Hedge Services
Hedge Accounting
International accounting standard 39 (IAS39) has highlighted the need for reliable valuation techniques for electricity hedge contracts in New Zealand.
Ideally, parties to these contracts would refer to a forward curve from a liquid hedge market to which their contracts could be bench-marked. Even if a reliable forward curve was available, hedgers in New Zealand would still require a valuation adjustment to account for price differences between their off-take or injection nodes and their hedged nodes.
In the absence of a suitable bench-mark for ‘mark to market’ valuations, Energy Link has modified its systems to be able to quickly and efficiently prepare valuations based on its electricity price forecasts.
The key attributes of our valuations are that:
- they are based on the client’s own weighted average cost of capital;
- the valuations come with a percentile range of values that reflect the uncertainty of future electricity prices;
- they are a cost effective approach to accounting valuations; and
- the valuations come on Energy Link’s letterhead.
Energy Link’s hedge valuations can be used to satisfy auditors when the ‘hedge accounting’ rules are applied to take changes in hedge valuation off the balance sheet (and hence remove any effect of these changes until the hedges actually expire.)
Risk Management
If your supply arrangements do, or could have, some exposure to spot prices, then they will be subject to change and will require your vigilance.
In this case you may choose to arrange your energy supply by either:
- purchasing at spot price and then “hedgeing” the spot pricing risk with a mixture of electricity “hedging” contracts; or
- choosing a supply arrangement that gives you a fixed price for most of your supply but with a varying price for the residual.
In either case you will need to pay careful attention to risk management. What happens when the spot price rises? Do you know how much extra this could cost you? How much do you think you stand to gain by taking this risk?
Energy Link is the only adviser/broker authorised by the Securities Commission to assist and advise you with your hedging arrangements.
Common hedging mistakes include:
- Being completely exposed to the spot price in order to save money in the long run;
- Not understanding how to adjust your hedge cover for price differences across the transmission grid;
- Not knowing how to evaluate the price of an offered hedge.
We recommend, where practicable, a ‘portfolio approach’ to hedging, which over the long term delivers low energy costs with minimal rate shock and low volatility. This approach takes into account the technical factors inherent in the electricity market and also the timing, term and prices of hedge contracts.
Simply better business.