Federal incentive payment of 1.8 cents/kWh for the generation of renewable energy—part of The Energy Policy Act of 2005—increases the economic attractiveness of many potential hydro sites,...
storage reservoirs will take more wells, more compression, and more cushion gas to develop. Today, all of these components (especially cushion gas) cost considerably more than they used to. If the location of the new storage is not ideal, longer (and more costly) pipelines will be needed to connect storage facilities to markets. Looking at these fundamentals for developing new storage, it is easy to see why a number of storage development prospects have remained only prospects for years.
Why not develop incremental storage directly in the marketplace, where demand is critical under peak conditions? The answer is simple: economics. Most development opportunities in the key market areas are small, under 3.5 Bcf of capacity, and relatively isolated, making pipeline interconnections more costly. These areas do not provide the economies of scale that larger storage facilities do. Very few projects can survive under such economic conditions.
The Storage Solution
We know that more storage is needed. We also know that not many new, flexible storage projects are making it to the finish line. So what will spur storage development? Let's look at this from two perspectives, the customer and the developer.
As you think about what impact the fundamentals discussed above will have on gas markets, think about how that will impact your business. Will the cost of gas during seasonal periods of scarcity make your industrial process, your end users, or power generation facility uncompetitive? Will the customers on your pipeline or distribution system have to curtail gas usage, causing you lost throughput? As a producer, won't you be dismayed by lost sales opportunities, and the impact on your netback of a less efficient use of existing infrastructure?
To protect your business against such scenarios, consider increasing your use of storage services. You may be positioning yourself to avoid crises that catch your competitors. And you will be encouraging the development of more infrastructure which, over time, may catch up again with the market's balancing requirements.
As a potential customer of storage service, this is the time to make your wish list. Ask yourself the following questions:
- Do I need storage to cover 20 to 30 days of peak in the winter or summer?
- Do I need storage to help me augment a larger part of my overall gas portfolio?
- Do I want storage to help insure against price spikes and to take advantage of selling opportunities when they present themselves?
- Do I want a storage service to help me minimize disruptions at my industrial plant?
- Do I want all of these things rolled up in a storage service?
With the flexibilities available in contracting for storage services today, storage customers should be able to negotiate any and all of these things. You can also demand a shorter-term contract in the 3- to 5-year range.
But avoid inflexible storage service. Find a storage developer that can build a contract that reflects the actual needs of your company. You may need more than one contract to fit your needs most economically. Look at your storage contract and the tariff that governs your