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Ofgem ups UK’s 'Big Six' electricity auction volumes to 25%

22 Feb 2012 17:25:28 | edem

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British energy regulator Ofgem is proposing that the "Big Six" UK utilities auction 25% of their electricity generation to jump-start liquidity on the forward curve.

The tough new proposal revealed on Wednesday is a step up from the watchdog's original proposal to force Big Six members - Centrica, EDF Energy, E.ON, RWE npower, ScottishPower and SSE - to auction 10-20% (see EDEM 21 March 2011). An Ofgem staff member flagged late last year that the percentage could be increased (see EDEM 15 November 2011).

The proposal is part of an Ofgem policy of intervention to increase market liquidity. The energy watchdog said that the lack of liquidity on the forward curve makes it hard for independent generators to hedge, preventing a more competitive energy market.

Ofgem said that recent pledges by three of the Big Six to place more volumes on the N2EX exchange had boosted traded volumes on short-term contracts (see EDEM 18 January 2012), but the forward market still suffers from a lack of liquidity.

The agency said that, because of low volumes, the proposed mandatory auctions will focus on delivery of longer-dated contracts as well as short-term transactions.

An Ofgem spokesman the auctions will take place on an exchange or exchanges nominated by either the Big Six or the regulator. The regulator will not be involved in the day-to-day running of the auction.

Competitive market

Ofgem said the auctions would include a range of power products flexible enough to respond to market needs. Speaking before the cross-party energy and climate change committee last November, senior markets partner Andrew Wright said baseload, peakload and other shapes could all be in the mix (see EDEM 15 November 2011).

Big Six members will be able to buy back volumes they place on the exchange, although rules will prevent them from buying an exact match of what they must sell.

Ofgem said a "self-supply restriction" would be an ineffective way to increase liquidity, given the vertically integrated makeup of the Big Six.

OTC market

Ofgem said it believes that the mandatory auctions will not harm traded volumes on the over-the-counter (OTC) market.

The 25% figure, which Ofgem pegged at around 50TWh, would equate to 5% of volume on the OTC market, the regulator said. "While this is sufficient to achieve our liquidity objectives, it is unlikely to have any serious impacts on liquidity in the OTC market," the agency said.

One UK-based trader suggested that, although liquidity for the Day-ahead market has shifted to exchanges, that would not necessarily be the case with the forward curve. "I think that is a timing issue," he said. "Nothing ever happens after 10am, but I'm not convinced by auctions as the answer."

Ofgem added that it is yet to decide whether a significant review of the cash-out system should be launched (see EDEM 2 November 2011), but is inclined to hold off on that issue for now to avoid affecting its liquidity drive on near-term contracts. FOR

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