Hedge market depth indicates confidence in electricity

Hedge market depth indicates confidence in the electricity market
4 October 2016

The electricity hedge market continues to perform well with levels of unmatched open interest (UOI) in exchanged-traded instruments strong in 2016, following a peak in late 2015.

In September 2016 UOI was at just over 4,000 GWh - a figure equivalent to the electricity consumed by approximately 560,000 average households over one year.

Chief Executive of the Electricity Authority Carl Hansen says “Open interest is a measure of ‘skin in the game’ and is an indicator of the depth in the hedge market. These figures indicate there is good depth in the hedge market at transparent prices.”

UOI measures the total number of exchange-traded hedge contracts that are yet to expire, adjusted for trades which offset a traders’ position (the number of net buys or net sells is what determines a trader’s level of ‘interest’ in the market).

Mr Hansen says, “Generally, greater depth in a market results in more efficient pricing. We are confident that the depth in this market means more efficient futures prices for electricity and helps electricity retailers enter and compete in the market—which is good news for consumers.”

The Australian Securities Exchange (ASX) is preparing to list two new cap products in 2017. Cap products allow electricity purchasers to pay an upfront premium to protect themselves against unexpected increases in spot prices.

Electricity generators, in particular those who generate mostly in a ‘dry year’, have an incentive to sell cap products because their spot market revenue enables them to pay-out on those products during dry events. Electricity purchasers that can reduce load during high prices (called ‘demand response’ parties) are another potential seller of cap products.

Mr Hansen says “Once these cap products have been introduced, we expect to see a rise in combined UOI for all exchange traded instruments because caps offer a different mechanism for spot market purchasers to manage risk.

A deeper hedge market, with more options for retailers to manage their risk position, could mean better prices for consumers. “

www.emi.ea.govt.nz/r/ffcns

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