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Gains still possible from voluntary market-making - EA

Friday 1st March 2019

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All the benefits available from voluntary market-making arrangements in the electricity futures market should be exhausted before new structures are considered, the Electricity Authority says.

Moving to a mandatory market as proposed by the Electricity Price Review, or adopting an incentivised scheme like that operated in Singapore, could take two to three years, authority chief executive James Stevenson-Wallace says.

While all models have their pros and cons, there may be quicker gains available from extending the existing four-participant model to include five or six players, he said. Other “wrap-around” enhancements may also be possible, including initiatives to improve general liquidity, without imposing the additional levy costs on consumers that a mandatory scheme would bring.

“I would favour doing as much as possible with the voluntary market,” he told BusinessDesk.

The futures market, operated by ASX, is key to enabling retailers without their own generation to compete by providing them a fixed price on power. Establishment of an “active” hedge market was a legislated requirement when the Electricity Authority was set up in 2010 and it has been subject to ongoing reviews since then.

The authority is planning another round of work in the 2019-2020 year.

While volumes and pricing in the futures market have improved over time, independent retailers say there is still not enough liquidity in contracts two or more years out.  Pricing also tends to blow-out at times of market stress – as they did during the price spikes in September through November.

In 2012, the authority looked at adding Trustpower, the country’s fifth-largest retailer, as a market-maker, but decided against it.

In 2015 participants again considered whether the futures market could be improved, with the EA deciding to develop a new cap product with the ASX. That is expected to be available this year.

But generators were split then on whether the voluntary market-making could be sustained as new products develop. Contact Energy and Trustpower favoured a move to incentivisation if there was to be a change.

Mercury, which was the firmest advocate of the voluntary scheme then, earlier this week said the cost of market-making should be either met by the entire market, or all participants should be required to participate, either directly or through an agent.

The government’s electricity price review last month said it favoured moving to mandatory market-making, which operates in the UK market and is being introduced in parts of Australia.

It argued that the level of obligation could be graduated based on a generator-retailer’s size and the extent of their vertical integration.

A mandatory scheme could be introduced “relatively quickly”, the panel said, and could be replaced later by an incentive-based scheme in which those firms best placed to act as market makers were paid to take on that responsibility.

“A levy on vertically integrated companies above a minimum size could help recover market-maker fees.”

Trustpower chief executive Vince Hawksworth says the relative scale of the next tier of generators – like Trustpower, Nova Energy or Pioneer Energy - remains a challenge to them participating as market-makers.

If the EA wanted to widen the pool to five or six participants, there could be industrial users with better capability to play a role, he said.

Hawksworth says he understands the desire to improve market-making and the concerns of the four big firms over the ongoing cost of providing that service.

But he is wary of trying to replicate arrangements in other electricity markets, given none of them have the particular risks around managing renewables that the New Zealand market has.

Trustpower still believes some form of incentivisation is preferable. Firms with the best assets for managing those risks would be encouraged to come up with innovative ways to operate them, or to develop new commercial arrangements around them, and they would be recompensed for doing so, he said.

Whatever happens, “the devil will be in the detail” and there are likely to be some difficult discussions to be had, he said.

(BusinessDesk)

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