Capacity Trading Reform Package
(Standardisation, capacity trading platform and reporting framework for secondary trades)
Final Recommendations
November 2017
Contents
Abbreviations
1.Introduction and Summary
1.1Progression of the capacity trading reform package
1.2Consultation on the capacity trading reform package
1.3Final recommendations
1.4How the capacity trading reform package will operate
1.5Next steps
1.6Structure of report
2.Overview of the Capacity Trading Reform Package
2.1Key elements of the reform package
2.2How secondary capacity can be procured under the new framework
3.Assessment Framework
Part A: Standardisation Reforms
4.Standardisation of Contracts
4.1AEMC recommendations
4.2Contracts to be standardised
4.3Standardisation of the operational GTA
4.4Application of the standardised operational GTA
4.5Cost recovery for provision of operational transfer services
4.6Governance arrangements for the operational GTA
5.Other Measures to Reduce Barriers to Trade
5.1Allocation agreements and access to receipt/delivery points
5.2Contractual limitations on capacity trading in primary GTAs
5.3Gas day start times and nomination cut-off times
Part B: Capacity Trading Platform
6.Initial Set of Capacity Products
6.1Initial set of products to be sold on the exchange
6.2Maximising the pool of prospective buyers and sellers
6.3Standardised products to be sold on the exchange
6.4Charging parameters for capacity products
7.Delivery Process for Exchange Traded Products
7.1Provision of transaction information to service providers
7.2Transfer of capacity
7.3Key timings on the capacity trading platform
7.4Interaction between the delivery process and other markets
8.Settlement and Credit Risk Management
8.1Centralised settlement system
8.2Centralised credit risk management
9.Financial and Delivery Default Arrangements
9.1Seller defaults on its GTA with the service provider
9.2Seller short-sells capacity
9.3Seller defaults on financial obligations in the GSH
10.Capacity Listing Service and Bilateral Trading
11.Governance Arrangements for the Capacity Trading Platform
Part C: Reporting Framework for Secondary Trades
12.Reporting Requirements for Secondary Trades
12.1Types of trades to be reported
12.2Information to be reported
12.3Reporting obligations
12.4Where the information should be published
12.5Advertising trades in advance
13.Governance Arrangements for the Reporting Framework for Secondary Trades
The views and opinions expressed in this publication are those of the GMRG.
While reasonable efforts have been made to ensure that the contents of this publication are factually correct, the GMRG and its advisor, Johnson Winter & Slattery, do not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.
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Abbreviations
Term / DefinitionAA / Access Arrangement
ACCC / Australian Competition and Consumer Commission
ADP / Amadeus to Darwin Pipeline
AEMC / Australian Energy Market Commission
AEMO / Australian Energy Market Operator
AER / Australian Energy Regulator
AEST / Australian Eastern Standard Time
BB / Natural Gas Services Bulletin Board
CGP / Carpentaria Gas Pipeline
COAG / Council of Australian Governments
CTA / Capacity Trading Agreement (for shipper to shipper sales of capacity)
DTS / Declared Transmission System
DWGM / Declared Wholesale Gas Market
East Coast Review / AEMC’s Eastern Australian Wholesale Gas Market and Pipelines Framework Review (May 2016)
EGP / Eastern Gas Pipeline
Energy Council / COAG Energy Council
ERA / Economic Regulation Authority (WA)
ETS / Trayport Exchange Trading System
FTP / File Transfer Protocol
GMRG / Gas Market Reform Group
GSH / Gas Supply Hub
GTA / Gas Transportation Agreement
HPTP / High Pressure Trade Point)
JWS / Johnson, Winter & Slattery
LPTP / Low Pressure Trade Point)
MAPS / Moomba to Adelaide Pipeline System
MCF / Moomba Compression Facility
MDQ / Maximum Daily Quantity
MHQ / Maximum Hourly Quantity
MOS / Market Operator Service
MSP / Moomba to Sydney Pipeline
MSV / Market Schedule Variation
NEM / National Energy Market
NER / National Electricity Rules
NGL / National Gas Law
NGO / National Gas Objective
NGP / Northern Gas Pipeline
NGR / National Gas Rules
RBP / Roma to Brisbane Pipeline
SCO / Senior Committee of Officials
SIP / STTM Interface Protocol
SRA / Settlement Residue Auction
STTM / Short Term Trading Market
SWQP / South West Queensland Pipeline
