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Policy Statement on financial transmission rights

Electricity: new Govt Policy Statement on financial transmission rights

The government is requiring the electricity industry to make new arrangements to manage wholesale electricity price risk caused by transmission line congestion.

Minister of Energy Pete Hodgson today released the Government Policy Statement on Electricity Financial Transmission Rights. The statement sets out the Government's expectations for the development of financial transmission rights (FTRs), which can be used by wholesale market participants as protection against price spikes caused when transmission lines operate at full capacity.

"This Statement has been the subject of extensive consultation with the electricity industry and wholesale electricity purchasers," Mr Hodgson said. "It is an important step forward for the wholesale market.

"The availability of FTRs will increase competition between electricity retailers and should improve the range of choices available to electricity users. FTRs will also improve the incentives for market participants to invest in transmission assets that are necessary for a secure electricity supply and future economic growth."

The Policy Statement establishes a set of guiding principles and a framework for the development of FTRs, including an auction market for trading them. It also specifies how the regime is to be governed. An 'FTR Group' of stakeholders will lead the development of the regime and will report to the minister by the end of February 2003 on a timetable for its implementation.

The price of wholesale electricity changes every half-hour and is different at different locations around the country. Constraints in the transmission grid and losses of electricity during transmission can cause the wholesale spot price at one location to be significantly higher than another location - often only temporarily. An FTR is a financial instrument that pays the holder the price difference between two agreed locations for an agreed volume of electricity.

"Electricity retailers who sell electricity to customers at one location and generate electricity at a different location will be able to use FTRs to manage the risk of price differences emerging between those two locations," Mr Hodgson said. "The ability to manage this risk will encourage retailers to enter new markets further away from their generation assets, resulting in more competition and choice for small consumers. The regime will also allow major electricity users who purchase wholesale electricity to achieve a greater level of certainty over their costs of production." The statement released today supplements the Government Policy Statement: Further Development of New Zealand's Electricity Industry released in December 2000, which included support for the development of a financial instrument to manage transmission price risk.

Further information on FTRs is available on the Ministry of Economic Development's website: http://www.med.govt.nz/ers/electric/ftr/gps/index.html

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