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The new gas trading exchange developed by the Australian Energy Market Operator (AEMO) is scheduled to go live on 20 March 2014. The gas trading exchange is the first stage in the development of a gas supply hub centred on Wallumbilla in Queensland.
The gas trading exchange is an electronic trading platform. Market participants submit orders to buy and sell products available for trading through the exchange. Each order must specify price, quantity and whether it is an offer (to sell) or a bid (to buy). The trading platform matches compatible bids and offers and when matched, transactions are formed. Participants must then deliver and settle. The settlement price for a transaction is determined by the price in the order - the gas trading exchange does not establish a single market price for settlement of all transactions.
The exchange is a forum to bring together buyers and sellers to trade short term gas on standard terms. In terms of its role in the gas market, the exchange has very little in common with the Victorian declared wholesale gas market (DWGM) or the short term trading market (STTM). Key features of the gas trading exchange are:
In developing the market design, AEMO looked to gas hubs and gas exchanges in the USand the EU. While the design of the gas exchange at Wallumbilla draws on some features of those facilities, it necessarily reflects the underlying gas market and regulatory environment in Australia. For example, unlike some EU gas exchanges, the exchange operator does not arrange for nominations to be registered to effect delivery nor is there a balancing mechanism in the underlying gas market to handle delivery variations. As yet the exchange does not offer hub services (such as compression or storage) which are offered at some other hubs, generally by gas transporters, and which support trading and liquidity.1
The Queensland Government proposed the development of a gas supply hub centred on Wallumbilla in its 2011 Gas Market Review. The Gas Market Review foresaw significant changes to the Queenslandmarket when new LNG projects at Gladstonereach operation, driven by the leap in gas volumes through the market.
The Review identified a need for transparent market structures to support trading among LNG participants and other gas producers and users. Wallumbilla was seen as an appropriate centre for trading given its location in gas production areas and given that at Wallumbilla, three major gas transmission pipelines interconnect:
Pipeline Map (source: 2012 Gas Market Review Queensland © State of Queensland)
Queensland's recommendation was taken to the Standing Council on Energy and Resources, which in turn asked AEMO to assess the feasibility of a gas supply hub and then to develop the gas trading exchange. AEMO worked closely with the Gas Supply Hub Reference Group, comprising gas producers, shippers, users and transporters.
Changes to the National Gas Law2 have established AEMO's gas trading exchange functions. Broadly, these require AEMO to establish, operate and administer one or more gas trading exchanges. The National Gas Law also authorised changes to the National Gas Rules to implement the gas trading exchange. Those changes took effect on 1 January 2014 and inserted a new Part 22 which:
The market conduct rules are of most practical relevance to market participants. Compliance with those rules is monitored and enforced by the Australian Energy Regulator. They are civil penalty provisions and conduct provisions for the purposes of the National Gas Law.3
The National Gas Rules require AEMO to establish the Exchange Agreement, which contains the substantive rights and obligations of market participants. It is a multilateral agreement to which the exchange operator and all those who sign membership agreements are a party. The agreement defines the process for becoming a participant and gaining access to the electronic exchange platform, the trading arrangements, prudential requirements, how transactions are concluded and delivery and settlement obligations.
As shown in the diagram, the Exchange Agreement incorporates associated documents such as the settlements and prudential methodology and each membership agreement.
Gas Trading Exchange: Legal Framework under the National Gas Law
Three participant categories are offered: trading participants, reallocation participants who provide credit support to trading participants and viewing participants who can view the market but not trade.
At market start, all products traded through the exchange will be for physical delivery of gas. The exchange includes a capacity listing service but those transactions must be bilaterally negotiated and settled.4
The physical gas products offered though the exchange provide for delivery at one of three trading locations corresponding to the Wallumbilla transfer points for each of the QGP, RBP and SWQP. At each trading location there are two or more delivery points and participants specify the applicable delivery point in their orders.
At market start, there will be four product categories:
For transactions concluded on the exchange, participants arrange delivery and acceptance of gas by making nominations to gas transporters. Subject to regulations being made under the Corporations Act2001 (Cth) relating to financial services licensing, delivery netting will apply to transactions concluded by D-2. Delivery netting is intended to simplify the nomination process for participants who have multiple delivery and receipt obligations on the same day at the same point. Deliveries are netted against receipts and matched with equal and opposite net obligations of one or more other participants.
After gas allocation, which is outside the scope of the exchange rules, participants notify delivered quantities to the exchange operator. Delivery variances are cashed out in settlement using, in broad terms, a 25% discount or uplift to the transaction price or to a market price where delivery netting applies.
The Exchange Agreement and all transactions under it form a single multilateral agreement. All amounts are owed to or by the exchange operator. Among other things, this structure allows for net calculation of market exposure for prudential purposes so reducing participant costs. Settlement is each month in arrears.
The Exchange Agreement and related documents are available on the AEMO website. The market conduct rules are part of the National Gas Rules published on Australian Energy Market Commission website.
1 Possible development of the hub is outlined by AEMO in its Gas Supply Hub Cost and Scoping Report (May 2012).
2 Made by the National Gas (South Australia) (Gas Trading Exchanges) Amendment Act2013 (SA).
3 Rules 542, 543 and 544 are prescribed to be civil penalty provisions and conduct provisions by the National Gas (South Australia) Regulations2008.
4 AEMO has been working with the Gas Supply Hub Reference Group to develop a standard form capacity trading document. This may eventually lead to a capacity product being offered through the gas trading exchange.
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