Jul 2008
Locational price risk refers to unpredictable movements in the price for electricity at different node varies (locational prices) throughout the country. Locational prices are largely driven by transmission constraints that reflect many complex and uncertain aspects of the electricity system. Locational prices are also affected by transmission losses, which are more predictable.
Participants in the wholesale electricity market are currently limited in how they can manage locational price risk. In general, a purchaser's exposure to locational price risks depends on their volume of hedge contracts and level of self-generation (if any), and on where those contracts and generation units are located relative to the location of their load. Hedge contracts may not provide effective protection against this type of locational price risk.
The main source of locational price risk occurs between the two islands - inter-island locational price risk - which accounts for approximately two thirds of all locational price risk. The other third arises within each island - within island basis risk (also known as intra-island locational price risk).
Solutions are sought for both inter-island and within island locational price risk to provide participants with mechanisms to manage their locational price risks.
EMAIL: info@ea.govt.nz
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