News Topic ID

Review into the effectiveness of gas pipeline regulation: summary of review process

05 September 2017

The AEMC has published a summary of the process for its review into the effectiveness of gas pipeline regulation. This review is looking at Parts 8 to 12 of the National Gas Rules to address concerns that users of transmission and distribution pipelines may be paying more than necessary for pipeline services.

The summary sets out the next steps in the review including key reporting milestones.

Submissions to the issues paper have also been published on the AEMC website. A summary of the issues raised in submissions will be included in an interim report to be published in October 2017.

Victoria delivers next steps for a well-functioning gas market

14 July 2017

The Australian Energy Market Commission (AEMC) today released its final report to the Victorian Government on a package of reforms to help keep the costs of buying and selling gas as low as possible

At the request of the Victorian government the AEMC has made a number of recommendations which should lower barriers to entry, streamline trading practices and improve transparency to help support greater competition in the Victorian market.

The recommendations are the next step in delivering the COAG Energy Council’s redesign of the east coast gas market which is focused on making it easier to buy and sell gas.

The reforms will help the reliability of electricity supply in both Victoria and other states, as gas fired generators would benefit from having better access to available supplies.

Victoria’s southern gas hub is one of the two pivotal wholesale gas trading centres on the east coast. Implemented in full, PricewaterhouseCoopers estimates these reforms to the Victorian gas market have the potential to increase Australia’s gross domestic product by up to $1.7 billion in net present value terms by 2040.

AEMC Chairman, John Pierce, said today improving access to gas across the eastern seaboard was one significant way to help keep prices as low as possible for consumers.

“The ability to move gas around is critical to our energy and economic future. The Commission is making both short and longer term recommendations to deliver benefits to Victorian consumers, increasing consistency with the wider east coast market while being relatively quick and low cost to implement,” Mr Pierce said.

Today’s report is focused on specific reforms to be made in Victoria. If agreed, they will provide a staged approach towards harmonisation with the wider east coast market changes. The recommendations from this Review of the Victorian declared wholesale gas market are to:

introduce a clean and simple wholesale price for the Victorian trading hub, making it easier for buyers and sellers to manage risk and lower transaction costs, lowering costs for consumers
establish a new forward trading exchange making it easier for buyers and sellers to trade gas and lock in a future price, helping businesses plan and manage price volatility – the new exchange will be standardised with other exchanges, making it easier to trade between states and creating more liquidity
improve the allocation and trading of pipeline capacity rights, making it easier to trade unused pipeline capacity rights enabling gas traders to better manage scheduling risks.

The Victorian gas package addresses new dynamics in eastern gas markets which are driving the need to adapt current arrangements to changing supply and demand conditions.

East coast gas markets are seeing a period of growth and change, as conventional gas reserves decline and unconventional gas resources become increasingly important with the growing influence of international prices trends. The gas market framework must be flexible and resilient enough to respond to this change, ensuring efficient market outcomes in the long term interest of consumers.

Media: Communication Director, Prudence Anderson 0404 821 935 or (02) 8296 7817

Submissions invited on gas pipeline regulation review

27 June 2017

The AEMC today published an issues paper for our review into the effectiveness of gas pipeline regulation. This review is looking at Parts 8 to 12 of the National Gas Rules (NGR) to address concerns that consumers may be paying more than necessary for gas pipeline services.

The issues paper seeks stakeholder views on the policy objectives of the gas access regime, as well as the purpose and operation of the current regulatory framework for the economic regulation of covered gas transmission and distribution pipelines. Submissions are due by Tuesday 22 August 2017.

The review is considering whether rules need to be changed so that pipeline services are subject to appropriate regulation, including price regulation. It is also considering strengthening rules relating to access negotiation and dispute resolution between pipeline service providers and their customers.

The review will be informed by the experiences of gas consumers, industry participants, regulators and governments.

We are working closely with the Gas Market Reform Group, established by the COAG Energy Council, which is progressing implementation of recommendations from the AEMC’s east coast gas review. We are also consulting the Australian Competition & Consumer Commission, Australian Energy Regulator and the Economic Regulation Authority of Western Australia.

The AEMC will publish a draft report in February 2018 and provide a final report to the COAG Energy Council in June 2018.

Media: Prudence Anderson 0404 821 935 or (02) 8296 7817.

Australian Energy Week Conference 2017 – Speech by AEMC Chief Executive

21 June 2017

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Anne Pearson, Chief Executive, Australian Energy Market Commission Australian Energy Week, 21 June 2017, Melbourne

Introduction

Imagine a world without electricity. That is the line that stuck out for me when I was reading Dr Finkel’s blueprint a couple of weeks ago. And I’ve been trying to imagine it ever since.

