FTR background


FTRs are financial hedges that help protect energy purchasers or generators from price uncertainty caused by transmission losses and constraints. They confer the right to receive the difference between the prices at the nodes between which the hedge is written for a defined amount of megawatts and a defined period of time.

A Financial Transmission Right (FTR) allows market participants to offset (hedge) potential losses from price separation between nodes

 

As a financial contract, it entitles the holder to a stream of revenues (or charges) based on the actual price difference across a path

FTRs can be matched with an energy hedge to provide a high degree of price certainty. FTRs are a standard component of the market design in most overseas electricity markets that, like New Zealand, are based on locational marginal (or nodal) pricing. If you would like to understand more about the FTR Market we recommend that you review our market overview "FTR Market - an explanatory document", which can be downloaded under the FTR Docs link. On this page you will also find the FTR Allocation Plan, the various FTR policy documents and website links to external information.

Nodal prices introduce locational price risks


In electricity markets using locational marginal pricing (LMP, or nodal pricing), price differences between two points, or nodes, in a network are caused by network losses and constraints (locational risk). Consequently, energy contracts cannot be established at a fixed price without either the seller or the purchaser assuming locational price risk, where there is any risk of constraints arising between the generation and offtake locations.

FTRs can protect investment


FTRs also protect "first movers" from future demand growth on transmission assets and provide a means for transmission investors and regulators to compare the cost of transmission constraints with the cost of new investment.

Managing LMP through vertical integration


In the absence of tradable instruments the New Zealand electricity industry has moved to regional vertical integration between retail and generation. This arrangement provides good hedging characteristics for some but may not for others and has limitations for independent electricity retailers.