For more sophisticated participants, the Localvolts platform enables trading in futures contracts. This is designed for a number of use-cases such as:
- Individuals or organisations who are not connected to the Australian Electricity Market, but who want to take a position (long or short) on the forward price of electricity.
- Generators who wish to sell their output directly to consumers instead of negotiating a power-purchase agreement or carrying merchant risk.
Organisations that wish to offer financial risk management services such as offering a fixed-price on electricity to consumers.
The Micro-Futures Contract
What we are terming ‘futures’ within Localvolts are actually a special form of futures contract that we call the micro-futures contract. Currently, electricity futures only exist on platforms such as the ASX, and are in large minimum contract sizes (1 Megawatt) and long, flat periods (i.e. Monthly or Quarterly Flat). Localvolts futures contracts can be any size, and for any collection of market periods. By selling multiple contracts at different periods, volumes and prices, it is even possible to build up a sculpted futures position to follow such things as expected daily demand or expected solar generation. In many ways, the flexibility and trading process of futures contracts is very similar to the Localvolts peer-to-peer energy contract, but there are three important differences:
- Futures are contracts for difference, while energy contracts are sales/purchases of power. For example, if I sell 1kWh for 10c/kWh, I will receive 10c for that contract. If I sell a flat 1kWh of futures contracts for 10c/kWh, and the average actual spot price across that period (for that region) turns out to be 9c, then I will receive 1c for that contract.
- Futures contracts are ‘firm’ while energy contracts are ‘best efforts’. This means that selling a 1kW, 10c/kWh futures contract for a one hour period is a commitment to paying the wholesale spot price for that period and receiving 10c. If I was selling, say, solar generation of a flat 1kW for the same price and period, and then only managed to generate 0.85kWh, my trade would be scaled down such that I am only selling the amount generated.
- Futures contracts are limited by credit while Energy contracts are limited by forecasts. If I am trading energy, I can only sell up to my expected generation and demand levels, whereas for futures contracts, I will be limited to a contract size based on my available credit (i.e. my current account position). Note that in the current Alpha version, credit accounts are not yet implemented.
An offer to sell a futures contract is termed a ‘futures offer’ and becomes a sold futures contract if another party accepts that offer by bidding at an equal or higher price. You can enter an offer by navigating to the “Trade Futures” menu item and select “Sell (Offer)”. This will take you to the Create Contract wizard.
A bid to buy a futures contract is termed a ‘futures bid’ and becomes a bought futures contract if another party is offering contracts at an equal or lower price. You can enter a bid by navigating to the “Trade Futures” menu item and select “Buy (Bid)”. This will take you to the Create Contract wizard.
In order to provide visibility into the current market depth, both the Futures Bid and Offer screens feature a market depth graphic at the top
The market depth graph shows the cumulative amount of futures contracts on offer on the buy and sell side. Bids are shown in gray on the left side, while offers are shown in green on the right side. The darker colours at the top are futures volumes, while the lighter shades represent pure energy positions.
If we are looking at a single period, we would not expect the bids and offers to overlap (as we would expect such trades to be immediately matched – note that we only show trades available to all users, not restricted by preferences). If we have a period covering multiple market periods (such as all day or all week), we would often expected overlapping bids an offers (e.g. a flat futures buy contract may be matched against daylight periods but may remain an open bid overnight).
Entering a Trade
Entering a futures trade is very similar to entering an energy trade.
- Define the time frame you wish to make a bid or offer for;
- Enter the contract size, in kW. Note that this will multiply out into kWh depending on how long the selected period is;
- If you would like to restrict who you buy or sell from, check the “Counterparty preferences” checkbox and hit next. Use the preferences screen to select counterparties and whether to accept matches against energy only, futures only or both.
- Click next to set price breaks on the contract. This works in a similar way to selling energy. There are two aids to setting prices for bids and offers. The first is the Market Depth graph described above. You can see which price levels will be immediately matched and which will remain standing in the market. For example, if I can see bids totally more than my contract amount at, say, 10c and I enter an offer at 9c, I will expect some of my offer to be immediately matched. The second assistance is the Average Price and MtM figures. The Average Price field shows the average wholesale spot price over the selected period, in c/kWh). The MtM shows the expected return on the proposed price given current forecasts. Put simply, if the price entered is lower than the average price for a sell (or higher than average for a buy) then the Mark-to-Market figure will show an expected loss on the contract. Note that this is only expected – the actual result may be difference depending on actual spot prices.
- Confirm your selections and submit your contract.
Futures are subject to trading fees, currently set to 0.25% of the trade’s fixed value. This fee applies to buying and selling futures. There is no location-based pricing of futures contracts aside from the RRP of the applicable region.