Power regulator eyes end to voluntary futures market

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Taking a more commercial approach to market-making in the electricity futures market may increase participation and improve pricing for industry and power retailers, an analysis by the Electricity Authority indicates.

The authority is again reviewing the current arrangement under which the four major generators – Contact Energy, Genesis Energy, Meridian Energy and Mercury NZ – 'voluntarily' offer volume into the ASX futures market so that smaller participants can always fix a price on future power supplies.

But the system dried up in the second half of 2019 amid tight gas supplies and low hydro storage and in January the authority imposed tighter pricing rules on the market makers and tripled the volumes they had to offer. The government's electricity price review in October had also called for a move to mandatory market-making unless the industry could come up with a better fix faster.

In a discussion paper issued today, the authority lists six possible models of market-making, ranging from completely voluntary to completely mandatory arrangements. In between lie various hybrids with a mix of regulated requirements or commercial payments to deliver more effective arrangements.

The authority has previously failed to get the next tier of generators – Trustpower, Nova Energy and Pioneer Energy – to join the voluntary scheme. But it considers getting more participation from a more diverse group – possibly also including banks and trading houses – the key to delivering more reliable futures prices the major users and power retailers can have more confidence in.

It also wants a scheme that will allow services to evolve with the market, and one in which the costs are clear and can be charged to those benefiting from the service.

In a comparison of the options, a mandatory scheme that also allows the authority to contract in other parties came out slightly ahead of an entirely commercial model, or a model that included only market participants but which allowed them to contract in other parties to manage certain risks.

Easing concern

"Accessing a wider pool of market makers will introduce more information to the forward price curve, as well as potentially introducing more efficient providers of market-making services, contributing to greater reliability and greater confidence in the forward price curve," the authority says in its 32-page paper.

More diverse market makers may also ease the concern among some retailers that market makers they compete with may be offering futures at higher prices than they would be charging their own businesses, the authority said.

The futures market, operated by ASX, is key to enabling retailers without their own generation to compete by providing them with fixed prices for power.

Establishment of an "active" hedge market was a legislated requirement when the Electricity Authority was set up in 2010 and it has been subject to reviews since then.

Last year the authority pushed back on the price review's suggestion that a mandatory scheme, or a commercial model like that used in Singapore, could be established relatively quickly.

Generators, including Trustpower, were also wary of adopting models used in other countries that don't have to contend with the dry-year risk of New Zealand's hydro-dominated power system.

The authority is seeking an "enduring" model but tightened the rules of the existing voluntary scheme in January as it sought shorter-term improvements. It also created regulations so it could make those arrangements mandatory if market-making were to fail during times of market stress.

In February, Contact noted that since the 2017 financial year, its gains on market-making had averaged about $1.9 million but that the performance in any one year had ranged from a $3m loss to an $8m gain.

Increasing wholesale prices and greater price volatility meant its prudential exposure to the futures market had also increased over time.

The previous Contact chief executive, Dennis Barnes, said the new requirement on it to triple the volume it offered in monthly futures contracts, with a maximum bid-offer price spread of three per cent, was more likely to benefit speculative traders than smaller power retailers and customers.