STTM AND DWGM PARAMETER REVIEW - FINAL REPORT

Transcription

1 STTM AND DWGM PARAMETER REVIEW - FINAL REPORT PREPARED BY: AEMO DOCUMENT REF: VERSION: 1 DATE: 14 December 2012 Australian Energy Market Operator Ltd ABN inlo@oemo.com.au NEW SOUTH WALES QUEENSLAND SOUTH AUSTRALIA VICTORIA AUSTRALIAN CAPITAL TERRITORY TASMANIA

2 Contents Executive Summary Introduction AEMO s consideration of submission from stakeholders Alignment of Market Parameters between the STTM and DWGM Other issues The MOS cost cap The proposal to incorporate contingency gas into the DWGM Concerns with AEMO s assessment of DWGM and STTM Market Parameters Timing of the next market parameter review Conclusion...10 Appendix A Overview of DWGM and STTM Market Parameter Review...11 A.1 Market parameters assessed in the review...11 A.1.1 STTM market parameters A.1.2 DWGM market parameters A.2 Review approach and timetable...13 A.2.1 Summary of review Doc Ref: December 2012 Page 2 of 14

3 List of abbreviations Abbreviation AEMO APC Definition Australian Energy Market Operator Administered Price Cap CEA Clean Energy Act 2011 CPT DWGM GWCF MMA MMP MOS MPC NEM NGL NGR NGO NGR STTM STTM-CF VCR VoLL Cumulative Price Threshold Declared Wholesale Gas Market Gas Wholesale Consultative Forum (Vic) The GWCF is a forum established by AEMO for consulting with industry on matters relating to the DWGM. The GWCF is a forum open to all interested stakeholder to participate in. Further details can be found at: McLennan Magasanik Associates Minimum Market Price Market Operator Services Market Price Cap National Electricity Market National Gas Law National Gas Rules National Gas Objective National Gas Rules Short Term Trading Market STTM Consultative Forum The STTM-CF is a forum established by AEMO for consulting with industry on matters relating to the STTM. The STTM-CF is a forum open to all interested stakeholder to participate in. Further details can be found at: Value of Customer Reliability Value of Lost Load Doc Ref: December 2012 Page 3 of 14

4 Executive Summary Following consultation through the Short Term Trading Market (STTM) and Declared Wholesale Gas Market (DWGM) Consultative Forums, and consideration of submissions in response to a publicly released consultation paper and Draft Report, AEMO concludes there is no basis at this time to recommend any changes to the various market price cap parameters that apply in the STTM and DWGM, In coming to this conclusion, AEMO considers: that the market outcomes for the STTM and DWGM show no evidence of high market prices, at or near market caps, for any prolonged period, nor have the current price caps had any sustained and material distortionary impact on gas prices. that the assumptions for a revised assessment of the market parameters would be largely similar to those on which the current values were set. The market parameters being reviewed include the Market Price Cap (MPC) for the STTM, or the Value of Lost Load (VoLL) for the DWGM, the Administered Price Cap (APC), the Cumulative Price Threshold (CPT), CPT horizon for the STTM or the Cumulative Price Period for the DWGM, and the STTM s Minimum Market Price (MMP). Neither the STTM s Market Operator Service (MOS) cost cap nor the settlement surplus cap are within the scope of this review. Both caps were considered in the STTM Operational Review completed on 30 March This analysis has not been repeated in this review. AEMO published a draft report on 28 September 2012 and requested submissions from stakeholders on its draft recommendation. AEMO received four submissions, three of which supported AEMO s recommendation to leave market parameters unchanged at this time. The Major Energy Users (MEU) lodged the only submission objecting to AEMO s recommendation, as it considered the MPC in the STTM, and VoLL in the DWGM should be aligned, along with the CPT in both markets. Two other submissions also suggested that a subsequent review, after further operating experience with the STTM, should consider whether the market price cap parameters should be aligned between the DWGM and STTM. AEMO notes that market design in the STTM and DWGM has led to various differences in the operation of each market. Consideration of the potential alignment of market price cap parameters between the markets would need to take account of these differences in market design, and the different market risk profiles that result. AEMO notes that the DWGM Consultative Forum is separately discussing preparation of a rule change proposal to alter the Force Majeure provisions in the DWGM. The possible changes being considered may result in the CPT being the primary trigger for application of an APC in the event of supply shortages, such that, associated with this proposal, is an assessment of the relative risk mitigation afforded in the DWGM by the CPT. AEMO considers that this assessment of CPT in the DWGM be treated separately and in the context of the proposed amendments to the DWGM force majeure provisions, rather than as part of the broader and more generic consideration of the market parameters that is the subject of this report. Under Rule 492 of the National Gas Rules, AEMO is required to complete its next Market Parameter Review by December 2017 at the latest. AEMO will continue to monitor wholesale gas market outcomes in the intervening period, and may conduct an earlier review if warranted. 1 AEMO, STTM Operational Review and Demand Hubs Review Final Report, 30 March Doc Ref: December 2012 Page 4 of 14

