Hedge market

The Australian Securities Exchange (ASX) electricity futures and options are standardised contracts structured as cash-settled contracts for difference against two grid reference nodes - Ōtāhuhu in the North Island and Benmore in the South Island.

Electricity futures market hedges are always settled directly with the ASX. The ASX also has separate prudential requirements for traders in this market.

The approved exchange platform for trading New Zealand electricity base load futures contracts is the ASX electricity futures market.

Over-the-counter hedges are where buyers negotiate directly with sellers to agree on a price. These contracts can be customised and provide flexibility for both parties.

There are several over-the-counter hedges to manage different types of risk:

• contracts for difference
• fixed price fixed volume
• fixed price variable volume
• other bespoke arrangements.

The majority of hedges are contracts for difference that are cash-settled each month based on differences between spot prices and the hedge's fixed hedge price.

Over-the-counter hedges can be settled directly between parties, or lodged with the clearing manager and settled at the same time as the parties’ electricity market transactions.

Over-the-counter hedges that are lodged with the clearing manager can also be used to reduce a party’s prudential requirement. It can be used to offset their purchases in the wholesale market.

Financial transmission rights (FTR) hedges help parties manage risk from large and unpredictable differences in spot prices between two locations, or nodes, on the national grid. This is known as location price risk.

The FTR market enhances competition in the retail and hedge markets by allowing generator-retailers to compete for customers on a national basis, rather than just in regions near where they own generation assets. It also allows other retailers to compete in areas away from where they purchase the hedges.

What is an FTR?

A financial transmission right is the right to the difference in price between two hubs or dedicated locations. The hub from which the energy originates is called the source, and the hub where the energy exits is called the sink.

Energy can flow in either direction, so for each pair of hubs there are two potential financial transmission rights. One where the first hub is the source and the other where the second hub is the source. Each financial transmission right is further split into two products – options and obligations.

How the FTR market works

The FTR manager publishes the FTR allocation plan containing the auction rules and grid design. Auctions are held twice monthly. Before and during each auction, the FTR manager checks with the clearing manager that each party holds sufficient security to validate their bids. (View FTR market disclaimer.)

The clearing manager manages the prudential security and settlement of FTR. They also publish the FTR prudential security assessment methodology.

Industry participants need to disclose risk management contract information using the electricity hedge disclosure system website. (See Part 13 of the Code.)

Industry participants can use the hedge disclosure system website to:

• view and compare hedge contract details
• produce historic contract curves to better understand the market
• view historic contracts which may assist when negotiating new hedge contracts.

Disclosures are anonymised to protect commercially sensitive information.

Every participant who submits hedge information must certify they have disclosed information accurately.

Complete and submit a hedge disclosure declaration certificate by 30 June (as per clause 13.230 of the Code).

Every participant trading electricity contracts on the ASX, or other exchange, must give permission for de-anonymised trading data to be shared by the exchange with the Electricity Authority. This helps provide quality data on risk management contracts to inform improvements to the wholesale electricity market.