UK electricity market-maker move could have consequences – traders

UK power traders fear an imminent move forcing the Big Six energy suppliers to place bids and offers on seasonal contracts could extend the fragmentation of the electricity market while killing liquidity outside of two assigned hour-long market-making windows.

Furthermore, energy regulator Ofgem will on Monday put in place long-awaited rules obliging eight of the largest energy firms to follow set rules when dealing with smaller, independent suppliers in a bid to drive increased wholesale electricity market competition.

But as of last week, only four independent suppliers had signed up to the deal, Ofgem records show.

The liquidity intervention takes effect from Monday. It falls under Ofgem’s secure and promote (S&P) licence condition, requiring the Big Six to place bids and offers on seasonal contracts out to the fourth baseload season on the forward curve and the third peaks season. This will happen during two hour-long trading windows opening at 10.30 and 15:30 London time ( see EDEM 20 November 2013 ).

This means that, if trading needs are fulfilled during the two windows, there will be less necessity to post bids and offers throughout the rest of the day. This will concentrate what liquidity there is which, over the longer term, could even lead to an overall decrease in traded volumes.

“It will be interesting to see how the market deals with it and whether or not it will be dead in between the windows,” one UK power trader commented.

One UK-based analyst concluded a dead curve outside of the windows was “definitely a possibility”.

Platform

A second concern is the fragmentation of liquidity. The vast majority of the market expects the Big Six to fulfil their obligations on established broker screens through the Trayport gateway. This is where almost 99% of curve liquidity is centred today.

But competition law forbids Ofgem from prescribing a platform on which the obligation must be fulfilled, because doing so would risk driving competing platforms out of business.

And market participants now fear that companies may swap between platforms – a potential outcome that would contribute to the wider debate over how liquidity should be fostered, whether through regulatory intervention, or reliance on market forces.

“They [the Big Six] don’t really want to do it,” one source said. “If the market becomes more fragmented than it already is, this sticks two fingers up at the government”, he said, suggesting a wilful scuppering of the interventionist ideology – in effect a move in support of pro-market forces – could be on the agenda.

Such motivation would be highly unlikely however, especially given that the obligated companies are soon to come under the microscope of the Competition and Markets Authority (see separate story).

None of the Big Six confirmed any plans to trade on a particular platform at the time of writing. However ICIS understands that, alongside Trayport, one company may choose to fulfil its obligation on Griffin Markets during one window each day, while a second may favour the ICE Futures exchange, while Nasdaq OMX remains a possibility.

Such a split would support a degree of liquidity fragmentation – something that would not be in the spirit of the intervention.

Independents

The intervention has prompted moves from all platforms to position themselves to attract any increased business ( see EDEM 20 December 2013 ).

Indeed, Griffin Markets is launching its UK power platform on Monday, coinciding with the implementation of S&P.

“All of the big six have signed up to use Griffin and have permission to trade on our platform,” UK power head Richard Black said.

“Each of them can market make on any platform provided that the platform fulfils the MMM [mandatory market making] requirements. Market makers do not have to nominate platforms and can switch between them before, during and after trading windows. They can also use multiple platforms for different products.”

Black expressed concern over a dearth of liquidity outside the windows, although he said this should alleviate over time.

“As the markets develop and grow, this may become less of an issue,” he said. “Only time will tell as to whether the MMM will be successful in opening up the market and increasing liquidity but the market had reached a point where something needed to be done to bring it to life.”

The second area of the S&P licence condition, covering supplier market access rules, governs how the Big Six, plus Drax Power and GDF SUEZ, trade with smaller suppliers. It covers areas from trading agreements and credit terms to minimum clip sizes.

But a note posted by Ofegm on 21 March revealed that only four smaller independent companies had signed up: BES Commercial Electricity, Co-Operative Energy, Ecotricity and Utilita Energy. Jamie Stewart