Rule Change: Open

Overview

This rule change request from the Australian Energy Market Operator (AEMO) proposes to introduce a voluntary market for short term financial derivatives to enable participants to contract for electricity in the week leading up to dispatch.
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This rule change request from the Australian Energy Market Operator (AEMO) proposes to introduce a voluntary market for short term financial derivatives to enable participants to contract for electricity in the week leading up to dispatch. 

The proposed voluntary market would:

  • be operated by AEMO
  • facilitate the trading of anonymised short term electricity forward contracts 
  • operate on the Trayport platform
  • offer a range of standardised contract tenures from a day ahead to a week ahead of trading
  • where practicable, use existing NEM settlement, clearing and prudential frameworks.

Draft determination

On 12 December 2019 the Commission decided not to make a draft rule, as it considers that it is unlikely to contribute the National Electricity Objective.

If the benefits from the short term forward market (STFM) were to be realised by participants, the voluntary STFM would need to be liquid and traded on. To understand the way that participants currently manage their risk and determine the underlying level of demand for short term hedge contracts, the Commission consulted widely, meeting with small renewable participants and new entrants, established vertically integrated participants, brokers, exchanges, and industry bodies.

The rule change proposal identified three groups of participants that may benefit from short term hedging, namely intermittent generators, demand response participants and gas peaking generators. 

  • Discussions with intermittent renewable generators revealed that there was mixed demand for short term financial firming products. Two larger participants stated that short term hedging products may be useful for optimising within their diversified generation portfolio. However, most other participants stated they preferred to manage their price risk on a longer term basis. Other products such as power purchase agreements, proxy revenue swaps and longer term solar and wind firming products were more attractive as they further reduced investors' exposure to risk and do not require an active trading desk.
     
  • Demand response participants also showed little interest in short term financial hedging products. Participants noted that the likely clearing price of a short term derivative before a high priced event, would be relatively high, reducing the effectiveness of the product>
     
  • Almost all participants that own open cycle gas turbines (OCGTs or gas peakers) did not support the introduction of a STFM for electricity derivatives. Stakeholders told the Commission that, if required, short term portfolio optimisation can and does takes place through trading on the ASX. If participants want to buy or sell hedging in the short term, they will trade in and out of a cap contract for the current quarter. Participants noted that this only works as the quarterly contract market is the most liquid of all listed products.

The conclusion from the consultation and market analysis is that there is currently limited demand for short term hedge products in the market and that demand is sporadic and bespoke. Therefore, if introduced, the Commission believes a STFM for electricity derivatives would not be actively traded on and hence would not provide any investment signals, or materially improve short term operational decisions, and thus is unlikely to generate any material benefit to consumers.  

Further, the Commission noted that market-led processes for establishing new financial products appear to be working. Typically, before an exchange lists a new product, there is evidence of that product trading more frequently on the OTC market. There is recent evidence of new products being developed and traded by brokers on the OTC market, such as solar shape products.

Submissions on the draft determination are due by 6 February 2019.

Extension 

On 1 August 2019 the Commission extended the period of time to make the draft determination to 12 December 2019. The Commission considered the extension necessary to allow for additional consultation with a broader group of stakeholders and sufficient time to work through the complex policy and legal issues.

Consultation paper

On 11 April 2019 the AEMC published a consultation paper seeking stakeholder feedback on the proposal. Key questions were:

  • how is short term risk currently managed in the NEM and would a short term forward market be beneficial to market participants
  • what design elements should be considered as part of a short term forward market
  • how significant are the implementation costs and what other implementation issues should be considered in the rule change assessment.

Submissions were due by 23 May 2019 and can be found below.

Background

On 20 December 2018 the AEMC received a rule change request from AEMO for the introduction of a voluntary short term forward market. 
This request was based on a recommendation made by the AEMC in our 2018 Reliability Frameworks Review on how to integrate more demand response into the wholesale electricity market. 

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