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utILItY WeeK | 6th - 12th June 2014 | 13 Special report would not have any impact on the bottom line for consumer bills. "EDF Energy has argued throughout the long debate that liquidity has been driven by factors outside the energy market, and in particular access to credit for new suppli- ers," the company said. Scottish Power added that even if greater liquidity was achieved, the impact on con- sumer bills was far from certain. Not only might there be no apparent decrease, but the measures could increase costs. "[I]t is unclear to us that prices in the elec- tricity wholesale market are currently above the efficient level – indeed many observers think that current wholesale power prices are well below new entry costs, leading to the need for capacity interventions," said Scottish Power's response. "It is therefore unclear to us whether additional liquidity will create a downward, rather than an upward, pressure on whole- sale prices. In any event, if generators are required to fund the costs of liquidity meas- ures then this will create upward pressure on wholesale prices." Eon agreed that it was difficult to pro- vide a quantitative estimate of the potential impact on consumers' bills from greater liquidity. "Consequently, the risk is that Ofgem's assumptions are wrong and the industry incurs net costs, which in the long term would inevitably have to be met by cus- tomers," Eon said. As Ofgem's rules came into effect over April, liquidity did indeed pick up compared with the same time last year. But not only was the increase in trading more likely to have been due to the Russia-Ukraine crisis, but it also proved short-lived. Trade data from energy market special- ist Icis shows the average market volume of winter-delivered power in April was 6,224MW this year, up 124 per cent from April last year. But the strong increase in volumes failed to continue in May which (for trading days up to and including 28 May) saw a 36 per cent decrease in volumes to 3,970MW. "Strong liquidity in April was definitely supported by volatility in the gas market due to developments in the Russia-Ukraine cri- sis," Harris said. "I would say increased vol- umes were mainly due to these events." But perhaps the most damning indict- ment of Ofgem's plans to level the play- ing field for smaller suppliers is that they go directly against calls from the suppliers themselves. In their consultation responses, inde- pendent companies including First Utility, Smartest Energy and Co-operative Energy consistently called for measures previously proposed by the Labour party, and widely expected from the CMA intervention: a restriction of big six self-supply. "We believe the best and simplest solu- tion to promote liquidity would be a self-sup- ply restriction," said First Utility. "Such a solution focuses not on the spe- cific detailed trading activities such par- ticipants must undertake, but it instead describes the one activity that those par- ticipants cannot undertake: internal energy transfers," it added. Smartest Energy agreed: "Self-supply restrictions would be a more effective inter- vention not only to improve liquidity but also to improve transparency in the market, especially in the current media and political context." "[It] would have had a greater impact on liquidity than Ofgem's proposals," Co-opera- tive energy said. UK power traders told Utility Week that Labour's plans made sense from a market point of view. "They really need to break up the generation and retail arms and limit internal trading to make power a real market – with producers and users – rather than inte- grated utilities that can internalise it," a trader said. "It has always been argued that what Ofgem proposed was never going to increase liquidity. The only thing that will do that is more counterparties, or traders, making money. You either need more people needing to trade – therefore more trades take place – or a market that is conducive to traders mak- ing money," he said, adding that a proper market would see the return of speculative financial players too. "The big six in general have said this all along. It's just that Ofgem needed to be seen doing something," he added. A spokesman for Ofgem claims it is just too soon to tell if the market-making plans are a success. "We have been monitoring the market and taking opportunities to engage with stakeholders to gauge early experiences with the reforms. However, it is too early to draw conclusions about the results of this intervention," a spokesman says. Even over the longer term it could still prove difficult to determine the success of the measures, given the strong influence that external factors will continue to have. "We can imagine scenarios where liquid- ity could naturally increase," said EDF Energy, pointing to tightening surplus mar- gins aer 2015, and changes to asset owner- ship and the wider financial markets, as key drivers of liquidity in the future. Harris added that predicting future liquid- ity was particularly difficult as the energy sector moves into a time of flux. "Reduced surplus margins by 2015 could bolster trade but the uncertainty regarding the impact of capacity market measures set for 2018 could cause further withdrawal of non-generating players," he said. "There are lots of changes coming for the UK power market, some of which could improve liquid- ity while others might have the opposite effect. We just don't know yet." With the results of the CMA investigation still to come, and a 2015 Labour government a real possibility, a wider shake-up of the market could trump all current predictions. Perhaps the safest bet might be that what- ever the future for UK power liquidity, Ofgem is unlikely to be responsible for it. 2,500 2,000 1,500 1,000 500 0 TWh Source: Icis Heren, APX, N2EX, Ice, Dukes Start of Neta Generation is forecast for 2013 YTD gB annuaL churn 10 8 6 4 2 0 Churn 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Volume traded OTC (TWh) Generation volume (TWh) Churn OTC