Managing Risk in Electricity Markets William Prajogo Singapore Exchange
Agenda Introduction Benefits of an Electricity Futures Market How Electricity Futures Works Product Information Questions 1
Characteristics of Singapore electricity market Wholesale competition towards FRC* in 2018 Sell Side 3 largest gencos are Senoko, Seraya, and Tuas Power Smaller gencos are Sembcorp, Keppel, and PacificLight Each genco has its own electricity retailer business which sells electricity to large consumers Buy Side There were only 7 retailers (1 independent retailer) at the start of this decade, but the number has grown to 18 (11 are independent retailers) with the introduction of electricity futures market in 2015 Large consumers typically buy electricity from genco retailers often under fixed price, long term contract, but with more independent retailers, there is now more product choice for them Smaller consumers pay a regulated tariff from SP Services (default retailer), but may soon be able to choose their own electricity supplier when the market is fully liberalised in 2018 *FRC Full Retail Competition, where everyone can choose his/her own electricity supplier
In the spot market, electricity generation and consumption balance every half hour In the spot market, electricity generation and consumption balance every half hour 3
Spot prices can fluctuate markedly Due to haze (PSI: 400), causing surge in demand and CCGT de-rated Due to extremely tight supply conditions Due to tight supply cushion Spikes can be caused by: - lower supply, caused by plant outages - transmission congestion - increased forecasted demand - fuel supply shortages and price shocks 4
Electricity futures market helps balance short-term fluctuations in the spot market 5
Agenda Introduction Benefits of an Electricity Futures Market How Electricity Futures Works Product Information Questions 6
Key features of trading electricity futures + + + + + + + Exchange-traded and well-supervised Cleared, therefore reducing counterparty credit risk Open, anonymous and transparent market Standardized contract size and unit Single account to access more trading counterparties Increased capital efficiency through multilateral position netting and margin offsets Easy accessibility via clearing members (banks) with global presence 7
Benefits of electricity futures to the industry Better risk management Improved access for electricity producers to manage their commercial and operational risks such as plant outages. Ability to lock in prices Large consumers have a broader product choice to lock in long term prices. Enhanced retail competition The ability for independent retailers (without own generation assets) to use EF to secure fixed price contracts facilitates market entry. 8
Agenda Introduction Benefits of an Electricity Futures Market How Electricity Futures Works Product Information Questions 9
Using electricity futures to hedge price risk Hedging is buying or selling a derivative to offset the risk of a physical position to allow a known profit to be locked in ahead of time Generator Retailer/Consumer Physical Long the physical electricity at a future date Short the physical electricity at a future date - Market rises Physical profit UP Physical profit DOWN - Market falls Physical profit DOWN Physical profit UP Paper (hedge) Sell electricity futures (short futures) Buy electricity futures (long futures) - Market rises Paper profit DOWN Paper profit UP - Market falls Paper profit UP Paper profit DOWN Net position FLAT - profit or loss on the physical market are offset by profit or loss on the paper market (P&L is locked in) FLAT - profit or loss on the physical market are offset by profit or loss on the paper market (P&L is locked in) 10
Hedging examples Generators During falling electricity prices, a generator can sell Electricity Futures to protect their revenue target Retailers A retailer can purchase Electricity Futures to lock in their electricity selling cost to their customers Consumers A consumer has more choice on how they procure and hedge their electricity by using Electricity Futures Electricity consumption (MW) Flexibility Base Load Existing Options: Fixed Price, Fuel Indexation, Floating/Spot, SP Tariff Indexation New Options with EF: Spot procurement for total load, EF for the base load portion of load Spot procurement + EF for base load portion of load, fixed price variable volume for the flexible portion of load Time 11
