Archive - Within-island basis risk

Before making a decision about expanding the FTR market, we sought to gain a representative sample of participant set-up and on-going costs of participating in the current two node FTR market, and subsequent potential expansion into a multi-node market.

We requested relevant cost information from existing participants in the FTR market, and also sought to gain an insight from parties who may have been considering entering the FTR market.

We asked parties to provide the following cost information by 23 September 2013:

• Establishment costs
• IT systems development and implementation
• Training
• Staff time
• On-going costs:
• Additional Staff/staff time equivalent
• Systems maintenance
• Cost (not value) of prudential security.

Losses (or gains) from trading of FTR’s, changes in LCE (Loss and Constraint Excess) rebate levels, opportunity cost of other developments are explicitly excluded.

We also sought the following information at an aggregate level:

• An estimate of establishment costs and annual on-going costs for participation in the 2 node FTR market.
• An estimate of establishment costs and annual on-going costs for participation in a multi-node FTR market with the following characteristics and with 1 key variable:
• First Auction 6 months after finalised specifications, nominally August 2014.
• Extra points are nodes.
• Auction runs point to point.
• Both options and obligations are traded.
• Auctions run as per 2 node market.

Key variable:

• 3 additional nodes.
• 7 additional nodes.

On 25 June 2013, the Authority released a consultation paper, ‘Within-island basis risk: Proposed approach’ proposing a multi-point FTR as the preferred approach to manage WIBR. The proposal is to add between 5 and 20 new FTR nodes. The Authority does not consider that a multi-point FTR will not completely solve WIBR, some risk will likely remain and new risks may develop over time. As a result, the Authority proposes to periodically review the nature of WIBR.

The preferred option of a multi-point FTR does not preclude other options (such as zonal pricing or LRAs) from forming part of the solution to WIBR in the future, should a material level of WIBR be identified as part of a periodic review.

The Authority prepared the following two papers’ in the course of developing the proposed approach consultation paper:

• “Within-island basis risk: Characterising the risk”, which proposed a framework characterising the location and nature of WIBR.
• “Within-island basis risk: Quantifying the risk”, which applied the framework in order to quantify WIBR. Much of the statistical analysis in this paper supports the recommendation in the proposed approach consultation paper.

 As a result of this process the Authority wrote to the FTR Manager on 13 October 2013 about further development of the FTR market.

We commissioned Energy Link Ltd to analyse the extent of WIBR. Energy Link Ltd produced a report titled “Further analysis of within-island basis risk”, which discusses options for, and recommends an approach to, assess the level of WIBR.

The analysis of WIBR concluded with a report titled “Within-island basis risk”. This report identified regions (or ‘clusters’) within which little or no WIBR was observed, examined the cause of WIBR between the regions and made projections about how WIBR may evolve over time.

The Authority’s assessment of the level of WIBR concluded in June 2012.