1. APEX Conference 2016 Medellin, Colombia
Terry Grimwade, Market Reform
13 October 2016

2. About Market Reform
Market Reform is an international consultancy specialising in industries undergoing significant structural change – generally through the introduction of competition or new business models. Our work has a particular focus on energy, water and environmental markets. Our people, individually and as part of Market Reform, have over the years advised a number of the members of APEx, including:
EirGrid/SONI/SEMO
AEMO (and predecessors)
Singapore EMC
PEMC
Elexon (and predecessors)
Transpower
Ontario IESO
Nodal Exchange
PJM
ERCOT
EPEX Spot (and APX)
California ISO
MISO
ISO New England
NYMEX/CME
New York ISO
© Market Reform, 2016.

3. APEX Panel Session 1: Value of Markets and Future Developments
What is the outlook of the Electric and Gas markets (spot and derivatives)?
What is the value of the electric and gas markets from a customer perspective?
What are the dependencies between the gas and electric markets?
What are the benefits of coordination between the electricity and gas markets at a regional level?
What is the impact of the increase in LNG supplies globally?
© Market Reform, 2016.

4. The Electricity and Gas Markets in Eastern Australia
National Electricity Market
Eastern Australia Gas Markets
© Market Reform, 2016.

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7. Australian National Electricity Market Prices ($ of the day)
Best known GHG emissions trading scheme is in Europe. Also have RGGI, California.
Should also remember that there are older emissions markets in SO2, NO2/NO3 (often labelled NOx).
In Australia, many market infrastructure functions for emissions are proposed to be (or are already) performed by the Clean Energy Regulator; contrasts with energy markets, and almost any other market. Also fails to heed the lesson that regulators make poor infrastructure operators.
© Market Reform, 2016.
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8. Australian National Electricity Market Prices (Real $)
Best known GHG emissions trading scheme is in Europe. Also have RGGI, California.
Should also remember that there are older emissions markets in SO2, NO2/NO3 (often labelled NOx).
In Australia, many market infrastructure functions for emissions are proposed to be (or are already) performed by the Clean Energy Regulator; contrasts with energy markets, and almost any other market. Also fails to heed the lesson that regulators make poor infrastructure operators.
© Market Reform, 2016.
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9. Australian National Electricity Market Demand
Demand reducing
Increased industrial consumption due to compression for LNG exports
Source: AEMO National Electricity Forecasting Report 2014
© Market Reform, 2016.

10. Improved Quantity, Quality and Availability of Information Planning
Value of Markets
Pricing signals
Improved Quantity, Quality and Availability of Information
Planning
Investment
Operation
Options/choice
Incentives for improved plant performance
Availability
Flexibility
Encourages innovation
©Market Reform, 2016

11. Electricity and Gas Markets - Dependencies
Fuel Substitution
Alternative fuels for electricity generation?
Impact of GPG on gas deliverability and capacity requirements – gas storage
Impact of LNG export industry (compressors) on electricity demand
Pricing signals between markets
Investment - long term outlook
Operational
availability/timeliness of short term (spot) pricing signals
Timeframes
electricity is 5 minutes, gas much longer
Availability/deliverability of gas
Gas storage
Location/transportation costs
Electricity transmission costs v pipeline costs
© Market Reform, 2016.

12. Impacts on Market Design/Outcomes (Australian example)
Victorian gas spot market introduced (March 1999)
Initially a single, ex-post, daily price
In 2004, issues with existing GPG demand and expected “dash for gas” led to market review
2007 – new Victorian market design with 5 within day pricing periods and ex-ante pricing
Expansion of pipelines created interconnected eastern Australian gas grid
Gas STTM developed in other States (2009)
concerns over pricing signals for treatment of constraints
Expected increased GPG did not eventuate
Development of LNG export industry in Queensland
Drought in 2007/8 led to:
Closure of coal fired generators in Queensland
High gas prices in Victoria!
© Market Reform, 2016.

13. Australian East Coast Gas Demand
September 18
2084 PJ
1961 PJ
Source:
AEMO National Gas Forecast Report 2016
1009 PJ
697 PJ
GPG
201 PJ
GPG
175 PJ
GPG
185 PJ
East coast gas demand to treble in next 4-5 years due to LNG
Domestic demand likely to decrease
Gas fired generation particularly
Other demand uncertain due to pricing and supply issues.
GPG
69 PJ
Other
468 PJ
Other
486 PJ
Other
480 PJ
Other
447 PJ
2012
2015
2020
2035
© Market Reform, 2016.

14. Potential impacts of LNG exports
September 18
Potential impacts of LNG exports
Domestic prices linked to global LNG prices
e.g. in Australia wholesale prices projected to increase from $5/GJ to maybe $10-12/GJ?
Impact on domestic gas demand, industry
Competition for gas supplies; domestic vs. LNG exports – and attendant political implications
Availability/competitiveness of GPG. Could make coal attractive again.
Capacity/deliverability issues.
Inter-basin pipeline expansion for access to export terminals.
Key Points:
Prices:
Int’l LNG price function of supply/demand balance
Three key LNG pricing hubs – US ($8), Europe ($12) and Asia ($15)
Australia linked to Asia with potential competition from other regions depending on production and transport costs => puts pressure on Asian price => pressure on Australian price
Australian domestic price depends on domestic supply/demand balance => ample resources that could monetised below current Asia netback => need markets to show value
US market example of disconnect between export and domestic price => difference will be eroded over time
Supply:
Uncertainty => short term contracts, price pressures, potential shortfalls (NSW – see later)
Demand:
Substantial noise to implement reservation policy and protect industry rising prices => demand destruction? But when and what price?
Reservation may increase prices => investment less attractive, shale needs $8/GJ + in Australia, future CSG also $8/GJ + (depends on production / flow rates in wells)
Investment:
Opportunities for storage or fuel substitution
Competition:
Attractive prices in the north for southern gas => basin on basin competition => more gas supply => downward pressure on prices
Markets not supporting potential efficient outcomes across east coast, facilitated markets relatively small % of total gas demand < 20%
© Market Reform, 2016.

15. Benefits of Gas and Electricity Coordination
Forecasting
Account consistently for interaction/dependencies
Planning Information
Investment
Outage/Maintenance planning
Operational planning (gas storages/linepack)
Pricing Signals
Different timeframes – as for planning
Operational decision making
Better signals/incentives for efficient fuel substitution
© Market Reform, 2016.

16. Outlook
Increased Interconnection/Integration of Electricity Markets (e.g. Europe).
Gas markets becoming increasingly global with increased LNG supplies.
Competition for gas supplies between domestic (including GPG) and exports
More combined electricity/gas IMOs?
Changing patterns in electricity demand and supply – move to more distributed power generation, wind and PV penetration
Market designs need to be flexible /adaptable
Inertia for change and regulatory timeframes mean changes to market design may not keep pace
So, market designs also have to be robust
© Market Reform, 2016.