Hedging examples Buy side 2Q16 3Q16 2Q16 3Q16 2Q16 3Q16 Avg Hedge Price (S$/MWh) Hedge Qty (MW) Hedge Amount (S$) Jan-16 58.00 10 1,266,720 Feb-16 57.00 10 1,244,880 Mar-16 56.00 10 1,223,040 Apr-16 59.00 10 1,302,720 May-16 65.00 10 1,435,200 Jun-16 63.00 10 1,391,040 Avg Hedging Price (S$/MWh) 57.00 62.33 Total Hedge Amount (S$) 3,734,640 4,128,960 2Q16 3Q16 Financial (a) Hedge Qty (MW) 30 30 (b) Total Hedge Amount (S$) 3,734,640 4,128,960 (c) Avg Hedging Price (S$/MWh) 57.00 62.33 (d) Final Settlement Price (S$/MWh) 49.48 66.71 (e) Final Settlement Amount (S$) 3,241,930 4,418,870 (f) Hedging P&L (S$) { = (e) - (b) } (492,710) 289,910 (g) SGX Clearing Cost (S$) (6,000) (6,000) (h) CM Brokerage Cost (S$) (6,000) (6,000) (i) Total Financial Cash Flow (S$) { = (h)+(g)+(f) } (504,710) 277,910 Physical (j) Total Load (MW) 30 30 (k) Qtr Avg USEP (S$/MWh) 49.48 66.71 (l) Spot Electricity Procurement Cost (S$/MWh) 3,241,930 4,418,870 (m) Total Physical Cash Flow (S$) { = (l) } 3,241,930 4,418,870 Net Result (Physical+Financial) (n) Net Cash Flow (S$) { = (m) - (i) } 3,746,640 4,140,960 (o) Net Energy Cost (S$/MWh) 57.18 62.51 Assumptions/Notes: Total customer load is 30 MW Linear hedging to be done over 3 months 2Q16 and 3Q16 are shown to illustrate downtrend and uptrend market conditions 2Q16, 3Q16 also refer to the quarterly EF contract for the second and third quarter of 2016 Hedge prices shown are actual price levels for 2Q16 and 3Q16 EF contracts in the corresponding hedging months 12
SGX margining system Clearing/Trading Account and Margin Deposit To trade futures on SGX, market participants have to open an account with an SGX Clearing Member. An Initial Margin deposit is required when a contract is opened. This deposit can be in the form of cash, government securities, or other approved collaterals acceptable to the Clearing Member. The funds and collaterals collected from customers are segregated from the house funds and collaterals of the Clearing Member. Initial Margin The amount of funds and/or collaterals required before a contract could be opened. Maintenance Margin The minimum amount of funds and/or collaterals required to be maintained in an account for each outstanding contract or open position. Margin Call A call for additional margins if the margin balance in an account falls below the prescribed maintenance margin level after the daily mark-to-market of positions. Daily Marking of Positions to Market Cleared contracts are re-valued or marked to market and settled on a daily basis. Market participants receive the profit or pay the losses made on their positions on a daily basis, enabling efficient management of trade positions and accounts. The effect of margining and daily marking of positions to market ensures all losses due to daily price fluctuations are being accounted for and settled, preventing huge losses from being accumulated. 13
Example of SGX electricity futures margining system Trader buys 1 lot of current contract quarter (assume contract size is 1,080 MWh) of SGX quarterly base load electricity futures @ S$80/MWh. Initial Margin (IM) and Maintenance Margin (MM) for this contract are S$5,500 and S$5,000 respectively. Trader has an initial account balance of S$6,000. DAY 1: Beginning account balance = S$6,000 Settlement price at the end of Day 1 is S$82/MWh (price is up) Hence, unrealised profit for Day 1 = (S$82-S$80) x 1,080 = S$2,160 Account balance at the end of Day 1 = S$6,000+S$2,160 = S$8,160 > S$5,000 (MM) No margin call DAY 2: Account balance from Day 1 = S$8,160 Settlement price at the end of Day 2 is S$79.50/MWh (price is down) Hence, unrealised loss for Day 2 = (S$79.50-S$82) x 1,080 = -S$2,700 Account balance at the end of Day 2 = S$8,160-S$2,700 = S$5,460 > $5,000 (MM) No margin call 14
Example of SGX electricity futures margining system DAY 3: Account balance from Day 2 = S$5,460 Settlement price at the end of Day 3 is S$78/MWh (price is down) Hence, unrealised loss for Day 3 = (S$78-S$79.50) x 1,080 = -S$1,620 Account balance at the end of Day 3 = S$5,460-S$1,620 = S$3,840 < S$5,000 (MM) Margin call. Trader needs to top up S$1,660 to bring margin back up to the initial margin (S$5,500) S$6,000 S$8,160 IM S$5,500 MM S$5,000 S$5,460 Margin Call S$1,660 Day 1 Day 2 Day 3 S$3,840 15
