Financial Markets
In addition to physical spot trading through the NEM, there is a separate financial trading market for electricity.
Prices in the spot market are highly volatile and the spot price can spike to several hundred times the average price for short periods. Therefore buyers and sellers wish to lock in energy prices through financial hedging contracts. Under a “contract for differences” the purchaser (typically an electricity retailer) agrees to purchase a specified physical quantity of energy from the spot market at a set price (the “strike price”). If the actual price paid in the spot market by the purchaser is higher than the strike price, the counterparty to the contract (typically an electricity generator or a financial institution) pays the purchaser the difference in cost. Conversely, if the price paid is lower than the strike price, the purchaser pays the counterparty the difference.
There are numerous variations on the standard hedging contact available in the market, often containing complicated financial arrangements, for example one way option contracts, cap and collar contracts.
Hedging contracts are financial instruments. The financial market in electricity is conducted through over-the-counter trading and through exchange trading through the Sydney Futures Exchange (see Exchange-traded derivative contract).
The Sydney Futures Exchange lists eight standardised futures products based on Base Load and Peak-Period energy bought and sold over a calendar quarter in the NEM in New South Wales, Victoria, South Australia and Queensland.
Read more about this topic: National Electricity Market
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