Wholesale gas markets discussion paper released

by Energy Action | Aug 21, 2015
The Australian Energy Market Commission, on 6 August 2015 released a wholesale gas markets discussion paper for consultation as part of the East Coast Wholesale Gas Market and Pipeline Frameworks Review. The Discussion Paper expands on the requirements for the development of a liquid wholesale gas market and what such a market might look like on the east coast of Australia.

This Discussion Paper follows the release of the Australian Energy Market Commission’s (AEMC) Stage 1 Final Report published on 23 July 2015, which includes recommendations to improve price transparency with a new gas price index to show price trends over time starting in 2016 and recommendations to reduce market complexity by highlighting the need for the same start time for gas trading in all markets.

The Discussion Paper discusses the role of gas hubs, sets out why physical and financial trading of gas takes place and outlines how physical imbalances can be managed.

The transfer of ownership and pricing of gas takes place at defined locations on a gas network called hubs. Broadly, there are two types of hub designs: physical and virtual.

Physical hubs can provide strong locational signals on the price of gas at a specific point in the network, as title transfer occurs at well-defined locations on the pipeline system. Multiple physical hubs, and the need to source pipeline capacity to transport gas to and from hub locations can have a negative impact on trading liquidity and may therefore not provide meaningful price information associated with a liquid “market”. This is because not all participants are likely to be able to access all physical points on the network.

Virtual hubs allow for title transfer of gas anywhere within the definition of the hub, thereby providing participants with greater trading flexibility and promoting liquidity. For instance, in Europe a virtual hub is often defined as the entire gas transmission system of a country. Virtual hubs typically require a system for allocating transmission capacity into and out of the hub area and can be more complex to balance.

Three design concepts are set out in the Discussion Paper ranging from multiple physical hubs to two large virtual hubs and are briefly summarised below

Concept 1: Multiple physical hubs

This model involves Gas Supply Hubs at Wallumbilla, Moomba, Longford, Iona and Gladstone, all of which represent physical hubs close to production and storage. Separate balancing arrangements are located at major demand centres in Adelaide, Brisbane, Melbourne, Sydney and potentially Canberra.

Concept 2: Northern and southern virtual hub

Concept 2 involves the establishment of two virtual hubs on the east coast, namely:

  • - a new virtual hub in the northern region that encompasses the Roma to Brisbane Pipeline and the current Wallumbilla hub; and

  • - a virtual hub in the south covering the entire Victorian Declared Transmission System.

The intention of Concept 2 is to concentrate trading liquidity at two hubs that are reflective of the different demand and supply characteristics in these two regions, in order to foster the development of a meaningful reference price for gas. Separate balancing mechanisms are located at Adelaide and Sydney, which are outside of the virtual hub definitions.

Concept 3: Two large virtual hubs covering the east coast

Concept 3 is an extension of Concept 2 and involves the establishment of a northern and southern virtual hub that, together, cover the entire east coast. Concept 3 further concentrates the trading liquidity in each of the northern and southern hubs by dividing the entire east coast into two definitions. There would not be a requirement for separate balancing arrangements at demand hubs as balancing would be catered for within each virtual hub.

Submissions to the Wholesale Gas Markets Discussion Paper close on 10 September 2015.

Gas trading hubs on the east coast of Australia

Source: AEMC based on information contained in the 2015 AEMO Gas Statement of Opportunities Map for Eastern and South Eastern Australia

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