Ofgem, the U.K.’s power and natural- gas market regulator, may force the nation’s six biggest utilities to sell 25 percent of their generated electricity in auctions to boost competition.
The watchdog proposed mandatory sales of power for delivery from three months to three years ahead to help smaller companies buy and sell the contracts, Ofgem said today in an e-mailed statement.
EON AG, Iberdrola SA (IBE), SSE Plc, Electricite de France SA, Centrica Plc (CNA) and RWE AG (RWE), collectively known as the “big six,” supply 99 percent of the nation’s power and gas. That makes it harder for smaller companies such as Intergen NV, Drax Group Plc (DRX), First Utility Ltd. and Ovo Energy Ltd. to compete. EON, Iberdrola and SSE have said they will increase power sales in the day-ahead market operated by the N2EX exchange.
“Ofgem is proposing to introduce mandatory auctions to force the pace of change and increase transparency,” Andrew Wright, senior partner for markets at Ofgem in London, said in the statement. The proposal doesn’t inhibit utilities from increasing trade on their own accord, Ofgem said.
Trading Volumes Slump
Traders and analysts forecast a 2 percent rise in traded volumes of U.K. power this year, according to the median of 16 estimates in a Bloomberg News survey last month. That’s after the amount of electricity bought and sold slumped in the 12 months through July to its lowest in six years, according to Financial Services Authority data compiled by Bloomberg. Britain’s power market is vertically integrated, meaning the six biggest companies generate and supply electricity, so have little need to trade.
“If they’re trying to encourage liquidity then it’s a very effective and simple measure to do so,” James Cox, an analyst at energy consultant Poyry in Oxford said by telephone today. “There are more deep-seated issues which come back to the vertically integrated nature of the U.K. market.”
Thatcher's Legacy
Former U.K. Prime Minister Margaret Thatcher broke open the nation’s energy industry more than two decades ago in an effort to attract investment and drive efficient pricing. While that allowed the U.K. to enjoy some of the lowest power prices in Europe, it sapped trading as utilities sought profit.
The proposals, which are open for comment until May 8, are part of Ofgem’s biggest reform of the industry to help drive competition since Thatcher’s privatization. The plans aim to ensure the market delivers enough contracts to help traders hedge price risks, has trusted reference prices for future contracts and that the near-term market provides the right signals to switch on power stations, according to documents published on the regulators website.
Ofgem Decision
Ofgem plans to publish its final decision later this year, which may include establishing monthly auctions of electricity via an approved exchange by 2013, Chris Lock, a spokesman for the regulator, said by telephone from London. The government is looking at ways to give Ofgem more authority, Secretary of State for Energy Edward Davey said in a separate e-mail.
Most of Britain’s power trading is done via brokers including Spectron Group Ltd., Tullett Prebon Plc and ICAP Plc. Nasdaq OMX Group Inc. and Nord Pool Spot AS’s N2EX exchange holds a daily auction of electricity. APX-Endex Holding BV allows trading via a power cable to the Netherlands. ICE Futures Europe handled 160 percent more power futures last month than a year earlier, according to a Feb. 14 report.
Ofgem may pick one exchange to handle the volumes or utilities can propose multiple exchanges, Lock said. The measures would ensure 49.2 terawatt-hours of generation were sold for future delivery each year across baseload and peak contracts, the Ofgem documents show. U.K. power stations provided 381 terawatt-hours in 2010, according to the Department of Energy and Climate Change.
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