Ofgem considers extension of UK power market-making obligation

26 June 2017 16:04 Source:ICIS

An extension of market making obligations to more companies in the UK electricity market could be considered as part of energy regulator Ofgem’s consultation on its Secure and Promote (S&P) licence condition. The consultation will launch next month.

The regulator confirmed on Friday that it is conducting a review of the licence, which it launched in March 2014. A consultation will follow in July and comes after a workshop on the policy was held last month.

The S&P licence includes a market making obligation for the five largest integrated utilities in the market to post bids and offers on select wholesale electricity products during two separate liquidity windows from 10:30 to 11:30 and 15:30 and 16:30.

Changes to business models

Uniper, which assumed the generation and trading business of E.ON as a separate entity last year, was relieved of the obligation after a written request late last year.

However, significant changes to the business models of large utilities involved in the UK market in recent months could mean more names added to or even removed from the list of licensees. Ofgem said such considerations could form part of the current review.

“On the market making question, we may consider that as part of the progress review of the liquidity reforms that we will carry out,” a spokesman said.

There have been calls from the industry, including major utility SSE, to extend the market making obligation to other vertically integrated companies such as Drax and Engie ( click here to read story ).

Drax, which operates 4GW of coal and biomass-fired generation, owns a retail business called Haven Power. French utility Engie, which also has a stake in a variety of UK generation assets, recently launched its own UK domestic supply arm in addition to its existing business supply unit.

Both companies are S&P licensees and are subject to supplier market access (SMA) rules, which oblige them to trade under certain conditions with any supplier with eligible status. However, their licence does not extend to participation in market-making.

Swedish utility Vattenfall, which is set to reach 1GW of operational wind capacity in the UK by next year, is also purchasing an independent supplier following the recent launch of its own business customer unit in the UK ( click here to read story ).

Meanwhile, Centrica’s sale last week of its last two major combined-cycle gas turbines (CCGTs) has left it with a negligible amount of generation to sell into the wholesale market. While the utility retains a 20% share in the UK’s nuclear fleet, most of the new assets it is building are small-scale flexible capacity.

The decision to make changes to the list of licensees and their obligations is a subjective one. Any significant and sustained changes in generation market share could merit Ofgem changing or removing aspects of a company’s licence condition, according to a guidance document published by the regulator shortly before its launch in early 2014.

Equally, any such changes to domestic supply market share would also merit consideration of adding or removing companies from the market making obligation, Ofgem said in the document.

May Workshop

Sources that attended the recent workshop said there was little agreement on market making issues between the licensees and eligible suppliers.

“The smaller ones want more, the big six [sic] think it is useless,” one source said.

A presentation by RWE ( click here to view ), one of the utilities subject to the licence conditions, argued that there was “questionable logic for identifying obligated parties” and that wider market-making windows would encourage new entrants and capital to the wholesale market.

Trading platforms

Ofgem may also look to regulate more closely what constitutes a “qualifying trading platform” for conducting market making obligations. Currently, obligated parties can post bids and offers during the liquidity windows with brokers or an exchange.

“The licensee must have a reasonable expectation that the relevant product will be traded on the platform,” the licence condition states.

UK electricity curve volume is predominantly traded through brokers, with the exchanges yet to capture the liquidity they have managed on prompt contracts in recent years.

Utility ScottishPower was the only one of the five licensees to confirm it conducts market making obligations through brokers rather than an exchange.

“ScottishPower quotes bids and offers to trade standard bilateral forward contracts via the OTC brokers in all trading windows,” a spokesman said. henry.evans@icis.com

By Henry Evans