Pressure mounts on British electricity regulator to reverse liquidity plunge

Author: Jamie Stewart

2011/07/26

A committee of UK lawmakers has identified what it calls "a number of serious problems" with the domestic electricity market, and has called for "serious intervention" from the government and the regulator in order to boost faltering wholesale market liquidity.

The parliamentary committee said on Tuesday that issues including liquidity and price transparency in the UK "have been of concern for too long", and warned British energy regulator Ofgem and the Department of Energy and Climate Change (DECC) that it intends to "keep a close eye" on the performance of both bodies over the coming months.

The warnings were included in the Energy and Climate Change Committee's Retail Market Review.

The state of liquidity has been of mounting concern across the industry. The future structure of the UK wholesale electricity market, as defined in DECC's recent white paper which included a contracts for difference proposal, will depend upon a liquid wholesale market in order to set a reliable reference price (see EDEM 18 January 2011).

But Ofgem has found that the churn rate - the number of times a given volume trades - on the UK market has been on a downward trajectory for some time.

Earlier this year, the regulator's chief executive Alistair Buchanan described the churn rate on the UK power market, which he put at two, as "really poor". This compared with a rate of around 11 on the British gas wholesale market.

Vertical integration

Ofgem believes that there are significant links between liquidity and effective retail market competition, therefore, "a well-targeted liquidity intervention could have significant benefits for retail market competition and for consumers", the committee report said.

The issue of vertically integrated utilities has long been held up by some parties as a barrier to liquidity growth (see EDEM 10 February 2011).

But as the committee report pointed out, many in the industry think that rather than liquidity, the main barriers to new entrants were small retail margins and large balance sheet requirements that small companies find "difficult to work with".

Ofgem, for its part, is forging ahead with controversial plans to force the UK's "Big Six" utilities to make at least 20% of their power generation volume available to the market via a mandatory auction (see EDEM 21 March 2011).

The committee concluded that some of the problems facing the market are "deep-seated". It added: "We suspect that the dominance of six vertically integrated companies is a consequence of the structure of the market and will need serious intervention from the government and from the regulator." JS