Poyry - How will intermittency change Europe’s gas markets? - Point of View

Pöyry Point of View:
Shaping the next future
Howwill
intermittency
changeEurope’s
gasmarkets?

2 | PÖYRY POINT OF VIEW
Intermittencywill
changegasmarkets:
areyouready?
The rapid development of renewables across
Europe is having profound effects, shaking up
electricity markets and transforming how we
generate electricity. An area that has never
been fully investigated is what the impact will
be on gas markets, as gas-fired CCGTs are
likely to become the back-up to intermittent
wind generation, leading to a concept we have
dubbed ‘gas intermittency’.
In partnership with Europe’s leading energy companies (including EGL, Eni, Gasunie, GRTGaz,
RWE, Statoil and Vattenfall), Pöyry Management Consulting has undertaken a groundbreaking
study, taking a ‘deep dive’ look at how intermittency impacts Europe’s gas markets.
In this Point of View, we share the highlights of the study covering the big questions:
• What is the impact on gas demand: to what extent does demand volatility increase and does
seasonality decrease?
• How are wholesale gas prices affected – do they become more volatile?
• How do flows of gas between countries change – is geographic diversity and interconnection
important?
• Do the flows of LNG change and how important is LNG to manage future demand volatility?
• Do pipeline supplies offer opportunities to manage the increased volatility?
• How will the usage of gas storage change over time, and will it become more or less profitable?
• How much gas storage does Europe need and does the gas intermittency effect increase
requirements?
The main characteristic of wind and solar
generation is their variability – in the case
of wind generation, periods of very low
generation of up to a week can be followed
by very high levels of generation in an
unpredictable fashion. For solar generation
the variability differs, with a highly predictable
day/night and seasonal cycle overlaid with
unpredictable cloud cover. As a result of this
variability, there is a need for thermal plant to
balance the system and meet demand. And
thus in periods of low wind or low irradiation,
thermal power stations have to turn on to meet
demand, and turn off in response to higher
wind speeds and high irradiation.
FIG2 - 1
Generation type
Pumped storage
Imports
CCGT
CHP
Coal
Renewables
Nuclear
Figure 1 – Hourly plant dispatch for GB in
a typical February in 2012 and 2030
The dispatch of plant on the system will alter radically
over the next 20 years, with a system dominated by
nuclear, coal and gas being replaced by large amounts
of intermittent renewable generation.

3PÖYRY POINT OF VIEW |
Figure 2 - Hourly CCGT generation in GB in
a typical February in 2012 and 2030
In response to wind generation, the utilisation of
CCGTs will change to become more intermittent.
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Although both coal plant and gas-fired CCGTs
are able to respond to much of this variability,
it is gas-fired plant that are of most interest,
as the variability in their output has a direct
impact on the gas network: periods of low
wind/solar generation lead to higher gas
demand and vice versa.
The changes are shown in Figure 1, which
compares the typical dispatch of the power
“The role of gas-fired
generation is changing. Gas
markets will change too.”
stations on the system in 2012 and 2030
for GB. In 2012 the system is much more
stable, with regular patterns of day-night and
weekday- weekend. However, by 2030, the
large amount of wind and solar generation
disrupts these patterns.
Figure 2 shows the utilisation of the gas
plant, and it is clear how this becomes
highly dependent on the weather and, in this
example, on the wind generation.
The increased volatility of gas demand will
have an impact on the gas system and the
gas markets, and in this Point of View we will
summarise the major findings from the study
and explore the key questions that this effect
raises.

