Stress tests
Disclosing participants need to apply a set of standard stress tests to their market position and report the results.
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About stress tests
The stress testing regime requires disclosing participants in the wholesale electricity market to apply a set of standard stress tests to their market position. They need to report the results to their Board and to an independent registrar appointed by us.
Disclosing participants are participants who:
- consume electricity that is conveyed to them directly from the national grid
- buy electricity from the clearing manager.
Application of stress tests
Stress tests are intended to fit with the arrangements that industry participants already have in place for monitoring their exposure to spot price risk.
Stress testing applications are in three broad categories:
- Quantitative assumptions - where we specify matters that must be followed. These relate primarily to the average price projections to be used in base case and stress test scenarios
- Methodological direction - where we set out a methodology that we expect participants to follow, for example for locational price adjustments. In this category, we publish summarised quantitative information, but participants may generate their own adjustment factors provided they remain consistent with the broad approach specified by us
- Qualitative direction - where we provide direction of a non-quantitative nature. Participants must compile bona fide estimates consistent with this direction.
Read the following base case, stress tests and application notes for guidance.
Current scenarios
One test measures exposure to energy shortage events (sustained high spot prices).
The second test simulates conditions possible during a relatively brief (8 hour) but unexpected shortfall in generation capacity during a time of relatively high demand.
The stress tests and associated base case scenarios are set out in Tables 1 and 2.
Table 1: Energy shortage stress tests
| Key | Test scenario | Base case |
|---|---|---|
Reference code |
E1 |
EB |
Nature of event |
Sustained national drought (no public conservation campaign) |
Base case for energy tests |
Key features of scenario |
Average spot prices are $400/MWh for the coming quarter (time weighted average at Otahuhu) |
'Average' conditions apply |
Average level of prices |
$400/MWh (time weighted average at Otahuhu) |
$100/MWh (time weighted average at Otahuhu) |
Table 2: Capacity shortage tests
| Key | Test scenarios | Base case |
|---|---|---|
Reference code |
C1 |
CB |
Nature of event |
Unexpected short-term capacity shortage at time of high demand |
Base case for capacity tests |
Key features of scenario |
Spot prices are $10,000/MWh across 8 peak hours of day, for 1 day |
'Average' conditions apply |
Average level of prices |
$10,000/MWh (time weighted average at Otahuhu) |
$100/MWh (time weighted average at Otahuhu) |
Large scale consumer stress tests
Many large consumers have supply contracts with their retailer that links their price to the wholesale spot price. This link means these large consumers can be directly affected by high prices in times of wholesale market stress.
Large consumers can apply a modified set of stress tests to help them assess their risk position. These voluntary stress tests can act as a guide to help large scale consumers understand how their electricity bills might vary if they are exposed to spot prices. Consumers can also see how their electricity costs during such an event would change if they were hedged for a smaller or greater proportion of their electricity use.
There are two stress test scenarios that allow consumers to compare their financial performance under the stress test scenarios to a business-as-usual or 'base case' situation.
Participants' obligations
The following guidance is for disclosing participants on what and how to provide for stress tests.
What is a spot price risk disclosure statement?
Disclosing participants must prepare a spot price risk disclosure statement quarterly to the registrar, which includes the following information:
- annual net cash flow from operating activities, as set out in the most recent audited financial statements
- level of shareholders' equity, as set out in the most recent audited annual financial statements
- for each stress test:
- the estimated value of electricity that it expects to sell to the clearing manager during the period that the stress test is applied, minus the estimated value of that electricity when the base case is applied
- the estimated value of electricity that it expects to purchase from the clearing manager during the period that the stress test is applied, minus the estimated value of that electricity when the base case is applied
- the estimated projected net cash flows from operating activities when the stress test is applied, minus the estimated value of those cash flows when the base case is applied
- a statement as to whether the disclosing participant has an explicit risk management policy in respect of its exposure to the wholesale market and, if so, the target cover ratio for each stress test calculated in accordance with a method published by us.
The registrar collates these results and provides them to us in a format that ensures individual participants are not identified. We then publish the results on the EMI website.
Disclosing participants subject to the stress test regime can review these reports and compare their exposure to that of other participants.
How to submit a statement?
To submit your spot price risk disclosure statement, go to the Stress Test Registrar.
To request log in details, email stregistrar@nzx.com
Statements must be submitted at least five business days before the start of the quarter to which the statement relates.
What is a spot price risk certificate?
Clause 13.236F of the Code requires each disclosing participant to submit a certificate to us that:
- verifies their Board has considered the disclosure statements for the certification period and the projected change in net cash flows from operating activities as a result of applying the stress tests
- confirms that they have provided information about the stress tests to any of their customers who entered into or renewed a supply contract with any spot price exposure, so as to allow the customer to consider their own stress test outcomes.
How to submit a certificate?
Complete and return the spot price risk certificate form.
If you have any questions about certificates, contact stregistrar@nzx.com.
Consolidating disclosure statements
Disclosing participants may apply to the Electricity Authority to consolidate their spot price risk disclosure statements. Here is some more information on this process.
Why consolidate?
It can be more efficient for two or more participants to submit one set of consolidated spot price risk disclosure statements.
Who can consolidate?
Disclosing participants can consolidate their disclosure statements.
Under Part 1 of the Code, ‘disclosing participant’ means either a person who:
- consumes electricity that is conveyed to the person directly from the national grid; or
- who buys electricity from the clearing manager.
Note that if a notice under clause 1.5(4) of the Code is in force, ‘Participant A’ to that notice is the person who buys electricity from the clearing manager. This may change the requirements to submit disclosure statements.
Any qualifying criteria?
The criteria for allowing consolidation are:
- the first party's risk must be wholly absorbed by the second disclosing party
- this must be demonstrated by an arrangement covering electricity purchase between the parties
- in the case of parties not closely related, the arrangement must be a written contract between them
- a director, chief executive or chief financial officer for each party must certify existence of the arrangement or contract and consent to the consolidation on behalf of the party.
What's the process?
- Participants submit an application - at any time in the reporting cycle participants can email marketoperations@ea.govt.nz with 'Stress testing consolidation application' in the subject line. The email should:
- describe the extent to which the participants comply with each of the qualifying criteria above
- include attachments, as necessary, to support the application.
- Electricity Authority consider the application - according to the qualifying criteria and either approve or decline it. If the application is declined, we will notify the parties stating our reasons. If the application is approved, we will:
- notify the parties of the approval and any conditions
- advise the registrar that a consolidated statement is expected from one of the parties and that the other party is exempted.
If circumstances change and the participants no longer qualify, we must be notified as soon as practical. Our approval is automatically withdrawn if the criteria are no longer met.
We will advise the registrar and confirm the change in writing to the relevant participants.
Stress test question?
Feel free to contact marketoperations@ea.govt.nz with your questions or for support.