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Development of an inter-island financial transmission right

Development of a solution to inter-island locational price risk has been ongoing since 2008. The Authority gazetted a Code amendment in August 2011 to allow for the introduction of financial transmission rights.

Secondary Trading of FTRs 

The Authority has prepared a brief information paper setting out its position on developing a more formal secondary trading market and to provide clarity to interested parties.

FTR Code change proposals - 3 July 2012

As preparations are made for the start of the FTR market on 1 May 2013, several issues with the Code have been identified. As a result the Authority has received a number of Code change proposals from its service providers seeking clarification on the Code.

The Authority has released a consultation paper which discusses the issues raised and analyses the proposed solutions.

The consultation paper and details of how to make a submission are available on the consultation page.

An informal briefing session on these issues was held at the Electricity Authority on Monday, 23 July 2012. The presentations and worked examples of the different options are available below:

Allocation of residual loss and constraint excess - 3 July 2012

During consultation on the Code amendment for FTRs (April 2011) some parties currently receiving loss and constraint excess (LCE) were concerned about the possibility of no longer receiving LCE, and also not receiving an allocation of the Residual LCE. Other parties were concerned about the potential competition implications if parties currently receiving LCE receive Residual LCE and participate in FTR auctions.

The Authority, in conjunction with LPRTG, continued work analysing the impact of the selected methodology to reallocate residual loss and constraint excess. This analysis has now concluded and the attached information paper sets out the Authority's decision not to change the current Code provisions and the analysis supporting that decision.

The Authority invited feedback from interested parties on the analysis and conclusion in this paper. Six parties provided feedback, these are attached below.

Presentations to EPOC workshop

The Electric Power Optimization Centre (EPOC) of the University of Auckland hosted presentations on financial transmission rights (FTRs) at its Winter Workshop 2011 on 2 September 2011. Two presentations involving the Electricity Authority are provided below. The full set of presentations given at the workshop are available on the EPOC website.

Code amendment - introduction of financial transmission rights - 11 August 2011

Following consultation on the draft Code amendment paper (April 2011), the Authority has finalised the Code amendment to allow for the introduction of an inter-island FTR.

As a result of feedback received in submissions and consultation with LPRTG, some changes were made to the draft Code amendment. These were outlined at an industry briefing session, held on 2 August 2011 at the Authority's offices, and in the following information paper:

Stochastic Optimization Limited were asked to peer review Schedule 14.6 of the draft Code amendment (as drafted in the April 2011 Consultation paper) and appendices D and E of the April 2011 Consultation paper. Following their report some changes were made and an updated version of Schedule 14.6 produced.

This updated version of Schedule 14.6 was then provided to Stochastic Optimization for review prior to being finalised in the Code amendment made in August 2011. Findings of this second review are found in the supplement to the report on locational price risk management.

The original report refers to a version of Schedule 14.6 provided to Stochastic Optimization in July 2011 (the version from the April 2011 Consultation paper), and refers to sections and equations that are in that version. As a result of corrections made to Schedule 14.6, some of the sections and equations from the original report are now out of date.

On 12 September 2011, the Stochastic Optimization Limited's supplement to the report on locational price risk management was republished to correct some minor numerical errors in the example on page 6.

The following document is available to help both industry participants and interested parties understand the changes to the Code to allow for FTRs and understand the basics of an FTR:

Consultation on Managing locational price risk: proposed amendments to the Code - 12 April 2011

On 12 April 2011, a consultation paper was released identifying changes to the proposal from the previous round of consultation (September 2010) and proposing draft amendments to the Code.

The Authority commissioned the following reports in the course of developing the proposal:

The Authority invited submissions on this paper by 5pm on 12 May 2011. Seventeen submissions, including one confidential submission, were received.

The following documents are available from the consultation page:

  • Managing locational price risk: Proposed amendments to the Code consultation paper
  • Erratum to Appendix D (20 July 2011)
  • Summary paper of locational price risk
  • Requests for information
  • Submissions
  • Response to submissions

A briefing to present the proposal was held in Wellington on 19 April 2011, further details are available on the briefing page.

Work Prior to 1 November 2010

The following consultations and papers were prepared by the Electricity Commission prior to the Authority's establishment on 1 November 2010..

Proposal and consultation - September 2010

At the Market Development Conference in May 2010, the Electricity Commission outlined its plan to proceed with the development of a locational hedge that would include a financial transmission right (FTR) as its core component.

Following further analytical work and taking account of participants' reinforcement of the need for simplicity and flexibility to accommodate future possible developments in the electricity market, the Commission proposed an inter-island FTR as its preferred option. The proposal is included on the consultation page.

In the course of developing this proposal the Commission received and considered the following papers:

A briefing to present the proposal was held in Wellington on 23 September 2011, further details are available on the briefing page.

High level option selection - May 2010

The Commission, working with the LPRTG, undertook a supplementary review of the locational price risk options that were included in the Options paper. The process and outcome of the supplementary evaluation are included the following information paper:

As part of this supplementary evaluation the Commission received and considered the following paper from Paradox Strategic Advisors Limited:

Information paper - March 2010

Following an analysis of submissions on the Options Paper and further discussions with stakeholders and the LPRTG, the Commission decided to proceed with the selection of a preferred high-level option to take to a detailed design phase of the project. This Information Paper includes:

  • the results of the Commission's analysis of key issues raised by submitters on the Options Paper and
  • the criteria that the Commission has adopted to select the high-level locational hedge option to be taken to detailed design.

The Options paper, Managing locational price risk: options consultation - October 2009

A consultation paper (the Options Paper) released in October 2009 considered four locational hedge options - a Locational Rental Allocation (LRA), FTR, a hybrid of an LRA and FTR, and zonal pricing. The paper included high-level cost-benefit analysis of the four locational hedge options against the status quo and indicated that the initial preferred option for managing locational price risk was a hybrid of an LRA and FTR.

An update to the consultation paper (including Appendix 2) was published in November 2009, which addressed technical issues relating to the treatment of the HVDC in some options.

A conference was held in October 2009 to provide an overview of the Options Paper and other consultation documents, and an opportunity for industry participants to discuss the options.

Fifteen submissions on the Options Paper were received.

Supplementary analysis - February-August 2009

Prior to preparing the Options Paper the Electricity Commission undertook some supplementary analysis was undertaken. The material considered as part of this analysis is attached for information purposes. The cost-benefit analysis of an LRA presented here is preliminary and only considers a simple LRA model.

Following the consideration of submissions on the Issues Paper and the additional material listed above, it was decided that further work on locational hedges should consider LRAs, FTRs, zonal pricing and combinations of these options. For this reason, the Options Paper considered an LRA, an FTR, a hybrid of an LRA and FTR, and zonal pricing.

Issues paper, Managing locational price risk consultation - July 2008

A consultation paper (the Issues Paper) was released on 8 July 2008. This paper sought the views of submitters on whether the preferred option at the time - a Locational Rental Allocation (LRA) - should be further progressed. The paper described a simple version of an LRA and provided numerical results for that model.

A public briefing was held in August 2008. The objective of the briefing was to present the information contained within the Issues Paper in advance of respondents finalising their written submissions.

Twelve submissions on the Issues Paper were received.

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