3 Jun 2010

Major electricity companies turn to Australian stock exchange

9:09 pm on 3 June 2010

Major electricity generation companies have turned to the Australian stock exchange to help improve liquidity in New Zealand's electricity market, spurning the NZX.

An electricity hedge market, which allow participants to buy and sell electricity at a future date to reduce volatility in prices, is part of the Government's reforms to promote competition.

The NZX is setting up its own future trading markets. It had been negotiating with Energy Hedge, which represents the major generators - Contact Energy, Genesis, Meridian, Mighty River Power and TrustPower.

The new market should have been in place by the start of this month, but Energy Hedge chairman John Woods says the group decided to go with the Australian exchange to speed up the process.

Energy Minister Gerry Brownlee supports the move and says the Government will review the hedge market in a year's time, to make sure it has sufficient liquidity.

But NZX is unhappy, saying the Australian-based market will put up barriers to smaller companies trying to enter the market.

NZX also says it is a blow to the development of capital markets in New Zealand.

How it works

The electricity industry is embracing more free market measures by setting up what is known as an options and futures exchange.

At present, most commercial electricity is sold in half-hour chunks on the spot market, or on long term fixed price deals known as hedge contracts.

But a new market will allow people to acquire options on electricity contracts that can later be retained or onsold.

It will also allow them to buy and sell a contract for electricity at a fixed price in the future, which can also be traded later.

Options and futures are commonly used in many other markets and form part of the so-called derivatives market.

The proposal was called for in a recent report to the Government and is supported by all five major electricity generators.

It is not clear when it will start.