Suspension of wholesale trading obligation confirmed

Ofgem has confirmed that the market making obligation (MMO) compelling large incumbent energy companies to offer wholesale trades to smaller competitors will be ended entirely.

The decision comes after RWE became the fourth of the big six to be released from the obligation following Eon, Scottish Power and Centrica. For the time being, it only applies to SSE and EDF.

The MMO requires obligated companies to regularly post bids and offers on trading platforms to buy or sell power over a variety of timescales, whilst also limiting spreads between the two.

The measure was introduced in 2014 to improve the liquidity of the wholesale market and enhance access for other suppliers. It was intended to apply to vertically integrated companies with significant shares of both the generation and domestic retail markets.

However, since then the sale of large chunks of their businesses has significantly reduced the market shares of the big six. It was on this basis that Ofgem released four of the companies from the obligation, mostly recently RWE following the sale of its majority stake in Npower-owner Innogy.

Ofgem has previously said this would prompt the complete suspension of the obligation, noting that SSE was also likely follow suit after selling its retail arm to Ovo Energy.

Explaining its final decision, the regulator said the removal of obligation from most of the big six had “materially increased the costs incurred by the remaining parties”, which were now “disproportionate”. It said the policy had also become “less effective in meeting its objectives, specifically in enabling the development of robust reference prices”.

Ofgem acknowledged it “cannot know with any certainty” what the impact of the suspension would be on the wholesale market but said it did expect a widening of spreads between bids and offers. It said this would likely lead to higher transaction costs and could impact companies’ ability to hedge.

But, it added: “The extent of this cost impact is uncertain and it will not necessarily rise in line with wider spreads. Moreover, we have not seen clear evidence that wider spreads will result in higher wholesale prices as while price discovery may become impaired, prices will continue to reflect fundamental market drivers.”

Ofgem said the supplier market access rules introduced alongside the MMO as part of its Secure and Promote licence condition should also ensure smaller companies are still able to trade bilaterally with the previously obligated parties. Furthermore, the regulator said it expected third-party intermediaries to continue to provide a route to market.

The decision will take effect on Monday (18 November).