Fast-tracked electricity reforms put ASX in box seat for hedge market operator
by Pattrick Smellie
Dec. 22 (BusinessWire) - NZX Ltd's contract to manage the country's rudimentary electricity hedge market is threatened
by the speed with which Energy Minister Gerry Brownlee expects a deeper, more liquid hedge market to be established.
The five major power generators have until June 1 next year to establish a new hedge market for electricity trading.
Among the reforms' requirements will be a new clearinghouse to act as counter-party for all trades.
NZX is not currently able to offer a clearinghouse facility, whereas its arch rival, the Australian Securities Exchange
(ASX), "operates the largest clearing house in the Asia Pacific by value of trade", ASX said in written answers to
questions from BusinessWire.
New Zealand electricity industry participants confirm the ASX is a front-running alternative operator for the new local
hedge market, although EnergyHedge itself could also seek to establish clearinghouse facilities.
ASX established the first New Zealand electricity futures and options products earlier this year, although at this stage
trading has been in very low volumes. NZX has similar electricity derivative plans, but dairy industry derivatives have
been prioritised over opportunities in the electricity market thus far.
"EnergyHedge is sitting on an NZX-owned platform at the moment," said Greg Adlam from Carbon Energy Partners, which
EnergyHedge has contracted to provide market development services. "What we have to consider is how does it
(EnergyHedge) meet the timeframe set down in the Ministerial review?"
The revamped hedge market will require all large electricity generators to be "market makers" to force liquidity into
the market, a goal which has proved impossible in the six years that the existing EnergyHedge platform has been running
in its current form.
The creation of market maker obligations would fill "the only gap between the Ministerial decision and ASX's existing
product offering", ASX said in its regular electricity futures and options trading report, issued yesterday.
"Several financial market participants actively trading electricity futures and options at ASX are very positive about
the outcome of the (Brownlee) review and the prospect for their participation in the New Zealand electricity futures and
options market."
The "big five" local power companies announced yesterday that they had reconstituted EnergyHedge as a limited liability
company on August 1 to "operate the market under a more formalised structure designed to reinforce the governance,
increase the transparency and to further develop the market".
"The new company formalises what had previously been a multilateral arrangement within the electricity industry," said
EnergyHedge chair Gary Pemberton. "The previous structure required participants to meet certain obligations which
limited the opportunity for others to join the market.
NZX runs the current EnergyHedge platform under a contract it assumed when it bought the MCo electricity trading
business in April for $13.1 million. The contract is understood to be subject to a 30 day termination clause.
Inquiries with numerous electricity industry sources by BusinessWire suggest that unless there is leeway in the
government's reform timetable, NZX will struggle to create clearinghouse facilities in time for June 1.
That opens a potentially lucratived opportunity for ASX, given the government's determination to force a liquid
electricity hedge market that will require the involvement of major electricity users, financial institutions and
traders if it is to succeed. The power companies are equally committed to its success because Brownlee is threatening
mandatory hedging and other regulation if the latest effort to create wholesale electricity market competition is
another failure.
The market maker requirement in the Brownlee reforms will force the big players to offer no less than 3000 Gigawatt
hours of "unmatched open interest" into a new forward market.
However, some timing issues are unclear. The Electricity Reform Bill, introduced into Parliament last week, gives the
Minister of Energy power to make rules in this area is the new Electricity Authority does not do so within a specified
time. The EA replaces the Electricity Commission and will not be established until after the Bill becomes law late next
year, well after the June 1 hedge market requirements come into play.
NZX fell foul of the local electricity industry earlier this year when it tried to claim ownership of the pricing
information available through MCo, a suggestion quashed by the Electricity Commission, which was paying for the data and
expected it to be publicly available.
NZX had not responded to requests for comment at the time of writing and CEO Mark Weldon declined comment on the issues
in an interview with BusinessWire last week. ASX was only willing to respond to written questions, indicating the
significant commercial sensitivities around the issue.
(BusinessWire) 09:02:10