Gasdemandis
changing
Given the highly different generation mix
and renewables targets across European
countries, it is no surprise that there is a
strong variation in results between countries.
The example of Germany shown in Figure
3 illustrates the typical effects we see for
countries with high levels of wind. By 2030,
during a period of high wind on 3-4 October
it is possible to meet the peak demand
using only renewable generation , with
nearly 50GW of generation coming from
wind. During this period CCGTs are turned
off and restart generation for the following
two days, before being displaced again by
wind overnight moving into 7 October. The
impact of increased intermittency is also felt
by other generation types (for example coal/
lignite and hydro), as the swings in intermittent
generation exceed the CCGT capacity in
Germany.
It is notable that the load factors of CCGTs
come under downward pressure as a result of
the low variable cost of renewables. However,
given the current oversupply situation in
much of Europe, the utilisation of CCGTs
actually rises in many countries over the next
10 years as this supply situation is alleviated,
before falling as further renewables are built.
CCGTs are also faced with more unpredictable
running patterns in most countries but
the number of starts does not necessarily
increase – this depends on the market
and the local supply situation. However,
CCGTs broadly experience a greater number
of cold starts which has implications for
maintenance.
As a result of the wind intermittency and
the resulting variation in CCGT operation,
the amount of gas used by the power sector
varies enormously. Figure 5 highlights how
the gas demand for power generation in the
Netherlands and Germany changes from
2012 to 2030, becoming much more volatile.
Total gas demand
Although the volatility of the gas demand
from the power sector is important, it is only
one element of total gas demand – there is
also the requirements from the residential,
commercial and industrial sectors. Typically
the power sector is between 10-40% of total
gas demand depending on the country, so
the significant impact shown in the previous
charts will be attenuated to a certain extent,
depending on the market and the amount of
gas-fired generation.
In Figure 6 we show the impact on total gas
demand, again comparing 2012 with 2030.
The change in gas demand as a result of gas
intermittency is clearly visible, but the impact
is less dramatic as 60-70% of demand is from
the non-power sector and hence remains
unaffected.
The impact of intermittency on gas demand
is typically larger in absolute terms during
the winter when electricity demand is high
and changes in wind generation are the
greatest – these large swings require a
matching response from thermal power
stations. However, changes in demand from
the residential, commercial and industrial
sectors caused by temperature are also
greatest during the winter, so the wind effect is
less pronounced. The effect of intermittency
on gas demand is larger in relative terms
during the summer when non-power demand
is lower and so gas demand for power
generation makes up a larger proportion of
overall demand.
3
Note: CHP – Combined Heat and Power, CCGT - Combined Cycle Gas Turbine,
CCS – Carbon Capture and Storage
Figure 3 - Snapshot of German power generation in October 2030
With a sharp rise in wind between 3-5 October, the CCGTs are displaced.

Countries most affected
The countries which experience the greatest
impact in gas intermittency are those with the
largest increases in wind capacity. In these
countries there is a requirement for other
sources of generation to become more flexible
to accommodate the variable patterns of wind
generation and solar generation.
Figure 4 illustrates that the gas markets in
countries in North and West Europe will be
most affected by intermittency (the darker
the colour the more affected the country). In
these regions, it is most likely to be CCGTs
which respond to the changing output of
wind generation. The countries in South and
East Europe have much weaker correlation,
as there is typically a lower level of wind
generation which does not require the same
response from CCGTs.
Figure 5 - Gas demand from power generation in the Netherlands and Germany
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TED COUNTRIES
17 JANUARY 2012
PÖYRY POWERPOINT 2010 TEMPLATE 1
“Gas demand
will become less
predictable as
the presence
of intermittent
generation
grows.”
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Dailydemand(mcm)
2030
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Dailydemand(mcm)
2030
2012
Netherlands Germany
Figure 6 - Daily variation of total gas demand in the Netherlands and Germany
FIGURE 4 - Countries most affected by 2030
Darker green colour shows countries most affected by the ‘gas intermittency’ impact
About Tableau maps: www.tableausoftware.com/mapdata

COPYRIGHT©PÖYRY
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Dailyflow(mcm/day)
Storage
Interconnectors
LNG
Norway
Indigenous
Demand
Figure 7 - Daily flows of gas in the Netherlands in 2012
Flows are dominated by indigenous production, in particular the Gronigen field, with significant exports to other
European countries
Figure 8 - Daily flows of gas in the Netherlands in 2030
Exports have reduced sharply as indigenous production declines, whilst storage usage increases in response to
more volatile demand
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Norway
Indigenous
Demand
Gassupplyis
changing
Changing patterns of demand will require
changes in the supply of gas; be it from
pipeline supplies, LNG sources, storage
or interconnection flows. In addition, the
available supplies to Europe will alter over the
next 20 years, with new pipelines, further
LNG supplies and the potential growth in
unconventional gas replacing declining
conventional indigenous supplies.
Figure 7 also shows the gas flows in the
Netherlands in 2012 from our modelling.
Flows are dominated by the Gronigen field
(indigenous production) in blue, with large
exports of gas to other countries. Storage
is only used to a limited extent, owing to the
flexibility provided by Gronigen.
By 2030, the picture has changed
dramatically, as shown in Figure 8. The
indigenous production has dropped, leading
to much lower exports. Gas demand volatility
has increased and the sources of flexibility
have reduced, leading to much greater use of
gas storage.

