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“It is difficult to get a reliable view of market prices”
Many energy consumers assume that any supplier or broker can simply buy the commodity they require at any time.
Often that is not the case. The market requires “liquidity” for efficient purchases and sales. High liquidity is when there are many buyers and sellers interested in undertaking a transaction. Low liquidity is when it’s difficult to find a buyer or seller for an exposure a consumer may have. This can occur for long periods or specific months.
The UK gas market has become a European leader for liquidity, but the electricity markets lag behind. Ofgem put in place a number of “secure and promote” measures last year to improve liquidity. This forced the largest energy companies to provide market-making wholesale prices (a buy level and a sell level) at defined times each day (10.30 to 11.30am and 3.30 to 4.30pm on trading days).
Liquidity has improved, but it is increasingly difficult to get a reliable view of market prices at other times because traders respond to the lack of liquidity by widening spreads, or not offering prices at all.
The Competition and Markets Authority says results have been mixed; there are more prices offered during the “windows”, but the re-entry of non-physical traders – to breathe life into the market – has not yet happened.
Although attempts to improve liquidity are welcome, flexible power buyers should be mindful that prices quoted outside these windows are not necessarily a robust indication of the market.
Peter Pharoah, head of energy markets, ENER-G Procurement
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