More liquidity needed
June 21st 2009 While Climate change and to a slightly lesser extent security of supply dominate,price is of primary concern and may mean the difference between being in business or not. Dominic Whittome, european policy adviser to the Major Energy Users’Council asks is the Government all at sea on energy policy?
If we asked this question in the context of climate change, security of supply, network access, investment or tariff initiatives then few of us could accuse any Whitehall department of being asleep on case. Indeed, the industry is possibly subject to more legal initiatives aimed at reinforcing our energy system and moderating consumer behaviour today than ever before. But some legislation is undeniably more welcome than others.Many readers of this article whose companies will have just been caught by the Carbon Reduction Commitment (CRC) will be quick to highlight the significant compliance burdens involved.
However,the CRC is just one example of a series of future measures likely to affect industrial and commercial users of energy. With little doubt, the CRC will be joined by further initiatives between now and 2020, the deadline that the United Kingdom recently set itself to achieve its 20% cut in carbon dioxide emissions overall.
With security of supply and climate change issues dominating the legislative agenda, perhaps ‘Lost at Sea’ is the more apt phase when it comes to the small matter of energy prices? End-user prices in the industrial and commercial markets ultimately depend on activity in the wholesale market.The degree of competition in this open Forward Market will decide whether or not consumers’ energy bills truly reflect supply and demand conditions for that particular commodity.This axiom applies whether they purchase their gas or electricity in the open Forward Market, or alternatively on a long-term contract with a dedicated gas or electricity supplier. In the latter case, the initial Base Price may be gauged against the calendar year price in the Forward Market while the operative Contract Price may be indexed to forward prices over the duration of the contract in question.
Concern remains that neither the gas nor the electricity wholesale markets have been working well. The forward markets in each case are certainly not operating as efficiently as they should in a market which is almost two decades into liberalisation.There is an increasing perception that gas producers and power generators are not releasing enough energy volumes for trading in the Forward Market on a long-dated part of the curve,i.e.on a seasonal and on a calendar year basis.A minimum level of long-dated supply is imperative for the wholesale market to operate efficiently.
One of the adverse effects of ‘liquidity starvation’is a higher price premium payable for long-dated delivery. This cost rolls down to all consumers, be they retail, commercial or industrial customers. A low forward trading volume also exacerbates market volatility as the price impact of even a small number of individual trades can be amplified.
In the course of last year’s Select Committee Enquiry,MPs questioned not only the state of liquidity and competition but also the truthfulness of the witness statements in the oral hearings, which were often inconsistent or contradictory. Since then, the new government department for Energy and Climate Change (DECC) has come into being. But as a consequence, the original BERR Select Committee has disbanded.
It is unclear whether or not a new select committee will take up the reigns of its predecessor. But the omens for change are not looking very good.And there is a nagging feeling in some quarters that the oil and gas majors and energy utilities may have been ‘saved by the bell’ on this occasion.Time will tell whether or not consumers will see the full and independent wholesale gas and electricity market inquiry that they want. For many braving the recession now, closure on this market liquidity and efficiency question cannot come soon enough. More articles from MEUC Limited: | 