The changes caused by intermittency have a
different effect in each of the nations studied
because of the different gas infrastructure and
supply portfolios in each country. Looking at
Germany in 2030 in Figure 9 shows the changes
in one of Europe’s biggest gas markets. In
particular, the gas flows are dominated by
Russian gas via Nordstream, along with gas via
interconnection both from the east and the west.
There is significant use of storage responding both
to changes in demand caused by temperature and
heating load, as well as the effect of intermittency
of wind and the demand of the power sector.
In Iberia, the system is dominated with LNG
imports and pipeline gas from Algeria with limited
interconnection to the rest of Europe, and limited
scope to build storage facilities. The power
generation sector is a very large component of
gas demand, and as a result the gas intermittency
effect is significant, with a very volatile gas
demand. The highly intermittent gas demand
that develops by 2030 (as shown in Figure 10)
is managed via LNG, with LNG tanks providing
almost all the increased requirement for flexibility.
“Individual countries face
radically different challenges, but
flexibility is a concern for all.”
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Nordstream
Norway
Indigenous
Demand
FIG 12
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Storage
Interconnectors
LNG
North Africa
Demand
Figure 9 - Daily flows of gas in Germany in 2030
There is significant storage usage to balance the highly variable demand, with most supplies coming from
Norway and Russia
Figure 10 - Daily flows of gas in Iberia in 2030
The Iberian peninsular has highly variable demand which is managed mainly by LNG and pipelines from
North Africa

Gasstorage:
winnersandlosers
Gas storage utilisation
One of the key outputs from the modelling
work is a detailed understanding of how gas
storage will be used in the future, as our gas
model accurately replicates the decisions
faced by operators as to whether to withdraw
(or inject) gas today or hold onto the gas in the
hope of a higher (or lower) price in the future.
The model simulates slow seasonal storage
types such as depleted fields, which provide
gas over the winter, as well as medium- and
fast-cycle facilities that can withdraw and
inject gas quickly and hence respond to daily
variations in gas demand and supply.
From the study, we have concluded that the
impact of gas intermittency on seasonal and
slower-cycle gas storage facilities is limited,
and in most cases their current operational
patterns are very similar to those we observe
in 2030. This is because the underlying
seasonality of gas demand does not change,
and hence the requirements for seasonal
storage does not change.
However, gas storage facilities that are
capable of cycling very quickly are well placed
to meet the variations in demand that result
from intermittency, and in all cases, there is
increased utilisation of fast storage facilities.
Figure11 below is an example how fast storage
usage increases in Germany as the demand
for gas from storage becomes more volatile.
Storage revenues
Gas storage revenue is fundamentally driven
by the ability to buy gas at a low price, store it,
and then sell it later for a much higher price.
There are typically two broad categories
of revenue for a gas storage facility – the
revenues from the summer/winter difference
in prices, and the revenues available as a
result of trading around the volatility of the
daily gas price.
We have found that the changes in the gas
markets to 2030 do not appear to increase
revenues for seasonal or slower storage
facilities that much, as most of their revenue
stems from the summer/winter spread which
remains broadly unchanged in our modelling.
However fast-cycle storage facilities
experience an increase in revenues,
benefiting from higher utilisation and greater
price volatility.
However, the geology for fast-cycle storage,
with large salt deposits, only exists in a
relatively small number of countries, including
GB, Ireland, Netherlands and Germany. As a
result it is only in these countries that we see
an increase in the value of storage facilities as
a result of the gas intermittency effect.
Figure 12 shows this increasing usage of fast-
cycle gas storage in GB from 2012-2030, also
highlighting how differing weather patterns
lead to different utilisation. As part of our
modelling, we looked at historical weather
patterns to help us understand how the
future might look if we had similar weather to
the past. In a warm winter such as 2006/07,
utilisation can be as much as 50% lower than
in a cold winter such as 2008/09.
Requirements for new storage
capacity
Currently in Europe there are a large number
of planned and proposed new storage
facilities, with plans for up to 70bcm of
additional storage, compared to current
storage of 85bcm in the countries studied.
There have been many calls to increase the
amount of gas storage in Europe, to cover
concerns about security of supply.
As part of this study, we have assessed the
requirements for new storage build, but
have confined the analysis to the ‘typical’
effects generated by weather conditions
assuming good availability of infrastructure. In
particular, we have not tested the robustness
of the European system to events such as
the loss of major pipelines or restrictions of
Fast
Volume
Figure 11 - Volume of gas in fast-cycle storage in Germany
The construction of new storage facilities leads to greater storage volumes whilst
the utilisation and cycling increases
“Typically an
additional
10-15bcm
of volume is
required by
2030.”

