In order to support competition and efficiency in a market, liquidity is vital.
Liquidity is a measure of the ability to buy or sell a product – such as electricity - without causing a major change in its price and without incurring significant transaction costs.
An important feature of a liquid market is the presence of a large number of buyers and sellers willing to transact at all times.
Liquidity is a key performance indicator for the wholesale electricity market and one of the measures that we use when monitoring the effectiveness and levels of competition in the GB wholesales markets. One way of measuring liquidity is to look at churn (ie the number of times electricity which is generated in the market is subsequently traded).
Improving liquidity in the electricity market can be beneficial for consumers because:
- liquidity is needed by any new participant considering entering a market;
- liquidity may result in greater price transparency which can then provide opportunities for increased competition across the market; and
- improved liquidity can work to provide a level playing field for independent companies so they can compete in the market on the same terms as vertically integrated companies.
How we work to promote liquidity in the electricity market
We have set three liquidity objectives for the market. The electricity wholesale market must:
- Ensure the availability of a range of longer-term products to support hedging of risk of exposure to large changes to prices (hedging refers to the ability to buy power over different timescales at set prices to manage risk of exposure to changes in price)
- Support robust reference prices that that are widely available to market participants (reference prices are prices reflective of a product’s real market value based on underlying economic conditions)
- Promote an effective near term market which enables all companies to buy the power they need for their customers.
To meet these objectives Britain’s major energy suppliers, (known as the Big Six), have committed to trade a proportion of their power station output in the day ahead market (where power is sold for use the next day).
There have also been some signs that independent suppliers are more able to buy wholesale electricity from Big Six companies in forward markets, although further progress is needed here.