The AEMC has decided not to introduce a market for short term financial derivatives where participants could hedge their position in the week leading up to dispatch.

The decision to not make a rule rests on the limited demand by industry for short term hedging products and given there are existing market mechanisms that enable hedging to occur. If additional demand develops in the future, existing market mechanisms are capable of providing the risk management products market participants require. 

Longer term reforms to bring the national electricity market closer to a two-sided market have more potential to improve the accessibility of demand response (and therefore reliability and security) at a lower cost.   In the interim, the Commission is considering a specific mechanism to introduce wholesale demand response into the market. The draft determination for this rule change is due in March. 

We are also working with the Energy Security Board, AEMO and the AER to develop a dedicated physical ahead mechanism for improving system security. This may be a better mechanism than a short term forward market for providing security services in a market with a large number of intermittent generators and more responsive demand.

We have consulted extensively with energy market participants – in particular renewable energy businesses, gas peaking generation businesses and demand response providers – in relation to this rule change to find out if allowing them to trade electricity contracts closer to real time could provide greater price certainty and more options to manage financial risks.

Our analysis and stakeholder feedback has found there is very limited commercial demand for additional short term financial hedging products. Market participants currently manage their risks using a range of ASX products, brokers or bilateral trades. Also, the market is willing and able to develop new hedging products in response to demand. Brokers and exchanges already have significant expertise in developing and selling these types of financial products.

We also considered whether a short term forward market could help improve reliability or security. However, the short term nature of the contracts would be unlikely to incentivise longer term decisions to invest in new generation or demand response services. This means there would be minimal impact on reliability. Similarly, a short term forward market would not materially improve system security because participation would be voluntary and there would be limited visibility of exactly which generating unit would be used to generate and back any particular financial contract.

Media: Kellie Bisset, 0438 490 041 or (02) 8296 7813