flows from Russia. Although the modelling
framework is well-suited to security of supply
analysis, the study was intentionally focused
on more frequent events of cold and calm
weather rather than low probability, high-
impact incidents.
In all the scenarios we examined, the study
concluded overall that there is requirement
for additional storage capacity in Europe,
but the real need does not occur for another
10 or so years. The additional working gas
volumes required are not that great – typically
4
Storageused(mcm)
Figure 12 – Utilisation of fast cycle storage in GB
There is much greater utilisation of fast cycle storage by 2030, but the range due to weather effects also
increases
an additional 10-15bcm of volume is required
by 2030, an increase of 12-18% on current
volumes. However, the study concluded
that there are limited new opportunities for
profitable storage build.
1. Salt Cavern
2. Oil and Gas Reservoir
3. Depleted Field
4. Transmission Pipeline
5. Compressor
45
2
3
1
How does gas storage work?
What is Gas Storage
storage?
Gas can be stored underground in
naturally-occurring geological formations.
The most common types of gas storage
are depleted gas fields, aquifers and salt
caverns. Market participants often inject
gas into storage facilities when prices are
low, and withdraw gas when prices are
high.

Increasedprice
volatility=
increasedrisk
IMPACT ON GAS PRICES
Our gas model has been specifically designed
to examine how daily gas prices will evolve
into the future, in particular to understand the
value that stems from flexibility provision. It
achieves this by looking at the fundamental
relationships that drive gas prices on a daily
basis, both the economic drivers of the cost
of supply, and also the historical relationships
that exist between changes in supply and
demand and the resulting prices.
From the extensive work carried out, we can
conclude that as daily variations in demand
increase and the European gas market
becomes progressively tighter, this feeds
through to increased daily variations in price.
Figure 13 illustrates that the variation between
prices each day becomes larger by 2030.
Figure 14 shows that price volatility will
increase across most gas markets in
Europe. This increase in price volatility will
be felt across the nations of Europe through
interconnection. So even if one country does
not invest in intermittent renewable generation
capacity, it would still have increasing daily
gas price volatility if its neighbours do. For
example, although neighbouring countries
of Germany are not planning to install high
amounts of renewable generation capacity
they still will experience an increase in price
volatility due to high amount of renewables
installed in Germany. This is consistent with
COPYRIGHT©PÖYRY
FIG15 - 11
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PÖYRY POWERPOINT 2010 T
Price(€/MWh)
Figure 13 – Example daily prices (based on 2006 weather)
Prices become more volatile and also rise over time
COPYRIGHT©PÖYRY
FIG16
PÖYRY P
Figure 14 – Map illustrating changes in absolute daily gas price volatility
Darker colours indicates higher gas price volatility
market prices in recent years where there is a
high degree of correlation between prices at
different traded hubs.