I have lived in country where the electricity supply was neither secure nor reliable – the country was in the middle of a brutal civil war. Cutting off electricity supply was a deliberate strategy to wear people down. No power for lighting, elevators, television – nothing at all…and for weeks at a time. But that was Lebanon. And it was 30 years ago.

Trying to imagine the lives of most of us here in Australia today without electricity is harder. Without energy, what would my household be like most evenings? We use electricity and gas for cooking, heating, powering computers, charging iphones and the almighty ipad for essential viewing of the Octonauts and Charlie and Lola.

Electricity (and energy more broadly) plays a key role in the lives of every single Australian. Not just a “nice to have” role – it is essential. Other services – like health, education and banking – cannot exist without energy. Australian businesses depend on energy. In fact, secure, reliable supplies of energy distinguish the first world from the third. It underpins our lifestyles and drives our economy.

This is why it’s so important to have an energy sector that is resilient. And one that delivers what households and businesses want now, and in the future.

Which is a good Segway to my presentation topic for today: “are market mechanisms adequate to facilitate change” – specifically, can markets facilitate the transition to a lower carbon energy system.

The answer is yes….with a twist. But let me unpack that a bit.

Can markets facilitate change?

The changes we are seeing in the energy sector today seem big, but change in the sector is not new. In fact it’s one of the few constants. There is a lot going on in energy – a lot going on in the world.

A decade ago Australia’s population was nearly 20 million. Now it’s 24. The first smartphone was unveiled. Now there are 16 million in Australia alone.

In the NEM 10 years ago there were around 300 generators. Now there are 1.6 million. It cost about ten thousand dollars to put a PV system on your roof. Now you can buy one on your credit card.

2 Some changes have been slower and predictable. Others have not. But change across the economy and in the energy sector is continuous. It’s part of the human condition – to develop, improve, progress. As Benjamin Franklin, one of the American Founding Fathers said, “When you’re finished changing…you’re finished”.

We are never going to be able to predict exactly the types of technology that will “make it”, or how households and businesses will want their energy made, packaged and delivered. We can’t know exactly how consumer behaviour and new technology will impact the energy market. And that is okay.

But this element of uncertainty is why markets are so important.

It’s interesting…people often speak about the “market” like an intangible object that is separate somehow from the people that participate in or benefit from it. But the energy market is actually just a process that allows consumers to choose what they want, and a way of interacting with energy businesses, to get it.

When they are allowed to function correctly – markets deliver a whole range of information about what is needed, and the tools to deliver it. It’s “the market” that will invest to deliver the transition to a lower carbon energy system, and a lower carbon economy more generally.

In the absence of markets, we leave all the decisions to a small group of central planners. We let them decide what, and where to build generators and networks and we let them decide the types of energy services we receive.

Without a market, we also place all the risks (and the costs of any mistakes) on energy consumers or tax payers. Either way, it’s households and businesses that pay. And at the Commission we think that it’s better to avoid this. To use an example from another sector to illustrate the point: Remember the videotape format war of the 80s Beta versus VHS? Since then we have had Blu Ray, DVD, digital TV and who knows what’s next?! Think of the risk taken-on by investors in these technologies! And think of the taxpayer money saved by not subsidising any of them!

How the Commission shepherds change in the consumer interest

So what is our role at the Commission in facilitating this change to a lower carbon energy system? Put simply, we are here to keep regulatory frameworks up to date so that energy markets can evolve in a way that delivers the best outcomes for customers, over the long term. When we amend the rules and provide advice to governments we stick to a few key principles:

Supporting effective consumer choice - so consumers can decide when the value of using energy is greater than the cost of producing it;
Promoting competition where possible and well-designed regulation where it is not;
Creating signals to drive efficient investment;
Acknowledging uncertainty so that instead of making things happen, we create an environment to let things happen if they deliver the best outcomes.

Benefits our market has delivered

So how have these principles helped the market develop so far?

Before the NEM was established, governments were in charge of building enough generators to meet consumer demand. Had these arrangements continued, we would have seen the equivalent of two new Eraring-sized power stations built over the decade. That’s 6000-odd megawatts of generation sitting idle because forecast consumer demand never eventuated.

Instead, the market was introduced, and price signals from the spot and contracts markets drove just enough new generation investment where consumers wanted or needed it. As demand flattened in the early 2000’s, price signals would have slowed generation investment had it not been for various government schemes that supported specific technologies.

On the retail side of things, markets have created choices that would not have existed in a centrally planned system. New retailers, products and services, using an increasingly wide range of technologies, are appearing in the market because of two waves of reforms.

The first was the structural reform of the industry in the late 1990s where the vertically integrated industry was disaggregated and the competitive wholesale and retail markets were formed.

The second wave, was a set of foundations we laid in the energy market rules to drive innovation and consumer choice.

