Re STTM Design and Demand Hubs Draft Report

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1 Violette Mouchaileh Senior Manager STTM Development Australian Energy Market Operator By 3 February 2012 Dear Violette, Re STTM Design and Demand Hubs Draft Report International Power-GDF Suez Australia (IPRA) appreciates the opportunity to comment on the STTM Design and Demand Hubs Draft Report by the Australian Energy Market Operator. IPRA supports the objective of increasing STTM competitiveness and economic efficiency, including the cost to cause concepts and acknowledges the efforts of AEMO in preparing the consultation paper setting out a range of draft recommendations and options. Our submission below sets out our views on the matters raised by AEMO in the draft report. Should you have any enquiries regarding this matter please do not hesitate to contact Michael Downey on Yours sincerely, David Hoch Regulatory Strategy Manager IPR - GDF SUEZ Australia Level 37, Rialto North Tower, 525 Collins Street Melbourne, Victoria 3000, Australia Tel Fax INTERNATIONAL POWER (AUSTRALIA) PTY LTD ABN Page 1 of 6

2 IPRA Submission to the AEMO STTM DESIGN AND DEMAND HUBS REVIEW PHASE 1 DRAFT REPORT (AEMO Reference ) 3 February 2012 IPR - GDF SUEZ Australia Level 37, Rialto North Tower, 525 Collins Street Melbourne, Victoria 3000, Australia Tel Fax INTERNATIONAL POWER (AUSTRALIA) PTY LTD ABN

3 =t ) ' international Power Contents Submission STTM Design & Demand Hub - Phase 1 1 Introduction Summary Response to draft recommendations Current pricing approaches...4 Hub Constraints Market Operator Services...5 MOS period...5 Pipeline Neutrality...5 Tradability...5 MOS Cap Cost to cause Market scheduled variations STTM Demand Hubs...6 Page 3 of 6

4 =t ) ' international Power Submission STTM Design & Demand Hub - Phase 1 1 Introduction International Power-GDF Suez Australia (IPRA) appreciates the opportunity to respond to the AEMO consultation process on the review of the STTM. International Power entered the Australian energy industry in 1996 and has grown to become one of the country s largest private energy generators, with assets in Victoria, South Australia and Western Australia. International Power also includes Simply Energy, a gas and electricity retail business. In February 2011, International Power combined with GDF SUEZ s energy assets to form a world leader in independent power generation, with more than 72,360 MW of power generation worldwide and further 15,503 GW under construction. 2 Summary IPRA is a participant that operates in the National Electricity Market (NEM), the Declared Wholesale Gas Market (DWGM) as well as the Short Term Trading Market (STTM). As such, we are ideally placed to comment on these markets including their operational effectiveness and efficiency. Not unlike other markets, the efficiency and effectiveness of the STTM is dependent upon good market design that promotes a competitive environment while maintaining equity between all participants and delivering the best economic efficiency. Therefore the views presented in the submission align with those principles and those of the national gas objective. IPRA supports the general direction AEMO has proposed in their draft report with most comments in regard to Market Operator Services (MOS) where we seek a better alignment between MOS and the daily markets. 3 Response to draft recommendations 3.1 Current pricing approaches IPRA agrees that the pricing outcome of gas markets is a function of market behaviour. Analysis of market prices may not reflect the cost to supply, therefore any unusual results from such analysis may not necessarily represent a symptom of a market problem or design failure. Pipeline capacities are reflected in an ex-ante offer, (or at least should have been). Hence any attempt to deal with the cost of pipeline capacity in the ex-post price will lose the linkage with gas that actually flows during that period. This would diminish the price signal that is reflective of what actually happened. Consequently, IPRA does not support any changes to the ex-post price, other than what is discussed latter in MOS and deviations positions. 3.2 Hub Constraints The difficulty with the interaction between the two pipelines in Adelaide (SEA Gas and Moomba to Adelaide) causing high levels of MOS needs to be resolved. IPRA notes that this issue is not new as it was evident in the previous REMCo gas market in South Australia. The Page 4 of 6

