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.