Ofgem’s £45m market reforms fail to increase trade

Sweeping reforms by Ofgem to increase trading and competition in the UK's electricity market at a £45 million cost to companies have failed, Utility Week can reveal.

The regulator put forward a raft of costly trading rules in April 2014 to force the largest energy companies to trade at pre-determined times during the day at an estimated cost to companies of £45 million. The reforms were designed to boost liquidity by removing barriers to smaller players but fresh data shows that trading on the power market has slowed, Utility Week can reveal.

Data from market experts at Icis shows that traded volumes in Q3 2015 were the lowest for the quarter since 2013, which was “the historical low for the UK power market”.

UK power market traders told Utility Week that trading picked up in the first few months following the introduction of the reforms, but that this was largely due to political tensions in the Russia-Ukraine region which raised concerns over gas supplies to Europe.

But as geopolitical tensions in the region have cooled so have traded volumes, raising questions over whether the reforms have achieved their aims, and whether the reforms themselves have stifled interest from larger financial players in the market.

Ofgem argues that by forcing trade to take place in two daily liquidity windows the market is able to produce clearer long-term price signals – needed to determine payouts through the Contracts for Difference (CfD) support levels – and allow smaller players greater access to the market.

According to traders active in the market the windows have increased trading opportunities on peakload power contracts in particular, which in the past have been difficult to trade. But there is no clear consensus on whether the costs of the reforms have been worthwhile.

“Has it been worth it? Well, Ofgem can say they are doing something, the utilities can say they are complying with Ofgem, and the small suppliers can’t say they are unable to hedge their volumes anymore,” one trader said.

“They have succeeded in getting better visibility of prices along the curve which will aid them in CfD indexation. But the actual volumes traded are going to fall,” the trader added.

The Competition and Market Authority (CMA) has warned that the reforms themselves might limit liquidity by driving away financial players which are put off by the heavy regulation.

In an early working paper within its wider energy market probe the CMA said Ofgem’s ‘secure and promote’ regime is not enough to cause a step change in its overall liquidity. The CMA said the UK power market needs the participation of financial players to improve liquidity, but that Ofgem’s market reform rules may be putting banks off.

“It is too early to judge the impact of our reforms as there is still only a limited amount of data available,” a spokesman for the regultor told Utility Week.

“Importantly small suppliers say they have found it significantly easier to access products since our rules were introduced. This was one of the main aims of the reforms.” 

The spokesman added that the regulator will “keep monitoring the progress of the reforms”.