5. A Possible Option
Officials have considered whether any further legislative amendment (short of full removal of ownership separation requirements) would assist lines companies in selling their generated output.
It seems possible that an ability to buy some electricity on the spot market to cover periods when their own generation is unavailable, and an ability to trade in hedges within specified limits, would improve the lines companies' ability to sell to retail customers (while still being within the parameters of the current regulatory framework).
We would like to invite industry comments on a proposal to:
Allow lines companies to trade in financial instruments (e.g. hedges) up to the nominal output of their generating plant, assuming that it is available on a continuous basis.
For example, a line company owning a generation plant of an overall 50 MW capacity would be allowed to buy and sell financial instruments up to 25 MWh in each half hour period, i.e. 438 GWh per annum.
The key issue is whether an amendment such as this would help lines companies sell the output from their plants. As noted, the key difficulty for lines companies appears to be a combination of the variability of output from their generation, inability to buy from the wholesale market and inability to hedge related risks. This results in an inability to offer continuous supply contracts to customers and to manage the risks of doing so.
The suggested amendment would allow lines businesses to buy electricity and hedges (up to the capped quantity) on the wholesale market and hence offer continuous supply contracts to customers.
However, the ability to buy conventional two-way and one way hedges seems unlikely to be of much assistance to lines companies. Lines businesses may not be able to buy hedges tailored exactly to when their plant was unable to generate to the quantities contracted to customers because in many cases (especially with wind generation) it is difficult to know in advance the exact output of that plant.
The suggested amendment would, however, allow lines businesses to buy call options, whereby the lines company, in return for a fee, can choose whether or not to exercise a hedge or more sophisticated "firming" contracts. While this would require the development of instruments which are generally unavailable on the market currently, there seems no reason in principle why this should not occur.
Another implication of the suggested amendment is that a monitoring regime may need to be established to ensure lines companies comply with the imposed limits. Officials recognise that this is likely to increase lines companies' compliance costs and would welcome suggestions on to how these could be minimised.
Back to Top