An overview of contracting and hedging arrangements in Australia's wholesale electricity market, presented as part of a workshop on Nigeria's transitional electricity market held in Abuja 2015

1. Interpretation & Understanding of
the Nigerian Transitional Electricity
Market Rules

2. www.transafricanenergy.com
Dr Stephen Labson
slabson@transafricanenergy.com
Trans African Energy Pty Ltd
Advisory and consulting services
Australia’s National Electricity Market
Contracting and Risk Management
Abuja 15 September 2015

3.  Spot market and pricing
 Spot market managed in real-time
through a centrally-coordinated
dispatch process.
 Generators offer supply bids with
specific amounts of electricity at
particular prices., ramp rates, etc
 Offers are submitted every five
minutes of every day.
 A dispatch price is determined
every five minutes.
 Six dispatch prices are averaged
every half-hour to determine the
spot price for each NEM region.
Price determination
 Source:AEMO
 Spot price capped at AUD $12 500/MWh
 Dispatch BIDS capped AUD $-1000/MWh
 NB to balance swap arrangements

4. slEconomics Pty Ltd 4

5.  Gross pool
 Market Participants deal with
AEMO- NOT with each other
when selling or buying wholesale
electricity.
 Limited recourse w.r.t.
AEMO
 Payments to Generators are
limited to the money available to
AEMO from receipts from
Market Participants
 AEMO has powers to draw
down on credit support if a
market participant is in
default of payments.
 Any shortfall in AEMO’s
recovery from any Market
Participant in relation to a
billing period is shared across
the generators of electricity by
reducing the amount paid to
them for electricity supplied
through the Market in that
billing period.
5

6. 6
 Risks from price volatility (wholesale market capped at AUD$
12,500/MWh)
 Rapid payment obligations
 Largest retailer (20% of NEM) with spot price at $12,500/MWh will increase
exposure toAEMO at over $1Million per minute
 Risk of non payment covered by bank guarantees with AEMO
 AEMO typically holds $1.5Billion to $3.5Billion in bank guarantees
 Level of guarantee (Max Credit Limit) driven by energy traded, average price and
price volatility
 Daily review of participant exposures
 Rapid payment requirements when near limits
 Default then suspend if obligation not met
 Rapid retailer of last resort required

7.  A ‘gross pool’ – such that all power
must be traded through the
wholesale pool:
 Bilateral trade in physicals is not
permitted.
 Financial hedges are used to
manage risks: e.g.
 Risk management for retailers
requires:
 Contracting around compulsory
gross pool spot market
 Direct generation investment
(vertical integration - gentailer)
 Demand side control
 Hedge contracts between generators
and retailers
 independent of AEMO’s
administration.
 The details of hedge contracts are
not factored into the balancing of
supply and demand, and are not
regulated under the National
Electricity Rules.
 But do set a strike price referenced
to electricity traded through the
pool.
 In this way hedge contracts are
financial instruments that participants
use to manage volatility of the spot
price.
7

8. Auctions of Inter-region Settlement
Residues
 The spot price for electricity in each
region of the NEM is PARTLY
determined by the physical
limitations of interconnectors, and
the loss factors for both the
transmission and distribution
networks.
 This means that there may be
significant differences in the spot
price across NEM regions.
 The difference between the value of
electricity in the region where it is
generated and its value if sold in
another region is called the inter-
regional settlement residue.
 The settlement residue that accumulates
is made available to the market by the
conduct of an auction.
 The auction process establishes the
market value of the residue,
 Registered participants who purchase
auction units obtain access to a share of
the residue.
 the premium paid for the auction
units provide protection against high
price differences between regions in
the wholesale market
8

9.  Most energy is traded outside the IMO administered market via Bilateral Contracts
between Market Customers and Market Generators.
 These Bilateral Contracts can have energy and capacity components. By trading energy
bilaterally, Market Customers and Market Generators can reduce their exposure to the IMO
administered energy market settlement processes. 9
The Wholesale Electricity Market (WEM) -
Western Australia*
Bilateral Contracts: Trades of energy and
capacity occur between Market
Participants.
The ShortTerm Energy Market (STEM):A
daily forward market that allows Market to
trade around bilateral energy positions
producing a Net Contract Position SouthWest Interconnected System

