Big challenge to make energy hedge market work
Big challenge to make electricity hedge market work
by Pattrick Smellie
Dec. 18 (BusinessWire) - Requiring electricity generators to make around 7% of their total production available to make a liquid electricity hedge market will be "difficult to achieve", says Wellington broking house McDouall Stuart's head of research, John Kidd.
While McDouall Stuart welcomed the reforms announced last week by Energy Minister Gerry Brownlee as pro-consumer, there was valid concern about the achievability of making 3000 Gigawatt hours of future energy available through a voluntary "market maker" hedge market policy.
The market maker approach gives
electricity generators the chance to create a liquid hedge
market after years of stalled efforts. However, Brownlee has
made it clear the government will consider regulating
mandatory hedging - an outcome widely opposed in the
industry - if it is unable to produce liquidity without such
intervention.
"Although this (3000 GWh) represents
only around 7% of total production, existing system
tightness and new obligations on generators to come to terms
with changes to their own internal and external positions
will make this difficult to achieve," the McDouall Stuart
commentary says.
Kidd also predicts that independent
electricity retailers will be relieved during select
committee hearings next year on the Electricity Reform Bill
of the proposed obligation to compensate customers in the
event that energy savings campaigns are required owing to
hydro catchments running low.
The report also
speculates that Meridian may decide not to integrate the
diesel-fired Whirinaki peaker station into its portfolio,
despite the reforms handing the Crown-owned plant to the
state-owned enterprise which has invested heavily in a
renewables-only brand, which Kidd says is "torpedoed" by the
Brownlee reforms.
McDouall Stuart identifies
Meridian as "the biggest loser" in the shake-up, and Genesis
the big winner.
The impact of the reforms on the two
NZX-listed generator-retailers, Contact Energy and
TrustPower, is judged to be negative, because both will face
tougher competition in the South Island, where retail
margins are relatively high, and because of the liquid hedge
market requirements which could "weaken generator trading
positions and strategies".
The listed network
operator, Vector, may gain from the reforms by being able to
enter electricity retailing with access to hedge
contracts.
The moves should also be positive for NZX
Ltd, "particularly given its (in retrospect, inspired)
acquisition of specialist electricity market operators MCo
earlier this year".
"An obligation on generators to
establish and participate in a large volume hedge market by
mid-2010 plays into NZX's hands."
NZX has been
developing energy derivatives market concepts over the
course of this year. While the ASX has already introduced a
New Zealand electricity derivative product, which has yet to
attract significant trading volumes.
(BusinessWire)
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