Posted on September 15, 2010

The Electricity Commission is proposing to introduce Locational Price Risk hedges in the form of Financial Transmission Rights (FTRs). Energy Link was supported by Transpower to produce application information for market participants concerning the integration of FTRs into hedging strategy. The reports show how the proposed FTRs reduce the risks associated with hedging between the North and South islands.

The two reports and the EC’s proposal are available at the EC’s website. The Summary report contains a number of worked examples for an independent retailer, merchant generator, gentailer, large consumer, and financial intermediary. The Technical report contains more information on the EC’s proposal, a discussion of the equivalence of FTRs and “basis swaps” constructed using futures contracts, and a lot mathematical hedging theory.

Greg Sise, Managing Director