UK electricity industry action ‘more important than ever’ as calendar switch approaches
Industry-led action to break down barriers to entry in the UK electricity market is “more important than ever” against an uncertain regulatory background, Steve Harris, the man driving the approaching Gregorian calendar liquidity switch, has said.
The liquidity cut-over – overseen by the Power Trading Committee (PTC) industry body, which is chaired by Harris – takes effect from Friday 1 November and covers all contracts from Winter ’14 out, while the day will remain unchanged, running from 23.00 to 23.00 hours London time. It will see the UK power market begin the process of getting rid of the antiquated EFA calendar, bringing it in line with the British NBP natural gas hub and continental power markets.
The move has been some time coming, with the preparation process spanning around two years.
However, in that time the market has seen change forced on it by regulators and lawmakers, outside the PTC’s sphere of influence, which has bitten hard into liquidity.
Top-down interventionist policy – ultimately driven by the drive for a low-carbon energy sector – has seen instruments such as carbon price support, which inherently creates uncertainty more than two years out on the curve, introduced alongside a host of domestic and EU policy instruments.
Rather than absorb the political and regulatory risk, a number of non-asset backed market participants simply left the market (see EDEM and ESGM 6 September 2013 ).
“When the industry came up with [the calendar switch], around three years ago, it sounded like a good idea, but now its impact on liquidity is going to be inconsequential,” one utility-based trader said.
“We used to have people who would look to trade across borders all over Europe. That would have been where the real impact [of the switch would have been] seen – those who traded the basis risk between Europe and the UK.
“But over the past three or four years we’ve seen a number of them scale things back or drop out altogether, because of the regulatory risks.”
But rather than be cowed by the negative impact of a shifting regulatory landscape, Harris said: “Anything that we can do to make it as easy as possible for new entrants to join UK power is a good thing and potentially more important now than it ever has been.”
With just three full trading days to go until the cut-over, and the sixth and final live trading window set from 11:00-12:00 on Wednesday, 30 October, key players across the industry are as ready as they will ever be for the switch.
Weekly live trading windows have been held, with bids hit and offers lifted on 1MW products, while a 15MW Gregorian spark deal was recorded ( see EDEM 2 October 2013 ).
ICIS spoke with a range of participants from across the industry last week – utilities, trading houses, brokers, generators and banks – and there is recognition that those that trade in meaningful volumes are ready for a hard cut-over, in effect binning the EFA calendar on the forward curve from Winter ’14.
Pockets of residual concern were evident regarding smaller, third-party players.
“Some people think a lot of companies are badly undercooked,” one trader claimed. “We are now slightly concerned that we’ll [not] have enough credit if only a few companies are set up. Although it’s only a slight concern.”
It also emerged that traders have more confidence in their own preparedness than in back-office systems.
“We should be ready by 1 November, but IT are being a bit slow,” one participant said. He added that his firm had not taken part in the live windows or made a Gregorian trade “for the same reason”.
Other sources were more relaxed. “You think most of the market would be ready. It’s not that difficult – there have been enough testing windows,” one source at a financial institution said.
Ultimately, any concerns will be ironed out once the switch has happened, and there is little more the PTC could have done in terms of guidance and getting the word out:
“There’s no dominant exchange that can set the rules or force people down one route or another, so the project has relied on a cooperative, collegiate approach,” Harris said.
“It’s not about people signing in blood that they going to make the change, but it’s about us all understanding that it’s for the good of the market and it’s in all of our interests to make it happen.”
Despite the shifting regulatory landscape, it is not all doom and gloom for UK power. The market has welcomed fresh liquidity in recent month, with firms such as newly asset-backed Australian financial institution Macquarie – which purchased the 819MW Sutton Bridge gas-fired power plant from French EDF Energy last December (see EDEM and ESGM 18 December 2012 ) – increasing activity, according to anecdotal evidence.
Although the interventionist policy approach has claimed scalps, Harris sees it partly as an opportunity: “Energy prices and energy policy; it’s a big deal at the moment, and the regulatory and political environment is moving very quickly.
“Any industry body that represents the power market has a chance to shape the direction of travel. It’s a very important time for the industry, and for the market.”
More top-down intervention is imminent. British energy regulator Ofgem is months from introducing its market-maker obligation on the Big Six suppliers, much to the consternation of some ( see EDEM 19 June 2013 ). And the influence that the Department of Energy & Climate Change’s (DECC) contracts for difference model will impose on liquidity remains up for debate ( see EDEM 18 March 2013 ).
One thing that is unanimously accepted: chopping and changing the laws that govern a forward market is not the way to breed liquidity.
“I’ve been staring at a £0.05/MWh spread on the Winter ’14 spark – the second season out – for six hours and 47 minutes,” one exasperated trader said on Thursday last week.
“The numbers are out there. The problem is a lack of vision concerning where the market will be further down the line.”
The calendar switch will at least offer long-term clarity. It is well-planned, permanent and certain. And by aligning UK power with other commodities, including British natural gas, it may spark some additional liquidity. “It can’t do any harm, can it?” one trader commented.
The bid was hit on the Winter ’14 spark, after six hours and 47 minutes, while ICIS was discussing the calendar switch over the phone. Is this a good omen? Maybe. But luck has had little to do with how far this industry-led action has come.
“We just kept on monitoring support, monitoring readiness and it became clear, certainly over the last six months, that everyone was confident it would happen,” Harris said. “We’re nearly there now.” Jamie Stewart
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