Utility Week

10 | DECEMBER 2022 | UTILITY WEEK Interview also face a risk of being unable to provide the power they have committed to if, for example, a plant stops generating. This means they then have to buy back this power from the market to ful l the trade, o en at high prices. Another reason is the fact that sellers are required to put up more credit/collateral to back trades, which have increased in value. Furthermore, higher prices mean generators need to hedge a lower volume in order to cover their costs. All this, says Commaret, has consequences for sup- plying consumers with energy and "creates an imbal- ance" between supply and demand. "This liquidity issue has a consequence on the prices for customers, it has a consequence on the ability for customers to contract at any time, because there are some times where there is not enough liquidity for them to contract with us and we are not able to make o ers at that point in time. "Also, a liquidity shortage creates higher volatility. Higher volatility means if ever a supplier were not to hedge because they have contracted with a customer and they don't buy the energy on the wholesale market, they are exposed to a loss. That could incur further disruptions and bankruptcies in the market." Acting on liquidity, Commaret says, would reduce costs not only for suppliers and customers, but also the costs being incurred by the government for its Energy Price Guarantee to cap energy unit rates. The government has also launched a £40 billion Energy Markets Financing Scheme, which is intended to provide nancial liquidity to energy companies facing large margin calls on their hedging activity as a result of volatility in wholesale markets. But the high interest rates facing companies access- ing the scheme are, according to Commaret, "aggravat- ing" the issue of wholesale liquidity. He continues: "It disincentives the generators to access this scheme… This scheme has been designed in a way which is not incentivising the generators to hedge forward. "It has been designed rather to provide a solution if ever someone were eligible for this and had the appetite to pay a very high rate. And you can see that nobody has applied for this scheme. To my knowledge not a single generator has applied for the scheme." One way of mitigating this, he says, is to encourage take up by lowering the interest rate on the loan, making it more a ordable to generators with less capital. He adds: "I think the government has to nd the right balance in all the features of this scheme. They have to tweak the conditions to have access to the scheme, to open the door and create more appetite for the generators. "But there is also something that should be included within the scheme, which is that it should come with a duty for generators to hedge forward. We have to nd a way to create the appetite for access to something which is interesting from a nancial point of view and will have a real impact on the wholesale market." He further raises concerns about the price cap's methodology, which he says adds to the burden on retailers. He continues: "The reasons suppliers are failing are because the cost at which they are buying energy is much bigger than the cost which is recognised in the price cap. That's the reality. The price cap is based on a formula that assumes a cost for the energy, but because of the lack of liquid- ity on the wholesale market it isn't easy for suppliers to have the ability to match the price assumed in the formula. "At the moment, I think there is still a lot of risk in this market and the cap on prices has aggravated the risk for suppliers to go bust. That is what should be looked at carefully; how to avoid those insolvencies. That's really something that we need to sort out." A lack of liquidity is not the only thing that is cur- rently threatening the stability of the energy market. In recent weeks Ofgem has con rmed that, for the h consecutive year, the mutualisation of missed Renewables Obligation (RO) payments has been trig- gered a er a number of suppliers failed to pay by the 31 October late deadline. As of 1 September, 36 retailers, most of which are no longer active in the market or are insolvent, le a £163 million shortfall in the RO buyout funds. "We know that the way the RO is set up is creating this type of risk because there is a huge lag between the moment where the obligation is incurred and is stacking up and the moment where the suppliers have to pay for the obligation," says Commaret. He says these issues have resulted in the inability of retailers to generate a pro t in the market, despite the widespread public belief they are. "For me, that's really the key point – how to create a market where there is a pro t for the suppliers. "That is completely counterintuitive to the public opinion because the public sees the massive pro ts of the oil and gas companies. But the reality is that the suppliers in the UK market haven't made any pro t in the last few years. "So that's really what has to be sorted if we want to avoid nding ourselves in a situation where indus- try costs like the Renewables Obligation are mutualised." Ensuring those most in need are pro- tected from the worst of the price shocks is clearly a key priority for Commaret and EDF. But the market needs stability in order to give customers the service they need and this will not be achieved with- out urgently addressing the issues of low wholesale liquidity. As Commaret observes, it is "absolutely a criti- cal topic to be addressed". "The reality is that the suppliers in the UK market haven't made any profi t in the last few years." continued from previous page to avoid nding ourselves in a situation where indus- try costs like the Renewables Obligation are mutualised." Ensuring those most in need are pro- tected from the worst of the price shocks is clearly a key priority for Commaret and EDF. But the market needs stability in order to give customers the service they need and this will not be achieved with- out urgently addressing the issues of low wholesale liquidity. As Commaret observes, it is "absolutely a criti- cal topic to be addressed".

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