Wholesale electricity market is more liquid, says Ofgem

The liquidity of the wholesale electricity market has improved throughout 2014, according to Ofgem.

Monitoring by the regulator of the wholesale electricity market shows that, since the market maker reforms came into effect at the end of March, there have been “early signs of improved trading conditions”.

The ‘market maker’ obligation on the largest eight electricity generators means they have to publish the price at which they will trade wholesale electricity up to two years in advance, and be prepared to buy and sell at those prices. The obligation also imposed enhanced reporting requirements.

Churn (the number of times a unit of electricity is traded before it is delivered) is equal to or higher in every quarter of 2014 than 2013. This is positive for liquidity as it shows there may be more participants willing to trade and hedge their positions in the market.

Meanwhile, the gap between the prices for buying and selling a unit of electricity (bid-offer spreads) is reducing, which Ofgem says gives more confidence that prices reflect demand and supply.

The trading volumes have risen during the prescribed market windows; the volume of products traded for delivery further into the future is increasing; and there are higher volumes of trade both on exchanges and over the counter compared with last year.

The independent suppliers have also reported that trading conditions have improved, with products easier to access and the suppliers “more responsive” to trading requests.

However, the regulator warned that there are many factors that affect wholesale liquidity and that while the improvement is welcome, “it is too early to attribute observed changes solely to the reforms”.

Ofgem will continue to monitor the electricity wholesale market and a full year’s data will be published in 2015.