Ofgem promises clarity on ‘market making’ future before cash-out price change

Ofgem has promised to provide clarity by November on whether it will maintain electricity trading arrangements that require large players to act as ‘market makers’ at two periods during the day.

The market-making requirements was introduced as part of Ofgem’s ‘secure and promote’ reforms, intended to make it easier for small suppliers and generators to buy and sell power. Before the market making was introduced, they had complained that they could not find willing counterparts when they wanted to trade.

Some argue that the arrangements – intended to be a short-term measure to improve liquidity  - have had the effect of driving all trades towards those periods. That might make it hard for small companies to make fast deals in the event they had to react to volatile prices outside those periods, potentially leaving them exposed to big costs. That is a particular concern this winter, when prices are expected to be more volatile because last minute actions by the System Operator (charged back to companies ‘out of balance’ as so-called ‘cash out’) will be costed on the most expensive action (so-called Par 1) rather than an average of 50 actions. That change is due to take effect on 1 November and may cause price spikes.

Others argue that if large companies are not required to be market makers at those times we will return to a situation where small players find it hard to trade at any time. Some also question whether it is sensible to make the change while the effects of a shift to Par 1 are not known and there are other sources of market uncertainty.

Ofgem is still deciding on its course of action but promised that it would publish its views by the time the Par1 change takes effect.

Further reading

Should the ‘market making’ obligation be suspended?

Elexon offers online ‘dashboard’ to help prepare for cashout changes next winter

Ofgem asks: Does mandatory market making work?

Is the Secure and Promote liquidity fix fit for purpose?

November’s ‘cash-out’ changes could hit small generators, PPAs, I&C supply contracts

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