Corrected: Liquidity reforms yet to affect UK electricity market – ICIS data

The below article, originally published on 23 April 2014, said that generators Drax Power and GDF SUEZ are included among the obligated parties under regulator Ofgem’s electricity market making initiative. In fact the market making inititive applies to the UK’s Big Six utilities, but not Drax Power or GDF SUEZ. A corrected article follows.

British energy regulator Ofgem’s attempts to boost activity on the UK wholesale electricity forward market through compulsory trading windows has so far not affected liquidity.

Market sources were initially fearful that Ofgem’s mandatory market making intervention obliging the Big Six suppliers to place bids and offers on curve contracts during two hour-long trading windows could lead to dead periods and cut overall levels of trade ( see EDEM 27 March 2014 ).

Ofgem introduced the measure to boost competition and make sure that even smaller companies would be able to trade electricity for long-term delivery.

But traders thought this could have the opposite effect, sucking all liquidity into these two mandated windows.

However, daily trade information received by ICIS suggests that Ofgem’s reforms have had a neutral effect along the curve of long-term deliveries.

Under the initiative, Big Six suppliers SSE, Scottish Power, Centrica, EDF, E.ON and RWE npower are made to put out bids to buy and offers to sell electricity for delivery over the two front months, the front quarter and the front three seasons on both baseload and peakload contracts. The fourth season on the baseload curve also comes under the regulation.

Trade outside the two windows, starting at 10:30 and 15:30 London time, has remained consistent since the intervention came into force on 31 March.

The most notable change of activity in the immediate aftermath of the intervention came on the front season, with trade information from the week ending 4 April indicating that liquidity had pooled around the two windows.

However, trade information from last Thursday reveals companies traded most front season contracts outside the windows, indicating a return to normal trading patterns.

One market source last week commented that the intervention had initially had a negative impact on intra-window liquidity although recognised these concerns had eased. “At a best case scenario, it’s back to where we were,” he said.

Any hopes that trading activity might increase substantially along the far curve have on the whole yet to materialise, with trading volumes on the front three seasons remaining level with previous months.

Interestingly, trade volumes have increased on the Summer ’16 Baseload contract, the furthest contract on the curve to be affected by the new reforms.

Trade information reported to ICIS reveals more than a twofold increase in trade on the Summer ’16 Baseload over the month of April so far compared with March, and fourfold compared to February.

Ofgem says it is satisfied with the progress of the reforms to date. “From our perspective, it is working quite well,” a spokesman said, adding that monitoring returns from the Big Six at the end of July and analysis of further data at the end of October would give the regulator a better picture of the reforms’ impact. Henry Evans