New Zealand FTR Market Newsletter - September 2013

Sep 17, 2013

This newsletter reports on (i) the results of the August 2013 Primary and Variation FTR auctions and (ii) the Provisional FTR Hedge Values for the FTR Period of August 2013.  Nexant hopes that market participants and other parties will find this newsletter of interest.[1]

 

August 2013 Primary and Variation Auctions

During the month of August 2013, three Primary Auctions were conducted for the months of October, November and December and three Variation Auctions were conducted for the months of September, October and November. For these six auctions, the FTR auction capacities, the FTR awards, the FTR Auction Clearing Prices (ACP) and the aggregated FTR Acquisition Cost per FTR product are shown in Table 1, Table 2 and Table 3, respectively.

The available FTR grid capacity is shown in Table 1.  The available FTR grid capacity is derived from discounting the net FTR flow[2] from the product of the FTR grid capacity and the Capacity Scaling Factor (CSF)[3].  The FTR auction capacity is equal to the available FTR grid capacity scaled by the Capacity Release Factor (CRF)[4].  For all FTR Periods except December, the published HVDC bipole configuration was 7[5], and the HVDC line was the limiting transmission constraint in these auctions in both the OTA to BEN and EN to OTA directions.  For the Primary Auction for the FTR Period of December, Nexant was not able to determine the limiting transmission constraint.

The results of the Primary and Variation auctions conducted in August are shown in Table 2. This data representation is in a tabular format and is different from the graphical format provided in the first two newsletters.  In those newsletters, Nexant presented the FTR Volume per FTR product in an intuitive manner showing the relative Hub locations and the FTRs flowing from a source to a sink. This presentation also showed that in the auction process FTR Obligations provide counter-flow while FTR Options do not. Since the number of auctions that will be processed each month will increase until a steady state is reached, a tabular format is more manageable.

 

Table 1: Development of FTR auction Capacity[6]

 

Table 2: FTR Awards and Auction Clearing Prices

The following list contains insights into the auctions conducted in August:

  • The FTR auction capacity for each auction was fully awarded in each direction since the Option ACP is greater than $0/MWh for each direction.
  • In all six auctions the Obligation ACP from OTA to BEN is negative and no OTA to BEN Obligations were awarded. In past auctions, some Obligation FTRs were awarded with a negative ACP and these FTRs were essentially providing counter-flow to Options and Obligations in the BEN to OTA direction.  The corresponding holder of these Obligations received funds from the auction settlement, i.e., the FTR Acquisition Cost is negative.  This may have been part of a speculation strategy, where the holder expects the negative FTR Acquisition Cost will outweigh the Final FTR Hedge Value over the FTR Period.  However, in the auctions conducted in August, it seems this strategy was not employed or if it was, the FTR buy-bid prices for the OTA to BEN Obligations were less than the negative ACPs resulting in no FTRs to be awarded.
  • The majority of the FTRs from BEN to OTA were Options. However, some were Obligations purchased at a lower ACP. Although the FTR Obligations are less expensive, they hold the risk of being a liability to the holder.

The aggregated FTR Acquisition Costs for the auctions conducted in August per FTR product is shown in Table 3. The total FTR Acquisition Cost over all six auctions conducted in August amounts to $1,870,050.58.  Consistent with previous auctions, the majority of the aggregated FTR Acquisition Costs are associated with BEN to OTA FTR Options.

 

Table 3: Aggregated FTR Acquisition Costs

Valuation of August FTR Period FTRs

Table 4 holds the aggregate Provisional FTR Hedge Values as well as the aggregated FTR Acquisition Costs for the four FTR products associated with the FTR Period of August 2013.

The preliminary net FTR payment (profit) as calculated in Table 4 is equal to the Provisional FTR Hedge Value minus Total FTR Acquisition Cost.  Since Nexant does not have access to the FTR Payment Scaling Factor, provisional FTR Hedge Values are used.  This may cause the Final FTR Hedge Values, in aggregate, to be lower, and thus these results are deemed preliminary.

Table 4: Preliminary FTR Profit for the FTR Period of August 2013

Under the scenario in which a market participant is procuring a FTR to hedge against transmission congestion and transmission loss rentals, it is rational that the FTR buy bid level be set equal to expected transmission congestion and transmission loss rentals, plus a risk aversion based premium.  It is also rational that the market participant is willing to pay up to this amount for financial protection against potentially large rental values.  However, in actual system operation, the rentals may turn out to be much smaller than anticipated.  This is observed in the OTA to BEN Option FTRs, assuming that the FTR Hedge Value is comparable in value to the rentals.  On the flipside, the BEN to OTA Option FTRs seem to be quite effective for their relative FTR Acquisition Cost, assuming that the FTR Hedge Value is comparable to the rentals.

From a financial speculation perspective, providing counter-flow with the OTA to BEN Obligation FTRs did not turn out to be a profitable pursuit because the preliminary value that must be paid back.


[1] In the current market framework, there are two FTR Hubs (OTA and BEN) and two FTR Types (Options and Obligations), yielding four FTR products: (i) OTA to BEN, Option, (ii) OTA to BEN, Obligation (iii) BEN to OTA, Option and (iv) BEN to OTA, Obligation.  The duration of every FTR product is one month.  Each of the four FTR products may have different Auction Clearing Prices (ACP).  However, important relationships hold between these ACPs, e.g., see “Consultation on Proposed FTR Allocation Plan 2012”, 10 April 2012 (authored by EMS).

[2] The net FTR flow is developed from existing FTRs that were awarded for that FTR Period in a previous Auction.  For example, in the direction of OTA to BEN, the net FTR flow is the Option FTR Volume in the OTA to BEN direction plus the Obligation FTR Volume in the OTA to BEN direction minus the Obligation FTR Volume in the BEN to OTA direction.  In a Primary Auction, the value of the net FTR flow in either direction is zero.

[3] For these particular auctions, the CSF is defined in Figure 8 of “FTR Policy: FTR Grid And Auction Data”, 26 June 2013.

[4] For these particular auctions, the CRF is defined in Figure 8 of “FTR Policy: FTR Calendar”, 15 May 2013 (authored by EMS).

[5] The HVDC bipole configuration code was 7, which indicated 110 MW of capacity in the northern direction and 45 MW of capacity in the southern direction on the HVDC.  See “FTR Policy: FTR Grid and Auction Data”, 26 June 2013 (authored by EMS).

[6] Variation Auction round is in the format of i of n, where n is the total number of Variation Auctions that are defined to be processed for this particular FTR Period.  The value of i denotes the ith variation auction within this process for this particular FTR Period.