Caution over UK month- ahead broker window
Participants are yet to be fully sold on the assumed benefits of the new UK brokers’ month-ahead power index window, three months after its launch, according to feedback given to ICIS Heren.
London Energy Brokers’ Association (LEBA) launched the month-ahead index window at the end of June. One of the key drivers behind the 16:00–16:15 (UK time) window was the desire to underpin the development of an active swaps market in power and spark spreads.
The first big deals to settle on the month-ahead index have now entered delivery. These were for October Baseload. Sources behind the window had predicted a surge in liquidity in September, given the first deals were priced during that month.
This was, indeed, the case. Average daily volumes traded within the window during the EFA month of September stood at 65.2MW, compared with a paltry 9.75MW in EFA August, according to LEBA data.
The average month-ahead window index in EFA September was £35.006/MWh (€38.050/MWh), which was virtually identical to ICIS Heren’s over-the-counter front-month volume-weighted assessment for the period.
Market scepticism
But market participants remained equivocal as to long-term viability of the window. “We still need more liquidity,” one trader at a major generator told ICIS Heren. There are only two or three main counterparties currently involved in the window, according to sources close to the project.
The trader added that liquidity within the window remained constrained by traditional trading habits within the power market. “4.15 is quite late for power,” he said. The trader argued the window’s prospects were further complicated by “patchy” liquidity in UK power, compared with the NBP.
One trader even expressed scepticism over the whole philosophy behind the project. “I don’t buy the idea the window will increase liquidity,” one financial participant told ICIS Heren. “I’d rather have a month-ahead index that included all trades than just those dealt in a window,” he added.
The trader argued that even the carrot of encouraging a more transparent spark market may in fact be a red herring. “I’ve not heard one person complain about any impact of liquidity mismatch between power and gas significantly affecting spark trading. The fact that power tends to go through earlier than gas may present some spark issues intra-day, but over a long period, it’s not a problem,” the trader said.
Despite market concerns, project sources remained upbeat as to the window’s prospects. “People should be encouraged by its performance. We’ve proved it’s do-able,” the source said. They added they were now looking to conclude some Q1 ‘10 deals to settle on the month-ahead index. RA
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