Hedge market development
Introduction
One of the outcomes of the Ministerial Review in 2010 was that the Minister of Energy and Resources requested the five major generators with over 500MW of capacity to develop an active market for exchange-traded electricity contracts. The Electricity Authority initiated work to review and evaluate the progress made in the development of an active market for trading financial hedge contracts for electricity, and introduce changes to address any shortcomings.
Developing and strengthening the electricity hedge market is an important project. The objective is to provide more transparent and robust forward price signals, and an electricity market that is more competitive, being readily accessible for existing participants and purchasers, as well as for new entrant generators and retailers.
The Authority has been encouraging the development of trading in New Zealand electricity futures and options on the Australian Securities Exchange (ASX) and pursuing several other initiatives designed to support the development of a more robust and transparent hedge market.
The Authority continues to monitor activity in the hedge market, and publishes a range of information on hedge market development via its weekly NZ Electricity Hedge Contracts update, and via the regular Market Brief.
The Authority continues to monitor progress and is pursuing a number of initiatives to further enhance trading activity, participation and confidence in the market.
Information paper: Hedge market performance and project update - 21 May 2013
Further positive developments have been unfolding in the hedge market since the previous information paper was released in November 2012. Most notably, there has been an increase in participation in futures trading, and ASX is currently developing new peak load quarterly futures and base load quarterly options products.
This information paper outlines recent market developments, and the Authority's approach and ongoing commitment to further improving activity in the market.
Correspondence with ASX and copied to the four largest generators – 26 November 2012
On 26 November 2012 the Chief Executive of the Authority wrote to ASX (and copied to the four largest generators) to request that it promptly finalise arrangements with market-makers and notify the Authority once this has been completed.
Information paper: Hedge market performance and project update - 26 November 2012
The hedge market has continued to show progress since the last information paper was released in June 2012. Unmatched open interest on the ASX NZ electricity futures market has remained above 2,000 GWh and 2,020 GWh of futures traded in October 2012. This is the largest volume of trades in a single month since the futures market began, and is equivalent to approximately 59% of the physical electricity market.
This information paper outlines recent market developments, and the Authority's approach and ongoing commitment to further improving activity in the market and encouraging a broader range of participants to get involved.
Managing electricity price risk guide
The Authority has developed a guide to enhance the level of knowledge and understanding about electricity price risk management, especially amongst end-use customers exposed to spot prices.
ASX report on new product development
ASX has prepared a report (letter) on its plans for new product development.
Information paper: Hedge market performance and project update - 26 June 2012
The hedge market has continued to show progress since April, despite having fallen short of the final UOI target. ASX futures have become an important mechanism for participants to adjust their trading position, and the recent UMR Research survey suggests there are perceptions that hedge market competition is improving.
This information paper outlines recent market developments, and the Authority's approach and ongoing commitment to further improving activity in the market and encouraging a broader range of participants to get involved.
While the Authority has not set new targets for UOI, it will continue to closely monitor performance against a range of metrics, including UOI, trading volumes, pricing behaviour and the number of participants.
Feedback on Information paper - 17 April 2012
Contact Energy Ltd provided feedback on the Information paper: Hedge market performance and project update - 17 April.
Information paper: Hedge market performance and project update - 17 April 2012
The hedge market has shown significant progress in recent months, following the introduction of tighter market-making agreements in October and other initiatives. There appears to be willingness from participants generally to support initiatives to facilitate trading. There has been a significant increase in futures market activity in response to the very low hydro inflows in the first quarter of 2012, which has had a very positive impact on trading volumes and on the level of UOI. Further participation from demand-side parties appears to be central to continuing to drive up UOI levels and trading volumes.
The Authority has prepared an information paper reflecting on these positive market developments and outlining the Authority's focus going forwards. The Information Paper was updated on 19 April 2012 to clarify the summary of the Mighty River Power feedback (contained in Appendix 1) on the Market-Making Cost Benefit Analysis. This clarification has not altered the Authority's conclusions on the cost benefit analysis.
Feedback on Market-Making CBA
The Authority received feedback from four parties on its information paper exploring the costs and benefits of tighter market-making arrangements.
Information on Virtual Asset Swap (VAS) agreements
Meridian Energy Limited has published a one page fact sheet on the VAS agreements. This fact sheet is available on the Meridian Energy website.
Location Factor and Average Price Reports - 14 December 2011
The Authority has published location factor and average price reports. This Location factor information was produced in response to requests by parties interested in the location factor variations between various nodes and the futures reference nodes.
Information paper: CBA Market-Making Obligations - 21 November 2011
The Authority has prepared a paper that analyses the costs and benefits of tighter market-making arrangements for New Zealand electricity futures traded on the Australian Securities Exchange. The Authority invites feedback from stakeholders on this cost benefit analysis. Any feedback would be most useful to the Authority if it was available by 17 January 2012.
Situation Update - 21 October 2011
The Authority has prepared a brief overview paper that outlines the initiatives the Authority has taken to provide for a more active hedge market.
Information paper - 20 October 2011
The Authority has prepared an information paper that describes and explains the Authority's key decisions, following submissions on the Consultation Paper published in August 2011 and recent further developments with the NZ electricity futures market.
Situation Update - 11 October 2011
As part of initiatives to develop a more active market for exchange-traded electricity contracts the Authority has been encouraging the main generator-retailers to voluntarily enter into tighter market making agreements with the Australian Securities Exchange (ASX) in order to encourage trading and liquidity in the ASX NZ Electricity Futures Contracts. There has been good progress towards this end.