5 1 Introduction The Short Term Trading Market (STTM) and Declared Wholesale Gas Market (DWGM) feature a number of price cap parameters that manage participant risk and provide economic price signals. These parameters have previously been derived based on extensive modelling and review. The STTM parameters were first set in 2009, based on modelling performed by McLennan Magasanik Associates (MMA) and a peer review by Creative Energy Consulting. The DWGM parameters were first set over 1997 and 1998, and were reviewed in 2008 based on modelling performed by MMA, with a peer review by Market Reform. Rule 492 of the National Gas Rules (NGR) requires AEMO to undertake a review of the STTM market parameters by 31 December This review presents an opportunity to validate market parameters against operational experience. AEMO also took the opportunity to review the DWGM market parameters in conjunction with the STTM parameter review. In undertaking this review of the market parameters in the DWGM and STTM, AEMO has: Presented the assumptions underlying the market parameters and set out the approach to the parameter review at an industry workshop in April Presented a first stage consultation paper in May 2012 and an intermediate draft report in August 2012, noting that there had been insufficient operational experience in the STTM, or indications of changes to the underlying assumptions in the DWGM or STTM to warrant a detailed review. Presented a draft report in September 2012, incorporating a review of outcomes against market parameters during the 2012 winter period, which recommended that market parameters remain unchanged. AEMO has provided an overview of the DWGM and STTM Market Parameter Review in Appendix A. Doc Ref: December 2012 Page 5 of 14

6 2 AEMO s consideration of submission from stakeholders AEMO published its Draft Report on 28 September 2012, requesting submissions from stakeholders by 2 November AEMO received four submissions from: Alinta Energy (Alinta) EnergyAustralia (formerly TRUenergy) Major Energy Users Inc (MEU) Stanwell Corporation Limited (Stanwell) Alinta, EnergyAustralia and Stanwell expressed support for AEMO s recommendation not to change the Market Parameters in the DWGM and STTM at this time. AEMO notes Alinta s support is based on a view that AEMO should undertake another Market Parameter Review in the medium term. The purpose of this next review would be to align the market parameters between the DWGM and STTM. EnergyAustralia also expressed a similar view. A major theme of submissions from Alinta, EnergyAustralia and the MEU was that substantial variation remains between the DWGM and STTM market parameters. In particular the Value of Lost Load (VoLL) in the DWGM is set at $800/GJ and is substantially higher than the Market Price Cap (MPC) set at $400/GJ in the STTM. While the MEU agrees with AEMO that, based on market outcomes during the winter 2012 period, there is no substantive reason to change the market parameters now, it expressed the following reservations about AEMO s recommendations: the Cumulative Price Threshold (CPT) in the STTM and DWGM should be aligned. the Market Operator Service (MOS) cost cap should be incorporated into this review, as operational market outcomes in the STTM have seen substantial wealth transfers due to MOS that have yet to be resolved. the MEU proposal to incorporate a contingency gas mechanism in the DWGM was not dealt with in AEMO s draft report. EnergyAustralia raised the following concerns with AEMO s assessment of the DWGM and STTM Market Parameters and requested an explanation of the consideration of: the cross market signal that ensues from the draft recommendation to retain the existing market parameters. the usefulness of the historic spot prices in the context of the expected impact on gas from emerging local policies (such as the Australian Government s Clean Energy Act 2011 (CEA)) and from the likely penetration of international prices into domestic gas markets. Alinta suggested that the future evolution of the market in the context of increased participant entry, increased transparency, and evolving gas prices, supports the need for more regular parameter reviews than once in five years. AEMO s responses to these outstanding issues are provided in the following sections. 2.1 Alignment of Market Parameters between the STTM and DWGM AEMO notes that the Market Parameter Review (a review of the appropriateness of each market parameter) is being undertaken concurrently with the Intraday Review (a review of intraday STTM market mechanisms), and following the Market Operation Review (a review of day-ahead market design), which was completed in March Therefore, AEMO has treated the STTM and DWGM Market Parameter Review as being solely focused on ensuring the Market Parameter values are set appropriately in the context of the current market design. In this Review AEMO has tested the: 1. robustness of assumptions underlying the DWGM and STTM market parameters. Doc Ref: December 2012 Page 6 of 14

