STAGE 1 FINAL REPORT East Coast Wholesale Gas Market and Pipeline Frameworks Review
Total Page:16
File Type:pdf, Size:1020Kb
STAGE 1 FINAL REPORT East Coast Wholesale Gas Market and Pipeline Frameworks Review 23 July 2015 Reference: GPR0003 Stage 1 Final Report Inquiries Australian Energy Market Commission PO Box A2449 Sydney South NSW 1235 E: [email protected] T: (02) 8296 7800 F: (02) 8296 7899 Reference: GPR0003 Citation AEMC 2015, East Coast Wholesale Gas Market and Pipeline Frameworks Review, Stage 1 Final Report, 23 July 2015, Sydney About the AEMC The AEMC reports to the Council of Australian Governments (COAG) through the COAG Energy Council. We have two functions. We make and amend the national electricity, gas and energy retail rules and conduct independent reviews for the COAG Energy Council. This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included. Executive summary The eastern Australian gas market is experiencing a period of significant growth and change, as conventional gas reserves decline, unconventional gas resources become increasingly important and the influence of international prices trends increases. The establishment of a liquefied natural gas (LNG) export industry based in Queensland is triggering unprecedented shifts in supply and demand and, consequently, changes in patterns of gas flows. These factors are resulting in a renewed focus on market development and gas supply chain efficiency. Against this background, the COAG Energy Council has requested that the Australian Energy Market Commission (AEMC or "Commission") review the design, function and roles of facilitated gas markets and gas transportation arrangements on the east coast of Australia ("the East Coast Review"). The review is to consider the role and objectives of the existing markets on the east coast in light of the changing market dynamics and set out a road map for their continued development. The Energy Council has developed a Vision for gas market development and a Gas Market Development Plan that will guide the scope of this review. The Energy Council, at the request of the Victorian Government, has also asked the AEMC to undertake a detailed review of the pipeline capacity, investment, planning and risk management mechanisms in the Victorian Declared Wholesale Gas Market ("the DWGM Review"). At this stage, we are incorporating analysis of the DWGM within the East Coast Review but during the second half of 2015 the DWGM Review will form its own workstream. The focus of the reviews is therefore the means of exchange for gas: how physical and financial transactions take place between buyers and sellers. Although providing important context for the reviews, issues relating to gas production or levels of competition in the production sector largely fall outside of the AEMC's remit and are being considered by other bodies, which we intend to work and consult with closely given the complementarity of the analysis. In particular, the Australian Competition and Consumer Commission (ACCC) has been tasked with undertaking an inquiry into Eastern and Southern Australian wholesale gas prices. The East Coast Review has been structured over two stages. Stage 1 outlines the overall direction for the east coast market development, including a factbase of current market outcomes and gap analysis between the Energy Council's Vision and the existing arrangements. Stage 2 will more fully develop any necessary medium and long term adjustments required to implement the Vision, including the transition path required. This structure is designed to provide the Energy Council with early and ongoing insight into the progress being made on the development and implementation of their reform agenda in this important area. This report is the AEMC’s Stage 1 Final Report and contains our preliminary recommendations on the areas of focus for market reform to be pursued in Stage 2, as well as recommendations for market enhancements and initiatives that can be progressed in the near term. Executive summary i Changing market dynamics and the need for reform Historically, natural gas has been used for a range of industrial, commercial and domestic applications in eastern Australia. Large industrial use makes up the largest share of total gas demand in eastern Australia overall, accounting for 44 per cent of demand in 2014. Gas-fired generation is responsible for approximately one-third of demand, most of which is base load generation in Queensland and South Australia. Residential and commercial demand makes up a relatively small amount of demand in all states besides Victoria (and to a lesser extent, New South Wales), where it comprises over half of total demand.1 In an emerging market, with a handful of suppliers and customers, remote production facilities and pipelines had little alternative use if a buyer was to terminate its agreement to purchase the output of those assets. Long-term contracts were therefore implemented to reduce the risks and costs for both sellers and buyers of gas. In a small, stable market where transactions occurred infrequently, finding counterparties and undertaking negotiations was relatively straightforward. The development of the LNG industry, combined with the growing maturity of the east coast market, is expected to fundamentally alter these market dynamics. While bilateral contracts are likely to remain a fixture of the east coast markets in the future, industry participants are also likely to require more flexible and sophisticated mechanisms to manage their gas portfolios. However, in the current environment a number of large users have reportedly found it difficult to find producers that are willing to enter into new long term contracts, or contracts of sufficient length to meet their commercial needs and support investment. Concerns have also been raised by some users about the prices payable under new contracts. The current facilitated markets in eastern Australia (the DWGM, the Short Term Trading Market (STTM) hubs and the Wallumbilla Gas Supply Hub) were intended to provide additional market options to complement the trade of wholesale gas through bilateral contracts and to allow greater transparency and improved price discovery. However, it is not clear that the DWGM and the STTM are meeting this objective or are likely to provide the flexibility required under this new market dynamic. In particular, the requirement for all gas in these markets to be traded through them, despite the vast majority of transactions occurring through bilateral contracts outside of the markets, imposes additional direct and indirect costs on shippers. The markets can also expose participants to a number of price risks, for instance as a result of deviating from their scheduled positions, some of which may be difficult or impossible to manage. A drawback of the prevalence of bilateral contracting for gas is that little price information is publicly available. This lack of transparency can impede the price discovery process. This is currently a particular concern to users as the market transitions to prices driven by the ability to export gas, and consequently influenced by international LNG prices. 1 AEMO, National Gas Forecasting Report, 2014. ii East Coast Wholesale Gas Market and Pipeline Frameworks Review The facilitated markets are however only part of the changing dynamic. There are substantial inter-linkages between transportation arrangements for gas and the facilitated markets for trading gas at demand and production centres. The full benefits of any further development of the markets are unlikely to be realised if gas cannot flow to where it is most highly valued. Gas transportation arrangements on the east coast are characterised by a marked difference between those used in Victoria and those applying elsewhere. Under the Victorian arrangements, market outcomes in the DWGM determine the use of the pipeline system on a daily basis. Elsewhere, pipeline owners enter into bilateral contracts with their customers to allocate pipeline capacity, generally over long periods. Bilateral contracting for gas transportation has facilitated significant new investment, with the Australian Pipelines and Gas Association (APGA) reporting that its members have built over $2.2 billion of new infrastructure providing 4000km of coverage across a large number of new gas transmission pipelines since 2000.2 However, the significant increases in demand and the volatility of flows likely to be experienced on the transmission network in the future will test the flexibility of the current arrangements. As an example, the outage of a single LNG facility could lead to the redirection of gas equivalent to a significant proportion of total domestic demand. There are concerns that, under such circumstances, difficulties in reallocating rights to use pipelines will impede the ability of the market to reach an efficient outcome. Directions for Stage 2 and the treatment of medium to long term issues The market and regulatory frameworks impacting Australia’s gas markets have evolved in a somewhat piecemeal manner since the development of the initial gas access regime in the 1990s. Consequently, fully understanding the issues and developing and assessing potential solutions requires detailed analysis and consultation with industry. Stage 2 of the review is intended to allow for the development of any medium and long term adjustments necessary to implement the Energy Council's Vision. Many of the issues