NZX is proving its commitment to building a thriving and healthy futures market for the New Zealand electricity sector.
NZX is confident that it can meet the conditions outlined by Minister Brownlee in the recent Ministerial Inquiry relating to a clearing house acting as a counter-party, low barriers to participation and transaction costs, standardised tradable contracts and market makers, within the timetable presented.
“NZX looks forward to continuing the positive engagement to date with the industry to implement the Minister’s directive,” said NZX Head of Strategy, Heather Kirkham.
The Government’s 2009 inquiry into the operation of New Zealand’s electricity market supported the development of a liquid electricity futures market so that:
-new entrant retailers can enter the market with confidence as to their input costs, and
-medium and large electricity users can hedge their future electricity needs confidently and at a competitive price.
This price certainty will help give New Zealand consumers greater choice in electricity providers, and help New Zealand companies better manage their risks and plan for the future.
NZX has been consulting with the major generators and other potential market participants on the best way to apply its markets knowledge, experience and infrastructure to drive liquidity in the electricity futures market. In addition, NZX will conduct a roadshow early in 2010 to outline its electricity futures market offering and discuss product design to support risk management with interested parties.
“It is very important that the products developed on this market suit local needs, and enable efficient risk management for the wide range of potential electricity market participants. They all have different risk profiles depending on location, electricity usage profile and a range of other factors. Therefore, to be effective and meet the goals outlined by the Minister, New Zealand’s electricity futures market must meet the needs of the full range of electricity market participants, both existing and potential,” said Kirkham.
International experience shows that contracts based in the home jurisdiction are better tailored to industry needs, have lower transaction costs and have a wider range of domestically based participants as a result.
NZX also anticipates that the success of the local derivatives market will bring strong spillovers into the wider economy, through demand for new skills and experience, and related supporting industries.
“A strong domestic electricity futures market will be a powerful complement for the whole milk powder (WMP) futures contract that will be launched around the same time. The WMP future will strengthen New Zealand’s position as an important soft commodity producer and soft commodity marketplace for the world,” said Kirkham.
Last week NZX announced the development of load-weighted regional indices based on prices faced by electricity retailers and users, to be launched in early January 2010. Such indices are common internationally as a way to provide a broad measure of price movement across a range of locations.
Any parties interested in being included in the product design process should contact ?Heather Kirkham on heather.kirkham@nzx.com.
BACKGROUND - ADVANTAGES OF A NEW ZEALAND BASED ELECTRICITY FUTURES MARKET
1. Advancing New Zealand: enabling new industry developments
The formation of a derivatives market drives the establishment of supporting industries such as technology, trading and advisory, infrastructure and networks. This is evident in all other cities where derivatives markets have emerged such as Chicago, London and New York, among others. Key to building a derivatives market in New Zealand is the listing of local products for local participants, while providing global accessibility. The development and listing of New Zealand derivative products offshore would impede the formation of a broad and deep market in New Zealand, disadvantaging New Zealand market participants and, ultimately, the New Zealand economy.
2. Product and market influence
Domestic exchanges listing local products tend to respond better to local customer demands than foreign exchanges that list cross border products. Successful derivatives markets are first and foremost dependent on the participation, advice and support of local players, whose views and requirements are prioritised when developing and designing products for the home market. Equally, local participants have a much greater influence when products are priced. History has shown that offshore providers tend to charge more for cross border products than their own domestically traded contracts.
3. Higher participation from local energy users
The seeding of liquidity in the electricity market begins with the gentailers (generator retailers) who will provide the basis and cornerstone of the market. The establishment of a fully liquid market is heavily dependent on firms other than gentailers who will also utilise the market. Nearly all that participation is going to come from New Zealand firms based in New Zealand. Access to market for these participants needs to be as easy and cost effective as possible, which is where a domestic exchange provides users significant advantages over an offshore provider.
