Interpretation & Understanding of

the Nigerian Transitional Electricity

Market Rules

www.transafricanenergy.com

Dr Stephen Labsonslabson@transafricanenergy.com

Trans African Energy Pty Ltd

Advisory and consulting services

Australia’s National Electricity Market

Contracting and Risk Management

Abuja 15 September 2015

Spot market and pricing

Spot market managed in real-time through a centrally-coordinated dispatch process.

Generators offer supply bids with specific amounts of electricity at particular prices., ramp rates, etc

Offers are submitted every five minutes of every day.

A dispatch price is determined every five minutes.

Six dispatch prices are averaged every half-hour to determine the spot price for each NEM region.

Price determination

Source: AEMO

Spot price capped at AUD $12 500/MWh

Dispatch BIDS capped AUD $-1000/MWh

NB to balance swap arrangements

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Gross pool

Market Participants deal with AEMO- NOT with each otherwhen selling or buying wholesale electricity.

Limited recourse w.r.t. AEMO

Payments to Generators are limited to the money available to AEMO from receipts from Market Participants

AEMO has powers to drawdown on credit support if amarket participant is indefault of payments.

Any shortfall in AEMO’srecovery from any MarketParticipant in relation to abilling period is shared acrossthe generators of electricity byreducing the amount paid tothem for electricity suppliedthrough the Market in thatbilling period.

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Risks from price volatility (wholesale market capped at AUD$ 12,500/MWh)

Rapid payment obligations Largest retailer (20% of NEM) with spot price at $12,500/MWh will increase

exposure to AEMO at over $1Million per minute

Risk of non payment covered by bank guarantees with AEMO AEMO typically holds $1.5Billion to $3.5Billion in bank guarantees Level of guarantee (Max Credit Limit) driven by energy traded, average price and

price volatility

Daily review of participant exposures Rapid payment requirements when near limits Default then suspend if obligation not met Rapid retailer of last resort required

A ‘gross pool’ – such that all power must be traded through the wholesale pool:

Bilateral trade in physicals is not permitted.

Financial hedges are used to manage risks: e.g.

Risk management for retailers requires: Contracting around compulsory

gross pool spot market

Direct generation investment (vertical integration - gentailer)

Demand side control

Hedge contracts between generators and retailers

independent of AEMO’s administration.

The details of hedge contracts are not factored into the balancing of supply and demand, and are not regulated under the National Electricity Rules.

But do set a strike price referenced to electricity traded through the pool.

In this way hedge contracts are financial instruments that participants use to manage volatility of the spot price.

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Auctions of Inter-region SettlementResidues

The spot price for electricity in eachregion of the NEM is PARTLYdetermined by the physicallimitations of interconnectors, andthe loss factors for both thetransmission and distributionnetworks.

This means that there may besignificant differences in the spotprice across NEM regions.

The difference between the value ofelectricity in the region where it isgenerated and its value if sold inanother region is called the inter-regional settlement residue.

The settlement residue that accumulates is made available to the market by the conduct of an auction.

The auction process establishes the market value of the residue,

Registered participants who purchase auction units obtain access to a share of the residue.

the premium paid for the auction units provide protection against high price differences between regions in the wholesale market

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Most energy is traded outside the IMO administered market via Bilateral Contracts between Market Customers and Market Generators.

These Bilateral Contracts can have energy and capacity components. By trading energy bilaterally, Market Customers and Market Generators can reduce their exposure to the IMO administered energy market settlement processes. 9

The Wholesale Electricity Market (WEM) -Western Australia*

Bilateral Contracts: Trades of energy and capacity occur between Market Participants.

The Short Term Energy Market (STEM): A daily forward market that allows Market to trade around bilateral energy positions producing a Net Contract Position South West Interconnected System

Where capacity is traded bilaterally the IMO reduces the market capacity charges for the relevant Market Customer and reduces the market capacity payments to the associated Market Generator.

Market Customers and Market Generators can modify their bilateral energy position through trading in the day ahead STEM, forming a Net Contract Position (NCP).

Differences between actual net energy supplied or consumed and NCP quantities are bought and sold in the Balancing Market.

After the Trading Day, the IMO determines a balancing price for each Trading Interval.

Generators receive (pay) this Balancing Price for any quantity above (below) their NCP and Market

Customers pay (receive) this Balancing Price for any quantity above (below) their NCP. Generators dispatched out of merit are eligible for constrained on or off compensation.

If a Facility in the Non-Balancing Dispatch Merit Order was dispatched by System Management, it receives (pays) its standing data price (pay-as-bid) for deviations below (above) the relevant Resource Plan level.

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OTC contracts

Forward contracts operate in parallel with the gross pool wholesale market and provides price certainty. This means that if the gross market spot price is:

higher than the strike price, the seller in the forward contract pays the purchaser the spot price minus the strike price

lower than the strike price, the purchaser in the forward contract pays the seller the strike price minus the spot price.

This method for effectively fixing the price sellers receive and purchasers pay is called Contracts for Differences.

They provide a form of electricity price risk insurance and play an important role in underpinning the financial stability of the National Electricity Market.

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And shaped products

Exchange-traded products Futures and options are standardised products traded on the Australian

Securities Exchange (ASX) outside the NEM Rules.

They differ from OTC contracts as:

the prices and volumes are made public and so the market is transparent;

liquidity is increased by the participation of financial companies such as hedge funds or investment banks; and

the exchange requires the deposit of an initial margin as collateral against credit risk which is updated to match prices daily until the position crystallises at expiry.

This lowers the level of default risk compared to some OTC contracts

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Base Load Electricity Futures, which is for 1 MWh based on a base load profile. The base load profile is defined as the NEM base load period from 00:00 hours Monday to 24:00 hours Sunday over the duration of the Contract Quarter.

Peak Period Electricity Futures, which is for 1 MWh based on a peak-period profile. The peak-period profile is defined as the NEM peak-period from 07:00 hours to 22:00 hours Monday to Friday (excluding Public holidays, as determined and published by the Australian Stock Exchange) over the duration of the Contract Quarter.

Strip Futures Products, which is defined as a trade where consecutive traded quarters of a futures product (with the same volume for each of those traded quarters) are bought or sold simultaneously.

Quarterly Base $300 Cap Products, which are 1 MWh on a Base Load profile for the respective States (NSW, QLD, VIC and SA) over the duration of a Calendar Quarter.

Australian exchange-traded electricity products are considered to be ‘thinly’ traded but turnover volumes have been steadily increasing.

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Contracts between players in the form of bilateral between generators and distribution businesses came slowly.

One large retailer become insolvent due to lack of hedge contracts

Exchange traded hedge instruments have assisted the industry and added needed liquidity to the market.

But physical re-integration via generation and retail bundling has perhaps been just as significant.

Integrated gas and power forward markets are becoming more important as well

i.e. traditional long term back to back supply arrangements are being replaced with forwards, swaps and options in gas to gas and gas

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Dr Stephen LabsonTrans African Energy Pty Ltdslabson@transafricanenergy.com

www.transafricanenergy.com

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