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Ofgem plans UK ‘market maker’ move from early 2014, to boost electricity market liquidity

12 Jun 2013 12:27:00 | edem

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(The ICIS article headlined “Ofgem plans UK ‘market maker’ move from early 2014, to boost electricity market liquidity”, originally published on 12 June 2013, contained an error in the second paragraph.

Please read “The obligation would capture the ‘Big Six’ utilities – Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE – while Drax Power and GDF Suez, both of which operate large generation businesses, would fall under separate market access rules, Ofgem said on Wednesday”, instead of “The obligation would capture the ‘Big Six’ utilities – Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE – as well as Drax Power and GDF SUEZ, both of which operate large generation businesses, Ofgem said on Wednesday”. A corrected story follows.)

British energy regulator Ofgem has advanced its plans to force the country's largest suppliers to place bids and offers on forward-curve products from as soon as early next year, as it aims to boost liquidity on the wholesale electricity market.

The obligation would capture the “Big Six” utilities – Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE – while Drax Power and GDF SUEZ, both of which operate large generation businesses, would fall under separate market access rules, Ofgem said on Wednesday.

The 'secure and promote' (S&P) licence condition, as it is termed, will not stipulate a trading platform on which the market-making obligation will apply, leaving the door open for companies to build over-the-counter (OTC) market liquidity.

"Bearing in mind current practice in the wholesale market, it is quite likely that S&P licensees will market make on an OTC platform," the regulator said.

Ofgem, which has been accused in the past of being ineffective in its attempts to grow liquidity and by extension open up the electricity market to increased competition, is consulting on its updated plans until 9 August.

It intends to confirm the reforms via statutory consultation in the autumn, with the rules taking affect as soon as early 2014.

Costs

The S&P licence condition was first tabled in December last year (see EDEM 5 December 2012).

The latest development is almost certainly the death knell for boosting liquidity through a mandatory auction of forward-curve products - an interventionist action that the regulator previously championed, much to the consternation of traders (see EDEM 19 April 2012).

S&P will also impose supplier market access rules, which mean the eight companies cannot refuse any reasonable requests by small suppliers to buy electricity. They must also ensure they sell power to small suppliers at a fair price and negotiate fairly.

The large companies will also have deadlines for acknowledging requests and responding to them.

According to Ofgem, S&P will cost the eight firms it applies to around £4m (€4.7m)to comply, and £14m/year as an ongoing cost. This, it estimates, will translate to a £0.04/MWh premium on the electricity market.

This is its "best estimate" - the "high case" puts initial costs at £7m, with ongoing costs at £26m. This would translate to a £0.08/MWh premium on wholesale power prices.

The "low case" indicates a mere £0.02/MWh premium.

However, it insists this will be more than offset by downward pressure placed on the market by increased competition.

UK Energy, which represents UK electricity producers, said: "We need to consider carefully how the proposals join up, as some have the potential to increase costs while others may well make it easier to see what is happening in the market." Jamie Stewart

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