WIREDGOV

• Ofgem monitoring indicates early signs of improved trading conditions in wholesale market
• Suppliers report easier access to range of wholesale electricity products
• Ongoing monitoring needed to assess impact of Ofgem reforms

Ofgem has today published its first analysis of the impact of its reforms to improve liquidity in the wholesale electricity market. The reforms, which came into effect on 31 March 2014, are designed to ensure that the market provides the products and price signals that all companies need to compete effectively. Their goal is to improve the ability to buy and sell products in the wholesale market. This ability is known as liquidity. Ofgem's analysis shows improvement in liquidity in the wholesale market.

No one single metric can provide a complete view of liquidity in the market, so Ofgem’s approach is to analyse the market across a number of metrics, as well as assessing stakeholder feedback. For example:

• Churn (the number of times a unit of electricity is traded before it is delivered) is equal or higher in 2014 than 2013
• Bid-offer spreads (the gap between the prices for buying and selling a unit of electricity) are reducing, which gives more confidence that prices reflect demand and supply
• Trading volumes have risen in the prescribed market making windows
• The volume of products traded for delivery further into the future is increasing
• There are higher volumes of trade both on exchanges and over the counter compared with 2013

In addition, independent suppliers report that trading conditions have improved, with products easier to access and suppliers more responsive to trading requests.

There are, however, many factors that are likely, alongside the Ofgem reforms, to have contributed to the increase in liquidity in 2014. So while improvements are welcome it is too early to attribute observed changes solely to the reforms. Ofgem will continue to monitor the market in order to understand their impact and to see if the improvements are maintained.

A full year’s data will be published in 2015, which will allow a better assessment of the impact of Ofgem’s reforms.

Notes to editors

1. Liquidity is a measure of the ability to buy or sell a product – such as electricity - without causing a major change in its price and without incurring significant transaction costs. Low liquidity can prevent competition by deterring new participants from entering a market; reducing opportunities to trade; and weakening price signals.
    
2. Secure and Promote places requirements upon the six vertically integrated companies and the two largest independent generators to trade fairly with eligible suppliers. The rules state that they cannot refuse any reasonable requests from independent suppliers to buy electricity and they have deadlines for responding to requests. The six largest vertically integrated companies also have to publish the price at which they will trade wholesale electricity up to two years in advance, and be prepared to buy and sell at those prices. These prices must be published daily in two one-hour market-making windows, giving independent suppliers and generators opportunities to buy and sell the electricity they need to compete effectively. The goal of these reforms is to secure access to a range of products and promote robust and trusted prices both in the nearer term and further out into the future.

For further press information contact:

Kate Wilcox:   020 7901 7113
Chris Lock:   020 7901 7225
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