5 =t ) ' international Power Submission STTM Design & Demand Hub - Phase 1 problem is a combination of close proximity of delivery points, the varying control regime on the individual pipelines and a market design that treats each delivery point independently. This is not a failure of the STTM arrangements but the market has highlighted the problem, and IPRA recommends AEMO progress their investigation as a matter of urgency. STTM does not need to deal with distribution linepack as experienced in the Sydney hub, but should treat this potential source of gas as contingency gas. On the 22 November 2011, there was an intraday constraint applied, which represented the pressure de-rating for the Sydney trunk line due to flooding. Once positive MOS has been exhausted, domestic demand was unlikely to be met via wholesale supply, consequently increasing the likelihood of needing contingency gas. The valuation of this contingency gas, being the distribution linepack on this occasion, could have been at the Market Price Cap (MPC). The STTM does not need more rules to deal with such a scenario when the current market rules are adequate to deal with and value the various services available to this gas market. 3.3 Market Operator Services MOS period We do not agree with the draft report recommendation for one month contracting period for MOS. The MOS period should be daily as longer periods will restrict the number of participants willing to offer MOS services to the STTM. An example of this is a participant who has operational responsibility for a gas fired power station within its portfolio is subject to the rules, processes and the dynamics of the National Electricity Market. These power stations are generally unable to commit their gas services to the STTM for the provision of MOS for periods longer than a day due to the uncertainty that exists beyond the next day. Pipeline Neutrality The market should be indifferent to the historic categorisation of pressure and flow classification of pipelines, but more importantly, what services they can bring to the market. Hence parties with contracted rights on a pipeline which they believe can be translated into Shipper and/or MOS rights in the market place should not be impeded from providing those services simply because they were tagged as a flow pipeline. The STTM should not deal with this issue, but leave it for market participants to negotiate such services from their pipelines, or have those service rights traded via an alternative process. Tradability Currently, MOS and Shipper rights are treated differently within the National Gas Rules (NGR). Shipper rights can be assigned through a Trading Right Notice (TRN) process. MOS, on the other hand, can only be provided by holders of pipeline contracts. The ability to trade this MOS to another party should be similar to the Shipper TRN process, and should serve to increase overall market participation and liquidity. MOS Cap The MOS cap should remain unchanged until the other MOS and deviation proposals have been introduced. Once it has been confirmed that no unintended consequences emerge, then the MOS cap should be removed. Removing the MOS cap will attract other parties that may otherwise not participate in the provision of MOS. A power station that is able to switch its Page 5 of 6

6 Submission STTM Design & Demand Hub - Phase 1 fuel source, or as discussed above, could in response to the NEM signals make this service available to a participant. However the existing MOS cap adds an economic constraint to the willingness to offer this service. 3.4 Cost to cause Deviation charging is based on the aggregate position at the end of the month. This effectively softens the commercial impact of a deviation that a single party may cause. This approach does not embody the intent of the National Gas Objective. Moving to a daily causer pays model is a more efficient market outcome all round. As the deviations are met through MOS adjustments, the linking of the two is imperative. Option 1 in the AEMO draft report is the model that we prefer with the objective to minimise the instances of under or over recovery of charges against costs for MOS provided. The MOS price should be locked in at the day+2 and no subsequent revisions should be allowed, thus enhancing certainty in the market. 3.5 Market scheduled variations Participant should be able to enter Market Schedule Variations (MSV s) without restrictions, including related companies. For these reasons, IPRA supports recommendation number 10. Future development of MSV trading should be a central screen based trading system where participants can list their respective bids and offers; when a sale price matches, a deal is executed and instructions issued to those parties. This arrangement is very transparent, accessible by all and would place a value on MSV s which the STTM does not do currently. At no time should participants be denied access to bilaterally negotiate MSV s. 3.6 STTM Demand Hubs Examining new or expanding STTM hubs is premature at this time for two main reasons; =t ) ' international Power the STTM is young and with this review and one planned later this year, the industry is seeking to improve the current STTM model; and AEMO is developing a supply hub for Queensland and while this is in its early stages, the final solution might provide additional insights that could be applied to other energy markets. The objective is to establish and widen the STTM or other market arrangements to achieve a truly national gas market. This should also include WA and NT, in recognition of the linkage between global LNG markets and domestic gas markets become stronger. During times of constraint, a transparent market place will allow gas to flow to the highest price taker, whether it is the LNG facilities or domestic demand. Page 6 of 6

Draft report. Structure of participant fees in AEMO s gas markets February Australian Energy Market Operator Limited

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