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UK market-making plan will align OTC electricity and natural gas

20 Nov 2013 18:00:19 | edem esgm

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The UK’s Big Six energy suppliers will be obliged to place bids and offers on wholesale electricity forward-curve products during two hour-long windows each trading day, under latest liquidity-boosting proposals unveiled by regulator Ofgem on Wednesday.

The windows will open at 10:30 and 15:30 London time. The later window, which closes at 16:30 in line with the wholesale gas market, is intended to align both electricity and natural gas, boosting outright power and spark-spread volumes accordingly.

Under the regulator’s rapidly diminishing self-imposed timeline, the Secure and Promote (S&P) licence condition, as it is termed, is now just months from becoming law, with implementation due early next year.

No trading platform has been specified, with previous plans to require eligible platforms to have at least ten generation or supply licensees trading now dropped.

However Ofgem previously said it is “quite likely that S&P licensees will market make on an OTC [over-the-counter] platform” ( see EDEM 12 June 2013 ).

For baseload products, a minimum bid-offer spread of 0.5% on the two forward months, the front season and two forward seasons has been put forward, rising to 0.6% on the third and fourth seasons.

Therefore if the front season is valued at £50.00/MWh – trading around this level for sessions this week – Ofgem’s proposal would oblige an individual participant to post a minimum £0.25/MWh bid-offer spread.

Minimum spreads for peaks contracts of 0.7% for the two forward months, front quarter and two forward seasons were proposed, rising to 1% for the third season out.

For the first three months after the licence condition comes into force, maximum permitted bid-offer spreads would be increased by 0.2 percentage points for all products to assist with the transition, Ofgem said.

Reload

The regulator proposed a “reloading window” of five minutes after a bid has been hit or offer lifted for market makers to re-post, as well as a 10MW maximum volume for each trade.

A 30MW net volume cap for each individual curve product will be included under the proposals, which once passed, a licensee would then be able to withdraw from market making on that product for the rest of that window.

“At a minimum, this would require a S&P licensee to be asked to carry out three trades in the same direction in a particular window,” Ofgem said. “However, our best estimate assumption for the impact assessment is that the licensee would be trading each product roughly once per day.”

However the regulator has no plans to impose a cap on overall volumes traded, for example on an annual basis, despite some sections of industry pushing for this.

Why windows?

The trading window approach is a new addition to the S&P proposals, which have been in development since Ofgem shelved its previously favoured mandatory auction scheme ( see EDEM 5 December 2012 ).

Ofgem had previously proposed a 50% availability rule for on-screen bids and offers to govern the market making model. But on Wednesday, it said it favoured trading windows on grounds that they:

provide guaranteed opportunities to trade every day

increase market depth because all market makers would be present in each window

align the power market with activity in the gas market

provide a focal point for the further development of trading, alongside other practical benefits such as the demonstration of compliance obligations.

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.

The consultation closes on 19 December. Jamie Stewart

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