TGP / Tasmanian Gas Pipeline
Transportation services / This term is used to jointly refer to pipeline and compression services
Vision / COAG Energy Council’s Australian Gas Market Vision (December 2014)
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1.Introductionand Summary
The Gas Market Reform Group (GMRG)was established by the COAG Energy Council (Energy Council) in the latter half of 2016 to lead the design, development and implementation of a range of reforms set out in the Gas Market Reform Package, including a package of capacity trading reforms.[1]
The capacity trading reform packagewas recommended by the Australian Energy Market Commission (AEMC) as part of its Eastern Australian Wholesale Gas Market and Pipelines Framework Review (East Coast Review)(see Appendix A for further detail) and endorsed by the Energy Council at its August 2016 meeting. The reforms, which relate to transmission pipeline and compression services (jointly referred to as ‘transportation services’), include the development of:
a capacity trading platform(s) that shippers can use to trade secondarycapacityahead of the nomination cut-off time and provides for exchange-based trading of commonly traded products and a listing service for other more bespoke products;
a day-ahead auction of contracted but un-nominated capacity, which would be conducted shortly after nomination cut-off and subject to a reserve price of zero (with compressor fuel provided in-kind by shippers);
standards for key contract terms in primary, secondary and operational transportation agreements to make capacity products more fungible and, in so doing, facilitate a greater level of secondary capacity trading; and
a reporting framework for secondary capacity trades that provides for the publication of the price and other related information on secondary trades.
Together these reforms are expected to foster the development of a more liquid secondary capacity market and, in so doing, improve the efficiency with which capacity is allocated and used on transportation assets operating under the contract carriage model (i.e. outside the Declared Transmission System (DTS) in Victoria),[2]by:[3]
using market based processes to allocate capacity on a non-discriminatory basis to those that value it most;
improving the incentive shippers have to trade capacity and posing a constraint on the ability of pipeline operators to sell secondary capacity at prices in excess of what would be expected in a workably competitive market;
reducing search and transaction costs; and
reducing information asymmetries and aiding the price discovery process.
Greater liquidity in this market is expected to facilitate increased trade in gas and support the development of a more robust reference price for gas. This, in turn,is expected to enable market participants to make more informed decisions about their use of gas and investments in exploration, production, pipelines and storage facilities.[4] The package of reforms is therefore expected to promote the National Gas Objective (NGO) and the Energy Council’s Vision for the Australian Gas Market (Vision) (see Box 1.1).
Further detail on the reform package can be found in Chapter 2.
Box 1.1: National Gas Objective and Vision for the Australian Gas MarketNational Gas Objective
The NGO is set out in section 23 of the NGL and states the following:
The objective of this law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.
Energy Council’s Vision for the Australian Gas Market[5]
The Energy Council’s Vision is for:
..the establishment of a liquid wholesale gas market that provides market signals for investment and supply, where responses to those signals are facilitated by a supportive investment and regulatory environment, where trade is focused at a point that best serves the needs of participants, where an efficient reference price is established, and producers, consumers and trading markets are connected to infrastructure that enables participants the opportunity to readily trade between locations and arbitrage trading opportunities.
At the time it released the Vision, the Council also noted that it would pursue the following outcomes in the next phase of gas market reform and development:
Stream 1: Encouraging competitive gas supply:
(a)Improvements to the regulatory and investment environment so that gas supply is able to respond flexibly to changes in market conditions.