7 2. whether these market parameters have caused market distortions or are otherwise impacting market outcomes. AEMO concluded in its draft report that this has not occurred and there are no drivers to warrant a detailed review and/or updated modelling of market parameters at this time. AEMO notes that the market designs of the DWGM and STTM are markedly different, in particular: The STTM was developed to allow market participants (Shippers) with long term pipeline contracts to trade gas with Users to balance variations in daily gas demand. The DWGM was developed as a dynamic gas market to allow the trading of gas between market participants. Therefore the objectives which informed each market design were different. The STTM operates as a day-ahead market while the DWGM operates as an intraday market with an initial bidding period for the whole gas day and four rebidding periods for the balance of the gas day. AEMO operates the gas network in the DWGM but network operation remains in the hands of pipeline operators and network owners in the STTM. AEMO manages linepack in the DWGM across transmission pipelines that comprise the Declared Transmission System whereas in the STTM each pipeline operator manages linepack on their pipelines, with balancing provided by MOS. AEMO considers that these differences in market design will need to be considered when setting all market parameters in the STTM and DWGM including the VoLL/MPC and CPT. Consequently alignment of the value of price cap parameters between markets may not be appropriate or result in commensurate levels of risk mitigation. AEMO intends to commence consultation with stakeholders in 2013 on the development of a strategic wholesale gas market direction. The development of such a strategic wholesale gas market direction may influence subsequent consideration of the various gas market parameters. In addition AEMO notes that in some applications (e.g. space and water heating) gas is a substitute fuel to electricity and vice versa. Therefore to remove market distortions, and fully account for this complementary status, AEMO may also have to consider in its analysis the alignment of the gas MPC with the National Electricity Market (NEM) MPC, which is currently set at $12,900MWh. 2,3 The electricity MPC equates to a gas market price cap of $3,583GJ. The interaction between the gas and electricity markets does not appear to have been considered in stakeholder submissions, but AEMO considers that if consideration is to be given to the alignment of market parameters in the DWGM and the STTM, then it would also be logical to consider alignment between the gas and electricity markets. 2.2 Other issues The MOS cost cap The MEU has proposed that the MOS cost cap should be incorporated into this Market Parameter Review, as MOS has resulted in substantial wealth transfers in the STTM. The MEU is proposing that an adjustment to the MOS cost cap may mitigate the impact of the counteracting and excessive MOS quantities observed at times in the STTM, by reducing the value that can be charged for MOS. AEMO considers that the MOS cost cap is a market parameter. However, the value of the MOS cost cap was assessed during the STTM operational review, concluded in March 2012, and found to be appropriate. It would be appropriate to consider the MOS cost cap in subsequent market parameter reviews. 2 Please note the market price cap in the NEM is adjusted annually to account for inflation. 3 The conversion factor from MWh units to GJ units is 1 MWh equals 3.6GJ. The electricity MPC, converted from MWh units to GJ units, would therefore be $3,583GJ. Doc Ref: December 2012 Page 7 of 14

