‘Arm-twisting’: Authority eases market regulation for gentailers

Worried small power firms and traders have complained to the Electricity Authority about a unilateral rule change damaging confidence in the market. “This could trigger a cascade of exits, leading to heightened volatility and contagion risk across the market,
Contact, Genesis, Meridian and Mercury are legally required to act as “market-makers” every afternoon on the electricity derivatives market, traded through the ASX, in order to provide sufficient liquidity that energy retailers and corporates can hedge their longterm power prices.
But this week, it’s thought they dug in their heels. That’s prompted the Electricity Authority to announce a temporary code change: they’re now required to offer up only half as much volume, and the maximum spread between how much they’ll buy power for and how much they sell it for has been dramatically widened from 3 percent to 15 percent. 
“I think this is arm-twisting, even bullying,” says Phill Anderson, from UK-owned Haast Energy Trading.
The first that smaller players in the market knew of the regulatory change was when the gentailers offered in the wider 15 percent spread, and lower volumes, at 3.30pm on Monday afternoon.
Worried small power firms and traders complained to the Electricity Authority about unilateral rule changes damaging confidence in the market. “This could trigger a cascade of exits, leading to heightened volatility and contagion risk across the market,” wrote energy broker Daniel Skipper, of Aotearoa Energy.
Airihi Mahuika, the Electricity Authority’s legal, monitoring and compliance general manager, blames “speculation in the market creating volatility” for the need to change the rules.
“The Electricity Authority made a change to the market making requirements when it saw speculation in the market creating volatility (creating a large degree of uncertainty for a fair price),” she says. “This volatility does not benefit consumers as it has the effect of reducing liquidity and keeping prices higher for longer.
“As soon as the authority was aware of the behaviour it engaged with all market makers to better understand the situation.”
Mahuika says the authority acted to make interim arrangements before the market reopened on Monday morning, to send a clear message. She says a longterm code change, even an urgent one, would take several weeks.
“The authority considers widening the allowable spread between a market maker’s bid and ask will reduce the impact of current conditions and enable market-makers to manage the costs of providing liquidity and price transparency.
“A decrease in the available volume will reduce market-makers’ exposure to the daily price changes, while being sufficient to maintain liquidity for hedging in the stressed market environment.”
She says the change was communicated to all market-makers and the authority will be inviting traders to a webinar on Thursday morning to get feedback on an urgent code change that is sustainable in the short term.
“The effect of the change was to ease the speculator activity that was benefiting from higher prices. We may reduce or lengthen the duration of these urgent changes currently in place.”
In addition to the interim arrangement, she says, the authority has sought further information to better understand who is benefiting from this volatility and high prices.
The authority will be consulting on enduring market-making settings later in the year.