What Does Exchange Trading Bring to Power Markets?
This article looks at the history of the UK power market, the drivers for change, and how the new UK market offering – N2EX – is looking to deliver a level of liquidity in a market which has not seen liquidity growth during the past 10 years.
By Mikael Lundin & Geir Reigstad
the market demand, regulatory issues and intervention, the need to create competition and lower some of the barriers to entry for smaller participants in the market, and address the shortfall in power generation in the future. Liquidity is the lifeblood of any market – regardless of whether
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it is trading oil, equities or electricity. Without liquidity there is no transparency, and without transparency there is little credibility around generated prices. This also hinders new participants from entering the market. The consequence: reduced levels of competition – and lack of competition impacts the consumer and how much they pay. Ultimately, liquidity begets liquidity and the current market set-up is considered to be prohibiting this.
The UK Power Market The UK power market has suffered more than most from
a lack of transparency and liquidity. This was highlighted recently by the general increase in traded volumes in other UK commodities versus that of UK power. Whilst there has been a slight increase in ‘churn’ over the past four years, it has failed to match that of other commodities like oil and gas. The liberalisation and restructuring of the UK electricity
sector, pioneered in the early 1990s, offered important lessons to the rest of the world. It showed, for example, the value of separating monopoly networks from activities that could be seen as competitive (such as generation and retailing) and the importance of innovations in tariff regulations in transmission and distribution. Further regulatory measures,
including the introduction of the New Electricity Trading Arrangements (NETA)1
in 2001, followed by the British
he challenges facing the UK power market today are a lack of market liquidity, price transparency and new market entrants. This article examines the major influences –
of the UK wholesale electricity market. Liberalisation brought in an explosion of new participants looking to cash in on the newly opened market. The arrival of other large US utilities – such as Dynergy, AES and Duke Energy – saw liquidity grow rapidly and establish itself on EnronOnline2
. Churn rose to
about seven times that of consumption in the space of a couple of years. Unfortunately, the collapse of Enron in late 2001 took with it
many of those who had invested in the UK market. This meant that to ensure the lights stayed on, the British Government, the banks, the remaining incumbent utilities and some of the larger utilities from mainland Europe, stepped in to underpin the market. In order to ensure that these companies were able to survive, they become vertically integrated and as a result the market began to constrict in order to survive.
A Shrinking Market According to Bloomberg, the UK is the only European power
... the UK is the only European power market to shrink in the past six years
Electricity Trading and Transmission Arrangements in 2005 was a fundamental step change. The system was implemented to create a difference in the way electricity was traded in England and Wales, and designed to deliver more competitive, market-based trading arrangements for electricity – similar to those in other commodity markets like coal and oil, and in other geographic regions. But instead of the UK being an example to the rest of Europe, other markets such as Germany and Scandinavia have surged ahead in the light of liberalisation, whilst the UK has stagnated. It is important perhaps to acknowledge that the exposure to the collapse of Enron in 2001/02 severely impeded the growth
worldPower 2010
market to shrink in the past six years. This decline in electricity trading has led to inflation in prices for consumers, while at the same time benefitting generators and suppliers who often fail to pass on wholesale price reductions. While UK energy regulator OFGEM recognises and acknowledges weaknesses in the system (Refer to Project Discovery – Options for delivering secure and sustainable energy supplies, Oct 2009) and is looking at ways to revive interest in power markets (Liquidity study of the GB wholesale market, Feb 2010) including persuading portfolio management companies, banks, trading houses and large energy consumers, such as retailers, manufacturers and industrials to trade more electricity, there are other issues. Through market consolidation,
the UK’s biggest utilities buoyed by billions of pounds worth of takeovers, have virtual control of both power
production and sales, accounting for 99% of the domestic retail customer market. This dominance has resulted in the low liquidity in trading currently experienced and prohibits new, smaller market entrants from participating. This has resulted in the market trading bilaterally and is symptomatic of the fact that 97% of the wholesale market is traded over-the-counter compared with somewhere like the Nordic region where only 30% is traded OTC. In addition, let’s not forget the potential shortfall in power
generation in the future and the need for small, independent companies from the low carbon and renewable energy
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