Listed company Contact Energy - together with the government-owned trio of Genesis Power, Meridian Energy and Mighty River Power - have commissioned consultancy firm Taylor Duignan Barry to set up an electricity derivatives market.

The quartet has been quietly trading in a live trial market - a centralised trading platform for standardised derivative contracts for electricity prices out to 2006 - since last month and progress is due to be reviewed later this month.

The website http://www.energyhedge.co.nz says Contact, Genesis, Meridian, and Mighty River established this market to enhance the existing hedge market activity in New Zealand.

They wish to enhance the electricity hedge market in New Zealand through the development of a standardised derivative contract, with the objectives of standardisation, accessibility, liquidity and transparency, for the benefit of participants and the electricity industry generally.

The principles that will be applied in the development of the market are that processes will follow a simple, low cost model and will be self-regulating while liquidity will be created through price making reciprocity by market making participants.

Transparency will be provided through the public viewing and publication of Transaction prices; and widespread participation, development, and growth in the hedge market will be encouraged.

The participants intend that this market will provide benefits through the creation of an accessible and transparent forward curve out to two years for electricity prices; and an increase in the transparency, liquidity, and volume of existing electricity hedging activities.

Earlier attempts to develop an electricity futures market have struggled to get generator support for the necessary liquidity.

This time may be different, say commentators, because of the Electricity Commission, which from next month will have as part of its brief the fostering of a transparent and liquid hedge market.

The draft government policy statement on electricity governance says such a market should enable participants to manage their risks and facilitate retail competition.

Also the commission is empowered to require generators to participate in a hedge market to a specified minimum extent and/or to post buy and sell hedge prices.