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
*FRC – Full Retail Competition, where everyone can choose his/her own electricity supplier
•
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
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 extremely tight
supply conditions
Due to haze (PSI: 400),
causing surge in demand
and CCGT de-rated
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
Ability to
lock in prices
Enhanced
retail
competition
Improved access for electricity producers to manage their commercial
and operational risks such as plant outages.
Large consumers have a broader product choice to lock in long term
prices.
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
- Market falls
Physical profit UP
Physical profit DOWN
Physical profit DOWN
Physical profit UP
Paper (hedge)
Sell electricity futures (short futures)
Buy electricity futures (long futures)
- Market rises
- Market falls
Paper profit DOWN
Paper profit UP
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
Existing Options:
 Fixed Price, Fuel Indexation, Floating/Spot,
SP Tariff Indexation
Base Load
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
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Avg Hedging Price (S$/MWh)
2Q16
3Q16
2Q16
3Q16
Avg Hedge Price (S$/MWh)
Hedge Qty (MW)
58.00
10
57.00
10
56.00
10
59.00
10
65.00
10
63.00
10
57.00
62.33 Total Hedge Amount (S$)
2Q16
3Q16
Financial
(a) Hedge Qty (MW)
30
(b) Total Hedge Amount (S$)
3,734,640
(c) Avg Hedging Price (S$/MWh)
57.00
(d) Final Settlement Price (S$/MWh)
49.48
(e) Final Settlement Amount (S$)
3,241,930
(f) Hedging P&L (S$) { = (e) - (b) }
(492,710)
(g) SGX Clearing Cost (S$)
(6,000)
(h) CM Brokerage Cost (S$)
(6,000)
(i) Total Financial Cash Flow (S$) { = (h)+(g)+(f) }
(504,710)
Physical
(j) Total Load (MW)
30
(k) Qtr Avg USEP (S$/MWh)
49.48
(l) Spot Electricity Procurement Cost (S$/MWh)
3,241,930
(m) Total Physical Cash Flow (S$) { = (l) }
3,241,930
Net Result (Physical+Financial)
(n) Net Cash Flow (S$) { = (m) - (i) }
3,746,640
(o) Net Energy Cost (S$/MWh)
57.18
30
4,128,960
62.33
66.71
4,418,870
289,910
(6,000)
(6,000)
277,910
30
66.71
4,418,870
4,418,870
2Q16
3Q16
Hedge Amount (S$)
1,266,720
1,244,880
1,223,040
1,302,720
1,435,200
1,391,040
3,734,640
4,128,960
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
4,140,960
62.51
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$8,160
S$6,000
IM S$5,500
S$5,460
Margin Call
S$1,660
MM S$5,000
S$3,840
Day 1
Day 2
Day 3
15
Agenda
 Introduction
 Benefits of an Electricity Futures Market
 How Electricity Futures Works
 Product Information
 Questions
16
Contract specifications
SGX USEP Quarterly Base Load Electricity Futures (EF)
Contract Period
9 consecutive contract quarters (Mar, Jun, Sep, Dec) starting with the current contract quarter.
Contract Size
0.5 MW over each half an hour per day over the contract length:
90-day Qtr: 1080 MWh
91-day Qtr: 1092 MWh
92-day Qtr: 1104 MWh
Price Quotation
S$ per MWh
Tick size
S$0.01 per MWh
Trading Hours
2.00pm – 5.00pm, during Singapore business day
Last Trading Day (LTD)
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
Cash Settlement
Final Settlement Day
LTD + 5 business day
Negotiated Large Trade
Minimum 10 lots
Margin Requirements
Contract
Code
Contract Name
Ccy
Tier
EF
EF
EF
EF
EF
EF
USEP Quarterly Base Load Electricity Futures
USEP Quarterly Base Load Electricity Futures
USEP Quarterly Base Load Electricity Futures
USEP Quarterly Base Load Electricity Futures
USEP Quarterly Base Load Electricity Futures
USEP Quarterly Base Load Electricity Futures
SGD
SGD
SGD
SGD
SGD
SGD
1
2
3
4
5
6
Contract
month
(From)
Dec-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Contract
month
(To)
Dec-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-99
Margin Offsets
Maint.
Margin
Initial
Margin
5000
5000
5000
4500
3500
3500
5500
5500
5500
4950
3850
3850


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)
OI Mix by Contract
Daily Settlement Prices (DSP)
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
12. Merrill Lynch (Singapore) Pte Ltd
2.
Barclays Capital Futures (S) Pte Ltd
13. Mizuho Securities (Singapore) Pte Ltd
3.
BNP Paribas Securities (S) Pte Ltd
14. Morgan Stanley Asia (S) Securities Pte Ltd
4.
CIMB Securities (S) Pte Ltd
15. Nomura Securities Singapore Pte Ltd
5.
Citigroup Global Markets Securities (S) Pte Ltd
16. OCBC Securities Pte Ltd
6.
Credit Suisse Securities (S) Pte Limited
17. Phillip Futures Pte Ltd
7.
DBS Vickers Securities (Singapore) Pte Ltd
18. RHB Securities Singapore Pte Ltd
8.
Deutsche Futures Singapore Pte Ltd
19. SG Securities (S) Pte. Ltd.*
9.
Goldman Sachs Futures Pte Ltd
20. The Hongkong and Shanghai Bank Corp Ltd
10. JP Morgan Securities Singapore Pte Ltd
21. UBS Futures Singapore Limited
11. KGI Ong Capital Pte Ltd
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
[email protected]
Or visit our website:
www.sgx.com/commodities/electricity
24
Thank you
Singapore Exchange
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