Several market making agreements have been established with ASX that include 5% maximum bid-ask spreads and provide more depth of available contracts. The observed bid-ask spread on the ASX NZ Electricity Futures has narrowed and the depth of market has improved considerably in the last 30 minutes of each trading day.
This is illustrated by the following observation:
- EnergyLink commented in its June 2011 report* that unmatched open interest sat at approximately 600 GWh and the observable bid-ask spread at that time was 7% - 8%.
- As of 7 October 2011, unmatched open interest has increased to approximately 810 GWh and the bid-ask spread has reduced to 1% - 5%.
Ken Chapman, the General Manager Futures and Options for ASX notes that “the improved liquidity and price discovery as a result of the commitment made by the generator-retailers has significantly enhanced the market's ability to facilitate efficient and cost-effective risk transfer and forward investment decision making”.
The Authority is very pleased with these developments, as the narrow spreads are a key component of achieving robust forward price curves for electricity futures.
The Chief Executive of the Authority, Carl Hansen, notes “the major generator-retailers appear to be coming to the party with the new market maker agreements, and should be congratulated for doing so. This is an important milestone in achieving more active trading in electricity futures as required by section 42 of the Electricity Industry Act.”
Although overall trading activity still needs to develop considerably to meet targets for unmatched open interest, the Authority is hopeful the narrow spreads will attract financial intermediaries, small retailers and large consumers into the market.
*Evaluation of Hedge Market liquidity - June 2011 prepared by EnergyLink
Consultation on hedge market arrangements - 1 August 2011
A consultation paper was published that proposed a way forward for further development of the ASX NZ electricity futures market. The consultation paper is available on the consultation page. Submissions are available on the submission page. TrustPower has made further comment in a letter and the Authority has responded to that letter.
Sample letter sent by the Authority
Response letters from generators and ASX
Correspondence with large generators and ASX
On 24 June 2011 the Chief Executive of the Authority wrote to the five major generators and ASX. The letter noted the progress in developing the ASX futures market, and requested information, including an indicative timeline, on the following measures being considered to develop more active trading in that market:
- Development by ASX of a standardised market making agreement including certain specified characteristics, and
- Increased transparency on the virtual asset swap contracts, and in particular, the price indexation to ASX futures prices.
The responses from the five major generators and ASX indicated a substantial commitment to making the futures market work. The Authority's letter and the response letters are attached below.
The responses, along with the report by Energy Link were utilised by the Authority to develop the consultation paper published on 1 August 2011.
The Authority would like to thank respondents for their time and engagement on this issue.
Independent Hedge Market Evaluation Report
Energy Link was engaged in May 2011 to undertake a review, and to prepare a report that evaluates the progress the major generators have made toward achieving the Government's expectations concerning a liquid electricity hedge market, and to recommend actions to address shortcomings identified in the evaluation.
The completed EnergyLink report is attached below. The views, opinions, analysis and conclusions given in this report are based on independent work undertaken by Energy Link and do not represent the views of the Electricity Authority.
Hedge market survey
The Authority conducts a survey of the New Zealand electricity hedge market to gather information on the scope and operation of the hedge market and assist with the identification of the key problems. The survey provides guidance on developing initiatives aimed at improving the New Zealand electricity hedge market. The objective is to develop an active market for exchange-traded electricity contracts and provide liquidity and open access for new entrant generators, retailers and consumers.
The hedge market survey is carried out approximately every two years and has been run in 2005, 2007 2009 and 2012. It is anticipated that the next electricity hedge market survey will be carried out in the first quarter of 2014.
Previous reports and surveys have been published and are available from the bottom of the page.
Development initiatives
A number of initiatives have been introduced, and others are under development, to improve the market for managing spot price risks.
The initiatives and progress on their development is provided below:
- Locational Price Risk Hedges
- Publication of risk management contract information
- Model Master Agreement - A standardised schedule for the purchase and sale of electricity derivative contracts.
- Review of prudential and settlement arrangements
- Disclosure of relevant wholesale market information
Related Documents
Fourth hedge market survey April 2012
Hedge-market-survey-April-2012.pdf | pdf | 2.2 MB | Last Changed: 11/06/2012 11:58am
Response letter to TrustPower regarding market making on ASX electricity futures market - 26 September 2011
Letter-to-Vince-Hawksworth.pdf | pdf | 2 MB | Last Changed: 27/09/2011 8:37am
TrustPower Follow up Letter - 15 September 2011
TrustPower-Followup-Letter.pdf | pdf | 78 KB | Last Changed: 20/09/2011 8:28am
Energy Link hedge liquidity report June 2011
Energy-Link-hedge-liquidity-Jun11.pdf | pdf | 887 KB | Last Changed: 30/06/2011 11:59am
Third Hedge Market Survey Report - December 2009
HedgeMarketSurvey-Dec09.pdf | pdf | 2.1 MB | Last Changed: 12/04/2011 9:39am
Second Hedge Market Survey Report - February 2008
Final-ElectricityHedgeMarketIssues-Feb08.pdf | pdf | 1.5 MB | Last Changed: 12/04/2011 9:39am
First Hedge Market Survey Report - August 2005
HedgeMarketIssues-Aug05.pdf | pdf | 689 KB | Last Changed: 12/04/2011 9:39am
This page is related to: Retail and Wholesale Market.