Utility Week

UTILITY Week 30th October 2015

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Markets & Trading This week Winter supply crunch 'open to exploitation' A loophole in the rules leaves National Grid vulnerable to generators gaming the system UK generators could exploit a regulatory loophole to inflate market prices as National Grid seeks to secure power supply for the winter, industry sources have warned. Although wholesale power prices will typically spike in the event of a capacity crunch, Utility Week understands that National Grid's plans to secure winter supply raised concern at an industry seminar this month over whether generators may be able to exploit this shortfall by inflating prices. National Grid has removed three power plants from the market this winter to form a capacity reserve to pre- vent blackouts. But the operator can call on these units only aer all available plants have been ramped up. This means the final market plant could name a dra- matically higher price, knowing National Grid will have to accept it before it can draw on its reserve. A similar phenomenon was seen in 2008 when Ofgem was forced to put in place rules to prevent generators "gaming" the market at times of physical transmission constraint between Scotland and England. UK power traders told Utility Week that although it is possible to take advantage of tight supply by inflating "offer" prices to National Grid, few would be willing to take the risk of falling foul of European market rules. "Is it really worth it? It would mean an investigation and a whole load of very negative publicity. And while the initial profit may look big, the fallout would be massive," one trader said. JA ELECTRICITY Ofgem's £45m market reforms fail Sweeping reforms by Ofgem to increase trading and com- petition in the UK's electricity market at a £45 million cost to companies have failed, Utility Week has learnt. The regulator put forward a ra of costly trading rules in April 2014 to force the largest energy companies to trade at predetermined times during the day, at an estimated cost to the companies of £45 million. The reforms were designed to boost liquidity by removing barriers to smaller players, but fresh data shows that trading on the power market has slowed. Data from market experts at Icis shows that traded volumes in Q3 2015 were the lowest for the quarter since 2013, which was "the historical low for the UK power market". UK power market traders told Utility Week that trading picked up in the first few months following the introduction of the reforms, but this was largely due to political tensions in the Russia-Ukraine region, which raised concerns over gas supplies to Europe. As geopolitical tensions in the region cooled, so did traded volumes, raising ques- tions over whether the reforms had achieved their aims, and whether the reforms themselves had stifled interest from larger financial players in the market. Ofgem argues that by forcing trade to take place in two daily liquidity windows, the market is able to produce clearer long- term price signals, which are needed to determine payouts through the contracts for differ- ence support levels, and to allow smaller players greater access to the market. GAS IGas submits shale scoping request IGas has submitted a scoping request to Nottinghamshire County Council, taking the first steps towards shale gas explora- tion at a new site in the county. The request refers to a site at Tinker Lane near Blyth, and is separate from an application made to the council to monitor groundwater across four loca- tions near Springs Road, which was announced last week. The council will review the scoping request to assess the environmental issues IGas intends to include in its Envi- ronmental Impact Assessment. It will provide a response within five weeks. IGas said that if it decided to submit a planning application, the development would involve exploration of the site using test drilling to check the suit- ability of the rock for shale gas extraction. Would traders risk skirting close to the rules? 26 | 30TH OCTOBER - 5TH NOVEMBER 2015 | UTILITY WEEK Source: Icis UK forward gas prices 50 40 30 20 10 0 TRADED VOLUMES IN GW Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Data from market experts at Icis shows that traded volumes in Q3 2015 were the lowest for the quarter since 2013, which was "the historical low for the UK power market". The slowdown in trading came despite a ra of costly Ofgem trading rules put in place in April 2014 to force the largest energy companies to trade at predetermined times during the day. Traders say volumes have fallen in line with lower volatility as geopolitical tensions in Ukraine have eased.

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