Fast-tracked electricity reforms put ASX in box seat for hedge market operator

Tuesday 22nd December 2009

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.co.nz

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