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Electricity regulator targets futures market liquidity

Friday 21st October 2011

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The Electricity Authority has tweaked key features of the newly reformed electricity market to encourage more liquidity, and is threatening to publish the prices underpinning the so-called “virtual asset swap” contracts between state-owned power producers if the SOE’s themselves will not.

Indications are that the state generators, Genesis Energy, Meridian Energy, and MightyRiverPower, will find a way to publish enough detail of electricity hedge contracts totalling 3,300 Gigawatt hours, which they were required to sign as part of electricity reforms to force greater nationwide retail electricity competition.

The move comes as the EA acknowledges that key market players have fallen well short of the benchmark 3,000GWh of “open interest” contracts on the new ASX-administered electricity futures market by last July.

Instead, open interest contracts have grown to just 800GWh in October.

However, EA chief executive Carl Hansen told a media briefing the EA was pleased with progress, especially as four major generators were working to new market-making norms, which will narrow to a maximum spread of five points the buy and sell prices offered in the contracts.

Previously, spreads of up to 10 points were permitted and the gap was judged a reason why more trading activity was not occurring on the newly fledged market, which the EA is promoting to make future prices of wholesale electricity more publicly visible than they have ever been in the past.

In times of extreme price volatility, the five point spread rule can be relaxed, but the authority was confident competing spread offers would be less than 5 percent, to the benefit of major electricity buyers.

However, the market needed more transparency, which could be achieved by publishing the electricity pricing elements of the so-called VAS contracts, instituted in recent electricity reforms which also saw a physical swap of assets between Meridian and Genesis.

The virtual asset swaps involves Meridian selling electricity by way of financial hedges, up to 450 GWh annually to Genesis and 700 GWh annually to MRP in the South Island, and buying the same volumes of electricity from Genesis and MRP in the North Island.

“What we’re saying is that from the EA’s perspective, the 3,000GWh target has been largely achieved, but we don’t have the transparency we need … for confidence,” said Hansen.

The EA has also reset target dates for 3,000GWh of open interest contracts to 1,000GWh by Dec. 1, 2,000GWh by March 1 next year, and 3,000GWh by June 1.

Its alternative for missing the original target would have been direct regulation, which electricity generators have been keen to avoid, hence their willingness to agree to measures intended to try and kick liquidity into the electricity futures market, which critics have long feared will struggle for critical mass.

However, the EA says it has received strong indications that “financial intermediaries”, most likely including the ANZ and Westpac banks, are becoming more confident about entering the futures market, partly because of moves such as this and others also announced today.

Hansen revealed the EA has finished a long-stalled project to introduce a new “despatchable demand” regime, including a demand side bidding and forecasting system, which will also give major users more ability to manage their electricity costs, and to contribute load into the system to reduce wholesale prices during price spikes.

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