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NZX edges closer to EnergyHedge deal

Wednesday 17th March 2010

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NZX looks set to pip its arch-rival, the Australian Stock Exchange, at the post for rights to establish an electricity derivatives market in New Zealand "that meets the requirements of the Ministerial Review" of the electricity market.

While ASX already offers a limited range of New Zealand electricity derivatives and has a track record in derivatives trade, heavy lobbying and a behind the scenes push by NZX to have a new clearing and settlement system in place by the required date of June 1 is swinging the pendulum in the local provider's favour.

Development of the electricity hedge market is in the hands of EnergyHedge, a company established by the five main electricity generator-retailers: Contact, Genesis, Meridian, MightyRiverPower and TrustPower.

"EnergyHedge and NZX are, as a first step, working through key milestones and market design," a statement from NZX said, with updates to the market available when it becomes available.

In an investor day presentation last week, NZX outlined plans to launch electricity derivative products in two stages, in June and September this year, and to spend around $10 million on a new clearing and settlement system, which is essential to creating a new trade in derivatives.  NZX is pinning much of its future growth prospects on derivatives, which it sees as eventually providing half the local exchange operator's income.

From June 1, electricity companies will be required to offer at least 3,000 Gigawatt hours of uncommitted future generation to try and force a more liquid and competitive electricity hedge market after years of such a market developing of its own accord.

In preparation for such involvement, NZX last year paid $13.1 million for M-Co, an electricity information and trading platform.

EnergyHedge chairman John Woods said the company was negotiating with no other parties than NZX.

In submissions on the Electricity Reform Bill at Parliament this morning, Simon Mackenzie, the chief executive of the NZX-listed network company Vector questioned the wisdom of leaving the hedge market development in the hands of generator-retailers, who had so far failed to create a liquid hedge market.

Mackenzie said it would be important for NZX to offer hedge products that were "fit for purpose", so that would-be retailers such as network companies could write long term and flexible contracts that would allow them to create balanced retail portfolios without needing to own power stations.

"The gen-tailers are unlikely to assist new entrants," said Mackenzie.  "An independent hedge market should be established."

The electricity reforms allow network companies to compete more in electricity retailing.

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