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The Electricity Authority (EA) is consulting on amendments to the hedge disclosure requirements in Part 13 of the Electricity Industry Participation Code 2010 (the Code).
The changes would broaden both the scope of the information collected and the range of risk management contracts covered, including explicitly clarifying applying the requirements to Power Purchase Agreements (PPAs).
Submissions close on 9 August 2023.
Proposed changes
The EA considers that the existing obligations are no longer fit for purpose as they do not:
- Capture a number of commonly used ‘over the counter’ electricity risk management contracts, including PPAs (as opposed to contracts for difference which are clearly already captured), shaped products and ‘Swaption’ arrangements; or
- Provide adequate visibility into the contracts market to foster competition, reduce costs for generators, and facilitate the entry of new retailers – all for the long-term benefit of consumers.
Taking on board options and recommendations put forward on behalf of industry (including the Market Development Advisory Group and the 2022 report commissioned from Boston Consulting Group), the EA’s view is that increased transparency is needed to allow participants to better design effective hedging strategies and to allow the EA as regulator to better monitor and promote effective competition in the electricity market.
Accordingly, the EA is considering amendments to:
- Collect a broader set of information on all forms of ‘over the counter’ contracts (excluding contracts traded on the ASX). Notably, this would explicitly include collection of information on PPAs;
- Expand the information collected to include the relevant nodes and contract volumes (in addition to the price, dates and other data already required to be disclosed);
- Require that the entire contract is submitted to the EA; and
- Collect information about pre-negotiation bids and offers.
The EA is also considering the best approach to publication – from expanding the information required to be published to publishing no information – and updates to the current Hedge Disclosure System.
The current hedge disclosure obligations, introduced in 2009, are intended to promote competition in the electricity contracts market by facilitating the comparison of electricity prices and other key terms of risk management contracts.
They are also intended to allow the EA to monitor the contracts market and promote effective competition. As New Zealand moves through the energy transition, the EA expects major changes in market dynamics, including an increase in spot price volatility, which will drive an uptake in risk management contracts.
Currently industry participants are required to disclose specific information about certain ‘over the counter’ electricity risk management contracts – specifically, contracts for difference, option contracts and fixed price physical supply contracts. The information, including price, quantity, grid zone, relevant dates and certain terms, is published on the Electricity Disclosure System (hosted by the NZX).
Commercial consequences
While increasing the depth of New Zealand’s electricity contract market is important for the future of the industry, the levels of disclosure proposed by the EA may require the release of commercially sensitive information, including pricing structures, contract volumes, and trade secrets, that could be exploited by competitors to the commercial disadvantage of the discloser.
These concerns will be particularly relevant in the context of securing long term PPAs for new generation developments, now a highly competitive part of renewables development in New Zealand.
An increase in the level of disclosure required will also mean that a participant’s commercially sensitive information may be available to a wider group of authorities and increases the risk of it being released publicly through an Official Information Act request.
To address the potential commercial consequences, a well-crafted regulatory framework is crucial, one which balances whether there is a genuine need for the disclosure against the need in a well-functioning market to protect commercial confidentiality and the bargaining power of market participants.
Measures like redaction of commercially sensitive information, restricted access to disclosed information, or limited disclosure of aggregated data could help strike a balance between regulatory objectives and commercial interests.
Next steps
The EA intends to publish a consultation document on its preferred options in late 2023. If you wish to have your views taken into consideration before the EA formulates those preferred options, we can assist you with a submission. Submissions close on 9 August 2023. Please get in contact with any of our experts in the Energy Team.
