FAQS - Contracting approach

This page lists questions, answers and feedback received about the HVDC contracting approach.

Feedback/questions Response
Can we have worked examples on the contracting arrangements so that we understand the approach

Our approach will be to use:

a) CFDs
b) CFDs with a physical component
c) Digital options under ISDA contracts.

We may also see a need for availability contracts and contracts for the system ride through tests. These would be bespoke contracts outside of the ISDA.

For the 3 instruments above:

a) Contracts for differences (CFDs). We have spoken with a number of participants who believe CFDs to compensate for the opportunity costs of fuel to move the natural HVDC transfers are all that is required. CFDs are a purely financial instrument but they should help incentivise the type of movement we want. This will be buying electricity in one island or one node (in order to incentivise increased generation or decreased load) and selling in the other island or another node (in order to incentivise decreased generation or increased load).

b) Where pure CFDs are not having or will not have the desired effect then we may move to also having CFDs with a physical element. This would be similar to the structure outlined above but with an additional element of a set point or range on generation/load to be achieved (i.e. XYZ hydro <500MW). There would be an additional premium for the physical element. Full payout on the CFD and physical element would only be if the physical element were achieved.

c) Additionally, for some tests where the range or tolerance around the transfer level over the HVDC is small then we may also structure in (additional to one or both of the above instruments) a digital option.

This is where a fixed payout is auctioned for achievement of the test conditions (please note this is dependent on conditions being achieved for the test, not the actual test being achieved). We would put up a fixed sum, for the test conditions (certain transfer over the HVDC) being achieved. Participants can bid for this fixed payout and the winner of the auction (probably the highest bidder, but subject also to them being able to sufficiently influence HVDC transfers) will pay their bid price. Should the test conditions then be achieved they would receive the fixed payout. Only the successful bidder will pay their bid price. Unsuccessful bidders will not pay their bid price.

Transpower said at the briefing that there is no optionality, so how will you contract flexible schedules?

There is no optionality within the contracts as we are trying to gain certainty. But naturally the risk management of these arrangements by counterparties may (in the case of financial only contracts) imply some optionality in the way in which you manage and/or hedge the resulting risk.

The flexibility within the schedules comes from the ability to schedule tests, as much as practicable, to use the natural HVDC transfer.

During the South transfer testing period, will Transpower cover the risk of the Wellington Voltage stability constraint binding in the CFDs? Transpower is prepared to accept the basis risk in the CFD contracts. Similarly if counterparties wish to structure this into their prices we are willing to consider this arrangement also.
How is Transpower working with other parties that may be impacted by the Pole 3 testing, i.e. Maui during high north transfer tests when gas usage is significantly reduced?

We have held several briefings to the industry, but we acknowledge this may not cover all affected parties.  It is also important that those present at the briefings ensure any of their affected customers or suppliers are also aware of any implications. We are not necessarily in the best position to judge this.
 
We are available to discuss the commissioning process with anyone who wants to know more.

Please contact Dean Eagle at if you require more information.

How long before a test will you enter into transactions for that test? We are keen to use hydrological variability to our advantage so locking in a position very early (and thereby reducing valuable flexibility) is unlikely to be attractive.   In practice, we expect that some tests would ideally be contracted weeks in advance, with others being done a number of days in advance.
Will the CFD and physical swap transactions have an element of optionality? Yes and No.  The instruments themselves won’t have optionality for counterparties as we are trying to gain certainty.  But naturally the risk management of these arrangements by counterparties may (in the case of financial only contracts) imply some optionality in the way in which you manage and/or hedge the resulting risk.
How will sufficient reserves be procured? Reserves will be procured by the system operator through the normal reserves market. For some higher transfer tests it may be necessary for Transpower (as Grid Owner) to enter into non-ISDA reserve availability contracts, or possibly reserve offer incentives under the ISDA framework, to ensure that sufficient reserves are available
Why the ISDA framework? Transpower’s industry counterparties are very familiar with the ISDA framework, which is flexible enough to accommodate the range of transactions contemplated, including physical delivery transactions.  Most counterparties we have spoken to support the use of the ISDA framework.  We are interested in achieving the result we want with the least transaction cost.
When will the ISDA frameworks be in place? We expect to conclude negotiations with all counterparties by the end of July.
When will the first transactions under the ISDA frameworks be made? We expect to enter into the first transactions for Pole 3 testing proper in October.  It is possible we will enter into “dry run” transactions before that to test our processes.
Will you consider splitting up transactions so that smaller players can participate? Transactions will be contestable as much as possible.  If we believe that best value for money can be achieved by dividing a transaction between several participants then that is what we will do.
Who will take the basis risk in the transactions? That will depend on how each party prices the basis risk.  It is fair to assume that most basis risk will be taken by Transpower as the party that is likely to have the most information about it and best be able to manage it.
How will the system ride through tests be procured? We intend to enter into bilateral contracts with the generators who can provide the necessary frequency disturbances for the system ride through tests.  Where feasible, these contracts will be contestable.  They will not be under the ISDA framework.
Will there be energy availability contracts? We are considering that for some thermal generators.  If such contracts are required they will not be under the ISDA framework.
Contracts should be provided early. In June we will be coming to speak to generators and seek feedback regarding the contractual framework we propose to use.
Use ISDA for Energy Hedge agreements. We are intending to use commercial arrangements that are based on ISDA.
Can NZX be used for traded options? Given the short term nature of the tests and the quarterly nature of the ASX New Zealand Futures Contract we do not anticipate the use of these instruments.
Need 4 days to change contracts if additional outages are needed. Noted. We will endeavour to work within this timeframe.