days, he said. And after a fatal explosion at Baumgarten in Austria that halted flows in December, storage again met around one-third of Italian demand while Tag pipeline flows were unavailable, which could not have been achieved through Algerian supply and LNG, he said.

Tight summer-winter spreads — partly a result of increased European supply flexibility — have put pressure on operators' margins and driven the closure of some facilities in northwest and central Europe.

A number of facilities, such as Germany's Berliner Erdgasspeicher and Krummhorn, and Austria's Thann site have been taken off line in recent years. And the UK's Rough storage is being closed. The rate of site closures could increase in the coming years, market participants have said.

The service provided by storage facilities is "not rewarded by the market", Holzer said. Regulatory intervention is needed to support storage sites and the supply security they provide, he said.

Regulators should provide at least a 50pc discount or eliminate tariffs on gas transported between the gas network and storage sites. Or transportation tariffs should be used to subsidise the cost of storage, Holzer said. This would recognise and compensate storage operators for the value they add to the system, Italian gas grid operator Snam's chief international assets officer, Federico Ermoli, said.

But it was not clear if the lack of profitability was a symptom of the market failing to account for security of supply or an "oversupply of storage sites", Austrian regulator E-Control gas analyst Carola Millgramm said. And even if facilities operate at a loss, large decommissioning costs may prevent more closures in the near future, according to German firm Innogy Gas Storage NWE's commercial managing director, Michael Kohl. The sale of cushioning gas was not usually enough to mitigate the cost of closure, he said.

Sites that require large investment to continue operations — such as the Rough and Thann — and slower-cycling, less flexible sites are more susceptible to closure, Kohl said. Innogy NWE's remaining sites are all salt caverns, which are quicker cycling and more flexible, making it easier to retain their profitability, he said.

It is difficult to build a case to build new storage facilities outside of a politicised decision, Holzer said.