Spent an interesting day yesterday at a forum on the next challenges for ongoing market reform organised by the Melbourne Energy Institute and Centre for Market Design from the University of Melbourne.
There were some comments made about the low level of liquidity in the electricity derivative market here compared with electricity markets elsewhere. In the conversation that followed, it occurred to me that data on the volumes of trading of electricity derivatives on the ASX is not broadly available and understood.
Note that this is an updated copy of the same chart which we originally published in our 2011 Issue “Power Trading Schematic” Market Map wall chart.
As can be seen, the ratio has been at 2, or above, for three years. This ratio is a commonly quoted metric to indicate the depth of liquidity in the financial market.
Interesting, we see volumes of electricity traded financially decline in 2011-12. There are three contributing factors that jump out at me immediately:
1) As can also be seen in this chart, demand has also been declining in the physical market for the past couple of years (with a number of contributing factors, including these). As a first order variable, this means lower requirement for hedging.
2) The declining demand has run in parallel with increased levels of price-subsidised generation sources which has all contributed to declining prices in the market – hence perhaps there has been a declining appetite, on the part of the physical participants, to hedge output.
(a) These green subsidies (LRET for wind farms, and SRES + attractive feed-in-tariffs for solar PV) have had some effect on squeezing out thermal production but has been more significant in the effect on spot prices.
(b) The following chart (from NEM-Review) shows annual average prices for the NSW region as an example of this. The coloured distribution slices highlight how the instances of prices above $50/MWh declined from a high of 2007 (in a drought year) through until 2011. The level has picked up in 2012 due to the impact of the carbon tax from 1st July.
3) There’s also been a number of financial traders exit the market over the past 12 months or so – the ones that come to mind as I write this include JP Morgan, Optiver, Barclays, Ignition, BAML – and there’s no doubt others I have forgotten (note that it has not entirely been one-way, with some new faces appearing).