The initiative was developed following a Standing Council on Energy and Resources’ request that Australian Energy Market Operator (AEMO) develop a hub to enhance transparency and reliability of gas supply. It is an exchange for the wholesale trading of natural gas, offering a low-cost, flexible method for voluntary participants to buy and sell gas at interconnecting transmission pipelines.
“This type of commodity market tends to develop over time, but the initial feedback has been positive,”? says AEMO Group Manager of Business Strategy Peter Geers.
“At market start, there were eight registered trading participants with more indicating an interest to trade by mid-to late-2014.
“We couldn’t have asked for a better start to a market that is voluntary and designed to complement existing gas supply arrangements and gas transportation agreements.”?
Responding to need
The new market responds to emerging challenges in the east coast gas markets. Queensland in particular is experiencing substantial developments in LNG exports, which has increased the need for more flexible and transparent upstream transactions between parties. AEMO estimates demand for gas on the east coast is expected to triple from 745 petajoules (PJ) to 2,182 PJ in the next 20 years.
Wallumbilla is a major transit point between Queensland and other gas markets on Australia’s east coast. It is strategically located close to significant gas supply and demand, being a collection point for major gas fields, and a supply point for demand centres in Gladstone and Brisbane. It is also close to gas storage facilities and gas-powered generation.
The diversity of business activities and the number of industry participants at Wallumbilla create a natural point of trade.
The new supply hub is flexible in its design in that new locations and products can be added to suit industry needs. It is different to mandatory demand markets, which generally cover a specific distribution area, and are primarily designed to balance the supply of gas with demand.
Hub operations
The Wallumbilla Gas Supply Hub offers products for the sale and purchase of gas delivered through any of the three major connecting pipelines at Wallumbilla. Participants place anonymous offers (to sell) or bids (to buy) a specified quantity at a specified price, and these are automatically matched on the exchange to form transactions.
The hub provides a centralised trading, settlement and clearing facility through an online portal and enables generators, users, producers and retailers to manage their daily and future gas requirements.
AEMO used global best practice to establish the new trading environment, which features a 1 terajoule (TJ) contract size to increase trading flexibility.
AEMO will offer spot and forward-dated products to participants trading at the hub, with spot transactions to include a core “˜day-ahead’ and a “˜balance-of-day’ product. The “˜balance-of-day’ product enables parties to adjust their portfolio closer to real-time, and to manage imbalances within the gas day.
Alinta trades at Wallumbilla
Alinta is one of a growing number of companies registered to trade at the Wallumbilla Gas Supply Hub.
Alinta’s east coast gas interests include Braemar-1, a 500 megawatt (MW) gas-powered generation plant located in southern Queensland comprising three open-cycle gas turbine units. It also owns around 150 km of gas pipeline between Condamine and Braemar, used exclusively to supply the Braemar Power Station.
Alinta Gas Trading Manager Peter Frost says that the new market will provide greater flexibility and liquidity in gas trading on the east coast.
“Setting aside any impact from the carbon price, spot and wholesale electricity prices are at low levels and gas prices are steadily increasing as a result of the growing LNG export industry,”? says Mr Frost.
“In this environment, Alinta potentially sees value in gas being sold as a commodity rather than as a fuel to generate electricity.
“There is already interest in trading at the Wallumbilla location, but exchange conditions vary between counter parties, with each new sale requiring considerable legal work.”?
The hub will introduce standardised terms and conditions under an exchange agreement, developed by market participants.
Automatic matching of buyer-bids and seller offers is useful, with the market providing anonymity to protect participants’ commercial positions. Prudential arrangements also protect participants.
“Delivery netting should reduce transaction and administration costs because spot traders won’t have to physically nominate receipts and deliveries for each transaction,”? says Mr Frost.
Intra-day trading at the hub will also enable faster response times. This is important to Alinta, which operates in the volatile electricity spot market where prices can rise and fall rapidly.
Mr Geers says the hub also provides a capacity listing that allows participants to list any unused pipeline capacity. The listing service is available to both trading and viewing participants wanting to advertise their interest to buy or sell haulage capacity.
“We are still working with industry on a set of standard terms and conditions for shipper-to-shipper capacity transfers. We are pleased with the progress so far, and are also working with pipeline operators to develop an industry-led, operational capacity transfer model,”? says Mr Geers.
The hub also has the potential for longer-term quarterly trading, and expansion into other regions to enable locational swaps that offset trades in one region with trades in another region.
Developing more hubs
Once the current model is well established, there may be scope to develop supply hubs in other regions. Supply hubs have worked well in the US and in Europe; improving trading liquidity, developing secondary markets, enabling third-party access to capacity and storage facilities, establishing forward price curves, and increasing information transparency to support efficient market outcomes.
“We expect that in 12-24 months, the market will have been reshaped to meet the changing needs of trading participants. Industry will take a lead role in defining new products for the exchange,”? concludes
Mr Geers.