Is the Secure and Promote liquidity fix fit for purpose?

Ofgem is reviewing the Secure and Promote licence condition, starting with a workshop on 2 May.

In 2014, the regulator brought in the Secure and Promote Licence Condition, to try to address concerns about the lack of liquidity in the GB market and specifically the problems small suppliers had trading they require. Three years on, has Secure and Promote done its job? Opinions are divided.

Three years ago, Ofgem tried to help new companies enter the power market by addressing continuing complaints about whether they could buy power when they needed to. New entrants were not specifically excluded from power markets, but they found little liquidity there. Two years later the Competition and Markets Authority decided that – whether or not because of Secure and Promote – the problem had eased. There was enough liquidity, in power markets, it decided, that sourcing power would not be a problem for new entrants.

Were the energy and competition regulators right to think the problem had gone away? Several supply companies that New Power contacted recently said no. Liquidity problems remain.

As for Secure and Promote, it may have been helpful for brand new market entrants, but “it achieves very little for us” was a typical comment from one established but smaller company.

The bigger problem, according to some companies that spoke to New Power, is that the market has moved on and companies need more from it. They need to be able to buy power for shorter periods (referred to as ‘shape’).

“Secure and Promote is not fit for purpose,” said one. “It has no granularity. We need to handle shape risk.” That refers to the fact that market makers are offering power for long periods – a season, a quarter, or even a month. But suppliers have to meet demands that vary within the day and they want to buy their power supplies to fit morning and evening peaks.

Others were more positive, saying it had been helpful. It was “one of the more successful things Ofgem has done”, one said. No-one wanted to see it withdrawn. Some wanted it expanded, while others thought it may now be addressing the wrong problem.

Ofgem is likely to be wary about any changes because the market-making obligation is not risk-free; it simply transfers more risk to the larger companies. That was one reason the regulator in another market – that of Northern Ireland and the Republic of Ireland – declined to take similar measures.

Ofgem’s market-making obligation tried to increase trades ‘down the curve’ (further ahead in time), where trading had been very limited, hoping that would be reflected in shorter-term trades. But most companies New Power spoke to thought it was the other way around: if there were more trading for today or tomorrow’s delivery, it would gradually start to drive more trades further ahead.

Some sections of the industry would still like to see all companies required to sell all their power in the day-ahead market – or use exchanges instead of bilateral trades – but Ofgem has not had much appetite for such a dramatic change.

This is an extract from: Is the liquidity fix in good shape for the future?, New Power Report, April 2017. Members, log in here to read  read more about what power supply companies think of liquidity in 2017. 

The workshop will be held on 2 May 2017 at Ofgem’s London office. For any questions, contact Yasmin Valji on Yasmin.valji@ofgem.gov.uk.

Related content:

OPINION: Please come back bankers, all is forgiven

Supplier chiefs want more oversight from Ofgem

IoT for energy: Is there a future for energy suppliers?

Subscribe to New Power for full analysis, comment, interviews and data in our monthly Report, and access to our Database, or sign up to our FREE e-newsletter for website updates

Not a subscriber? To see if you qualify for our next FREE TRIAL send your name, job title, and telephone number to subscriptions@newpower.info

Leave a Reply

Your email address will not be published. Required fields are marked *


*