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Operating the electricity market ||| Fact sheet 8

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Operating the electricity market ||| Fact sheet 8

Financial transmission rights (FTRs)
The Electricity Authority is establishing a market for trading financial transmission rights (FTRs) from mid-2013.
The FTR market is designed to help promote competition in the retail market to benefit consumers.

An FTR is a locational hedge product
FTRs are hedges designed to assist wholesale electricity market participants
to manage their locational price risk.

The Electricity Authority is introducing FTRs
to promote competition in the retail market
for the long-term benefit of consumers.

FTRs insure against large unpredictable
Locational price risk is the risk that wholesale electricity market participants
electricity price movements on the
face due to unexpected changes in the difference between prices at different
wholesale electricity market.
locations across the transmission grid. The prices at different locations can rise
and fall significantly and are not easily predicted, as they are caused by a mix of
transmission constraints, electricity losses along the grid, and how much reserve power is available.
To start with, FTRs will cover the price differences between the South Island (at Benmore) and the North Island (at Otahuhu, Auckland).

An FTR provides insurance for unexpected electricity price movements
FTRs allow the holder of an FTR to cover their price risk between two locations on the national grid. Effectively, they are a hedge
product that can protect wholesale electricity market participants from half-hourly variations in spot market prices in one location
versus another.
The inter-island FTR has been designed to complement existing hedge products. FTRs are offered for periods of one calendar
month between Benmore and Otahuhu and are available for purchase via auction. FTRs will be available for a given month up to
two years in advance. The number of FTRs available for any one month will be based on predicted market conditions.
An FTR is designed to pay out the price difference between the two points. If a participant purchases an
FTR from Benmore to Otahuhu for a given month they will receive the difference in price between Otahuhu
and Benmore, assuming the price at Otahuhu is higher than at Benmore. For example, if the price on
the wholesale market for electricity is $10 per megawatt hour (MWh) at Benmore and $100 per MWh
at Otahuhu, a retailer who needs to buy electricity to supply their customers near Otahuhu has to pay
$100 per MWh on the whole...
An FTR is a locational hedge product
FTRs are hedges designed to assist wholesale electricity market participants
to manage their locational price risk.
Locational price risk is the risk that wholesale electricity market participants
face due to unexpected changes in the difference between prices at different
locations across the transmission grid. The prices at different locations can rise
and fall significantly and are not easily predicted, as they are caused by a mix of
transmission constraints, electricity losses along the grid, and how much reserve power is available.
To start with, FTRs will cover the price differences between the South Island (at Benmore) and the North Island (at Otahuhu, Auckland).
An FTR provides insurance for unexpected electricity price movements
FTRs allow the holder of an FTR to cover their price risk between two locations on the national grid. Effectively, they are a hedge
product that can protect wholesale electricity market participants from half-hourly variations in spot market prices in one location
versus another.
The inter-island FTR has been designed to complement existing hedge products. FTRs are offered for periods of one calendar
month between Benmore and Otahuhu and are available for purchase via auction. FTRs will be available for a given month up to
two years in advance. The number of FTRs available for any one month will be based on predicted market conditions.
An FTR is designed to pay out the price difference between the two points. If a participant purchases an
FTR from Benmore to Otahuhu for a given month they will receive the difference in price between Otahuhu
and Benmore, assuming the price at Otahuhu is higher than at Benmore. For example, if the price on
the wholesale market for electricity is $10 per megawatt hour (MWh) at Benmore and $100 per MWh
at Otahuhu, a retailer who needs to buy electricity to supply their customers near Otahuhu has to pay
$100 per MWh on the wholesale market. However, if they hold a Benmore to Otahuhu FTR, they receive
$90 per MWh back (the price difference between Benmore and Otahuhu), less the price they paid for the FTR.
By bidding successfully for an FTR, the holder reduces their price risk between the North and South
Islands. The FTR holder knows that if the volatility in the market causes prices in one island to suddenly
surge upwards then they should be covered for the amount of FTRs they hold, and will receive a
pay-out from the FTR.
Financial transmission rights (FTRs)
Operating the electricity market ||| Fact sheet 8
The Electricity Authority is establishing a market for trading financial transmission rights (FTRs) from mid-2013.
The FTR market is designed to help promote competition in the retail market to benefit consumers.
The Electricity Authority is introducing FTRs
to promote competition in the retail market
for the long-term benefit of consumers.
FTRs insure against large unpredictable
electricity price movements on the
wholesale electricity market.
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Operating the electricity market ||| Fact sheet 8 9 10 936