Power's big four move to manage unstable prices

By BRIAN FALLOW


Plans are afoot to develop a financial market to manage the risk of volatile electricity prices in the same way as foreign exchange or interest rate variability.

The four big generator/retailers, Contact Energy, Genesis Power, Meridian Energy and Mighty River Power, have commissioned consultancy Taylor Duignan Barry to set up an electricity derivatives market.

The embryonic market went live last month as a trial with the big four trading among themselves. Progress is to be reviewed in mid-February.

It is internet-based and can be seen at www.energyhedge.co.nz.

Taylor Duignan Barry's principals have backgrounds in finance rather than the electricity sector.

Geoff Taylor, who is running the project, headed the Dairy Board's corporate finance and treasury operations, and Pat Duignan ran the Treasury's Debt Management Office and later managed the treasury, corporate finance and tax areas for Telecom.

Earlier attempts to develop an electricity futures market have struggled to get the generator support necessary for liquidity.

This time may be different because of the advent next month of the Electricity Commission. Part of its brief is to foster a transparent and liquid hedge market.

Such a market, the draft Government policy statement on electricity governance says, would enable participants to manage their risks and facilitate retail competition.

The commission will be empowered to require generators to participate in a hedge market to a specified minimum extent and/or to post buy and sell hedge prices.

For the energy hedge market to succeed it will also have to persuade major industrial users that it is more than just a generators' club and that it will not be gamed at their expense.