ASX pips NZX at the post for electricity derivatives market

Photo / NZ Herald

NZX's plans to base its future growth on derivatives trading took a serious knock this morning with the announcement that the country's five main electricity generators will use the Australian exchange operator, ASX, to operate the new electricity forward market mandated by Energy Minister Gerry Brownlee's electricity reforms.

NZX said the decision was "a blow for the development of New Zealand's capital markets and this country's relevance as a financial centre, which is built one product and one institution at a time."

Shares of NZX fell 1.2 per cent to $1.59 today. NZX had the front-running with EnergyHedge - the forward electricity trading market platform owned by Contact Energy, Genesis, Meridian, MightyRiverPower and TrustPower - until about three weeks ago.

EnergyHedge had announced in March that it was only dealing with NZX, and ASX had all but given up hope of being considered in what it judged was a politically motivated preference for a New Zealand-led market to develop.

The new market was supposed to be in place three days ago, on June 1, for development of a new forward market for electricity. The government adopted that timing in its electricity reforms to allow NZX time to establish clearinghouse facilities and to attract all-important clearing participants to the New Zealand market.

But in the end, despite NZX saying as recently as last week that it was still working through milestones with EnergyHedge, and the announcement that it had attracted one clearing participant to its bid, the local market operator was unable to deliver quickly enough.

The absence of several clearing participants - finance houses of global standing who guarantee trades on a derivatives platform - was a key stumbling block.

"We have really become aware of the importance of clearing participants in the last six months, and that has been a learning curve for us," EnergyHedge chairman John Woods told BusinessWire.

With clearing participants in place and New Zealand electricity derivatives already trading on the ASX, albeit at very low volumes, the Australian exchange was better able to meet EnergyHedge's need to build liquidity in the forward market by June 1 next year than NZX, Woods said.

The electricity reforms require generators to be offering 3000 Gigawatt hours of uncommitted forward load into the market by June next year.

"That will take a little time to do so, at the end of the day, the (EnergyHedge) board was pulled to an existing market that is established, has all its systems in place...and an existing set of clearing participants."

Australasian banks, including ANZ, had also preferred an ASX outcome, and their participation was important for creation of the long-sought liquidity that would allow a range of new competitors to trade and sell electricity by using the new derivatives market, said Woods. It was also likely a more liquid market would attract smaller, more innovative local players to participate.

Among such players is NZAX-listed Pulse Utilities Ltd, an electricity retailer which owns no generation assets, whose chief executive Dene Biddlecombe had been agitating for an outcome on the new market in recent days.

However, NZX said in a statement that "an Australian-based market will present significant barriers to entry for the type of small, innovative entrant who could bring genuine price competition in the New Zealand electricity market.

"This will in turn limit the benefits for New Zealand electricity users: household and industry."

NZX said earlier this year it was investing $10 million in clearinghouse facilities, and announced the software vendor for the new system last week.

Electricity derivatives were always a smaller prize than its main target - dairy industry-based derivatives and futures contracts. These are due to launch later in the year, but will also require NZX to attract several clearing participants.

In an investor presentation in March, NZX said it was anticipating more than 50 per cent of revenues coming from derivatives trading in five years time, while traditional equities trading - still a mainstay of the local exchange's income - would drop to around 40 per cent.