Australia : April 15, 2009
The Emissions Trading Scheme or ETS has been set by the Australian Government with commencement in July 2010. This action, of course, raises the question whether the ETS will increase electricity pricing and based on current market trends the answer is a definite “Yes”.
The Sydney Futures Exchange (SFE) has seen a marked increase in the liquidity of 2010 hedged electricity contracts with the ETS being the cited culprit. The prospect of the federal ETS commencing in July 2010 has stimulated additional trading in long-dated contracts as market participants seek to hedge the uncertainty of power prices beyond July 2010. SFE figures show that in the months from July 2008 to November 2008, there were over 44 million Mwh of 2010 future hedged contracts traded on the SFE. This figure compares with 8 million Mwh traded for the first half of 2008. In fact, on a single day in September 2008, there was 4.5 million Mwh of 2010 contracts traded.
At present, electricity future contracts are cash settled to the average NEM pool price, without exposing retailers and other derivative buyers to any additional contractual carbon costs. This essentially means that the electricity retailers can hedge their power price risks by using futures and exchange traded options without being exposed to any subsequent price adjustments that may arise as a result of the Generator Carbon Emissions. However, this also means that the Electricity Generators are using the future market to lock in revenue hedges at historically lucrative prices.
Retailers who have not already hedged for their 2010 and beyond pricing are now facing substantially increased hedging costs starting from this period which will be affected by the ETS. Due to the uncertainty associated with the ETS, generators are covering themselves. As a result, pricing for 2010, 2011 and future years are currently 20 to 40 percent above current 2009 pricing. So although the ETS has not yet been implemented, it is showing effects on pricing for years to come.