Ofgem sets out road map to open up electricity market for independent suppliers

Published on Wednesday, 22 February 2012 10:39
Posted by Scott Buckler

Energy regulator Ofgem has today set out a detailed road map to open up the wholesale electricity market by setting out three clear objectives which the Big Six suppliers will have to meet. This is to enhance competition and will ensure independent suppliers can buy wholesale power in the range of products they need more easily

The objectives are:

1) Availability of a range of products which support hedging
2) Robust reference prices showing how much power would cost in forward markets
3) Effective short/near term market

As progress has only been made on the third objective since Ofgem set out its intention to reform the market in March, Ofgem is proposing mandatory auctions to drive open the electricity market and ensure all three objectives are met. These would require the Big Six to sell a range of different products so independent suppliers would be able to hedge their positions more effectively on the forward markets and therefore compete on a more level playing field.

Ofgem’s proposal does not prevent the industry from taking more action to deliver the three objectives.Senior Partner for Markets Andrew Wright, said:

Since Ofgem announced that the Big Six companies needed to change radically their ways, they have made progress. We have seen pledges to simplify tariffs, moratoriums on door-step sales and now auctioning of power in the short-term market. This is to be welcomed. However, the needs of independent suppliers have not yet been met and this is why Ofgem is proposing to introduce mandatory auctions to force the pace of change and increase transparency.”

“Suppliers do not have to wait until the auctions are in place to act. Ofgem has set out clearly the three objectives we want met and energy suppliers now have the chance to take the lead and deliver this increase in liquidity.”

More electricity is now being traded in the short/near term market (where power is delivered either on the day or, for example, a day ahead). Between September and December 2011, day-ahead auction volumes increased five-fold.

However, in the forward market, Ofgem has yet to see developments. This is why Ofgem’s proposals for a mandatory auction seek to force the pace of change and would ensure the Big Six sell 25 per cent of their power in a variety of different products, much of which will be on the forward markets. This represents nearly half of all household power use in Britain and should allow plenty of liquidity for independent suppliers and potential new entrants to expand their businesses as they currently account for two percent of the domestic market.

 

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