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UK regulator eyes market-maker intervention to boost electricity curve liquidity

05 Dec 2012 17:24:55 | edem

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The UK's Big Six energy suppliers could be forced to offer a range of forward curve products to independent suppliers on the wholesale electricity market under plans considered by British energy regulator Ofgem.

The move, termed the "secure and promote (S&P) licence condition", would see terms added to the trading licences of the Big Six utilities - Centrica, EDF Energy, E.ON, RWE npower, ScottishPower and SSE - requiring them to 'market make' on the forward curve to boost liquidity.

Ofgem is consulting on S&P as a possible alternative to its controversial mandatory auction proposal, which proved unpopular among a range of market participants (see EDEM 19 April 2012).

An Ofgem spokesman stressed on Wednesday that the regulator is yet to make a decision on which approach it would take, meaning that implementing the mandatory auction remains a possibility.

He added that, with the impact of electricity market reform on curve liquidity unknown and the UK soon developing a single Day-ahead hub price under the northwest Europe market coupling project (see EDEM 28 November 2012), now is not an appropriate time to make interventionist decisions.

A decision will be made by next summer, and if the S&P option be adopted, the regulator would aim to make the licence modifications before the end of next year.

The development was initially welcomed by market participants. One trader, who is not based at a utility and was vocal in his opposition to the mandatory auction, said that the S&P approach was "broadly what we wanted", but he added that a restriction on self-supply, under which vertically integrated firms would be barred from purchasing their own generation volumes, "would be key".

Progress 'not yet sufficient'

According to the consultation paper, the availability of hedging products on the forward curve had improved to a degree.

"We have seen some large vertically integrated suppliers make commitments to trade with independent suppliers on more reasonable terms, including through smaller clip sizes, more transparent pricing and an improved approach to credit and collateral," Ofgem said.

However, the regulator said that progress "is not yet sufficient" to ensure fair and reasonable terms in trading agreements.

"We have repeatedly received feedback that, in some instances, some large vertically integrated players are not responding effectively to requests to trade from other market participants - particularly independent suppliers," the document said.

"This manifests itself in a failure to offer the products and volumes these firms need; by offering contract terms that they find difficult to accept; or by failing to respond in a timely manner to requests for trading.

"The result is to limit the access of some independent suppliers to the wholesale market, preventing them from competing effectively in the retail market."

Market-making

The market-maker obligation would be designed to ensure "robust" reference prices along the forward curve.

"The market may develop naturally to meet this objective, with liquidity spreading along the curve from near-term markets. However, we must also consider the case for intervention to ensure this objective is met," the document said.

The obligation would see the licensee post bids and offers on the two forward months, the front quarter, and the four forward seasons on the Baseload side; and the same products minus the fourth season on the Peaks side.

The licensee could also be required to post prices for more than 50% of the market opening time in any given calendar month, the documents show.

The UK wholesale electricity market has been plagued by poor liquidity on the forward curve for a number of years, which has long been cited as a major barrier to entry for smaller participants.

As a result, the department of energy and climate change is set to grant itself powers in its new energy bill, which is making its way through parliament, to intervene if necessary to boost liquidity (see EDEM 29 November 2012).

"When we see the [Ofgem] proposals it may be that they will be sufficient, but it's quite reasonable for government to develop a new policy framework to keep powers in this area," energy secretary Ed Davey told ICIS last week.

Stakeholders have until 15 February to make their views known to Ofgem. The consultation documents are available on the regulator's website. JS

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