Liquidity

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:

  1. 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)
  2. 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)
  3. 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.

Publications and updates

  • Published: 9th Sep 2015
  • Reports and plans
  • 1 Associated documents
Ofgem's first annual report on liquidity in the wholesale electricity market since our new licence obligations to promote liquidity came into effect in March 2014.

  • Published: 19th Aug 2015
  • Open letters and correspondence
  • 1 Associated documents
Open letter on improving transparency for eligible suppliers on prices charged under SMA rules.

  • Published: 28th Jul 2015
  • Closed: 26th Aug 2015
  • Consultations and responses
  • 7 Associated documents
Statutory consultation on modifying the electricity generation licence of Secure and Promote licensees – market making on the afternoons of the preceding business day to the 25 December and 1 January

  • Published: 31st Mar 2015
  • Decisions
  • 1 Associated documents
This direction switches off the requirements of Special Condition AA.2-AA.6 for Uskmouth Power Company Limited from 01 April 2015.

  • Published: 18th Dec 2014
  • Reports and plans
  • 1 Associated documents
This report shows the findings from the first six months of monitoring under our Secure and Promote liquidity reforms.

  • Published: 5th Dec 2014
  • Open letters and correspondence
  • 1 Associated documents
This is a letter of policy intent in response to queries that we have received regarding the market making obligations under Secure and Promote on the afternoons of 24 and 31 December.

  • Published: 24th Jun 2014
  • Other
  • 1 Associated documents
This direction switches on the requirements of Special Condition AA for Carnedd Wen Wind Farm Limited from 25 June 2014.

  • Published: 25th Apr 2014
  • Decisions
  • 2 Associated documents
This document sets out our decision to modify the licence of Carnedd Wen Wind Farm Limited to include the ‘Secure and Promote’ licence condition.

  • Published: 21st Mar 2014
  • Closed: 22nd Apr 2014
  • Consultations and responses
  • 4 Associated documents
This statutory consultation sets out our intention to insert the 'Secure and Promote' licence condition into the licence of Carnedd Wen Wind Farm Limited.

  • Published: 21st Mar 2014
  • Open letters and correspondence
  • 2 Associated documents
These directions switch on the requirements of Special Condition AA from 31 March 2014.

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