The AEMC today published a consultation paper on a rule change proposal from ENGIE to establish voluntary market making services in the national electricity market.
A market making arrangement would increase the opportunities for market participants to trade in electricity hedge contracts and to have greater visibility of wholesale contract prices. It can be voluntary or compulsory.
The service is typically made available in less liquid markets so retailers and other market participants always have an opportunity to buy and sell electricity futures contracts. This helps to increase market liquidity and support competition and confidence in the market as a whole.
ENGIE’s rule change request proposes a tender for voluntary market making services, to be run by the Australian Energy Regulator. The request also raises a number of issues with compulsory market making mechanisms.
There has been significant work on market making in the Australian Electricity Futures market during 2018:
- A market liquidity obligation forms part of the Retailer Reliability Obligation currently being developed by the Energy Security Board.
- The ACCC recommended that the AEMC introduce a market making obligation in South Australia to boost market liquidity as part of the Retail Electricity Pricing Inquiry published in July 2018.
- In November 2018 the Commonwealth Government proposed legislation that would allow the ACCC to recommend to the Treasurer, in the event that a person has engaged in prohibited conduct, that an order be made to require an electricity company to offer electricity financial products to third parties.
- ASX commenced a process in July 2018 to introduce a voluntary market making scheme to the Electricity Futures market. The ASX aims to have the scheme in place by 1 April 2019.
Internationally, market making arrangements for electricity markets have been introduced in recent years in New Zealand, Singapore and the United Kingdom.
The Commission will be looking at all these developments as part of its consideration of the rule change proposal.
Submissions on the consultation paper are due by 7 February 2019.
Media: Prudence Anderson, Communication Director, 0404 821 935 or (02) 8296 7817
Background: Contracting in the national electricity market
Electricity retailers and large energy users enter into various wholesale hedging contracts to manage their financial risks and to have more certainty over wholesale energy costs.
These contracts fix the wholesale price retailers pay for electricity over the course of a year, or several years. This reduces retailers’ exposure to the highs and lows of the spot market - which can go as low as minus $1,000 per MWh, and as high as $14,500 per MWh - and smooths their costs. Retailers can then offer their customers stable retail prices, which typically change only once a year.
For generators, entering into wholesale hedging contracts increases the certainty of their revenue streams, which allows them to get funding for their generation investments from banks or other financial institutions.
Banks and some other types of financial institutions are also able to participate in the market and offer contracts without actually owning physical generation assets.
To work effectively, the contracts market needs to be liquid – that is, there must be enough contracts available for retailers and large users to manage their wholesale risk, and for generators to finance their investment.