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 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 Australian rival, ASX, operates “the largest clearing house in the Asia Pacific by value of trade.” EnergyHedge, which will administer the new forward market could also seek to establish clearinghouse facilities of its own.

ASX established the first NZ electricity futures and options products in 2009, and 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. Greg Adlam from Carbon Energy Partners, which EnergyHedge has contracted to provide market development services says “EnergyHedge is sitting on an NZX-owned platform at the moment. 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 the existing EnergyHedge platform has been running in its current form. ASX says the creation of market maker obligations would fill “the only gap between the Ministerial decision and ASX’s existing product offering. 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 NZ electricity futures and options market.”

The “big five” local power companies announced before Christmas 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.” EnergyHedge chair Gary Pemberton says “the new company formalises what had previously been a multilateral arrangement within the electricity industry. 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 $13.1m. The contract is understood to be subject to a 30 day termination clause.”

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