Authority makes rule change to aid futures market

The Electricity Authority Te Mana Hiko has made an urgent change to rules to ensure that the electricity futures market continues to work for consumers, even during periods of high volatility.

The Authority is introducing a price-based test to adjust market-making settings during times of stress, as was experienced last month. A lack of supply in the electricity system created uncertainty and resulted in high prices.

“A robust futures market allows companies such as electricity retailers to contract for electricity in advance. This means that small and large customers can be protected from paying the high spot prices,” says Andrew Millar, General Manager Market Policy.

Over 98% of residential electricity consumers are on fixed contracts with their retailer.

“Market-makers provide additional contracts into the market to make it easier for retailers to contract at fixed price. We support a healthy futures market so consumers can access electricity at a fixed price.

“The ability to get that fixed price could be at risk should market makers withdraw from the futures market during times of high prices and volatility,” said Millar.

Under the urgent amendment to the Electricity Industry Participation Code (Code) published today price-based relief will be triggered if prices exceed $500/MWh.

The price-based test for market-making settings will provide the market with greater certainty about the response for periods of stress.

“While market conditions have improved since early August 2024, we now have a framework in place should such conditions develop again. This is a simple and transparent measure that is in the best interests of consumers. It also means there are no surprises for the market – it is clear how the Authority will respond when the market is stressed while we develop a permanent solution later this year.

“As well as the rule change, we continue to monitor behaviour to ensure the market is functioning in the best interest of consumers,” said Millar.

Details of the Code amendment

If the settlement price triggers the relief, then the bid-ask spread will increase from 3% to 5% until prices drop below the threshold. Volumes will remain unchanged.

The urgent Code amendment takes effect from 12 September 2024. It expires nine months after taking effect. The Authority will consider its options for making the settings permanent later in 2024.

On 12 August 2024, the Authority used its discretionary powers to provide guidance on its enforcement approach as an immediate measure in response to conditions in the electricity futures market traded on the ASX. It allowed for widening of spreads and halving of lot sizes before the Authority would exercise its discretion to take enforcement action.

After market conditions improved, the guidance was revised on Wednesday 21 August 2024 and removed completely after trading on Friday 23 August 2024.