No sign of brokered trade on UK secondary electricity capacity market

Jamie Stewart

29-Dec-2015

Holders of contracts in the UK’s electricity capacity mechanism will be hard pushed to participate in secondary trading for the foreseeable future with no sign of an organised, brokered market emerging.

This is despite the government having acknowledged that an “appropriate” secondary trading market would be “an important element” in ensuring investment was supported, and that it has a “vital interest” in enabling the market and fostering liquidity.

Contract holders in the UK’s capacity market will begin delivering their obligations from winter 2018. The second annual auction for the model, held four years in advance of 12-month delivery windows, took place earlier this month (see EDEM 11 December 2015).

It cleared at £18/kW per year, meaning contract holders will be paid this amount for having capacity available to the power system.

A secondary market, which has been promoted by the Department of Energy and Climate Change (DECC) since the capacity mechanism was in its early development stages, will allow contract holders to spread risk by trading a part of their obligation.

Secondary trading will take three forms:

Financial trading: A private, bilateral arrangement between two capacity market units (CMUs). Counterparties will be free to trade with whoever they like. Any financial trading is not expected to take off until much closer to the first delivery year.

Volume reallocation: Intended to cover outage risk. Can only happen 11-19 working days following months in which capacity holders have experienced “stress events”.

Obligation trading: There will be two types, one for medium- to long-term cover, the other for up to five weeks cover. Will be used to cover longer periods of unavailability.

Chicken and egg

With no liquidity in secondary trade expected until at least 2018, any nascent market looks locked in a chicken-and-egg situation: Little demand from contract holders to enter into deals means no incentive for private companies to offer a voice-broking service. Yet no voice-broking service means no established platform for contract holders, or those looking to buy into an obligation, to enter into deals, should they wish to.

ICIS asked the major London-based energy brokers if they had looked at offering a voice broking service for the secondary capacity market.

Most within the intensely competitive sector would not be drawn on future plans, although a spokesman for Griffin Markets said it had not put any plans in place “because we haven’t yet seen sufficient demand for it”. But, he added: “It’s something we’re likely to look at more closely next year.”

ICAP is selling its voice broking services to Tullet Prebon, and as such neither would be drawn on future plans. Neither Marex Spectron nor GFI had commented at the time of writing.

Short-covering

Market participants report that no voice broking service has been advertised to them.

One participant at specialist commodity brokerage New Stream Renewables said secondary trading will likely be restricted to short-covering in the event of outages much closer to delivery.

Capacity contract are “highly sought after”, he said, questioning whether holders would therefore be prepared to sell part of their obligation prior to delivery unless forced to do so through unplanned outages.

DECC said in a recent capacity market consultation, published in October, that it intends to ease access to secondary trading through a number of amendments to legislation, including penalty payment reform, scope of trade and an expansion of the qualification criteria governing participation.

But the department has repeatedly said there will be no government-led development of an organised market place, leaving its emergence instead in the hands of the private sector, if it emerges at all. jamie.stewart@icis.com

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