Designing the Day-Ahead Auction for Contracted But Un-nominated Capacity on Gas Pipelines in Australia

The Situation

The Australian gas market is built on long-term gas supply and transportation contracts. Short-term trading of gas and transportation capacity can provide increased flexibility within the general structure of long-term contracts. However, in the past, there has been little short-term trading due to high transaction costs (locating a willing counterparty), operational requirements, and a general lack of price transparency.

The Gas Market Reform Group (GMRG) was established by the COAG Energy Council in 2016 to lead design, development, and implementation of Australia’s Gas Market Reform Package. One of the key elements of this reform package was to establish an auction for short-term transportation capacity on gas pipelines.

NERA was engaged to advise on the design of this day-ahead auction (DAA) for contracted but un-nominated capacity. The capacity on offer in the auction is contracted (i.e., tied to longer-term contracts) but was not nominated by the contract holder and would otherwise not be used on a particular day. The DAA offers shippers the opportunity to bid for this short-term capacity for the next gas day.

NERA's Role

NERA was retained by the GMRG to advise on the design of the DAA as well as its impact on the gas market as a whole. NERA advised the GMRG throughout stakeholder workshops, the consultation with the industry, and the final rules recommendations.

A key concern in the design of the auction was to ensure that it reflects the complex system constraints while at the same time making it as simple as possible for shippers to develop their bids. NERA recommended a simple combinatorial auction in which shippers only specify receipt and delivery points as well as the quantity and maximum unit price they are willing to pay. The auction solver then decomposes bids into linked bids across the relevant zones and segments and determines winners in a joint optimization. Prices are then determined using a generalised clearing price rule ensuring that successful bidders only pay as much as is necessary to beat their rivals on the products that they win.

In January 2018, the COAG Energy Council endorsed the GMRG’s final recommendations on the design of the day-ahead auction of contracted but un-nominated capacity, which paved the way for an auction start in March 2019.

The auction platform was developed by AEMO. NERA was commissioned to test the accuracy of the auction solver before the official launch. 

The Result

The auction went live in March 2019 and, according the AEMC, the industry regulator, has been credited with contributing to liquidity growth in east coast wholesale gas markets. The Australian competition watchdog, the ACCC, found in its report in January 2020 that the DAA has contributed to greater liquidity in the Sydney STTM and has lowered gas prices for consumers.