Big electricity users welcome new 'transparent' market

Photo / Mark Mitchell

Major electricity users and the Government have welcomed an agreement between ASX and the five big generators to develop a futures and options market in electricity.

The absence of a deep and transparent forward market is a longstanding structural shortcoming of the New Zealand electricity sector.

Such a market should make it easier for large industrial users to manage price risk and also remove one barrier to companies (including lines companies) with limited generating capacity of their own getting into the electricity retailing business.

"It will enable new-entrant retailers and large industrial consumers to gain access to hedged electricity on terms similar to the large power companies, instead of being exposed to the volatile spot market or managing risk through the current illiquid and opaque hedge market," Major Electricity Users Group executive director Ralph Mathes said.

As part of the package of electricity industry reforms before a select committee the generators will be required to participate in such a market on a scale that will provide it with some liquidity.

One of the reasons previous attempts to develop such a market have foundered is the difficulty of dealing with "basis risk" - bottlenecks in the national grid which give rise to price differentials and create in effect not a single national market, but a series of regional ones.

The futures market is expected to address this by offering contracts for three different nodes, Otahuhu, Whakamaru and Benmore.

What the ASX futures market brings to the table is that it already has a number of "clearing participants" - typically, large international banks or brokerages which act as intermediaries, ensuring everyone gets paid and providing anonymity for market participants.

"There are about 12 who would clear about 95 per cent of the global futures industry and they all currently participate in the [ASX-owned] Sydney futures exchange clearing house," ASX general manager energy markets, Anthony Collins, said.

"These clearing participants provide scale and existing infrastructure so they can roll out access to the market at very low cost," he said. "For them it's just another product down the same pipeline."

Collins said the Australasian banks were already active in the Australian electricity market, boosting its liquidity. The commitment from the five generator/retailers to be market makers, providing both bids and offers, gave the banks comfort they would be able to get out as well as in, he said.