8 With regard to the counteracting and excessive MOS payments that have been observed in the STTM, AEMO is continuing to investigate these and explore alternative options to mitigate their occurrence. A reduced MOS cap is a potential mitigating measure, but one that is unlikely to address the root cause. Therefore, AEMO considers it inappropriate to make adjustments to the MOS price cap in this generic review of market parameters in order to address a specific issue that remains under a separate and ongoing review and assessment process. Should that separate process conclude that a reduction in the MOS price cap is appropriate, then this can be pursued at that time in conjunction with any other market design changes to address the issue The proposal to incorporate contingency gas into the DWGM The MEU proposed to incorporate a contingency gas mechanism in the DWGM in its submission to the draft decision. AEMO considers that the Market Parameter Review is appropriately focused on the current market parameters in the context of the current design and operation of the STTM and DWGM. AEMO notes that the faster scheduling periods, together with the ability to undertake operational re-schedules within the DWGM reduces the need for a Contingency Gas product within the operation of the DWGM. Nevertheless, should MEU wish to pursue the concept of contingency gas in the DWGM, then AEMO invites MEU to raise and discuss such a proposal through the GWCF Concerns with AEMO s assessment of DWGM and STTM Market Parameters EnergyAustralia also raised the following concerns with AEMO s assessment of the DWGM and STTM Market Parameters and requested consideration of: the cross market signal that ensues from the draft recommendation to retain the existing market parameters; and the usefulness of the historic spot prices in the context of the expected impact on gas from emerging local policies (such as the CEA) and from the likely penetration of international prices into domestic gas markets. AEMO notes that its recommendations have been informed by its analysis of the assumptions underlying the market parameters as well as market outcomes in each of the markets within the scope of the review. Further, the approach for the review was endorsed at the April 2012 industry workshop (which was attended by EnergyAustralia and other industry participants) and in submissions to the intermediate draft report of August AEMO notes that the impact of the Gladstone LNG facility and the CEA policy were well known by industry at the time of the initial review. AEMO notes that no participants have raised these factors for consideration in the analysis of the assumptions underlying the market parameters in the STTM and DWGM. AEMO further notes that the impact the CEA on gas wholesale prices is very limited as liabilities under the CEA arise on consumption, so have a limited impact on wholesale gas prices. AEMO also notes that uncertainties have increased about the future international gas price which makes assessing the impact of the Gladstone LNG facility on Australian domestic gas prices uncertain. This is due to the USA s shale gas projects potentially, if legislation is passed allowing the USA s gas producers to export gas, introducing a large supply of cheap gas. Therefore AEMO considers it would be premature to make predictions concerning the impact of the international price on Australian domestic prices. AEMO does not consider the analysis of these factors in the final report to be appropriate, but will consider them in a future review of the market parameters. Doc Ref: December 2012 Page 8 of 14

9 2.2.4 Timing of the next market parameter review Alinta proposed that the next market parameter review will likely be required before 2017, when the next market parameter review is required by Rule 491. Alinta considers that the future evolution of the market in the context of increased participant entry, increased transparency, and evolving gas prices support the need for regular parameter reviews more than once in five years. The Rule only requires AEMO to complete the next Market Parameter Review under Rule 491(1)(f) by December However there is no reason why a review cannot be completed before this date, should other trigger events indicate that it is warranted. AEMO will continue to monitor wholesale gas market outcomes to assess the appropriateness of the market price cap parameters in each of the gas and electricity markets. Doc Ref: December 2012 Page 9 of 14