10.  Where capacity is traded bilaterally the
IMO reduces the market capacity
charges for the relevant Market
Customer and reduces the market
capacity payments to the associated
Market Generator.
 Market Customers and Market
Generators can modify their bilateral
energy position through trading in the
day ahead STEM, forming a Net
Contract Position (NCP).
 Differences between actual net energy
supplied or consumed and NCP
quantities are bought and sold in the
Balancing Market.
 After theTrading Day, the IMO determines
a balancing price for eachTrading Interval.
 Generators receive (pay) this Balancing
Price for any quantity above (below) their
NCP and Market
 Customers pay (receive) this Balancing Price
for any quantity above (below) their NCP.
Generators dispatched out of merit are
eligible for constrained on or off
compensation.
 If a Facility in the Non-Balancing Dispatch
Merit Order was dispatched by System
Management, it receives (pays) its standing
data price (pay-as-bid) for deviations below
(above) the relevant Resource Plan level.
10

11. OTC contracts
 Forward contracts operate in parallel with the
gross pool wholesale market and provides
price certainty.This means that if the gross
market spot price is:
 higher than the strike price, the seller in
the forward contract pays the purchaser
the spot price minus the strike price
 lower than the strike price, the purchaser
in the forward contract pays the seller the
strike price minus the spot price.
 This method for effectively fixing the price
sellers receive and purchasers pay is called
Contracts for Differences.
 They provide a form of electricity price risk
insurance and play an important role in
underpinning the financial stability of the
National Electricity Market.
11
And shaped products

12. Exchange-traded products
 Futures and options are standardised products traded on the Australian
Securities Exchange (ASX) outside the NEM Rules.
 They differ from OTC contracts as:
 the prices and volumes are made public and so the market is transparent;
 liquidity is increased by the participation of financial companies such as
hedge funds or investment banks; and
 the exchange requires the deposit of an initial margin as collateral against
credit risk which is updated to match prices daily until the position
crystallises at expiry.
 This lowers the level of default risk compared to some OTC contracts
slEconomics Pty Ltd 12

13.  Base Load Electricity Futures, which is for 1 MWh based on a base load profile.The base
load profile is defined as the NEM base load period from 00:00 hours Monday to 24:00
hours Sunday over the duration of the Contract Quarter.
 Peak Period Electricity Futures, which is for 1 MWh based on a peak-period profile.The
peak-period profile is defined as the NEM peak-period from 07:00 hours to 22:00 hours
Monday to Friday (excluding Public holidays, as determined and published by the
Australian Stock Exchange) over the duration of the Contract Quarter.
 Strip Futures Products, which is defined as a trade where consecutive traded quarters of a
futures product (with the same volume for each of those traded quarters) are bought or
sold simultaneously.
 Quarterly Base $300 Cap Products, which are 1 MWh on a Base Load profile for the
respective States (NSW, QLD, VIC and SA) over the duration of a Calendar Quarter.
Australian exchange-traded electricity products are considered to be ‘thinly’ traded but turnover
volumes have been steadily increasing.
13

14.  Contracts between players in the form of bilateral between generators
and distribution businesses came slowly.
 One large retailer become insolvent due to lack of hedge contracts
 Exchange traded hedge instruments have assisted the industry and
added needed liquidity to the market.
 But physical re-integration via generation and retail bundling has
perhaps been just as significant.
 Integrated gas and power forward markets are becoming more
important as well
 i.e. traditional long term back to back supply arrangements are being
replaced with forwards, swaps and options in gas to gas and gas
14

15. Dr Stephen Labson
Trans African Energy Pty Ltd
slabson@transafricanenergy.com
www.transafricanenergy.com
15