Short-term gas trading market begins operation

Following its official launch by the Australian Energy Market Operator on 1 September 2010, the short-term trading market is making a significant impact on the way the Australian gas industry operates. Gas Today spoke to an industrial user and a retailer about the changes to the market.

The short-term trading market (STTM), is a transparent wholesale spot market for the trading of natural gas, which will determine daily market prices and a timetable for gas deliveries from pipeline transmission users and hubs. The market is currently operational in Sydney and Adelaide, with Brisbane to join in 2011.

Increasing competition, decreasing costs

Australian Energy Market Operator (AEMO) Chief Executive Officer and Managing Director Matt Zema says “The STTM is a key step in gas market reform that will improve transparency, efficiency, and competition across the gas sector in New South Wales, South Australia, and Queensland (for 2011). It provides clearer price signals, incentives for efficient management of resources, and enhanced market liquidity.”

Adelaide Brighton is an industrial end user of gas, and General Manager Commercial Michael Williams says that the STTM “provides us with the opportunity to reduce our annual gas costs by buying a proportion of our gas from the STTM when prices are low relative to long-term contracts.”

Mr Williams says “These low prices are expected to occur during the mild seasons of the year when there is a surplus of gas. Conversely, there will be times of the year when gas demand is very high and at these times there is the opportunity to sell gas that is excess to our operating requirements.

“From an operational perspective, the STTM places increased importance on our capability to accurately forecast our gas consumption one day ahead. The STTM requires additional management of costs and risk management processes; however, the cost of the additional management processes is recovered quickly through the cost savings,” Mr Williams says.

From a retail perspective, the new market, which integrates AEMO’s roles as both the retail market and wholesale market operator, offers an opportunity for a “more integrated interface to deal with as participants,” says AGL Manager Gas Market Development George Foley.

Mr Foley says that while the market is an ex ante market, there is provision for minimising the impact of deviation charges incurred on a trading day through intraday renominations to the pipeline, — this particular feature of the design recognises the linepack capacities of pipes feeding both the Adelaide and Sydney Hubs.

“This is a useful feature of the market.”

Trading in the new market

AGL has been continuously improving the accuracy of its demand forecasts, which Mr Foley says has “certainly been given a boost by the introduction of the STTM.”

Mr Williams says that “prior to the commencement of the STTM, our gas shipments sourced from our long-term gas supply contract matched our gas usage exactly and although possible, bilateral wholesale gas trades with other parties have been difficult to establish due to lengthy master contract negotiations. The STTM enables a mechanism to easily match sellers who are long term and looking to sell gas at attractive prices to buyers.

“One benefit of the market is that large industrial gas users can offset the increasing gas prices of their long-term supply arrangements with the ability to purchase some of their gas requirements at lower prices when demand is not high.

“Whilst the market prices are unlikely to be able to be effectively used by large industrial users when seeking long-term supply contracts, it does provide the opportunity for large users to manage their own gas requirements and seek to reduce costs by having at least a partial exposure to the market price.”

Mr Williams remarked that another strength of the market is that it provides transparency.

“Historically, the gas industry has tended to function as a close knit industry with very little transparency.

“Gas users have not been in a strong position in terms of information and options when going into long-term contract negotiations with major gas suppliers and, as a result, long-term gas contract prices have probably been higher and less flexible than they could have been. The STTM has created far greater transparency of the gas market, will encourage new gas entrants, and will produce more efficient outcomes than the previous bilateral arrangements.”

Room for improvement?

Mr Foley suggested that “the rigid manner in which trading rights are registered may mean a slight loss of portfolio diversity for the industry as a whole.”

Mr Williams and Mr Foley agreed that the introduction of user-to-user market schedule variations (MSVs) would help to contribute towards the STTM’s continued efficiency.

Mr Williams said that “MSVs – transactions to balance gas between participants after the gas day has finished – are traded bilaterally. All parties benefit from undertaking MSVs and we would like to see a mechanism whereby these can be traded and settled via the STTM rather than requiring a separate bilateral negotiation and settlement with each participant on each gas day.”

A gas market for the future

The process of changing any of the key features of the STTM is prescribed by the National Gas Law and National Gas Rules. AEMO and participants can propose changes to the features of the market. To this end, AEMO established an open consultative forum (the STTM Consultative Forum), which is one vehicle to consult with industry on STTM development issues.

“In this way, progress will be made in a consultative way, which has been important in the development and implementation of the STTM for commencement, and will be important in the future development of the market,” says Mr Zema.

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