A University of Queensland researcher is close to completing a computer model for calculating fair prices for new electricity market derivative securities.
Commerce Department Associate Professor Stephen Gray said the derivatives - contracts in which pay-offs depend in different ways on the changing price of electricity - were increasingly being bought by electricity distributors from generators or third-party companies to protect against surges in electricity prices at peak times.
Dr Gray's model - a framework for valuing derivatives - will be disseminated to the State's electricity industry by the Queensland Electricity Reform Unit (ERU) - an independent body set up to manage the deregulation process which began three years ago.
The research is funded by a three-year, $200,000 Australian Research Council Strategic Partnerships with Industry - Research and Training (SPIRT) grant with the ERU.
"Queensland's industry now consists of three generating companies and a number of distributors in competition with each other. In the near future they will also have to compete with generators and distributors throughout Australia," Dr Gray said.
"Electricity prices go up and down according to supply and demand. Distributors may pay anywhere between $10 per megawatt hour and $5000 per megawatt hour depending on demand and supply.
"Prices can soar for example on a hot day when air-conditioning units are in high use and/or when there is an outage at one or more generators."
To protect against excessive prices, distributors were increasingly buying derivatives from generators or third parties, he said.
"For example, Energex might buy a ?cap' that guarantees they will have to pay no more than $100 per megawatt hour. If, for some reason, electricity prices soar to $250 per megawatt hour, the counter party pays Energex the difference of $150 per megawatt hour," Dr Gray said.
Dr Gray's model combines a vast array of data including predictions of future electricity prices, market volatility and electricity prices throughout Australia as they change every five minutes.
"Electricity is a commodity that behaves very differently in different markets. The model for Queensland may not necessarily work elsewhere. For example, in Victoria, the coal used in their coal-fired power stations burns more efficiently than in Queensland making their power cheaper," he said.
"In Queensland, we have a delicate balance between supply and demand because no new generators were built during much of the 1990s. In other words, we've just got enough power to keep the lights on."
The derivative market for the electricity industry was a completely new area, he said.
"In the past, governments dictated electricity prices and generators and distributors were part of a giant, State-owned monolith. Now we are seeing the benefits of competition, but distributors must ensure - through strategies such as these derivatives - that they effectively manage the risks that come from potentially volatile electricity prices," he said.
He said he expected the Australian industry to eventually follow the United States example where more traders such as Houston-based company Enron became derivative dealers to help provide liquidity in the market for electricity derivatives.
For more information, contact Dr Stephen Gray (telephone 07 3365 6586) or Shirley Glaister in UQ Communications (telephone 07 3365 2339).
Enquiries can also be directed to communications@mailbox.uq.edu.au
