Hedges are referred to in the Code as risk management contracts.

Hedges are either agreed upon directly between the parties (known as over-the-counter - OTC) or purchased as derivatives on the Australian stock exchange (ASX) electricity futures market.

There is also a separate specialised financial transmission rights (FTR) market to help parties manage the risk they face from large, unpredictable differences in wholesale electricity prices between the North and South Islands.

Over-the-counter (OTC) hedges

There are several different over-the-counter hedge types such as:

  • contracts for difference (CFD)
  • fixed price fixed volume
  • fixed price variable volume
  • options.

Each type is designed to manage different types of risk, and are described in more detail in our guide to managing electricity price risk.

Our guide to managing electricity price risk is designed to build knowledge and understanding about how to manage electricity price risk, and help retailers and consumers understand the pros and cons of buying electricity at spot prices compared with other, more stable alternatives.

Over-the-counter hedges can be settled directly between the 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 as it can be used to offset their purchases in the wholesale market.

ASX electricity futures

The ASX futures market trades futures and options at two nodes – Otahuhu 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 ASX is continually looking at developing new hedge products to help parties better manage risk.

ASX electricity futures market website