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British regulator prepares for liquidity battle with Big Six

21 Mar 2011 16:56:35 | edem

British energy regulator Ofgem is looking to "break the stranglehold" the Big Six suppliers have over the wholesale electricity market by forcing them to auction up to 20% of their generation output.

The move, Ofgem chairman Lord Mogg said, would increase price transparency and make it easier for new players to enter the market.

The proposed action was unveiled by Ofgem on Monday as part of a review into competition and liquidity, covering both the wholesale and retail markets.

The proposals were backed by some tough talk from the regulator, which appears to be readying itself for a tough battle with the Big Six: "If firms frustrate reforms, they risk ending up at the Competition Commission," Mogg said.

But the move was greeted with caution on the trading floor. One source said it would "not be great" from a liquidity point of view. "The Big Six may just start putting OTC volumes into the auction," he explained.

The proposals would require the Big Six to make available between 10-20% of their power generation to the market through a regular mandatory auction.

Ofgem is believed to be looking at holding the auctions on a monthly or quarterly basis, although the details and structure are still to be hammered out with the industry.

The idea is that, via the auctions, smaller market participants would be able to acquire capacity which they could then trade on the OTC market.

Barrier to liquidity

The vertically integrated nature of the Big Six suppliers has long been viewed as a barrier to OTC liquidity by the energy industry.

Earlier this year Ofgem chief executive Alistair Buchanan described the churn rate on the UK power market, which he put at two, as "really poor." This compared with a rate of around 11 on the British gas market (see EDEM 18 January 2011).

One trader said that Ofgem should anticipate a lukewarm reaction from the Big Six: "They would be firmly against it because it takes away their competitive advantage of being vertically integrated," he said.

Scottish and Southern Energy said the proposals represented "potentially radical changes to the energy market in Great Britain."

The regulator is giving industry until 1 June 2011 to develop its proposed interventions or to propose alternative arrangements to address its concerns.

The need to ease the process for new participants to enter the electricity market has grown in importance alongside the £200bn (€230bn) investment bill facing the energy sector, as it continues the pricey transition to a low-carbon power generation profile.

Energy minister Charles Hendry said last week that the existing line-up of participants would be unable to deliver the capacity that is necessary (see EDEM 16 March 2011).

Ofgem is also consulting on mandatory market-making arrangements to ensure that smaller players in the energy market have access to a transparent and accessible platform that allows continuous trading. JS

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