UK wholesale power market is opening up, say small suppliers

Ofgem’s new trading rules have helped to open up the wholesale power market to smaller independent suppliers, according to fresh feedback from market players.

The regulator met with market participants on Thursday to discuss the impact of its new trading regulation, and Utility Week understands that there was a “broad consensus” that the supplier market access rules have proved successful so far.

Ofgem’s trading rules were implemented in April this year in a bid to “break the stranglehold of the big six”, and include license conditions which compel the larger suppliers, including generators Drax and GDF Suez, to offer a reasonable chance to smaller players to access trade agreements at a reasonable price.

“There has been success in agreeing new contracts which might not have happened otherwise,” one attendee of the session told Utility Week.

“And the larger players have realised that it’s not too much to ask,” he added.

Ofgem’s interim associate partner for wholesale market performance Philippa Pickford told Utility Week that overall the reforms seem to have had a clear benefit for smaller players who previously struggled to access the market.

“Feedback from independent suppliers also shows that they have found it easier to access products since our reforms have been introduced,” she said.

However, Ofgem’s rules targeting market liquidity continue to divide opinion with many players arguing that the mandatory trading windows implemented by Ofgem have sapped trading volumes over the rest of the trading day.

Larger market players are forced to post prices into the market during two one-hour ‘liquidity windows’, which are held at 1030 GMT and 1530 GMT every day, for deliver-periods up to two years in advance to guarantee the ability to trade.

But market participants have complained that the requirement to trade during these times means trading opportunity outside of the windows is limited.

“If you quote a customer at 11am based on the window and he gets back to you at 1pm and wants to trade, you have to say ‘sorry – I can’t do anything until 4pm’,” one power market trader said.

But another added: “If liquidity is what it is, then perhaps concentrating it is no bad thing”.

Prior to the reforms trading levels in the UK power market were less than half 2002 levels, which Ofgem blames on the increase in vertical integration through mid-2000s.

Liquidity in the market is now showing growth, Pickford said, but cautioned that it is too soon to establish the direct cause.

For example, volatility in the UK gas market – tracking tensions in the Ukraine – is frequently cited by market traders as a more likely driver of increased trade.

“There are many factors that can affect liquidity in the wholesale energy markets so it is too early to comment on the extent to which our reforms have contributed to this change,” Pickford said.

Ofgem’s interim report on its wholesale market reform policies will be published in December drawing on quantitative market data as well as qualitative feedback from the market. This will be followed by an annual summer report on the reforms progress.