10 3 Conclusion AEMO s decision is not to recommend any changes to the market parameters in the STTM and the DWGM. In coming to this conclusion, AEMO has considered: market outcomes for the STTM and DWGM that show no evidence of high market prices, at or near market caps, for a prolonged period, nor that the current price caps have had any sustained and distortionary impact on gas prices; whether the assumptions on which the market parameter values were previously set have not been shown to be incorrect in a material respect; and outcomes of industry workshops, discussions with stakeholders through the STTM-CF, and stakeholder submissions. AEMO notes that the majority of submissions, in response to the draft report, supported AEMO s recommendation to leave market parameters unchanged in the STTM and DWGM. The submission from the MEU has advocated the alignment of the MPC and VoLL in the STTM and DWGM along with the operation of the CPT. AEMO notes that market design in the STTM and DWGM has led to various differences in the operation of each market. These differences in market design need to be accounted for in the market parameters. Therefore despite the potential to align terminology AEMO considers that it may not necessarily be possible to align all market parameters between the DWGM and the STTM, or that such an alignment in the value of the various price caps would provide a commensurate alignment of risk profiles in the different markets.. AEMO is required to complete its next Market Parameter Review by December 2017 at the latest. AEMO will continue to monitor wholesale gas market outcomes in the intervening period and, if market outcomes or trigger events indicate that it is warranted, AEMO may undertake a further market parameter review before this time. Doc Ref: December 2012 Page 10 of 14

11 Appendix A Overview of DWGM and STTM Market Parameter Review This section provides background to the DWGM and STTM Market Parameter Review undertaken to date, including: 1. the DWGM and STTM market parameters that have been reviewed. 2. the timetable of the review and a summary of the review to date. Background to the review is provided in the following sections. A.1 Market parameters assessed in the review This section summarises the DWGM and STTM market parameters assessed in this review. A.1.1 STTM market parameters The following STTM market parameters are mandated for review under clause 492 of the NGR. Table 1: Current STTM Market Parameters Parameter Description Documented In Value Market Price Cap (MPC) The maximum market price to apply for a gas day. National Gas Rules $400/GJ The MPC provides an upper limit on market clearing prices while not suppressing or distorting economic incentives for capacity investment, and providing market compensation for involuntary curtailment. Administered Price Cap (APC) The cap applicable when an administered price cap state is in place. National Gas Rules $40/GJ The APC mitigates the risk of high prices in circumstances where exposure to extreme pricing is unlikely to promote a reasonable market response or market outcome. Cumulative Price Threshold (CPT) The threshold for automatic imposition of an administered price cap state. The CPT mitigates the risk of extended periods of high prices. National Gas Rules $440/GJ (110 per cent of the MPC) CPT horizon The period over which hub prices are summed to determine whether the cumulative price threshold has been exceeded. National Gas Rules 7 consecutive gas days Minimum Market Price (MMP) The minimum market price to apply for a gas day. National Gas Rules $0/GJ There are two other parameters that currently operate in the STTM: Market Operator Service (MOS) Cost Cap currently set at $50/GJ, the MOS cost cap is the maximum price for MOS increase and decrease offers covering the MOS service component of market settlements. The MOS cost cap must be sufficient to cover the cost of holding capacity, while limiting MOS costs on the market. Settlement Surplus Cap currently set at $0.14/GJ, the settlement surplus cap is the maximum settlement surplus payment rate to be allocated based on deviations. Neither the MOS cost cap nor the settlement surplus cap are within the scope of this review. Both were considered in the STTM Operational Review completed on 30 March AEMO, STTM Operational Review and Demand Hubs Review Final Report, 30 March Doc Ref: December 2012 Page 11 of 14

12 A.1.2 DWGM market parameters The following DWGM parameters were included in the 2008 review: Table 2: DWGM Market Parameters Parameter Description Documented In Value Value of Lost Load (VoLL) The maximum market price. VoLL provides an upper limit on market clearing prices while not suppressing or distorting economic incentives for capacity investment, and providing market compensation for involuntary curtailment. Infratil and International Power both consider this parameter should be examined. National Gas Rules $800/GJ Administered Price Cap (APC) The cap applicable when an administered price cap state is in place. The APC mitigates the risk of high prices in circumstances where exposure to extreme pricing is unlikely to promote a reasonable market response or market outcome. Wholesale Market Administered Pricing Procedures (Victoria) $40/GJ Cumulative Price Threshold (CPT) The threshold for imposition of an administered price period. The CPT mitigates the risk of extended periods of high prices. Wholesale Market Administered Pricing Procedures (Victoria) $3,700/GJ Cumulative Price Period The period over which marginal clearing prices are summed to determine whether the cumulative price threshold has been exceeded. Wholesale Market Administered Pricing Procedures (Victoria) 35 consecutive scheduling intervals (7 gas days) Doc Ref: December 2012 Page 12 of 14