I’m talking about rules that have made it easier:

choose and switch retailers
access and understand consumption data and
receive and respond to price signals

I’ll give you a few examples:

If you’ve got a solar/battery set-up you can find retailers that will use your energy use and generation patterns to optimise your system in line with wholesale price signals.
If you have a swimming pool you can find a bundled offer for electricity, pool equipment and services, that automatically cleans your pool when electricity is cheapest.
There are retailers that will use your consumption data to find the best retail offer out there, and automatically switch you when savings are available.
If you’re a real energy junkie, you can sign up with a retailer that gives you real-time usage information so you can turn appliances on and off remotely from your smart phone.

Most Australian consumers can get all this and do all this because we have an energy market that puts them in the driver seat if that’s what they want.

By carving up the supply chain to encourage competitive generation and retail sectors, we are saying to energy businesses “consumers are paramount, go and fight for them”.

By regulating monopoly assets we’re saying – “be as efficient as possible so consumers can use you, but must not pay more than necessary for the privilege”.

By putting governments in charge of policy, but giving the rule making, system operation and regulatory functions to separate bodies, we’re saying “this sector needs to be able to adjust continuously and predictably, so here are some specialist agencies to make it happen”

By giving everyone – industry, consumers and governments alike – the ability to suggest and help design new rules, we’re saying “you all need to play your part to make this work, now and in the future.”

Markets shortcomings and overcoming them with careful use of regulation and good governance

But at the Commission we don’t just blindly accept markets. We support them when the evidence shows they deliver the best outcomes for consumers. And we make tweaks when they don’t.

Markets tend to offer the most efficient and lowest cost way of discovering what technologies and services work best for consumers, and shepherding change in that direction.

But we acknowledge that markets suffer when there is information failure, inadequate competition, or other factors that distort price and other important signals. There are a range of tools we can and do use to overcome these without wading in boots and all and taking over:

Information and reporting requirements can even-out the playing field and increase transparency.
Facilitating negotiations and interactions between participants to minimise the likelihood of disputes and stalemates
Also, Short term regulatory obligations can be used as a stepping stone to transition to market mechanisms in time.

You would have seen these mechanisms (and more) applied in our work at the Commission. For example:

We are making more information available on the gas bulletin board – and making that information easier to access and interpret.
We have introduced an independent expert into the transmission connections process, who will help solve issues between parties before they escalate.
In our system security work we are looking at regulating the level of inertia to maintain the stability of the power system in the short term until new services develop over time and the market can take over.

However, each time we use one of these regulatory tools, we have to think “how much extra cost, and how much extra risk will consumers have to bear as a result of this?”.

That’s the key trade-off: we could regulate everything, but it would be more expensive and it would stifle innovation……We could regulate nothing, and consumers would be completely exposed. So we have to strike a balance.

Going back to the original question – can markets deliver change? Yes. Markets are a low cost way of shepherding change while encouraging innovation. Are they perfect? No. So we use regulation when the market – for whatever reason – is not delivering outcomes that benefit consumers.

We have been doing that since energy markets started in Australia (and indeed regulation is used in similar ways to support many other markets).

Decision making processes

The question then becomes less about whether markets can deliver the necessary transition, and more about whether our market structure – which includes the decision making and governance processes – can deliver it.

Based on my experience to date, my answer is also yes.

Just as we have overcome technical and geographical challenges in the past, we are confident that the processes and decision-making responsibilities set out in our market structure will support the transition underway right now. But it relies on each of us playing our role and sticking to it.

Governments set the policy parameters. This is a critical function that they must do. Given the essential role that energy plays in our economy more generally, it is no surprise that the “energy experience” is, and must be, affected by things that sit outside the energy market rules, and outside the energy portfolio. And governments are in the hot seat when it comes to making these cross-portfolio trade-offs. It is their job, and they are best placed to do that.

Using energy market design to help deliver other objectives.

Over time we have seen how other policy objectives have affected how households and businesses get, use and pay for energy. In the past it has been social policy, and environmental planning. Right now it is emission reductions.

The way in which these external objectives are pursued, has implications for how effectively the energy market can work in the long term interests of consumers. As our markets have become more sophisticated, it is more critical than ever to think about how external objectives will impact energy markets.

That’s not to say external objectives should not be pursued. It is about how they are pursued. Let me unpack that it a bit.

If the instruments used to achieve social or environmental objectives are compatible with the way energy is bought and sold, the market can continue to deliver secure reliable energy at lowest cost.
If the risks of investing to meet that social or environmental objective are allocated to the parties most able to manage those risks, then customers won’t have to pay for other people’s mistakes.
If policy mechanisms used to meet these other objectives don’t depend on a single version of the future, then the energy market will find the best and lowest cost way to meet it, and meet consumer needs as well.

We call this “integration”: Using the fundamental elements of the energy market to help deliver other, clearly articulated objectives.

At the Commission, we consider that the market processes of experimentation and discovery can support the lowest cost transition of the energy sector even while pursuing other external objectives.

Working together to support the transition

It’s clear however that the challenges we are facing right now are complex. They are interconnected. Some of them are urgent. And some serious coordination across governments and energy institutions is needed to support the transition.

There is an expectation that regulatory frameworks will respond to change in a more timely manner. The three market bodies – the Commission, the Regulator and the Operator – are keenly aware of this. We have always worked together to deliver the reforms customers want and expect. But we recognise the need to do this better.

And so we’ve set up a formal structure for sharing information, identifying issues and coordinating responses to actions in relation to priority energy matters. Collectively we will be able to provide a whole-of-sector perspective, and enhance the quality of advice going to the COAG Energy Council.

We need your help.

But market bodies and governments are not the only ones with responsibilities. In Australia, we have a unique governance framework that provides a role for market participants, consumers and all other interested parties. Having moved away from the allknowing central planner model, you all play a role in helping our markets evolve to benefit consumers.

When the Commission was first established, we used to get a handful of rule change request each year and we’d work with an equally small number of stakeholders to make them.

We’ve now made more than 220 new rules, we have hundreds of stakeholders, and it is a consumer – not a government or market body – that has suggested one of the biggest changes we have considered in many years – a move to 5 minute settlement of the spot market.

On the practical side, the Operator is continually adapting the way they run the system to accommodate new technologies, incorporate new information and deliver the actual changes in the system that are contemplated by the regulatory changes.

The Regulator has had its role expanded over the years to correspond to the increasing engagement from consumers. They have taken on consumer protections, monitoring of the wholesale market and new responsibilities when it comes to network regulation.

None of this has been easy or straight forward. And nor should it be.

Conclusion

In conclusion my mind turns again to another American – I have just returned from the US! In relation to going to the moon President John F Kennedy said: “we do these things not because they are easy, but because they are hard. Because the challenge is one we are willing to accept. One we are unwilling to postpone.”

I’m not suggesting we are going to the moon, but this quote is appropriate for many challenges. Change, transition, disruption - whatever word you want to use for it - will continue in the energy sector. Adapting the formal arrangements to keep up with the change is sometimes complex, its technical. It’s certainly interesting.

There are nine different governments, a good number of institutions, and many more stakeholders all trying to deliver the best outcomes for customers – and all with a different opinion of how to do it.We could go back to a more centralised model, allowing decisions to be made by a select few, with the rest of us just accepting our fate. It might be easier….

But the easy way out will not deliver the best outcomes for consumers, especially in the longer term. So, like JFK so aptly said: we don’t do things because they are easy.

We do them because energy is fundamental to our economy, to essential services, to jobs, businesses, households…to people’s lives. It’s worth making the effort…taking the harder path.

That’s what I think about every day. It’s what our 85 staff at the Commission think about.

It’s why we are intent on working with all of you to shepherd change through energy markets. To deliver the best possible outcomes for consumers, no matter what the future is.

Gas reforms take next step with review of pipeline regulation

16 May 2017

The COAG Energy Council is moving forward with its commitment to deliver comprehensive gas reforms by asking the AEMC to review Parts 8-12 of the National Gas Rules, and address concerns that consumers may be paying more than necessary for gas pipeline services.

This work builds on major reviews completed last year:

the AEMC’s East coast wholesale gas market and pipeline frameworks review, which recommended a comprehensive package of changes to make it easier to buy and sell gas and transport it across the east coast.
the Australian Competition and Consumer Commission’s (ACCC) east coast gas market inquiry into the competitiveness of wholesale gas prices, which drew two key conclusions: first, that some producers had taken advantage of supply uncertainty to increase prices and implement restrictive non-price terms and conditions; and second, that regulated pipelines may be charging monopoly prices.

The review will include consideration of whether rules need to be changed so that any non-contestable pipeline services are subject to appropriate regulation, including price regulation. It will also consider strengthening rules relating to access negotiation and dispute resolution between pipeline service providers and their customers.

In undertaking this review, the AEMC will work closely with the Gas Market Reform Group, established by the COAG Energy Council, which is progressing implementation of recommendations from the AEMC’s east coast gas review.

This review will also be informed by the experiences of gas consumers, industry participants, regulators and governments.

The AEMC will publish an issues paper by 30 June 2017, which will outline key issues and questions for stakeholders and will call for written submissions. More details on consultation timeframes will be published soon.

The final report of this review will be published by June 2018.

Media: Prudence Anderson 0404 821 935 or (02) 8296 7817.

Discussion paper on reforming the Victorian declared wholesale gas market

30 March 2017

Today the AEMC released a discussion paper on alternative market designs for the Victorian declared wholesale gas market (DWGM). The discussion paper sets out options to improve specific aspects of the DWGM that have been raised by stakeholders. Submissions on the paper are due by 11 May 2017.

This follows the publication of a draft final report in October 2016, which set out detailed draft reforms to address the issues with the DWGM and meet the COAG Energy Council’s vision for the east coast gas market.

Following extensive consultation on the draft reforms, the Commission agrees with stakeholders that there are benefits from re-assessing potential alternative reform suggestions. This will allow consideration of several new options that were not raised earlier in the review, and may undercover new benefits to already examined options.

To enable the AEMC to undertake additional analysis and consultation, on 9 March 2017 the Victorian Government extended the DWGM review to 31 August 2017, with a final report to be published by 14 September 2017.

This review of the Victorian DWGM aims to improve access to a reliable supply of efficiently priced gas for Victorian consumers, while maintaining Victoria’s key role in Australia’s east coast gas market as one of two wholesale gas trading hubs.

Gas market reform is also expected to benefit the electricity sector, as gas powered generators will have more flexible and reliable access to gas. Gas powered generation can: help to reduce electricity outages; lower emissions by balancing with renewable generation; and provide hedge contracts to help the electricity market manage risks.

Recommendations for extensive gas market reform for Australia’s east coast were accepted by the COAG Energy Council in August 2016. The reform package included establishing wholesale gas markets with trading hubs concentrated in Victoria and Queensland; improving access to pipelines; and delivering new and improved information to gas businesses and consumers.

The COAG Energy Council has established a Gas Market Reform Group to implement the reform package in consultation with stakeholders. Work is already underway to improve gas pipeline transportation arrangements, and the development of a northern hub for gas trading at Wallumbilla in Queensland.

Media: Prudence Anderson, Communications Director, 0404 821 935 or direct line 02 8296 7817

Australian Gas Domestic Outlook Conference 2017 – Speech by AEMC Chairman

14 March 2017

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Address by Australian Energy Market Commission Chairman Mr John Pierce Australian Domestic Gas Outlook 2017, Tuesday 14 March 2017

Introduction

In a room full of energy experts, I hardly need to point out that the energy sector is changing.

These changes are increasingly driven by new technologies, changes in consumer preferences, the growing interconnectedness between both energy markets within Australia but also between Australia and the rest of the world….and of course government policies.

The market frameworks supporting the energy sector were designed to, and do change continuously.

In responding to rule change proposals, the AEMC has a significant role in this evolution and has made 214 changes to market rules and completed 102 formal reviews and pieces of advice to the COAG Energy Council since the Commission was established.

With the recent events in the electricity sector, it should be clear to everyone that any discussion of system security in the electricity sector must however include some consideration of what’s happening in Australia’s gas markets.

So it won’t surprise you when I say that I am here today to talk about how the two – gas and electricity markets - are inextricably linked, and what that means for their design and the ongoing reforms in those markets.

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The relationship between the two can be summarised like this:

The east coast gas market has seen a huge increase in demand and the market is a lot more dynamic, fluid and potentially more volatile. As a result, the gas market is undergoing reforms so – at least at the wholesale level – there is more flexibly buy, sell and transport gas. This includes access to better information to inform their decisions and manage their risk.
These reforms should make it easier to move gas to wherever it needs to be within the interconnected network so it arrives at the place where it has the most value, thereby making a greater contribution to the value of Australia’s economic output. One of the places gas may be highly valued is in the electricity generation sector as that sector itself goes through its own transformation.
Gas fired electricity generation has four features that make it particularly useful as part of the electricity supply mix and because of these, gas can play a crucial role in Australia’s future electricity mix:

it is lower emissions than coal
it can balance intermittent renewable supply by varying its output
it can provide services to are necessary to operate the power system in a secure state
it can be a source of supply of hedge contracts into that market that help customers manage price risk

Gas market reforms can therefore contribute to our ability to achieve a reliable, affordable and lower emissions electricity.

The sheer availability of gas supply will obviously influence the success of gas market outcomes and, as the recent Gas Statement of Opportunities shows, and as you have been discussing today, that in itself may be a significant challenge.

However, the AEMC, as is our remit, has been focused for a number of years now on putting forward options to improve the functioning of our east coast markets so that, where gas is available, it can be traded more easily, and based on better information.

At this conference last year I spoke of fact that we only have a relatively small window of opportunity to adjust our domestic gas market arrangements and make lasting change.

Since then, Ministers of the COAG Energy Council have agreed to a suite of reforms that aim to make it easier to buy and sell gas and transport gas to where it is valued most.

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The east coast gas market reform package focuses on three areas:

1. Pipeline access

Reforms to pipeline access arrangements that will mean participants that value the gas the most will be able to access the pipeline capacity they need through:

day-ahead auction of contracted but un-nominated pipeline capacity;
standardised provisions in capacity agreements which will make capacity more fungible;
new capacity trading platforms to facilitate sales;
the publication of information on secondary trades; and  binding commercial arbitration framework on all pipelines if there are access disputes.

These improvements in transportation capacity trading arrangements will improve the liquidity of trading at hubs, the reliability of prices at those hubs, and in turn provide better signals for pipeline investment, and gas consumption and production.

2. Additional information to support the market

Secondly, additional information in the market will enable market participants to more better- informed decisions about trading, investing in, and using gas. New, more frequent and more accurate information will be reported on the gas bulletin board including:

annual information about reserves to give insight into where gas may be supplied from in the future
information on capacity and gas flows around gas supply hubs
large users including LNG facilities will report nameplate capacity and daily consumption.

These are designed to instil a greater level of confidence in the reported information and address information gaps and asymmetries. There will be standardised presentation requirements making the new information easier to interpret and use, and this will also strengthen the compliance framework.

3. Consolidating the various market designs

The east coast gas market has three different “facilitated trading designs” – hubs, short term trading markets and the Victorian declared wholesale market - three different sets of rules, if you like. Consolidating the design of these markets so that common trading arrangements and price discovery mechanisms exist across the east coast, will reduce barriers to participation. Market participants will only have to learn one set of rules and will be able to trade the same type of product regardless of geography.

To achieve this, a number of actions were agreed by the Council, including:

Concentration of wholesale gas trading at two primary trading hubs - a Northern and Southern hub - that share common trading arrangements
For the Northern Hub at Wallumbilla, optional hub services will help overcome the existing physical trading limitations of the hub – these will commence later this month.
For the southern hub, there are opportunities to align the trading arrangements in Victoria more closely with arrangements across the east coast. We are currently working with industry to develop the detail around this.
Finally, the Short Term Trading Markets in Sydney, Brisbane and Adelaide can then be simplified so they act as balancing mechanisms for the northern and southern hubs, supporting the development of meaningful liquidity at those hubs.

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Reforms in these three areas will reinforce each other and will lead to improved price and investment signals, make it easier to buy and sell gas over different time periods, make trading between locations easier, give investors more of an ability to manage risk and ultimately deliver lower transaction costs that will flow through to consumers.

Many of you in this room will be working with Dr Vertigan and his gas market reform group in developing the detail and implementing these reforms.

At the AEMC, our focus has now turned to improving the trading arrangements in the Victorian declared wholesale market in consultation with Industry.

The outcomes we would like to see in the Victorian market are:

Improving the ability and options available for participants to manage risk
Improved trading across interconnected pipelines
Promotion of upstream and downstream competition.
Support for efficient investment

Our final draft report proposed a number of options aimed at achieving these outcomes and we appreciate the input we have received to date and we hope that many of you will continue to work with us to develop the most appropriate approach for consideration by the Victorian Government.

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If both the east coast reforms and the Victorian-specific reforms are implemented, this will go a long way towards achieving the gas market vision that was set out by the COAG Energy Council.

The vision seeks to develop a market:

that provides a “clean” reference price that can be used to manage risk,
that gives efficient market signals for new investment,
where trade is focused at a point that best serves the needs of participants; and
where producers, consumers, and trading markets are connected in a way that allows flexible trade of gas

In other words, the vision aims to free up the trading of gas – making it easier to buy and sell and transport gas to where consumers want it.

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But that’s probably enough about what is being done. There is also a question as to why.

A major objective, if not the over-riding objective, we are seeking to achieve is to be confident that gas is supplied to those consumers that value it most at the lowest possible price over time.

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One such consumer or group of consumers are gas powered electricity generators.

And this is where gas reform becomes important for the electricity market.

I spoke earlier about the features of gas turbines that make them useful as part of the overall electricity supply mix:

the ability to balance renewable output with changes in consumer demand;
supporting the maintenance of a secure power system
lowering emissions; and
the ability to be a source of hedge contracts.

Gas generators are one option for the provision of hedge contracts within the electricity market which is a fundamental part of being able to manage price risk and is in fact a prerequisite for a competitive industry structure and delivering reliable supply of electricity over time.

The effective functioning of the hedge contract market is critical to maintaining reliable and secure supply to consumers, and in promoting competition in wholesale and retail markets.

Understandably, in recent times there has been a lot of focus and discussion about physical supply, reliability and security of physical assets, and the technical and engineering characteristics of different types of technologies.

Wherever those particular discussions may lead, it is absolutely essential that any decision criteria address the questions ‘Will this add to or detract from the diversity, liquidity and duration of the hedge markets? Will it add to the competitive supply of hedges as well as produce energy?’

Hedge contracts operate as a form of insurance against fluctuating spot prices and are also used to underwrite investment in new generation so there is enough capacity to meet demand. They are the critical fulcrum upon which these markets depend.

With a number of coal generators exiting the electricity market, the availability of hedge contracts appears to have decreased, resulting in consumers being more exposed to fluctuating spot market prices or receiving less reliable supply.

The decrease in the availability and competitiveness of contracts can really be used as the “canary in the coalmine” – excuse the pun - for future reliability and price rises in a region.

South Australia is an example of this: when Northern power station exited the market in May 2016 it didn’t just leave a gap in electricity supply to be filled by other technologies. It left a gap in both the availability and competitiveness of South Australian hedge contracts, which was not filled.

While large gentailers have the ability to hedge risk across their businesses, smaller retailers and industrial customers were faced with a choice of locking in higher contract prices, or exposing themselves to fluctuating spot market prices. Many chose the latter.

Over the long term, a reduction in contract market liquidity leads to a decrease in the levels of retail competition and small consumers start to feel pain.

The other side of the hedge contract coin is that without customers signing hedge contracts with generators at prices that reflect the value of that power and the cost of supply, this ultimately leads to less than efficient investment, and less reliable supply.

Having seen the course of events in South Australia, I’d suggest that contract market duration and liquidity is something we should keep a close eye on in other regions, particularly Victoria.

To emphasise the point: you cannot and will not have a reliable physical supply of electricity, nor a workably competitive industry structure or competitive pricing unless investment in physical plant also means a potential new source of supply of hedge contracts within relevant regions.

Because of the ability of gas power generators to be a source of supply of these contracts, there is a key link the between the reforms in the gas market which can support investment in gas fired power stations and in turn, support changes to the electricity market.

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So to take stock: Gas generation – along with other technologies that can complement the intermittency of renewables - provides system security benefits, and can help customers manage their price risk by offering hedge contracts.

These characteristics all point towards gas playing a growing role in any future electricity mix. How big a role, is yet to be seen. Irrespective of the size of the bet you wish to place about what the future may bring, a more flexible wholesale mechanism for buying and selling gas is essential for both gas consumers and electricity retail consumers.

The east coast gas reforms that are being implemented in the gas markets will go a long way to improving those markets, but taking opportunities to improve trading arrangements in the Victorian market will be particularly important, especially given how the Victorian generation mix is set to change this month with the exit of Hazelwood power station.

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Before I conclude, I want to talk briefly about another challenge facing the energy sector today, and that is in relation to investment confidence.

The overall aim of Australia’s energy markets is to provide a reliable, secure energy supply at the best possible price for consumers. It must continue to deliver this while the sector transforms in response to the other objectives of governments and structural changes within the sectors themselves.

Significant investment is needed to deliver these outcomes and this involves co-ordinating a complex set of commercial and technological considerations that result in a series of investment and disinvestment decisions - that is:

moving people and capital from one place to another…

moving from one business model to another….

moving from one form of technology to another…

and effectively managing the risks along the way.

It is a truism that our future prosperity depends on how well that process is managed. History teaches us that the co-ordination of all these decisions, the management of all these risks, is what workably competitive markets do best, given a credible policy framework and effective governance.

A key element of any credible policy framework that investors need in order to continue to provide secure, reliable energy at the best price for customers, relates to the emissions reductions policy for the energy sector.

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Many of you would be aware that the AEMC recently completed a report at the request of the COAG Energy Council that analysed three types of emissions reduction policy mechanisms, each designed to meet the electricity sector’s share of Australia’s Paris targets. The mechanisms we looked at were:

A market-based mechanism which would involve the establishment of a declining Emissions Intensity Target and scheme for the electricity sector.
A technology subsidy which would involve extending the existing LRET subsidy mechanism for new renewable generation capacity.
Government regulation involving a staged approach to fossil-fuelled generator exit.

The absolute outcomes of the analysis are less important than the relative performance of each of the mechanisms. It wasn’t a forecasting exercise, rather an exercise in explaining the characteristics of each of the three broad choices of mechanisms that could be used.

For example the analysis showed that an emissions intensity target is the most cost effective, scalable, and robust emissions reduction mechanism of the three. This was the case even when it was tested against a range of sensitivities – different views of the future - including high demand and low demand, high gas prices, low technology costs, and variations in the emissions reduction target.

The aim of this work however was not to recommend a particular mechanism, but to explore the impacts each would have on the energy market and consumers and to highlight the policy design characteristics that allow some mechanisms to better integrate with the energy sector than others.

A key characteristic that helps a mechanism achieve emissions reductions at the same time as supporting the delivery of secure, reliable energy at the best price for consumers is the ability to self-correct when future demand and technology costs inevitably turn out to be different from what is expected today. They also allow a mechanism to accommodate changes in the emissions reduction target over time.

Ultimately it is these characteristics that give investors and consumers’ confidence to invest and change behaviour. If the mechanism that we use to achieve emissions reductions target is built around a particular forecast of say demand, technology, fuel prices or any other variables that affect outcomes and change overtime, the credibility of the policy mechanism depends on both the confidence the market has in government’s forecasts and in those forecasts being pretty well correct.

It is the confidence of investors and consumers to invest and change their behaviour that will underpin the transformation of energy markets so they continue to provide a reliable, secure energy supply at the best possible price for consumers.

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So, back to what this means for gas markets. Gas reforms are not only critical for large users of gas, they support a whole range of other important objectives. It will be very difficult to achieve an electricity sector that provides secure, reliable electricity at the best price for customers and in a way

that also reduces emissions over time, without access to gas, and without the means to easily buy and sell the available gas across the east coast.

In that regard, the Gas reforms in Victoria particularly will be vital not only for the large gas users there but also to support the maintenance of a secure and reliable electricity system.

The Commission is therefore very focused, as we recently outlined in our submission to the Finkel Review, on supporting the transformation of Australia’s energy markets by providing flexible, resilient energy market frameworks that can adapt and change over time. It is this ability that underpins the confidence that investors can have in identifying investment opportunities and putting their money where their beliefs are. Without that, the rational response is to sit on their hands or to take a ‘no regrets’ position no matter how the future turns out.

The key challenges currently facing the energy sector are all interrelated – the sector often gets described as a tube of toothpaste being squeezed at one end and something comes out the other, or a bowl of spaghetti that is all joined up together. The success of any regulatory framework largely depends on how the people who operate the system and its many parts respond when something happens that had not been anticipated.

The Commission recognises this and the fact that any reforms we propose must balance and achieve multiple objectives and be designed in a way that is flexible and resilient and not dependant on any particular single view of what the future will look like.

I’ll leave you with that thought as you seek to navigate through what promises to be a very interesting time in energy.

Ends.

Further consultation on reforms to the Victorian declared wholesale gas market

07 March 2017

Today the AEMC announced a further round of consultation on the Review of the Victorian declared wholesale gas market (DWGM).

In October 2016 the Commission published a draft final report with recommendations for reform to the DWGM. Stakeholders proposed a range of alternative reforms in their submissions to the report. We plan to release a discussion paper in late March 2017 to enable stakeholder input on these alternatives.

While a final decision has yet to be made on the timelines for the review, the Commission expects that the final report will be submitted to the COAG Energy Council and the Victorian Government by the end of August 2017.

This review of the Victorian DWGM aims to improve access to a reliable supply of efficiently priced gas for Victorian consumers, while maintaining Victoria’s key role in east coast gas markets as one of two wholesale gas trading hubs.

Media

Prudence Anderson, Communications Director, 0404 821 935 or DL (02) 8296 7817

The publication day for notices of statutory decisions is changing

07 March 2017

From the week commencing 13 March 2017, AEMC announcements of statutory decisions will be published on our website on Tuesdays instead of Thursdays.

This is because the publication day for the South Australian Gazette has changed.

Under the National Energy Laws, the AEMC is required to publish notices of key statutory decisions including the commencement of Rules, draft and final rule determinations and statutory time extensions in the South Australian Gazette.

This change does not affect the statutory deadlines for rule change processes that are already underway.

All new rule changes will be commence on a Tuesday and therefore have statutory deadlines that fall on Tuesdays (e.g. deadlines for making of determinations and statutory extensions).

Notices of COAG Energy Council directed reviews will also be published on a Tuesday.

The AEMC’s e-newsletter will be sent to subscribers on Tuesdays from today.

For a small number of rule changes already scheduled for March publication, the AEMC may ask the South Australian Gazette to publish a supplementary Thursday issue in order to meet statutory deadlines. If this happens additional newsletters may be published during the week.

For more information:
Catriona Webster (02) 8296 7836

Request for gas pipeline operators to update scheme register

16 February 2017

Under the National Gas Rules, the AEMC maintains a scheme register of natural gas pipelines in Australia.

The scheme register is a list of all covered and uncovered transmission and distribution gas pipelines by jurisdiction. The scheme register covers pipeline classifications, owners/operators, and coverage status. The scheme register also includes a brief description of each pipeline. The scheme register currently lists 68 pipelines.

In order for the scheme register to provide timely and relevant information, we request feedback from natural gas pipeline owners and operators in relation to any existing or new pipeline descriptions, extensions or capacity expansions, and relevant regulatory decisions.

Kindly provide any feedback to scheme.register@aemc.gov.au, including the nomination of a contact person for future correspondence.

Media: Prudence Anderson 0404 821 935 or DL (02) 8296 7817

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