Agenda Introduction Benefits of an Electricity Futures Market How Electricity Futures Works Product Information Questions 16
Contract specifications Contract Period Contract Size Price Quotation Tick size Trading Hours Last Trading Day (LTD) SGX USEP Quarterly Base Load Electricity Futures (EF) 9 consecutive contract quarters (Mar, Jun, Sep, Dec) starting with the current contract quarter. 0.5 MW over each half an hour per day over the contract length: 90-day Qtr: 1080 MWh 91-day Qtr: 1092 MWh 92-day Qtr: 1104 MWh S$ per MWh S$0.01 per MWh 2.00pm 5.00pm, during Singapore business day Last business day of the contract quarter Final Settlement Price Arithmetic average of all USEP half - hourly prices over the expiring contract quarter, rounded to two (2) decimal places. Settlement Method Final Settlement Day Negotiated Large Trade Cash Settlement LTD + 5 business day Minimum 10 lots Margin Requirements Contract Code Contract Name Ccy Tier Contract month (From) Contract month (To) Maint. Margin Initial Margin EF USEP Quarterly Base Load Electricity Futures SGD 1 Dec-16 Dec-16 5000 5500 EF USEP Quarterly Base Load Electricity Futures SGD 2 Dec-16 Dec-16 5000 5500 EF USEP Quarterly Base Load Electricity Futures SGD 3 Mar-17 Mar-17 5000 5500 EF USEP Quarterly Base Load Electricity Futures SGD 4 Jun-17 Jun-17 4500 4950 EF USEP Quarterly Base Load Electricity Futures SGD 5 Sep-17 Sep-17 3500 3850 EF USEP Quarterly Base Load Electricity Futures SGD 6 Dec-17 Dec-99 3500 3850 Margin Offsets Inter-month Margin Offset: up to 50% Inter-commodity Margin Offset: 40% with fuel oil and LNG products Clearing Fee S$50 per lot 17
Market statistics Volume and Open Interest (OI) Daily Settlement Prices (DSP) OI Mix by Contract Volume Mix by Participants 18
Monitoring electricity futures prices SGX Website (www.sgx.com) Bloomberg (Code: SGEA Comdty) Reuters (Code: 0#SEF) 19
Newsletters and market reports 20
How to start trading in SGX markets 21
For access to SGX markets, contact any of our trading/clearing members below: 1. ABN AMRO Clearing Bank NV 2. Barclays Capital Futures (S) Pte Ltd 3. BNP Paribas Securities (S) Pte Ltd 4. CIMB Securities (S) Pte Ltd 5. Citigroup Global Markets Securities (S) Pte Ltd 6. Credit Suisse Securities (S) Pte Limited 7. DBS Vickers Securities (Singapore) Pte Ltd 8. Deutsche Futures Singapore Pte Ltd 9. Goldman Sachs Futures Pte Ltd 10. JP Morgan Securities Singapore Pte Ltd 11. KGI Ong Capital Pte Ltd 12. Merrill Lynch (Singapore) Pte Ltd 13. Mizuho Securities (Singapore) Pte Ltd 14. Morgan Stanley Asia (S) Securities Pte Ltd 15. Nomura Securities Singapore Pte Ltd 16. OCBC Securities Pte Ltd 17. Phillip Futures Pte Ltd 18. RHB Securities Singapore Pte Ltd 19. SG Securities (S) Pte. Ltd.* 20. The Hongkong and Shanghai Bank Corp Ltd 21. UBS Futures Singapore Limited 22. UOB Bullion & Futures Limited *Formerly Newedge Financial Singapore Pte Ltd 22
Agenda Introduction Benefits of an Electricity Futures Market How Electricity Futures Works Product Information Questions 23
Contact If you require more information on SGX Electricity Futures, or would like to be in our distribution list to receive regular market updates/reports, please contact: William Prajogo Product Manager Electricity +65 6236 8743 william.prajogo@sgx.com Or visit our website: www.sgx.com/commodities/electricity 24
Thank you Singapore Exchange London Tokyo Beijing Hong Kong Mumbai sgx.com This presentation is being made available to certain authorized recipients for their general information only. While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided in this presentation, they will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Neither SGX nor any of its affiliates shall be liable for the content of information provided by or quoted from third parties. Examples provided are for illustrative purposes only. The information in this presentation is subject to change without notice. Any recirculation, transmission or distribution of this presentation or any part thereof by any third party requires the prior written permission of SGX. SGX and its affiliates disclaim all responsibility and liability arising in connection with any unauthorised recirculation, transmission or distribution of this presentation or any part thereof. SGX Ltd, September 2014