Power market liquidity - why it’s important to have your say

In April 2022, we wrote about the impact of volatile wholesale energy prices on the liquidity of the energy markets. At the time, we said that it had “resulted in a reticence to trade in a highly unpredictable and fast-changing market. We are trading volumes where prices are moving ten times more than they usually do… which naturally brings additional risk.” 

We also said that we, along with other energy suppliers, were lobbying Ofgem to urgently reform UK power market liquidity to protect the industry and ensure businesses were getting fair prices for their energy.

Almost two years on, in December 2023, Ofgem published a call for input which it says “seeks to explore and assess current power market liquidity trends, issues, and concerns following the suspension of the Market Making Obligation in 2019”.

Declining power market liquidity - are reforms needed?

To assess whether interventions could be required, Ofgem has conducted an analysis of the liquidity levels in the Great Britain (GB) wholesale electricity market between 2019 and 2023. It found that there had been a steady decline in liquidity, which it put down to the influence of four main factors:

• The impact of the war in Ukraine: the move away from Russian gas across Europe has made trading power considerably more capital intensive and higher risk.
• The growth in renewables: Ofgem says this ‘might be fostering a structural reduction in liquidity on forward contracts with longer-term (far curve) delivery periods’ largely due to the intermittency and unpredictability of sources such as wind and solar photovoltaic (PV).

• Structure of retail contracts: standard variable domestic tariffs account for approximately one-third of our power consumption and are covered by Ofgem’s default tariff cap, which is linked to trading over the next four quarters. Ofgem says that this might reduce the incentive to hedge on the far curve, especially on contracts beyond one year ahead of delivery.

• Lack of international trading: the GB power market has historically found it difficult to attract speculative trading from international traders and financial institutions.

What the call for input will cover

Ofgem is asking for views from suppliers, businesses and other organisations into current issues with liquidity in the GB wholesale electricity market, whether there are insufficient levels of liquidity, and the impact this is having on trading, energy prices and competitiveness.

It will use this evidence to assess whether increased policy and regulatory intervention is required to stabilise market liquidity.

Ofgem does point out, however, that it will only consider intervention once the evidence provided has been assessed. It also says it needs to take into account how any potential interventions could be impacted by longer term reforms introduced under the UK government’s Review of Electricity Market Arrangements (REMA). 

Why it is important to have your say

As Ofgem will be making its decision based on the evidence provided by respondents, it is crucial that businesses have their say.

This is particularly important when it comes to outlining the issues they have experienced where their supplier has been unable to execute their hedging strategy due to illiquidity in the market, and the type of interventions that would be beneficial to their organisation. The more we can define the impact this has had on business, the more likely it is that Ofgem will support new policy interventions.

At the end of the day, any reforms or interventions will have an impact on future market liquidity and ultimately on the price you pay for power. 

An efficient, well-functioning market gives energy suppliers, like us, the ability to trade with more certainty and less risk and buy the power and gas your business needs at a fair and sensible price. Better far curve liquidity also means we can offer more affordable multi-year fixed-price contracts to provide the certainty that businesses need.

With unpredictability in the wholesale markets likely to continue, it is important that your views are heard.

Ofgem is seeking responses by Friday 2 February 2024. You can find out more here and can respond directly to the consultation by emailing WholesaleMarketPolicy@ofgem.gov.uk

In the meantime, our team is available to discuss any questions you may have about this, and how it impacts your purchasing strategy.