Ofgem will not halt UK power trading sessions for now

UK regulator Ofgem will not suspend the market-making obligation (MMO) under which the country's two daily power trading sessions are run, although it said market participants should prepare for its stoppage.

The MMO could be suspended if the merger between UK utilities SSE and Npower, and generator Drax's acquisition of Scottish Power's gas-fired and hydropower generation units go ahead, Ofgem said, with both due in the first quarter of 2019. But an immediate halt was ruled out on the basis that it could lead to a significant disruption to the market, which in turn could increase costs and reduce access for smaller parties, Ofgem said in a letter to stakeholders today.

There is no clear evidence to suggest that the four obligated parties — including Scottish Power, SEE, Germany's RWE and France's EdF, with a combined generation market share of around 50pc— will be subject to disproportionate costs or that the benefits of the MMO could not be sustained with these market markets, Ofgem said.

The regulator warned market participants to prepare for the obligation to be suspended if the SSE-Npower merger and Drax acquisition of Scottish Power assets take place, as this would mean there could only be one large generator — EdF — that meets its criteria, down from six when the policy was introduced in April 2014. Under such circumstances, the existing policy could to become "less effective" and the MMO may not generate a "robust reference price", Ofgem said.

The regulator will continue to monitor market liquidity and investigate longer-term policy options and alternatives to the obligation, although it was unable to provide any further details.

Ofgem received a total of 41 responses to its open letter on the mooted MMO changes, mainly from generators, suppliers and energy traders. A total of 30 respondents — predominately independent suppliers, generator and energy traders — were against the MMO suspension. Around half of the group said the suspension of the MMO could lead to less robust price discovery, which could increase costs related to bilateral trades and power purchase agreements and support higher wholesale prices — particularly when combined with the move to PAR-1, EU exit and the implementation of the default tariff cap for domestic suppliers that takes effect on 1 January 2019.

But a total of 10 respondents supported the suspension, with most of these wanting it halted immediately. Some argued the MMO had not improved overall liquidity but rather had concentrated it in the two trading sessions and cited falling transacted volumes of forward non-mandated products outside the windows.

Ofgem announced that it was considering suspending the MMO — potentially ending the UK's two daily power trading sessions — in early August. This was after the regulator agreed to remove the MMO for one of the country's largest suppliers, Centrica, in light of its reduced share of generation assets.

Changing market conditions have reduced the share of generation controlled by the country's six largest generators and paved the way for the entry of smaller participants recently.