• Asset swaps too hard
• Hedging as proposed won’t work
• Market maker scheme favoured

Electricity generators will be obliged to be two-way price makers in a new, open access futures-style market emerging as a favoured “third way” option for concluding Energy Minister Gerry Brownlee’s electricity market reforms. The new option follows the formal consultations by the Electricity Technical Advisory Group, led by NZIER economist Brent Layton. There have been dramatic twists and turns behind the scenes on the outcome of the review, with the surprise backing of asset swaps by the Major Electricity Users Group briefly improving the option’s chances, while generator-retailers bitterly opposed to the mandatory hedging option proposed as the alternative.

Once officials, especially in the DPMC, realised asset swaps were too difficult, they latched onto mandatory hedging, leading to a flurry of lobbying in recent weeks. What is emerging now resembles mandatory hedging as it requires electricity generators to actually make a market, in which any other participant can trade.

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If adopted, the move looks good news for the existing EnergyHedge product, the ASX, which has a prototype electricity derivative trading, and the NZX, which is also looking to launch a tradeable energy derivative. The Designated Market Maker approach would be a far less blunt instrument than mandatory hedging, which requires all generators to make a certain volume of generation available in a market pool. This idea has failed to fly, partly because it would require a regulator to the make the market.
Genesis is among those to oppose mandatory hedging, calling it “heavy-handed intervention at direct odds with a market approach,” with a high risk of regulatory creep, to the eventual disadvantage of the consumer since ever higher cost and risk would be priced into both the wholesale market and retail tariffs. DMM schemes are in use in other countries to stimulate market liquidity, where registered market-makers provide continuous bid and ask prices in futures product, such as world equities and financial markets.
If adopted here for electricity, the DMM approach represents a victory for an underlying belief that markets are better able than regulators to meet national security of supply needs at lowest cost. However, NZ Energy & Environment Business Week is told that this is the last chance for the electricity industry to make its broken market work, and that mandatory hedging will remain a live threat. If a DMM scheme fails, mandatory hedging would be applied.

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