Derivatives and hedging practices in the Australian National Electricity Market

Jonty Flottmann, Phillip Wild and Neda Todorova

Energy Policy, 2024, vol. 189, issue C

Abstract: This article expands on the seminal policy work by Anderson et al. (2007) and explores the impacts of a changing energy mix on derivatives and hedging practices 15 years on from their work in the Australian National Electricity Market (NEM). The NEM has undergone vast change since 2007 as variable renewable energy (VRE) has entered the market. This can have a significant impact on the contracting patterns and derivatives’ use of participants. A survey was undertaken to determine how market participants in the NEM conduct derivatives trading and hedging of their portfolios. Additionally, participants shared their views on the current state of energy policy and operation of the market. The results showed participants continue to use derivatives, as was previously documented, with increasing focus on power purchase agreements (PPA) for VRE contracting and a sharp drop in the use of traditional peak contracts. Nonetheless, there arose apprehension regarding participants' future capacity to hedge portfolios, given the diminishing liquidity within the derivative market due to the departure of dispatchable plants. This poses a difficult path for policy makers and regulators as a functioning and active derivative market is integral for the operation of an energy only market such as the NEM.

Keywords: Energy markets; Derivative markets; Hedging (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:189:y:2024:i:c:s0301421524001344

DOI: 10.1016/j.enpol.2024.114114

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