Efforts by local sharemarket operator, NZX, to establish electricity derivatives trading are foundering on its failure so far to find the backing of a global general clearing participant to stand behind trading on its proposed new derivatives market platform. This is apparently leading to a hold-up in its plans to launch dairy derivatives in June and September, but is creating a more politically pressing issue for the electricity generators as they target a June 1 start date for the revamped EnergyHedge wholesale electricity derivatives market, required under Energy Minister Gerry Brownlee’s energy reforms.

Brownlee’s attention has been diverted to the mining debate in recent weeks, but he has asked officials to investigate NZX’s proposal to the five owners of EnergyHedge – Contact, Meridian, Genesis, TrustPower, and MightyRiverPower – to consider backing the market themselves, at least until a global player can be enticed to support NZX’s ambitious plans to make derivatives the most important source of income for the local bourse over the next five years. But it remains to be seen how the boards – let alone shareholding Ministers and Treasury bean-counters overseeing SOE performance – will react to proposals the generator-retailers themselves become guarantors for electricity derivatives trading. In doing so, they would be taking on potentially open-ended liability for financial instruments whose value could swing around dramatically, creating another IFRS-style distraction for CFO’s and shareholders alike to deal with.

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More importantly, if no external counter-party can be found to guarantee trading on the EnergyHedge platform, it’s very difficult to see how it will ever become the kind of liquid market the Brownlee policies seek to create. If the market takes off as intended, volumes could create exposures no gen-tailer would want, especially since they would effectively be carrying risks on their balance sheets they are seeking to offset in the market. For the moment, EnergyHedge is dealing only with NZX. But its persistence with the local alternative is starting to look more politically than commercially driven, in the expectation Ministers would rather see power companies back attempts to strengthen local capital market infrastructure. This may be true, but not at the cost of electricity market hedge market liquidity – the holy grail of wholesale market efforts for some years now.

Derivatives and futures markets don’t work anywhere without a solid, global clearing participant through which all trading passes, creating certainty for participants their funds won’t disappear during a period of unforeseen extreme volatility. To have a credible shot at success, the new electricity derivatives market needs this and, for the moment, the only obvious supplier is across the Ditch with the ASX.

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