Thechallengesof
managingthe
system
WITHIN-DAY GAS DEMAND
Within-day changes in gas demand – whether
they are caused by consumers switching on
their heating systems in the morning or off
in the evening, or by power stations starting
and stopping – cause changes in supply
requirements that have to be managed by
the transmission system operator (TSO). The
TSOs have a number of tools available to them
to manage these variations, including linepack
(storage within the gas pipes themselves) and
getting shippers to flow more or less gas into
the system within-day.
As part of this study, we looked at whether
the gas intermittency effect would change
the requirements for within-day flexibility,
and whether gas demand within-day would
become more ‘peaky’ – that is whether
requirements for gas demand may become
more concentrated at peak times of the day.
We found that across most countries, there
is an increase in the ‘maximum within-day
peak’ of within-day gas demand for power
generation. This is caused by the increasing
number of CCGTs and the significant role
that they play in absorbing intermittency from
other generation sources. This is particularly
important when falling wind generation
coincides with rising electricity demand –
particularly in the early morning period. In
this case a large number of CCGTs have
to switch on to provide power both for the
increasing demand requirements but also to
compensate for the falling wind generation.
Figure 15 illustrates how the ‘maximum
within-day peak’ changes over time and in
most countries there is an increase over time.
This is particularly true for those countries for
which CCGTs are already a significant part
of the generation mix (GB, Iberia, Italy where
the absolute difference is highest) but also for
those countries where the number of CCGTs
is increasing, but from a lower base (Germany
and France where the absolute requirement
is fairly low to begin with, but increases on a
similar percentage basis).
This means that TSOs will need to be able to
manage increased within-day changes. It is
difficult to put these changes into context for
each TSO as the impact will differ for each
country. For some nations with large networks
and linepack, the daily change may not be
significant. For others where demand from
the power sector is currently very small (and
will grow) or where the network has limited
linepack the within-day changes we have
highlighted might be quite considerable.
What’s within-day gas
balancing?
Balancing ensures that the pressure in a
gas transmission system remains within
safe levels. Inputs to and outputs from a
network will respectively raise or lower
the pressure in the system. In Europe,
most transmission systems require
that suppliers balance their inputs and
outputs over any given day, a process
known as daily balancing. Within-the-
day, it is the responsibility of the network
operator to balance the flows of gas on
an hourly basis to ensure that the system
remains at suitable pressures.
Within-day balancing – in contrast to
daily balancing – requires suppliers to
balance the system over time periods
shorter than a day. For example, if
daily gas demand were to become less
predictable in the future, transmission
system operators may adopt hourly
balancing regimes to maintain the safety
of their networks, forcing suppliers to
match their flows of gas in and out of the
network on an hourly basis.
Figure 15 – Within-day flexibility
required from CCGT operations
Dark green shows a low requirement for within-day
flexibility provision and dark red shows a high
requirement

Howdoesgas
intermittencyaffect
you?
Investigating the myriad of impacts that
occur on gas markets as a result of policy and
market changes in the electricity markets
has been a complex and detailed task, and
it has required a large multi-client study
supported by a number of the key players in
the European gas market to achieve it.
• The study has shown that the intermittency
effect in electricity markets is passed
through into the gas markets. The main
effect is the increased day-to-day variation
in gas demand, with the effect most notable
in those countries which build the most
wind capacity and also have a large
proportion of CCGTs in the generation
portfolio.
• The most significant effect on energy
market players is likely to be day-to-day
price variations. Retail companies will need
to ensure that their gas hedging strategies
and short-term portfolio is robust to meeting
these changes in demand within acceptable
risk limits. The changes in wind output will
exacerbate the changes in price which are
currently often driven only by changes in
temperature through the link to heating
demand; though it should be noted that
temperature will remain a greater driver of
demand and price than wind speed.
• In the future, running patterns of CCGTs will
be strongly influenced by intermittency.
Their gas purchasing strategy will need to
enable CCGTs to respond to these signals or
risk forcing the plant to operate at times of
low spark spreads. This is likely to be a
particular issue in countries where there is
limited (or no) spot trading and thus
generators are reliant on station gate
delivered contracts.
• In interpreting the results and messages
from this study, one should understand that
there is no linear relationship between the
amount of renewable generation capacity
built and the effect on the gas market.
Flexible response from CCGTs and, hence,
gas demand, to manage the effect of
intermittency differ, depending on a number
of variables including amount of wind
capacity installed, the generation mix and
the relative costs of coal and gas generation
• As regards gas storage, the study
concluded overall that there is requirement
for additional storage capacity in Europe,
but given good availability of infrastructure
and supplies the real need does not occur
for another 10 or so years. Fast-cycle
storage projects are well placed to benefit
from the increased requirements for
flexibility, but storage developers cannot
rely on increasing levels of renewable
generation to stimulate demand for their
products and projects in the immediate
future. Even though price volatility
increases, this does not change the market
significantly enough to ensure that all new
projects would necessarily be profitable.
• How much additional storage capacity is
required in the future will depend on the
level of flexibility which comes from
upstream gas fields alongside the level of
installed renewable generation capacity.
Ultimately the future of gas and electricity
markets is highly uncertain and subject
to a myriad of foreseeable changes and
unforeseeable events. The full version of
this study has provided its members with an
unprecedented insight into how the current
direction of European renewables policy
could affect the European gas markets.

