Electricity house of the year, Asia: Macquarie Bank

Energy Risk Asia Awards 2019: Wide presence across the region and flexible solutions set Australian bank apart

Andrew McGrath, Macquarie

Extreme price volatility. Ongoing deregulation. Rapid technological evolution. High public profile and the constant risk of government intervention. Trading and managing electricity risk can be challenging, and there are few – if any – houses with the presence across Asia-Pacific power markets to equal that of Australia’s Macquarie Group.

Aside from its activities in its home market, where Macquarie has become a retailer to allow it to deliver supply solutions in conjunction with its depth of price risk management capabilities, the bank has a sophisticated electricity derivatives operation in New Zealand, has been active in Japan’s ongoing electricity market deregulation, and is one of the top three providers of liquidity to the Singapore Exchange’s electricity futures.

“I’m not aware of any other institution that has the breadth of electricity offerings in these markets,” says Singapore-based Andrew McGrath, Macquarie’s head of commodities and global markets, Asia. 

In the Australian market, much of Macquarie’s success, McGrath says, rests on the bank’s ability to offer sophisticated clients greater flexibility. “One of the things we identified quite early was that customers were demanding a dynamic approach to their electricity contracting, as they would in other commodities.”

A one-size-fits all approach doesn’t enable corporates to manage their risks optimally, says McGrath. This is why Macquarie set out to provide corporates with more flexible and tailored structures.

For example, the firm recently delivered a flexible retail power product for the Australian operations of a large global mining entity. The structure provides the customer with agreed retail supply terms over the contract period. The client then has the flexibility to include or remove particular sites from that agreement during the underlying period. 

“Often competing providers will seek to contract customers for term. Because we’re independent and not tied to specific assets, we can give customers the ability to roll sites in or out across the entirety of their NEM [National Electricity Market] portfolio,” says McGrath. “What the customer got here was substantial flexibility in a challenging electricity market.” 

Because we’re independent and not tied to specific assets, we can give customers the ability to roll sites in or out across the entirety of their NEM portfolio

Andrew McGrath, Macquarie Bank

Macquarie also allows clients greater flexibility in how they hedge. “What often happens in these markets is that a client will be shown a single price, for 100% of the usage to be hedged, for the full term – perhaps up to three years,” says McGrath.

“But there may be better ways to manage that risk,” he says. “As an alternative, perhaps build a protection profile over time, use different products and counterparties and enter the market at different times.”

Macquarie not only offers clients access to a range of products and prices, but it also allows clients to talk directly to other providers and, if preferred, to obtain products from competitors and have the products delivered through the retail contract. “We give a great deal of flexibility … it’s something the larger and more sophisticated counterparties are increasingly requiring.”

In Japan, meanwhile, Macquarie has been playing an active role in the opening up of the electricity market – the third largest in the world – in a process that accelerated after the Fukushima natural disaster of 2011 prompted a renewed focus on delivering change.

A catalyst for Macquarie’s involvement was the April 2017 opening of the market to full contestability, allowing business and retail customers to switch suppliers. Since that point, some 14–15% of the market has switched retailers, which in turn have needed to access new wholesale risk management products, McGrath says.

In response, the over-the-counter power market is emerging with the Tokyo Commodity Exchange launching electricity futures in September. Macquarie and a subsidiary of Mitsubishi carried out the first block trade in that contract.

Prudent risk management is essential to power market liberalisation, McGrath believes. Electricity prices can be subject to extreme levels of volatility, and suppliers face substantial variances in demand, often concentrated at the front end of the market. “If you don’t hedge, you have to have a really significant capital base to be able to withstand that,” says McGrath. “Often, the smaller entities that are emerging and focusing on using their capital for growth simply don’t have that internal buffer.”

Getting through that growth phase requires hedging or other risk-management tools, he says. “We’ve seen this in many other markets. We think that for these types of businesses, this is the best alternative for them.”