UK liquidity improving says Ofgem

British energy regulator Ofgem has reported “early signs” of improved liquidity in the UK wholesale electricity market, following reforms it launched earlier this year to increase pricing signals and allow fairer access to the market for smaller suppliers and generators.

Monitoring of the market since the market-making imperative was launched at the end of March has revealed an increase in churn rate from 2013 to 2014, a reduction in bid-offer spreads, an increase in traded volumes on forward baseload contracts and higher volumes on exchanges and OTC since 2013, Ofgem said in a statement on Thursday.

Independent suppliers have also reported an improvement in trading conditions and found products easier to access, according to Ofgem.

The regulator’s reforms have forced the Big Six Energy suppliers – Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE – to place bids and offers on the front two months, quarter and two seasons of the baseload market during the two windows that occur each day between 10:30 and 11:30 and 15:30 and 16:30 London time.

This improvement in the access of independent parties to the market has also been credited to an increased responsiveness on the part of the Big Six to trading requests.

But the regulator stopped short of claiming full credit for the improvement in market conditions, saying that it was still too early to attribute the changes solely to the reforms.

It cited other factors including an increased perspective of risk related to geopolitical events in Ukraine, the introduction of day-ahead market coupling in north west Europe, and supply-side events that might have persuaded players to enter the market.

Concerns that liquidity has coagulated during the market-making windows and reduced activity at other times have also been noted.

“There is some evidence of lower trade volumes before the morning market making window,” Ofgem said in the interim report, although activity between the windows has remained “broadly static”.

But an increase in forward liquidity is evident, with Ofgem reporting that baseload products more than one season ahead made up 47% of total baseload products traded over the last year compared to only 37% the previous year.

ICIS data also shows that there has been a 13% rise in volume traded on the season+2 baseload contract in the year to date compared with the same period in 2013.

Ofgem will publish a year’s data in 2015 to cast further light on the impact of the reforms, with a full assessment expected to be disclosed in the middle of next year.

Last month, one market source told ICIS that there was still scope for Ofgem to impose tougher rules on market makers, with the 0.5% maximum threshold for bid and offer spreads on regulated contracts keeping the market wide enough for participants to withhold their view of accurate market value (see EDEM 17 November).

Ofgem also acknowledged in the report that other barriers to market access are still apparent, with desired credit lines and the costs of posting collateral proving prohibitive to independents. Henry Evans