7. System Operation and Wholesale and Related Markets
83. The Commission should take primary responsibility for achieving the Government's policy objectives for electricity in relation to:
- common quality and real-time security
- dispatch and pool rules
- reconciliation and settlement
- information disclosure to improve market efficiency, including:
- aggregate hedge and contract prices and volumes
- offers by generators
- minimum prudential standards.
Hedge Market Transparency and Liquidity
84. A transparent and liquid hedge market is a critical component of an efficient wholesale market. It enables market participants to manage their risks and facilitates retail competition.
85. The Electricity Act 1992 provides regulation-making powers to establish and promote hedge markets. As with other regulation-making powers, the Commission may only recommend regulations if it has first established that there are significant problems that are not resolvable through voluntary arrangements and co-operation. The regulation-making powers (outlined in s172D) cover:
- disclosure of information on hedge and contract volumes and prices
- requiring electricity generators to offer by tender a minimum volume of contracts that enable the price risks associated with the spot market to be managed, including the terms and conditions of those contracts (excluding prices and reserve prices)
- requiring electricity generators to post buy and sell prices for hedge (including futures) contracts
- requiring buyers of electricity from the wholesale market to maintain minimum levels of hedge and contract cover with electricity generators.
Transmission Risk Management
86. The Commission should oversee the development of arrangements that will enable market participants to manage financial risk in respect of transmission losses and constraints.
87. The product developed should include the following broad principles:
- Realistic long-term risk management mechanisms should be made available to all parties that face financial risks arising from spot price effects caused by transmission losses and constraints;
- Economic efficiency, including the integrity of price signals, should be maintained or improved; and
- Solutions should be pragmatic and not overly complex.
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