Big challenge to make electricity hedge market work

Friday 18th December 2009

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.co.nz

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