Wellington, June 3 NZPA - Australia's ASX will champion the development of New Zealand electricity futures and options contracts, leaving the NZX to lament a lost opportunity.

An announcement today that five major electricity generators, three of which are government owned, will commit to making a market in electricity futures contracts on the ASX-owned Sydney Futures Exchange (SFE) was welcomed by Energy Minister Gerry Brownlee, the Major Electricity Users Group and Simply Energy.

NZX shares fell 3 cents to $1.58 today. NZX chief executive Mark Weldon said New Zealand had shot itself in the foot and lost an opportunity to develop its capital markets. His company would focus on developing a derivatives market for agriculture products.

NZX Energy operates the spot electricity market in New Zealand. ASX, as owner of the Sydney Futures Exchange, already operates futures contracts reflecting futures prices for electricity from the Otahuhu and Benmore nodes.

The Government had ordered that a liquid electricity hedge market be developed as part of its energy reforms.

EnergyHedge Ltd, a closed trading platform for contracts for difference and swaps, is owned and used by Contact Energy, Genesis, Meridian, Mighty River Power and TrustPower.

It today announced an agreement to develop New Zealand electricity futures and options with ASX after earlier being in talks with NZX.

Chairman John Woods said EnergyHedge's owners would each seek to enter into bi-lateral market making agreements with the ASX. This means they would agree to make bids and offers to give depth to the market. ASX will put effort in marketing and development.

"ASX is already all set up and has a set of relationship with clearing participants that are really essential to getting a market established," said Mr Wood.

Clearing participants organise settlement and guarantee payment to the clearing house.

EnergyHedge was likely to close its CFD (contracts for difference) and swap products as futures contracts were a better product.

Mr Wood said the group re-opened discussion with ASX about three weeks to a month ago and had been struggling with timing with NZX.

Mr Weldon the Government wanted a liquid hedge market so small players in electricity retailing could hedge positions without being a generator.

Testing was expected to be completed in the next couple of weeks on the NZX platform.

The main game for the NZX platform was dairy derivatives. This would have been a very good nice to have and a broadening of the market, he said.

Mr Weldon said New Zealand-only brokers may not be able to connect with the SFE platform.

The ASX already lists the Otahuhu and Benmore nodes and will consider the listing of futures contracts on the Whakamaru grid reference point.

In March, NZX published a product roadmap which showed phase one of its electricity derivatives plans launching about now, depending on a platform provider decision by existing electricity market participants.

Derivatives are financial instruments that derive their value from an underlying asset. They provide users with risk management tools by locking in forward prices or hedging exposure to changes in the price of the underlying asset. They are also seen as providing price transparency.

"An Australian-based market will present significant barriers to entry for the type of small, innovative entrant who could bring about genuine price competition in the New Zealand electricity market," NZX said.

"This will in turn limit the benefits for New Zealand electricity users: households and industry."

The decision was also a blow for the development of New Zealand's capital markets and this country's relevance as a financial centre, which was built "one product and one institution at a time".