Rule Change: Open
This rule change request from ENGIE seeks to establish a tender for voluntary market making services in the national electricity market.
Market making arrangements aim to 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 that 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.
On 27 June 2019 the AEMC released a draft determination not to make a rule.
There are a number of initiatives underway that should increase contract market liquidity in the national electricity market – in particular the ASX’s voluntary market making scheme and the market liquidity obligation which is part of the Retailer Reliability Obligation, which are both due to start on 1 July 2019.
The Commission’s analysis found that additional market making arrangements beyond the ASX and MLO initiatives are not likely to be efficient. On this basis, a rule to require additional market making services would not, or would not likely, contribute to the National Electricity Objective.
Key findings include:
- Liquidity across the NEM is generally healthy, although liquidity in South Australia is much lower than in other regions.
- The structural characteristics of the South Australian market contribute to lower liquidity. The characteristics include limited firm generating capacity, a heavy reliance on gas for firming capacity, high penetration of renewables, low levels of demand, limited interconnection and high levels of vertical and horizontal integration which can reduce the broader availability of contracts.
- The ASX and RRO/MLO schemes are expected to improve liquidity compared to the levels currently observable in the market. These improvements should be most notable in South Australia.
- The Commission engaged a consultant, NERA, to undertake an in depth analysis of the costs and benefits of the different types of market making arrangements put forward. The results of that analysis (NERA report) were released along with the draft determination. The analysis concluded that if the ASX scheme delivers to its design, then there would be no additional benefit from additional market making schemes. There would however be additional costs.
The draft determination also sets out specific monitoring and reporting that the Commission considers should be undertaken by the AER . This includes monitoring the ASX voluntary scheme and also implementation of the RRO/MLO to see if these new market making arrangements provide the benefits to contract market liquidity that are intended. This function would be enabled by proposed law changes to expand the AER’s market monitoring function to include the contract market.
Furthermore, in the process of addressing liquidity, it became apparent there are material information gaps in the contract market. These gaps undermine price discovery for participants, and also regulators’ ability to assess market conduct and performance. The draft determination notes specific improvements are needed in relation to the reporting of OTC trades through the AFMA survey of market participants, particularly in relation to price, coverage and timeliness. The Commission will work with the AER on these improvements, and also to determine whether large vertically integrated market participants should regularly report specific additional data to enable ongoing assessment of market conduct and performance.
Submissions on the draft determination are due by 8 August 2019.
On 20 December 2018 the Commission published a consultation paper on the rule change request. The paper sought stakeholder comments on a number of key issues including:
- diagnosing whether there is a contract market liquidity problem in the NEM
- defining solutions to the problem
- the range of options in relation to a market making arrangement
- the potential operation of a tender
- what contracting products should be considered
- jurisdictional issues.
Stakeholder submissions on the consultation paper were due by 7 February 2019 and can be found below.
The AEMC held a workshop on 28 February 2019 in Melbourne to gather industry views on the operation of the contract market. At the workshop the AEMC presented draft analysis of the issues gathered to date.
There has been significant work addressing market making in the Australian Electricity Futures, both by policymakers and by the ASX:
A market liquidity obligation forms part of the Retailer Reliability Obligation currently being developed by the ESB. The final rules package to implement the RRO was approved by the COAG Energy Council on 4 June 2019. The RRO is scheduled to commence on 1 July 2019.
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.
The ESB addressed a market liquidity obligation in September 2018 through a consultation paper on market making requirements in the NEM. The ESB has deferred further work on this recommendation until after this rule change process is complete.
In November 2018 the Commonwealth government proposed legislation following recommendations from the ACCC Retail Electricity pricing Inquiry 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. The legislation was referred to a Senate Committee before being withdrawn prior to the federal election. Since being re-elected, the government has indicated it will re-introduce the Bill.
The ASX commenced a process in July 2018 to introduce a voluntary market making scheme to the Electricity Futures market. The scheme is due to commence on 1 July 2019.
Internationally, market making arrangements for electricity markets have been introduced in recent years in New Zealand, Singapore and the United Kingdom.View less
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