A word on... electricity futures pricing

Spot prices indicate a price for electricity for a particular time and date and this is the actual price your retailer pays for the electricity supplied to you. But there’s another market that indicates future prices for electricity, the forward market, and it plays an important role in how retailers set end user pricing.  

Future dated New Zealand electricity contracts are listed on the Australian Securities Exchange (ASX).  The ASX market is open for any party to trade on, but importantly, this market delivers a daily signal on electricity prices for a period of 3 to 4 years into the future.  This provides an industry wide benchmark for expectations on forward prices, and in simple terms, provides a mechanism by which retailers can provide customers with fixed electricity pricing into the future.

Forward market prices still respond to the same demand and supply factors as the wholesale spot market. However, where spot prices may not respond, for example with the announcement of new generation coming on line in 2 years’ time, the forward market will.  The chart below shows the ASX forward prices for a 2 year period.  It demonstrates that, while the forward price is still closely linked to levels of national hydro storage, other more long term demand and supply factors also drive forward pricing higher or lower.

ASX Forward Prices and National Hydro Storage Comparison

futures pricing

Source: NZX (Spot prices) and ASX (ASX forward prices)

16 Aug 2018
3 minutes to read
By Contact Energy