Risk management through the transition
Financial transmission rights
Financial transmission rights is a key part of hedge market developments. Hedge markets is an umbrella term for all the markets that industry participants use to manage risks.
Overview
The market for financial transmission rights (FTRs) was created in 2013. Financial transmission rights are designed to assist market participants to manage their locational price risk (LPR) and benefit consumers by enabling greater competition in the wholesale and retail electricity markets. We undertake periodic reviews of the FTR market to ensure it is operating as intended.
On 6 June 2023, we published a decision paper about whether the FTR market settings are fit-for-purpose, following a public consultation. We found that the FTR market is working broadly as intended to assist market participants to manage their locational price risk, although questions remain around the efficiency of the funding design.
We will conduct further analysis to determine whether using both loss and constraint excess and auction revenue to fund the FTR market is to the long-term benefit of consumers.
Timeline
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1 November 2014
Decision —Code amendments for FTR reconfiguration auctions
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10 March - 8 April 2014
Consultation —Proposed Code amendment for FTR reconfiguration auctions
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10 December 2013 - 10 February 2014
Consultation —FTR settlement in event of a delay to final prices
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12 June 2013
Implementation —First FTR auction
Project background
The Electricity Authority began developing a solution to inter-island locational price risk in 2008. Locational price differences arise from the nodal nature of New Zealand’s electricity market and its transmission system, which is subject to:
- losses - energy losses increase as distance increases; scale is predictable
- constraints/congestion - where a shortage in the transmission capacity to supply the demand leads to more expensive sources of generation being used to supply electricity demanded; constraints are difficult to predict relative to losses
- risk of failure of critical elements - generation or demand reduction must be on standby to cover an event, referred to as 'instantaneous reserves’.
These factors can result in large and sometimes unpredictable price differences across the electricity grid that result in locational price risk. Locational price risk affects generators and purchasers. Without an adequate management tool, it can lead to lower levels of competition in wholesale and retail electricity markets.
FTRs are sold in monthly blocks at designated locations, called FTR 'hubs', by the FTR manager via a blind auction process. The first FTR auction was held in June 2013.
Other projects in Risk management through the transition
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Making the electricity futures market more efficient.
Over-the-counter market
Improving the operation and efficiency of the over-the-counter market.
Pricing in a renewables-based electricity system
How price discovery would work for the wholesale electricity market under a renewables-based electricity system.