Hedge market development

The Electricity Authority initiated work to review and evaluate the progress made in the development of an active market for trading financial hedge contracts for electricity, and introduce changes to address any shortcomings.

Developing and strengthening the electricity hedge market is an important project. The objective is to provide more transparent and robust forward price signals, and an electricity market that is more competitive, being readily accessible for existing participants and purchasers, as well as for new entrant generators and retailers.

The Authority has been encouraging the development of trading in New Zealand electricity futures and options on the Australian Securities Exchange (ASX) and pursuing several other initiatives designed to support the development of a more robust and transparent hedge market.

<LINK: NZ Electricity Hedge Contracts>

Market Brief

Hedge market surveys to gather information on the scope on operation of the hedge market were undertaken by the Commission in 2005, 2007 and 2009. These helped to identify key problems and provide guidance on developing initiatives aimed at improving the New Zealand hedge market.

 A number of other initiatives have been introduced and others are under development, to improve the market for managing spot price risks.

1. Locational Price Risk Hedges
2. Publication of risk management contract information
3. Model Master Agreement - a standardised schedule for the purchase and sale of electricity derivative contracts
4. Review of prudential and settlement arrangements
5. Disclosure of relevant wholesale market information

Hedge Market Development Steering Group

The Hedge Market Development Steering Group (HMDSG) was formed to investigate and provide advice on issues relating to electricity and transmission hedges. This group is now inactive.

Initial consultation

The HMDSG considered in detail the issues relating to price risk management that affected the New Zealand electricity market. The HMDSG created an Overview Paper and a companion Technical Paper for the Commission that outlined the work the HMDSG had undertaken and conclusions it had reached. The reports also covered the HMDSG's recommendations on the initiatives that should be implemented and the procedures and timelines within which this should be done.

The HMDSG Overview and Technical paper were released for consultation on 25 August 2006. The original consultation webpage is available for historic information. During consultation the HMDSG held a series of three industry briefings where members of the HMDSG presented their analysis.

Hedge market consultation 2006

 Submissions were received from 22 organisations that represented a diverse range of parties with an interest in New Zealand's electricity industry.

The paper below provides a summary of submissions on the Hedge Market Development Issues and Options paper, and presents the Hedge Market Development Steering Group's analysis of the submissions.

Development initiatives

In the initial consultation paper the HMDSG identified a package of initiatives that it considered likely to promote a significantly better functioning market for managing spot price risks. After reviewing submissions, the Commission considered that the initiatives would provide a useful platform for further consideration and development. For initiatives requiring rule changes, the Commission consulted on the specific proposals in accordance with the requirements of the Electricity Act 1992.

The proposed initiatives and progress on their development is provided below:

1. Transmission Hedges
2. Publication of risk management contract information
3. Model Master Agreement - a standardised schedule for the purchase and sale of electricity derivative contracts.
4. EnergyHedge - this initiative involved the Commission inviting the owners of EnergyHedge to develop EnergyHedge's services.
5. Centralised publication of outage and fuel - the Commission centralised outage and fuel information and converting information into GigaWatt-hours so that it is meaningful to risk management market participants.
6. Regular Survey - the Authority will undertake a regular survey of electricity market participants to ensure improvements in hedging are on track.
7. Hedge market training providers - the Authority is promoting greater purchaser understanding of electricity price risk management.

Report by Cybele Capital Limited:  The Development of a Liquid Electricity Hedge Market in New Zealand

The Commission requested that Cybele Capital Limited prepare a report to provide opinion on the following topics:

• A description of the key characteristics of a liquid hedge market that could be reasonably attained in New Zealand;
• An assessment of the Energy Minister's announced changes that relate to the hedge market;
• A description of any additional market developments that should occur to improve hedge market liquidity;
• Comments on key linkages with Market Development Programme (MDP) projects; and
• An opinion on the Commission's role in introducing the changes outlined above.