A NEW ELECTRICITY MARKET
Fri 29 Jul 2005
An exciting union of OTC and Futures trading
A major benefit of futures reallocations (if futures reallocations are recognised by NEMMCO) is that it would initiate a whole new market in electricity Exchange for Physicals (EFPs).
In essence, retailers could initiate EFPs (i.e. establish a futures position on one leg and an equal and offsetting swap on the other) to create the futures required to offset spot market prudential requirements. This means that a retailer doesn't have to hedge their load with futures, just initiate "prudential EFPs" for as much volume as NEMMCO predicts the retailer will have on the spot market. Any OTC counterparty (including hedge funds, banks, generators and other retailers in any state region) can participate in the EFP market and contribute to reallocation liquidity.
Other than ensuring that the potential prudential benefits of reallocations are increased, this would mean that EFP spreads (i.e. the difference between the futures price and the swap price) would in themselves, be an entirely new trading market. The EFP market would further encourage liquidity, credit risk management and the wider benefits of an OTC market and a futures market working in tandem (like the success of the bond EFP market).
All very exciting for the market, but obviously contingent on getting futures reallocations recognised by NEMMCO.