Utility Week

UTILITY Week 20th March 2015

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UTILITY WEEK | 20TH - 26TH MARCH 2015 | 29 Markets & Trading This week Ofgem rules are 'not enough for liquidity' CMA says Ofgem April 2014 rules have improved availability, but have not benefited liquidity overall Ofgem's drive to boost trade in the UK power market is not enough to cause a step change in its overall liquidity, according to the Competition and Markets Authority (CMA). In its latest working paper, the authority concluded that the UK power market needs the participation of financial play- ers to improve its constrained level of trading, but that Ofgem's market reform rules mean that the prospect is not an appealing one for banks. The CMA opted to investigate the liquidity of the power market, which lags that of the more popular gas market, to decide whether the low levels of activity pose a barrier to smaller companies. Although its current thinking concludes that the limited amount of trade is still enough for suppliers to hedge their forward positions up to a year, the findings add fuel to criticism that Ofgem's rules are themselves a major cause of dysfunction in the energy sector. Under its "secure and promote" reforms, Ofgem has managed to boost trading in a specific set of contracts traded through the wholesale market by forcing genera- tors and suppliers to commit to a minimum level of participation in designated trading windows. Although the CMA acknowledged that the April 2014 rules have improved availability for the contracts that are covered, there is no evidence that this will benefit liquid- ity overall. "It was not obvious to us that micro-level interventions had any potential to cause a step change in the overall level of liquidity in the market," it said. JA ELECTRICITY Funding granted for NSN interconnector Ofgem has granted the NSN pro- ject funding through its cap and floor regulatory regime, giving the go-ahead to an interconnec- tor between the UK and Norway. The NSN project is scheduled to begin operating in 2020 and will have a capacity of 1.4GW. The decision follows Ofgem's consultation on its proposals in December last year, where it analysed development costs, design specifications and tender- ing arrangements to ensure these would deliver good value for money for customers. National Grid said the deci- sion on cap and floor prices was "an important step" to reaching a final investment decision on the project. In a letter, the regulator's electricity transmission partner Kersti Berge wrote: "We will [now] consult on our detailed cost assessment at the final project assessment stage and our decision will be used to set a pro- visional cap and floor for NSN." Ofgem said the project will "bring benefits to UK consum- ers" by "reducing the wholesale price of electricity, improving the operation of the UK trans- mission system and increasing security of supply". The cap and floor regime was developed by Ofgem to encour- age investment in interconnector projects that deliver good value for customers. WATER Cox sets out five- year vision for sector Ofwat chairman Jonson Cox has set out a vision of vertical disaggregation, non- traditional consolidation and "de- consolidation", and an end to the indexation of Regulated Capital Value (RCV) to the Retail Price Index (RPI). In a speech to a London audi- ence last week, Cox reflected on the past two years and set out his agenda for the next five, follow- ing the recent conclusion of the price review. He looked forward to a more fragmented, diverse and differentiated water sector. In reference to the opening of the water market to competition for non-household customers in April 2017, Cox said: "The logic of vertical integration no longer works." He emphasised the importance of service delivery in a fragmented structure, and looked ahead to upstream reform. Cox said he was putting the controversial issue of whether companies' RCVs should continue to be indexed to RPI "back on the table". Pointing out that salaries and pensions are no longer linked to RPI, he suggested industry and the regu- lator would need to work with investors to find a new model. See analysis, p7 Trading has been boosted for a set of contracts Tricks of the trade Jillian Ambrose "Grids will be scrambling as solar output diminishes" As market inconveniences go, the moon is rather a large one. On 20 March, all eyes will turn to the sky for a rare solar eclipse that will plunge Europe into temporary gloom. But ahead of that, all energy geeks have turned their attention to the effect that this might have on solar panels. In the UK this is a pretty mar- ginal concern. But in renewables- rich countries such as Germany, grid operators will be scrambling to keep up as solar output dimin- The German grid operators' 75-minute astronomical roller- coaster is complicated further by the fact that while the timing of an eclipse can be perfectly forecast, predicting cloud cover is trickier. An already dull day would mean a less dramatic experience for sky-watchers but perhaps a calmer day at the office for the transmission system operator. It certainly puts the UK's current wind intermittency woes into perspective. ishes at almost three times the rate of your average sunset, only to return just as speedily. Already, traders note that the price of near-term power on the German wholesale power market is 8 per cent higher on Friday than for delivery a few days before – despite the fact that Friday typically brings lazier pre-weekend demand levels. The price premium is unsurprising. Experts at energy management firm Opower esti- mate that the eclipse could force the German power grid into a supply-demand scenario equiva- lent to turning off a medium- sized power plant every minute for an hour.

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