About electricity financial markets
The competitive national electricity market is structured around a common pool, or spot market, for wholesale trading in physical electricity.
By this means, a spot price for electricity is determined which reflects physical supply and demand across the whole market. This is an important signal for investors.
Investors are equally concerned about managing price risk. Generators wish to ensure an adequate return on investment. Wholesale buyers wish to lock in purchase prices to ensure a profit when the electricity is on-sold to retail customers.
Extreme events, such as generator outages, loss of transmission, or extreme temperatures can drive shortfalls in supply or exceptional demand, resulting in peaking prices. Businesses need to manage these risks to underwrite financial stability and returns.
The electricity financial markets derived from the physical market play a key role in risk management and in supporting market stability and informed investment.
Using financial instruments, wholesale market participants can agree on a particular price for an electricity transaction or can agree on a maximum or minimum price limit.
Agreements matching specific requirements of the buyer and seller are negotiated in bilateral contracts traded ‘over-the-counter’ (OTC). Price risk is also managed using standardised futures and options products traded on the Australian Securities Exchange (ASX).
Turnover in financial derivative products is now a multiple of the turnover in physical supply, and participants in the financial markets include not just business trading on the physical market but intermediaries such as brokers and financial services companies.
Work is continuing on opportunities to make the interaction between electricity physical and financial markets more efficient. The objective is to reduce capital requirements, support market stability and assist price discovery.
For more information about physical and financial markets, visit the Australians Securities Exchange website, the Australian Energy Market Commission website, or the Australian Energy Market Operator website.