Howdidwe
approachthe
study?
HOW DID WE APPROACH THE STUDY?
We initiated the study in partnership with
major players from Europe’s energy market
including EGL, Eni, Gasunie, GRTGaz, RWE,
Statoil and Vattenfall who formed the Steering
Group, giving direction to the study and
providing an external opinion on the work.
The results of the study represent the views of
Pöyry and are not necessary representative of
the views of the companies involved.
The study explored a number of future
scenarios in order to quantify how different
market environments would affect gas
prices and flows. None of these scenarios
represented a ‘base’ case, but rather
alternative possible future worlds which could
evolve. The scenarios aimed to capture a
broad range of interests and were developed
in collaboration with the Founders of the
study.
In particular, we examined three major
power scenarios to assess how changes in
the electricity market will flow through into
requirements for gas. The High Renewables
scenario explored a world where governments
meet their renewable obligations and continue
to decarbonise via extensive investment
in renewables. The Central Renewables
scenario examined a more central case where
the renewables targets were not met until
2030. We also examined a more aggressive
decarbonisation scenario, the Low Carbs
scenario, to understand how widespread
Understanding the gas intermittency issue
requires highly sophisticated models – not
only the ability to model the entire European
electricity market at an hourly resolution, but
to be able to model the European gas markets
simultaneously to capture the interactions
between the two in a consistent manner. A
further consideration comes from the weather
it is critical to ensure that the modelling
picks up the complex interactions between
temperature, wind and solar irradiation across
all the European countries, and also captures
a sufficiently wide range of historical weather
patterns to be representative. Finally, the
modelling must represent the uncertainty of
the future – in particular the decision faced
by gas storage operators as to whether to
withdraw gas today, or hold it in storage on the
expectation of a future cold day.
To achieve all of this, we have used two
leading-edge models – the electricity market
model (Zephyr) and the gas market model
(Pegasus).
• Zephyr is a highly detailed electricity
dispatch model that has been used to
provide the link between intermittent wind
and variable gas demand through gas-fired
power plant. The model simulates all 8760
hours in the year across the 19 countries
investigated.
• Pegasus is the main model of the study
optimising flows of gas across the world in a
way that replicates market behaviour.
Pegasus has a detailed bottom-up
approach where gas can flow freely
between countries based on the
fundamentals of each gas market and the
connections between them. Pegasus uses a
‘rolling tree’ principle where decisions to
flow gas are taken based on imperfect
information as to how the weather will occur
in future. Pegasus produces daily gas
prices and the gas flows used to meet
demand in each zone.
The relationships between the weather and
energy market demand and supply (through
solar and wind generation) are extremely
complex and critical to accurate analysis.
To do this we use highly detailed historical
data of temperature, wind speed and solar
irradiation, comprising over 100 million data
points, to accurately represent a single future
year. In particular we have used six historical
weather years (2004/05-2009/10) to provide
a range of potential outcomes. This approach
enables us to determine the projected price
both under ‘average weather’ and under more
extreme weather patterns.
Using these sophisticated and integrated gas
and electricity models, Pöyry has brought
fresh insight to the challenges Europe will face
on its path to decarbonisation.
Figure 16 - Under-the-bonnet of Pöyry Management Consulting’s powerful modelling
insight capability
If would like to access a copy of the full
200+ page study, or you would like to
understand how Pöyry Management
Consulting can help you with your
projects, then please get in touch:
consulting.energy.uk@poyry.com
deployment of renewables, nuclear
and carbon capture and storage (CCS)
technologies may alter the gas markets.
In addition, the study examined gas market
scenarios to understand how variations in
the amount of storage build and the level of
upstream flexibility would alter the impact.

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Unique ID: Point of View
Date: October 2012
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