13 A.2 Review approach and timetable AEMO is required to review the STTM market parameters in accordance with the extended consultative procedure as per section 9A of the NGR. AEMO is required, by Rule 492(1)(e), to complete this review by producing a final report setting out its recommendations by 31 December AEMO has established its approach to meet these requirements in consultation with stakeholders and this is set out in Table 1. Table 3: review timetable (no extensive modelling or review undertaken) Process Date Industry workshop to discuss review approach and scope 4 April 2012 First Stage Consultation Paper Open for Consultation 1 May 2012 First Stage Consultation Paper Closing date for submissions 8 June 2012 Industry workshops (if required) July/August 2012 Intermediate draft report 7 August 2012 Consultative Forum (discussion of approach in light of winter period outcomes) August/September 2012 Draft Report Open for consultation 28 September 2012 Draft Report Closing date for submissions 2 November 2012 Industry workshops (if required) November 2012 AEMO releases final report 14 December 2012 AEMO has provided a summary of its discussions with stakeholders at each stage of this consultation below. A.2.1 Summary of review In undertaking the review, as outlined in the timetable from the previous section, AEMO has: held a workshop with participants in April 2012, at which it was agreed, following analysis of market outcomes, to date, and a review of the assumptions underlying current market parameters, that undertaking an extensive review of the market parameters was not warranted at that stage, but that this outcome be reassessed in September 2012 should the winter period highlight a need to reconsider the gas market parameters. 5 published a First Stage Consultation Paper on 1 May 2012, in which AEMO examined the assumptions underlying the current STTM and DWGM market parameters and concluded based on the market outcomes, to date, discussed in the April workshop, that insufficient operational experience or material changes in market factors or industry structures had occurred since the last time the DWGM and STTM market parameters were set to warrant a detailed review at this time. 6 published an Intermediate Draft Report on 7 August 2012 that confirmed AEMO s approach to the Market Parameter Review and responded to stakeholder submissions in response to the First Stage Consultation Paper. 7 5 AEMO, Notes Market Parameter Workshop, 4 April 2012 AEMO, Market Parameter Review Approach STTM & DWGM, 4 APRIL 2012 AEMO, STTM & DWGM Market Parameter Review Approach, 29 MARCH AEMO, STTM AND DWGM Parameter Review - First Stage Consultation Paper, 1 May AEMO, DWGM AND STTM Parameter Review Intermediate Draft Report, 7 August 2012 Doc Ref: December 2012 Page 13 of 14

14 consulted, in late August 2012, with the STTM Consultative Forum (STTM-CF) and the Gas Wholesale Consultative Forum (GWCF) about whether to proceed with extensive modelling or review of market parameters for the STTM and DWGM based on the market outcomes of the 2012 winter period. 8 published a Draft Report on 28 September 2012 that detailed AEMO s draft decision on a recommendation that the market parameters remain unchanged in the STTM and the DWGM. 9 This paper provides AEMO s recommendation, following submissions on 2 November 2012, on the market parameters for the STTM and DWGM. 8 AEMO, GWCF , STTM , STTM & DWGM Parameters review, 28 August 2012 AEMO, GWCF , STTM , STTM & DWGM Parameters review - Update, 28 August 2012 AEMO, GWCF , STTM , STTM & DWGM Parameters review Additional information, 28 August AEMO, DWGM AND STTM Parameter Review Draft Report, 28 September 2012 Doc Ref: December 2012 Page 14 of 14