(b)A "social licence" for onshore natural gas development achieved through inclusion, consultation, improving the availability and accessibility of factual information to resources projects, and rigorous science to ensure communities concerns are addressed.
Stream 2: Enhancing transparency and price discovery:
(a)Provision of accurate and transparent market making information on pipeline and large storage facilities operations and capacity, upstream resources, and the actions of producers, export facilities, large consumers and traders.
(b)Increased flexibility and opportunity for trade in pipeline capacity.
(c)A competitive retail market that will provide customers with greater choice and large users with enhanced options for self-supply and shipment.
Stream 3: Improving risk management:
(a)Liquid and competitive wholesale spot and forward markets for gas that provide tools for participants to price and hedge risk.
(b)Access to regional demand markets through more harmonised pipeline capacity contracting arrangements which are flexible, comparable, transparent on price, and non-discriminatory in terms of shippers’ rights, to accommodate evolving market structures.
(c)Harmonised market interfaces that enable participants to readily trade between locations and find opportunities for arbitrage and trade.
(d)Identified development pathways to improve interconnectivity between supply and demand centres, and existing facilitated gas markets, which enable the enhanced trading of gas.
Stream 4: Removing unnecessary regulatory barriers:
(a)Regulation of gas supply and infrastructure is appropriate and enables participants to pursue investment opportunities, in response to market signals, in an efficient and timely manner.
The outcomes that are most relevant to the capacity trading related reforms are Streams 2(a), 2(b), 3(b), 3(c) and 3(d).
1.1Progression of the capacity trading reform package
To progress the capacity trading reforms outlined above, the GMRG established:
a number of project teams to carry out the detailed design and development work, whichconsisted of a mix of members drawn from industry, consumer groups, market bodies and other industries (see Appendix C for a list of members); and
an Advisory Panel to provide strategic perspective and advice to the GMRG on key issues, which comprises senior representatives from all segments of the gas supply chain as well as Energy Consumers Australia (see Appendix C for a list of members).
Importantly, neither the project teams nor the Advisory Panel had any decision-making power. Their role was to inform the GMRG’s consideration of the design options, which were then consulted upon with other stakeholders. The GMRG has nevertheless benefited from, and greatly appreciates, the effort and resources that project team members and the Advisory Panel put into providing their advice to the GMRG. The GMRG also greatly appreciates the support provided by the Australian Energy Market Operator (AEMO), the AEMC, the Australian Energy Regulator (AER) and the Australian Competition and Consumer Commission (ACCC).
Work on the design of the capacity trading reforms was initially expected to be completed during 2018, allowing the recommendations to be considered by the Energy Council at the end of 2018 so the reforms could be implemented by 2021. However, in response to a request from the Hon. Josh Frydenberg MP, Minister for the Environment and Energy, the GMRG examined opportunities to accelerate this work and committedto providing its final recommendations on the capacity trading reforms by the end of 2017. Specifically, the GMRG agreed to provide its final recommendations to the Energy Council on:
(1)Who should operate and administer the capacity trading platform and the day-ahead auction in July2017.
(2)The following elements of the reform package at the 24November 2017 meeting:
(a)the standardisation related reforms;
(b)the capacity trading platform;and
(c)thereporting framework for secondary capacity trades.
(3)The day-ahead auction of contracted but un-nominated capacity in December 2017 for an out-of-session decision. Due to the complexity and wide-ranging stakeholder views associated with the day-ahead auction, it has been necessary to split this recommendation from those listed in (2) to allow for adequate consultation and consideration of the design of the auction.
The GMRG’s recommendations on item (1) was provided to the Energy Council on 14July 2017. In short, the GMRG recommended that AEMO operate both the capacity trading platform and day-ahead auction and that the capacity trading platform form part of the Gas Supply Hub (GSH) trading exchange.[6] This recommendation was endorsed by the Energy Council[7] and the work subsequently carried out on the design of the capacity trading platform and auction has proceeded on this basis.
