\n Principal Economics is delighted to release our new report for the New Zealand’s Electricity Authority, evaluating market-making parameters for a standardised super\u2011peak hedge contract<\/strong>. This analysis supports regulatory design that promotes price transparency<\/strong>, market liquidity<\/strong>, and robust consumer outcomes.\n<\/p>\n \n The findings inform regulatory calibration of market-making in New Zealand\u2019s super-peak hedge markets\u2014helping ensure resilience amid volatility and price shocks, while avoiding onerous caps that stifle market participation. Our evidence-based design framework is meant to support durable, fair, and cost-conscious policy choices.\n<\/p>\nKey Findings<\/h4>\n
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\n We suggest a responsive cap structure with a 3.5% spread during normal conditions<\/strong>, and up to 8% during high-volatility or stress periods<\/strong>, ensuring a balance between affordability for hedge-takers and sustainable participation by market makers.\n <\/li>\n
\n Market-maker net benefits peak between 10\u201315\u202fMW<\/strong> of quote depth. Beyond this range, marginal benefits decline, reflecting diminishing returns.\n <\/li>\n
\n Regression results show that in high-volatility environments, a 1% increase in volatility increases spreads by ~0.37%<\/strong>, while doubling depth lowers spreads by ~8%<\/strong>, highlighting the trade-off between risk and liquidity.\n <\/li>\n
\n Analysis of super\u2011peak auction data reveals median effective spreads around 3%<\/strong>, with the 95th percentile reaching 9\u201310%<\/strong>, supporting the recommended cap framework.\n <\/li>\n
\n We apply an optimal frontier approach, plotting trade-offs between spread and depth to identify efficient market-making combinations<\/strong>. These choices deliver targeted liquidity at minimal cost\u2014supporting the Electricity Authority\u2019s public-interest objectives.\n <\/li>\n<\/ul>\n
\nWhy This Matters<\/h4>\n
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