A key focus of the recent Electricity Authority Te Mana Hiko (Authority) consultation paper, “Improving Hedge Disclosure Obligations - Preferred Options”, is to improve transparency in New Zealand’s electricity hedge market, where generators and buyers enter into financial contracts with other participants in order to manage the risk of future spot price movements.

Submissions for the Authority’s full consultation paper closed on 8 February 2024. The consultation paper can be viewed here.

The consultation paper recommends changes to the hedge disclosure obligations. If implemented, these changes will increase the risk management contract information collected and published by the Authority.

Why increase hedge disclosure obligations?

The proposed changes aim to enhance the ease with which participants can compare prices, provide additional transparency to risk management contract data, and empower the Authority to assess the competitiveness of the hedge market more effectively. With the benefit of recent options and recommendations published by the Market Development Advisory Group (MDAG),^[1] the Authority has identified that existing hedge disclosure obligations^[2] provide insufficient market information, especially in light of the electricity market’s increasingly rapid transition to a greater proportion of renewable generation.

The shift towards renewable generation is expected to bring increased electricity spot price volatility, due to the intermittent nature of solar and wind generation. The disclosure of more data, and improved granularity, will give the Authority more comprehensive pricing information and greater visibility on market response to intermittent generation, allowing it to make a nuanced assessment of contract shapes and types.

What are the Authority’s proposed additional price disclosure obligations?

The consultation paper proposes that the parties to all over-the-counter risk management contracts be required to disclose the following pricing information:

1. the price, or series of prices, for each half-hour trading period;
2. the contract premium (if applicable); and
3. the contract characteristics/category (eg options, swaptions and PPAs).

This is a significant change from the current price disclosure requirements, which only require the parties to provide the simplified time weighted average contract price for Contracts for Difference (CfDs) and Fixed Price Purchase and Sale (FPPS) contracts with a term of less than 10 years. Under the proposed changes, the provision of price information is no longer restricted to the average price or to contracts of a particular type and duration, equipping the Authority with enhanced data. The average price will still be calculated, now by the WITS manager on the basis of the granular price information provided by the parties, and will be published. The granular price information itself will not be published.

The Authority’s proposals have been carefully designed to protect participants’ privacy and commercially sensitive information. Identifying details, such as party names, will remain confidential while the contract location will be published based on the grid zone area instead of individual nodes, to maintain the anonymity of participants. These proposals align with submissions made to the Authority by the Major Energy Users Group relating to privacy and confidentiality concerns.

What type of contracts will be affected?

The Authority’s proposal looks to extend hedge disclosure requirements for, and to, all OTC contracts (with a volume over 0.1MW). OTC contracts fall into three main categories:

1. Contracts for Difference,
2. Options contracts, and
3. Fixed Price Purchase and Sale (FPPS) contracts.

Specialised contracts such as swaptions, Power Purchase Agreements (PPAs), shaped contracts, and caps are regarded as subsets within these primary contract categories. Information regarding requests for proposal (including bids and offers) is not caught by the proposed rule changes, and sharing such information would remain voluntary. To reduce compliance costs for industry participants, the Authority has also proposed to exclude exchange-traded contracts from hedge disclosure obligations.

Under the current system there is no clear classification for PPAs, shaped products or swaptions. Disclosure requirements vary - for example, CfDs and FPPS contracts must provide more detailed information, including price and grid zone location, but options contracts only have to disclose quantity, trade, effective and end dates.

The proposed amendments would impose these additional price disclosure requirements on all OTC contracts by:

1. modifying the definition of fixed-price physical supply contract to cover physical PPAs, so that contracts in which the buyer purchases variable amounts of electricity linked to actual consumption or generation are subject to the additional price disclosure obligations;
2. lowering the threshold for CfDs from 0.25MW to 0.1MW; and
3. adding a new unique risk management contract category, to give the Authority an ability to monitor contracts that are made to manage spot price risk but are not covered by the three main categories of OTC contracts above. Rather than prescribe a definition in the Code, it is proposed that participants who enter into a novel contract must notify the Authority and provide a description of the key contract terms. This will allow the Authority to identify new categories and determine whether it should add a new form of novel contract to the risk management contract categories.

The Authority will conduct workshops in early 2024 to assess the market viability of proposed changes, with details available on the Authority’s website. The Authority will consider workshop feedback and consultation paper submissions in its final decision on the Code amendments, with a decision likely by mid-2024.

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Special thanks to Johnathan Bates for his assistance in writing this article.