Many would agree that the monopoly of the Big Six on the industry is in serious need of re-assessment and Ofgem believe that greater market liquidity is the solution – this will allow more suppliers and generators to enter the market resulting in fiercer competition. As a result of pressure to increase market-liquidity from smaller market players, Ofgem released its report on ‘Wholesale power market liquidity: final proposals for a ‘Secure and Promote’ licence condition – Draft Impact Assessment’ 12th June 2013. The proposal made the following key recommendations:

• Facilitating entry and competition by smaller suppliers using the Supplier Market Access (SMA) rules
• A change to license conditions forcing major power generators to release intended trading prices 2 years prior to delivery allowing small competitors to hedge in the forward wholesale market
• Significant fines to major firms who do not sell and negotiate fairly at all times – enforced deadline to ensure they acknowledge and respond to requests by smaller suppliers to buy energy and they will no longer be able to refuse those deemed reasonable
• An investment of £4m total set up cost and annual ongoing cost of £14m.

Response from Industry

Many smaller suppliers have responded positively to the proposals. Co-operative Energy hailed it as the beginning of the end to ‘the unfair practices often used to effectively block small suppliers out of the wholesale market’ whilst First Utility, view it as ‘a good first step in the right direction’ resulting in a ‘positive impact’ on their ability to ‘compete more effectively with the Big Six’ as they buy just 1% of their electricity on spot market and need access to longer-term contracts.
However, the Big Six criticism of the proposal was rife even before the final draft was published. During the consultation process Centrica stated Ofgem had ‘seriously underestimated’ the costs for obligated parties whilst E.on agreed that there were large financial risks involved. The estimated costs involved in the proposals implantation were calculated before the license condition design was known so their accuracy has come under heavy fire. RWE Npower has expressed concern that the proposal could have a negative effect on competition and the resulting financial impact to consumers due to Ofgem’s lack of ‘detailed impact assessment.’

There are also concerns about European regulations and the risks of how market makers could be exposed to these. Ofgem are quick to dismiss this as being a real danger as this could be avoided by contracting out the obligation. The response deadline for the proposal is 9th August 2013 and Ofgem hope to make a formal direction to license conditions shortly after in autumn and the changes to be fully implemented by 2014.

Torse Analysis and Thoughts

Greater market competition is desperately needed. With smaller suppliers often scoring highest in customer satisfaction surveys being able to offer keener prices and more variety can only be a benefit to our clients.

• Ofgem have been working on ways to improve market liquidity ‘urgently’ since 2008 after first acknowledging it as a problem in 2005, but they still have a long way to go
• If these proposals came to fruition, alongside Drax and GDF Suez, the Big Six would still ultimately remain in control of 80% of the power generated in the UK and will therefore continue to dominate the market. A self-supply restriction forcing generators to trade all their energy on the open market would truly open up the market for greater competition
• Whilst greater market liquidity is required, surely more needs to be done to address the Big 6’s predatory pricing?
• As speculation already rife that the main market makers are set to launch an appeal to the Competition Commission against the proposals, it is difficult to see Ofgem keeping to their 2014 deadline
• Coupled with Ed Davey commenting that the Government ‘stands ready to use the Energy Bill to take necessary measures to improve energy market liquidity should Ofgem’s proposals be delayed or frustrated’ we don’t hold our breath that these proposals will ever really get off the ground

Useful Articles

Utility Week Article 1

Utility Week Article 2

First Utility Article