Perils of trading politics and carbon price that might not exist

The National Electricity market is one of the biggest ($11.4 billion) and most volatile financial markets in Australia. Each day, contracts worth millions of dollars are exchanged between generators and retailers, and traded by professional market players. There is a heavy trade in futures contracts and other financial instruments such as swap and option derivatives.

But for the last few days, it’s been virtually flying blind. Do generators price in a carbon price exists now but may not if the legislation to repeal it is passed in the Senate? Or do they try and pocket a profit by keeping the gains of their bidding (if and) when the carbon price legislation repeal is backdated to July 1.

“I’ve never had to trade politics before,” noted one trader of the sometimes bizarre trading patterns happening in the somewhat opaque market.

“There is a bit of a game going on. Some have removed carbon from their bidding stacks, some have done it partially, some haven’t removed it at all.

“It’s a totally mixed bag. Some traders are upset and some are happy. Many are asking what is the right thing to do.”

The uncertainty around the Senate vote on the carbon price repeal legislation, and the Abbott government’s determination to have this backdated to the end of the 2013/14 financial year, has created an unusual precedent for financial markets.

Essentially, they are being asked to ignore a carbon price that is, by law, still in operation, and at a price of $25.10 a MWh. The Australian Financial markets Association, apparently with some dissent, ruled that the markets could effectively ignore, up until July 18, the carbon price that is currently law.

The idea is that if this is done, then it avoids an absolute mess in trying to unravel contracts and deliver what the government has promised – in instant decrease in electricity prices on consumer bills.

Still, not all is what it seems. According to traders that RE contacted, some generators were clearly removing carbon prices from their bidding stacks.  They concede it is impossible to tell if a physical bid includes or excludes carbon – it’s just a price.

“One could infer something based on prior behaviour but the response could be that it is a change in bidding strategy,” one observer said.

Still, on the basis of changed bidding, traders cited CS Energy, Origin and Alinta as among those who apparently did remove the carbon price.

On other generators, such as AGL Energy, they were not sure. AN AGL spokesperson said in an emailed statement:

“AGL Energy ..  confirms households will receive price reductions if the carbon legislation is repealed. AGL’s bidding practices are commercially sensitive and AGL does not pass comment on those practices.

“However as previously stated, we will pass savings on to households if the carbon legislation is repealed and up until that time we must ensure we appropriately manage our legal liability under the current legislation.”

Ironically, the NSW government owned Delta Energy is one generator cited by traders as having appeared to have made no change to its bids, suggesting it was looking to pocket an extra approximately $20/MWh if the carbon price is, indeed, repealed.

One trader said Delta’s Vales Point plant had clearly shifted generation into higher price bands since July 1, but this could just be a concerted effort not to generate at low prices unless they necessary due to contract positions.

A spokesperson for the NSW Energy Minister did not respond to our queries.

As it is, bidding has been all over the place in the first few days – worsened by a line outage, and falling demand in Queensland (due to the fine weather), which combined with rooftop solar and carbon-free bidding, has pushed wholesale electricity prices to below zero. “It’s a pretty crazy market,” another trader noted.