Financial markets play a crucial role in the journey toward net zero emissions. Exchanges are uniquely positioned to offer the products, transparency and connectivity customers need to hedge transitional price risk. This can support the economy in meeting emission reduction targets and compliance obligations, whilst aligning with government policy on the energy transition. 

Daniel Sinclair, Head of Commodities at ASX explains. “Through building on our core Australian and New Zealand electricity market, ASX intends to deliver an integrated transitional ecosystem across electricity, gas and environmental products to help the market manage uncertainty and risk.” In support of this vision, the exchange is offering a temporary fee waiver on all Environmental Futures transactions. The fee waiver runs from 29 July to 31 October 2024 and is expected to attract interest from a diverse range of market participants. 

The role of Natural Gas 

One of the key products in ASX’s transitional ecosystem is Natural Gas. As the government looks to phase out coal facilities over the next decade, Gas will play an increasingly important role in ensuring Australian homes and businesses have access to the energy they need to keep the lights on. 

While investing in Natural Gas may seem contrary to net zero targets, Gas is widely recognised as a transitional fuel. It will bridge the gap in energy supply as we strive to move from coal-fired power to 100% renewables. 

Kellee Campbell, Director of Energy and Commodities at ICAP brokers explains. “It’s great that there’s a growing renewables portfolio, but when the sun doesn’t shine and the wind doesn’t blow, gas really comes into its own.”

It is for this reason the ASX is investing in a range of Natural Gas Futures contracts. Daniel Sinclair, Head of Commodities at ASX, emphasises the valuable role of gas in the energy transition. 

“I think it’s really important to acknowledge and understand the increasing significance of natural gas. It is becoming more and more important as a stabiliser within the electricity grid as we scale renewables,” he says. 

Recent disruptions at major coal plants in Victoria and New South Wales as well as seasonal lulls in wind, demonstrate the importance of gas in ensuring continuity of supply. Unplanned coal power outages combined with unexpected weather events and the large contribution of rooftop solar leaves Australians vulnerable to power outages without the support of gas.  

ASX is listing a new deliverable natural gas product in August this year covering the Wallumbilla Gas Supply Hub in Queensland. The contract, developed in collaboration with the Australian Energy Market Operator (AEMO), has been driven by client demand for a mechanism to hedge exposure to the Queensland hub as well as provide a proxy price curve for the Asia Pacific Natural Gas market. ASX is also exploring the potential to expand into Sydney and Victorian gas markets, broadening the geographic reach of the gas ecosystem traded on the exchange.  

Campbell believes new futures contracts will encourage confidence in the gas market through increased transparency in the forward price curve. “The listing of Wallumbilla Futures is really going to grow the client base beyond what is typically a very short term, physical market. This contract opens up the market to funds, banks, corporates and offshore players that have exposure in Australia and Asia.”

Confidence is key to unlocking scale

Building confidence and liquidity in any market is key to its success. One of the most effective ways to achieve this is by developing a liquid and transparent derivatives market. 

To support transparency and growth in the carbon market, ASX plans to list a suite of Environmental Futures contracts, covering Australian Carbon Credit Units, Large-scale Generation Certificates and New Zealand Units. The contracts will provide a forward curve out to 5 years, providing Australian and New Zealand customers with a mechanism to price and hedge their transition risk.

The power of a robust and liquid futures market is perhaps best demonstrated by the European Union Emissions Trading Scheme (EU ETS), the largest and oldest emissions trading scheme in the world. Of the USD $826 billion transacted in this market each year, 90% is executed via the futures market. 

Luke Donovan, Partner at Apostle Carbon Credit Funds, believes futures markets are the key to unlocking scale in the energy transition.

“The benefits of exchange traded products, particularly in newer markets, is that it helps to reduce the barriers to entry. That increases institutional investment and participation. Having a liquid futures product is a key step in scaling these markets,” he says.

Investment is an important part of the energy transition. The cost for Australia alone to meet net zero is estimated to be between AUD $7-9 trillion, highlighting the importance of access to funds in order to reach 2030 and 2050 targets.

By providing forward price transparency and opening up market access, futures markets have the ability to drive fundamental change in the underlying markets they represent. 

Donovan explains. “There are large pools of capital that are increasingly looking at ways to diversify their portfolios against some of the classic asset classes such as equities or fixed income. The more credibility and integrity you can build in liquid alternatives like power, gas, and environmentals, the more likely you are to attract investors with significant capital.”

Navigating the uncertainty of transition

The transition to net zero requires huge structural change on a global scale. The work to reach net zero is only just beginning and there will be numerous iterations of change along the way including governments, policies, emission targets and technology. 

Donovan believes the inherent uncertainty created by the transition is front of mind for investors.

“What we’ve seen over the last 6-12 months is the emergence of a theme not just around hedging the economic risk of the transition but also hedging against the risk of the transition happening in a disorderly way.” 

Throughout the transition there will be periods of advancement and periods of uncertainty. Clean energy technology takes significant time and investment to develop and will be progressively phased in over the next 25 years. This will occur alongside various changes in government and policy as well as the underlying technology itself. 

Sinclair believes the ASX, as the primary market operator across Australian and New Zealand Energy derivatives, has a responsibility to its customers to ensure they have access to the tools needed to make the transition as smooth and manageable as possible.

“By its very definition, the energy transition will be uncertain,” Sinclair says. “We are responding to that uncertainty by providing the market with the tools it needs to better navigate the transition.”