ASX in box seat to run NZ energy hedge market
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