In keeping with the timetable set out above, the remainder of this paper focuses on the matters set out in item (2). A separate paper will be provided to the Energy Council in December that deals with the matters set out in item (3).
It is worth noting in this context that while it has been necessary to split the recommendations on the design of the standardisation reforms, the capacity trading platform and reporting framework from the recommendations on the design of the day-ahead auction, these reforms are inextricably linked. The day-ahead auction, for example, will provide firm capacity holders with a greater incentive to sell any spare capacity they may have prior to the auction, while the capacity trading platform and the standardisation reforms will provide shippers with the means by which any spare capacity can be readily traded before it would otherwise be released in the auction. So while the GMRG is seeking agreement to the matters listed in (2) now and will be doing the same for the matters listed in (3) in December, the approval of the design of the capacity trading platform, the standardisation reforms and reporting framework pre-supposes approval of the proposed design of the day-ahead auction in December. The only substantive issue that therefore needs to be considered in December is the detailed design of the auction.
1.2Consultation on the capacity trading reform package
Work on the capacity trading reform packagecommenced in February 2017and over the last nine months the GMRG has conducted 35 project team meetings, four Advisory Panel meetings, two public forums and a large number of bilateral meetings with industry participants, consumer groups and market bodies. In May 2017, the GMRG also published a consultation paper that sought feedback from stakeholders on who should operate and administer the capacity trading platform and day-ahead auction. More recently, the GMRG has published consultation papers on:
the design of the standardisation reforms and capacity trading platform – consultation on these two elements of the reform package ended on 4 October 2017; and
the design of the day-ahead auction and reporting framework – consultation on these two elements of the reform package ended on 6 November 2017.
These consultation papers identified a number of design options for the various reforms and provided an indication of the GMRG’s preliminary view on each of the options.
Stakeholders were given four weeks to provide written feedback on the options presented in thesetwo consultation papers and were also invited to attend two public forums on these topics. The stakeholders that participated in these two consultation processes included the ACCC, AEMO, the AEMC, the AER and a number of organisations with interests across the gas supply chain, including, amongst others:
gas producers, such as APLNG, Esso, Shell, Santos,Central Petroleum and Senex, and the Australian Petroleum Production and Exploration Association (APPEA);
gas retailers and gas fired generators, such as AGL, Alinta, EnergyAustralia, Engie, ERM Power, Hydro Tasmania, Aurora Energy, Origin, Power and Water Corp, and the Australian Energy Council (AEC);
other gas users, such as Ridley Corporation and the Major Energy Users (MEU);
gas pipeline operators, such as APA, Epic, Jemena, SEAGas and Tasmanian Gas Pipeline(TGP) Pty Ltd, and the Australian Pipeline and Gas Association (APGA); and
other market participants, including CQ Partners and the Macquarie Group.
Feedback on the design of the capacity trading reform package was also provided by the GMRG’s Advisory Panel and through extensive bilateral discussions with stakeholders, including some consumer groups.
While stakeholders were generally supportive of the reform package and agreed with most of the GMRG’s preliminary views on the standardisation reforms, the capacity trading platform and reporting framework, a small number of issues were raised about the design of these reforms. The GMRG has therefore given further thought to these issues when developing the final recommendations set out in this report, a summary of which can be found in the following section.
In contrast to these three elements of the reform package, the design of the day-ahead auction has been more controversial. The GMRG is currently working through the feedback provided on the day-ahead auction and, as noted above, will provide its final recommendations on this element of the reform package in December.
Further detail on the feedback provided by stakeholders can be found in Parts A-C of this report. Public written submissions received in response to the two consultation papers can be accessed on the GMRG website.[8]
1.3Final recommendations
Having regard to the feedbackprovided by stakeholders and the advice provided by the GMRG’s legal advisor, Johnson Winter & Slattery (JWS), the GMRG has developed its final recommendations on the design of: