TERMINACIÓN DE LA COBERTURA Para un Miembro, en los siguientes casos:

The east coast currently has three gas market trading designs, each developed

separately of the other and at different times in the evolution of the broader east coast market. As of 1 June 2016, these are spread over six trading hub locations.82

The Commission considers that at the core of an east coast gas market development roadmap should be the concept that trading be conducted in as few locations as possible in order to concentrate liquidity. Accordingly, the Commission is

recommending a pathway for the future development of the market that seeks to concentrate trading at two points on the east coast – in the north by continuing to evolve the existing Wallumbilla GSH and in the south by enhancing the Victorian DWGM.

Recommendation 1: Focus development efforts on two primary trading hubs - a Northern and

Southern hub - that share common trading arrangements to improve price discovery and reduce barriers to participation.

Two primary pricing points have been recommended as the Commission is concerned that multiple trading locations will unnecessarily split liquidity and reduce the benefits to participants of a liquid wholesale market. Prices at the two hubs would seek to reflect the differing market conditions in the two regions which have significant sources of supply and demand:

• In Queensland, demand is primarily driven by LNG production and large users (including gas-fired generation) and there is significant conventional and unconventional gas production.

• In Victoria, gas is primarily consumed by residential customers and so is driven by day-to-day weather and the seasons. There is also significant production from the Bass Strait, with the Gippsland Basin in particular emerging as the "swing" producer of gas for most domestic demand.

Although there could be reasons for wanting to establish trading hubs to reflect market conditions in other areas, the Commission has concerns with approaches that seek to support the emergence of more than two reference prices, as this may serve to

unnecessarily split liquidity both in short term trading and in the benefits that can be obtained from having an accepted market price to refer to in financial derivatives and in long term physical contracts.

The Commission's recommended number and type of gas markets on the east coast to achieve the Vision was illustrated in Figure 2.1 (see Chapter 2).

Further, the Commission considers that exchange-based trading provides gas market participants with greater flexibility in how they buy and sell gas than the gross pool approach of the DWGM and STTM hubs. A range of different products - from on-the-day to month-ahead and beyond - can be traded on an exchange, creating

transparency around spot and forward price expectations. Exchange-based trading is also less administratively complex to implement and the Southern Hub can leverage off AEMO's systems and learnings from implementing the Wallumbilla GSH.

Further detail on exchange-based trading is provided in Box 4.2.

Box 4.2 Exchange-based trading and gas markets

Exchange-based trading involves buyers and sellers placing anonymous bids to buy gas or offers to sell gas using an electronic trading platform. The market matches bids and offers on price to execute a trade as is done on a stock market. All transactions on the trading platform are published as they occur to support liquidity and transparency.

Under the Commission’s recommended wholesale market design, participants can buy or sell gas through the exchange or trade bi-laterally outside the exchange. When a trade occurs, the facility operator is notified by the shipper and market operator, so that the existing physical nominations of the buyer and seller can be adjusted at the hub.

Trading occurs between predefined business hours on standardised, hub specific contracts. Exchange-based trading products can evolve over time to suit the requirements of participants. Some common contracts include: on-the-day; day-ahead; week-ahead; and month-ahead.

Participants will generally utilise a combination of exchange-based products, along with their bilateral contracts, in order to manage their gas portfolio needs. Continuous exchange trading facilitates the integration between the spot and forward markets through continuous trading of the forward products leading up to the gas day.

A liquid forward curve provides participants with transparency around the market's future price expectations for gas, say, a week ahead or a month ahead or even the following year. Financial derivatives to manage price risk are often developed over the most liquid of these physical products.

While not explicitly part of the Northern Hub, a second GSH at Moomba is likely to be an appropriate transitional measure to provide additional flexibility until trading at the Northern and Southern hubs, and in pipeline capacity, matures. Over time, Moomba could establish itself as a transit point for gas flowing between the east coast markets, particularly given the recent announcement to connect the Northern Territory to the east coast gas market via the Northern Gas Pipeline.83

Once the Northern and Southern hubs are developed and pipeline capacity trading is introduced, the Commission recommends that the STTM hubs are pared back from their current design to purely support transparent and competitive balancing. This will reduce transaction costs for participants that have to engage with these markets on a

daily basis, while still preserving competitive, market-based balancing at the demand centres.

The Commission notes that a potential emerging issue for the east coast gas market is that of different gas specifications. The Commission understands that the LNG plants require a dryer gas specification than the Australian standard. Natural gas

infrastructure operating on two different gas specifications could present a barrier to trade and the achievement of a liquid wholesale gas market. The ACCC's position, with which the Commission concurs, is that the Energy Council should monitor this issue and ensure that any costs associated with a non-standard gas specification are borne by the market participants that required that alternative specification.84