What are the barriers to energy market liquidity? You don’t know and you don’t care? Well, maybe it’s worth a little of your attention because as business energy users, it affects you and the future of your energy supply and billing in the UK.

Disfunctional Market

Economists probably have a more technical term, be it ‘closed market’ or similar but we consider the energy market to be a disfunctional one – and one that is in need of the energy brokers such as Torse, making sense of it.

The energy market in the UK is dominated by the Big Six, British Gas, EDF Energy, E.oN, npower, Scottish Power and SSE and whilst competition remains tough between these companies, so does their status as an oligopoly – a dominant force with too much power and exclusivity over providing energy to UK businesses. So, whilst the UK may seem to have healthy competition between the major and not so major players, this is an illusion created by the Big Six for their own benefit.

Bigger Company, Bigger Risk

New energy providers in the UK will always face tough competion in the following ways:

• Pricing Umbrella of Big 6 Legacy Base: To grow a customer base a new entrant needs to price below the Big 6. Current pricing practices of the Big 6 provide a pricing umbrella which disadvantages a small supplier.
• Working Capital for Energy Hedging: Hedging customer demand in the wholesale markets requires security with counterparties. The cost of this security for a small supplier is greater than for a larger player.
• Cost of Shaping Wholesale Products: Electricity and gas purchased on the wholesale market needs to be shaped to meet actual customer demand. Shaping is less efficient at low volumes and therefore more expensive for a small supplier.
• Fixed Overheads: The complex and regulated nature of the electricity and gas industries carry with them fixed costs in terms of regulatory and industry compliance. This is greater on a per customer basis for a small supplier.

Imbalance at Cash Out: Energy trading arrangements penalise suppliers for any difference between purchased and consumed energy at the point of delivery. A small supplier with a growing customer base has higher imbalance and more cost.

There is a distinction between high prices triggered in response to supply and demand conditions and the legitimate operation of the market (which all well-managed participants should be able to manage the risk of) on the one hand and turbulent prices that are aggravated by structural distortions and one-sided rules on the other. There are also issues that arise from the dominance of incumbent players, who because they are vertically integrated are able to bypass the wholesale market for large volumes of the power they produce. This situation means that parties who cannot trade because of market illiquidity cannot obtain contracts or shaped products, and they are systematically exposed to “imbalance trading” at potentially penal prices that cannot be anticipated. This in turn further disadvantages the smaller players relative to their larger, integrated competitors. – Suppliers Forum 2012

Why Should I Care About Liquidity?

You should care about energy market liquidity because the ability to break into the oligopoly could mean a potential reduction in billing through the ability to offer more flexible or tailored packages with the additional benefit of less overheads.

OK, How Can Torse Help?

Whilst there is no quick fix to this difficult situation and there is a long way to go, you could put yourself ahead in the game in the following ways:

• Be aware about any changes in tariffs and the packages offer by your supplier
• Check periodically  your meter reader
• Ask  your supplier for  accurate bills and prices
• Ask your supplier to clarify any issue that you do not understand in your contract
• Ask your supplier to provide you  full and accurate information regarded to the renewal terms of your contract, including information about rollover of a fix term contract at any time;

For more advice about the energy market, contact Torse on 0115 8532120, use the CONTACT FORM or email info@torse.co.uk