The move prompted the NZX to hit back in a statement yesterday, saying it believed EnergyHedge's decision would come at a cost to several sectors in New Zealand.
NZX chief executive Mark Weldon said he was "surprised and disappointed" by the decision, the exchange having wanted to add energy to dairy and agriculture derivatives.
The potential loss of revenue to the NZX was less than $1 million, but more importantly the addition of New Zealand's energy market to the exchange would have helped capital markets, he said.
"This is required by Government, but it was a local market, not global. It [energy] was not a game-changer, but would have helped the capital markets," he said.
The decision would result in "significant barriers" to market entry for the type of small, innovative entrant which could bring about genuine price competition in the New Zealand electricity market, the NZX said.
"This will in turn limit the benefits for New Zealand electricity users: households and industry.
"The decision is also a blow for the development of New Zealand's capital markets and this country's relevance as a financial centre, which is built one product and one institution at a time," the NZX said.
However, EnergyHedge chairman and Contact Energy general manager of wholesale John Woods said time was running out as by June next year, EnergyHedge wanted to have liquidity of about 3000GWh of electricity available for buyers.
While the NZX had one trading platform, and "likely more to come later", the ASX already had five platforms, with more clearing houses, banks and market participants, offering greater liquidity and as a result "less risk through the ASX than the NZX", Mr Woods said.
When pressed on the decision, taken after months of negotiations with the NZX, Mr Woods said he had no criticisms of the NZX, but "the fundamental truth of exchanges is `the bigger the better"'.
Mr Weldon said while the market was "complex" and "highly volatile", in terms of the need for a bigger market, it was worth noting just eight electricity trades had taken place on the ASX in recent months.
The NZX said the market infrastructure was in place and awaiting regulatory approval in order for the exchange to launch a clearing house. It recently announced the receipt of an application from a "significant offshore participant to be a general clearing participant".
Major Electricity Users Group executive director Ralph Matthes welcomed EnergyHedge's decision, saying recommendations from the Ministerial Review into Electricity Market Performance had included the development of an electricity hedge market with standardised, tradeable contracts accessible to all parties and market makers to provide liquidity, and the ASX, with its transparency, met these requirements.
"A futures and options market will assist wholesale market participants to better manage their risk and identify market price trends to underpin efficient investment decisions. A more efficient wholesale market will lead to a more competitive retail market, which will improve choices and options for households," Mr Matthes said in a statement yesterday.
Minister of Energy and Resources Gerry Brownlee also welcomed the decision, based on the need for a more liquid electricity hedge market and greater competition in the market.
"A hedge market is particularly important to enable new retailers, including lines businesses and new generators, to enter the market," he said in a statement.
The Government would review the hedging system in June next year to ensure it had sufficient liquidity, and if not, the new Electricity Authority would have "strong powers to impose requirements on industry participants", Mr Brownlee said.
EnergyHedge
OWNERSHIP
- Meridian: 100% state-owned enterprise.
- Mighty River Power: 100% SOE.
- Genesis: 100% SOE.
- Contact Energy: Origin Energy (Aust) 51.02%; balance on open market.
- TrustPower: Infratil (NZ) 48.25%; Tauranga Energy Consumers Trust 32.9%; balance open market.
> M-co is owned by the NZX and is a specialist operator of wholesale energy markets, retail competition markets, registries and internet-based trading platforms. EnergyHedge has been trading derivatives on M-co since 2006.
DERIVATIVES MARKET AND HEDGING
Derivatives trading provides companies with a risk-management tool by locking into forward prices, or hedging contracts, against changes in the future price of electricity. Other global derivatives markets include wheat, cotton, gold, pork bellies, rice and heating oil.
