Intrinsic value is the spread you can lock in today on the forward curve. It is an optimisation over months and rates, not the gap between two seasonal strips.
The intrinsic value of gas storage is the cash you can lock in today by buying gas forward in the cheapest months you can inject and selling it forward in the dearest months you can withdraw, within the facility's rate limits, less injection, withdrawal and fuel costs. On an illustrative 1,000,000 MWh facility and an illustrative forward curve it is 6,108,000 euros, or 6.11 per MWh of capacity. The familiar summer-winter strip spread puts it at 4.56 once costs are paid.
Worked in full in Energy Trading by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A trader leases one storage year, April to March, of an illustrative facility. The forward curve is invented for the arithmetic; it has the usual shape, cheap in early summer and dearest in January, but none of the prices is a market quote.
| Input | Value |
|---|---|
| Working gas volume, MWh | 1,000,000 |
| Maximum injection, MWh a month (5.0 months to fill) | 200,000 |
| Maximum withdrawal, MWh a month | 250,000 |
| Injection fee, per MWh | 0.80 |
| Withdrawal fee, per MWh | 0.60 |
| Fuel used on injection, share of gas injected | 1% |
| Inventory at start and end of the year | 0 |
All cash flows are shown undiscounted, to keep the arithmetic visible. A desk discounts each month's settlement to today; over one storage year that trims the value only slightly, and the larger cost of carrying the gas is shown separately below.
Each month the trader chooses an injection or a withdrawal. Injected gas is bought forward at that month's price plus 1 per cent for fuel plus the injection fee; withdrawn gas is sold forward at that month's price less the withdrawal fee. The inventory must stay between zero and the working gas volume and end the year empty.
Maximise Σ [ Wm × (Fm − 0.60) − Im × (Fm × 1.01 + 0.80) ]
subject to 0 ≤ Im ≤ 200,000; 0 ≤ Wm ≤ 250,000; 0 ≤ inventory ≤ 1,000,000; inventory in March = 0
Excel: Solver on a twelve-row sheet, or a short dynamic programme: one row per month, one column per inventory level
This is a small linear programme. With a curve of this shape it has an obvious answer, but on a real curve with a dip in October or a soft February the obvious answer is often wrong, which is why desks solve it rather than eyeball it.
| Month | Forward | Inject (+) / withdraw (−), MWh | Inventory, MWh | Cash |
|---|---|---|---|---|
| Apr | 30.00 | 200,000 | 200,000 | -6,220,000 |
| May | 29.00 | 200,000 | 400,000 | -6,018,000 |
| Jun | 28.50 | 200,000 | 600,000 | -5,917,000 |
| Jul | 29.00 | 200,000 | 800,000 | -6,018,000 |
| Aug | 29.50 | 200,000 | 1,000,000 | -6,119,000 |
| Sep | 30.50 | 0 | 1,000,000 | 0 |
| Oct | 32.00 | 0 | 1,000,000 | 0 |
| Nov | 35.00 | -250,000 | 750,000 | 8,600,000 |
| Dec | 37.50 | -250,000 | 500,000 | 9,225,000 |
| Jan | 38.50 | -250,000 | 250,000 | 9,475,000 |
| Feb | 37.00 | -250,000 | 0 | 9,100,000 |
| Mar | 34.00 | 0 | 0 | 0 |
| Year | 0 | 6,108,000 |
The plan injects in the five cheapest summer months at an average of 29.20 and sells in the four dearest winter months at 37.00: a gross spread of 7.80. Fuel takes 0.292 per MWh, the two fees 1.40, leaving 6.11 per MWh. September, October and March sit idle because the rate limits leave no room to use them profitably.
Lock it in by trading the plan as forwards: buy 200,000 MWh in each of April to August, sell 250,000 MWh in each of November to February. The 6,108,000 is then certain whatever prices do, before financing and credit.
| Change | Value, euros | Per MWh |
|---|---|---|
| Winter months (Oct to Mar) 4.00 lower | 2,551,000 | 2.55 |
| Winter months 2.00 lower | 4,108,000 | 4.11 |
| Base curve | 6,108,000 | 6.11 |
| Winter months 2.00 higher | 8,108,000 | 8.11 |
| Injection 150,000 a month | 5,628,250 | 5.63 |
| Injection 250,000 a month | 6,310,000 | 6.31 |
| Withdrawal 350,000 a month | 6,808,000 | 6.81 |
| Withdrawal 500,000 a month | 7,108,000 | 7.11 |
Value moves one for one with the seasonal spread while the plan stays full. When winter falls 4.00 the optimiser changes the plan: it injects in October, which is now cheaper than April, and withdraws only 800,000 MWh. Faster withdrawal is worth more than faster injection here, because the winter curve is peakier than the summer one: concentrating sales in December and January adds a euro per MWh.
Financing the inventory is a real cost the intrinsic number leaves out. At an illustrative 4 per cent on gas worth 29.20 a MWh, carried at each month-end level, it is 632,667 euros, 0.63 per MWh, which takes the value to 5.48.
Valuing storage as the winter strip less the summer strip. On this curve the six summer months average 29.42 and the six winter months 35.67: a spread of 6.25, or 4.56 after fuel and fees. That number averages in October and March, which a facility with these rates will not use, and it pretends the whole volume moves in both halves of the year. The optimised plan is worth 1,552,167 euros more. The opposite error is as common: quoting the gross 7.80 between the best months and forgetting that fuel and fees take 1.69 of it.
And intrinsic is only the floor. Once the hedges are on, the trader can re-optimise every time the curve moves, buying back a winter sale and selling a different month when the shape shifts. That rolling intrinsic, plus spot trading within the month, is the extrinsic value, and it is what a capacity fee above 6.11 is paying for.
The same logic of buying cheap hours and selling dear ones, applied to a battery, is in how to calculate battery arbitrage revenue, and how the forward legs are marked once traded is in mark-to-market on a power forward. For forward curves, hedges and the margin they call, see the free workbooks for this book.
Intrinsic value is what the forward curve pays today for one fixed injection and withdrawal plan: 6.11 euros per MWh in the illustrative case. Extrinsic value is what re-optimising that plan as prices move adds on top, through rolling the hedges or trading spot against forward. A storage capacity fee above intrinsic is a bet on extrinsic.
No. It averages months the facility will not use and ignores the costs. In the illustrative case the six-month strips give a 6.25 spread and 4.56 net of costs, while the optimised plan, injecting in five months and withdrawing in four, earns 6.11 per MWh: 1,552,167 euros more on a 1 TWh facility.
Faster rates let the plan concentrate in the cheapest and dearest months. Raising withdrawal capacity from 250,000 to 500,000 MWh a month lifts the illustrative intrinsic value from 6.11 to 7.11 euros per MWh, because all the gas can be sold in December and January; a slower injection rate of 150,000 cuts it to 5.63.
This article is one calculation from Energy Trading. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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