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: 23rd Jan 2014
  • Open letters and correspondence
  • 4 Associated documents
This document sets out our decision to introduce a ‘Secure and Promote’ licence condition to improve liquidity in the wholesale electricity market.

  • Published: 20th Nov 2013
  • Closed: 18th Dec 2013
  • Consultations and responses
  • 25 Associated documents
This document sets out our statutory consultation on the ‘Secure and Promote’ licence condition to improve liquidity in the wholesale electricity market.

  • Published: 12th Jun 2013
  • Closed: 9th Aug 2013
  • Consultations and responses
  • 35 Associated documents
This document sets out for consultation our final proposals for a ‘Secure and Promote’ licence condition to improve liquidity in the wholesale electricity market.

  • Published: 3rd Dec 2010
  • Open letters and correspondence
  • 1 Associated documents
Over the last 18 months Ofgem have been investigating the liquidity of wholesale power in Great Britain. The market is evolving - this letter provides an update and outlines our next steps.

  • Published: 29th Jul 2010
  • Closed: 10th Sep 2010
  • Consultations and responses
  • 16 Associated documents
This document sets out a framework for assessing the market’s performance in respect of liquidity. It then examines the market’s performance, as of summer 2010.

  • Published: 22nd Feb 2010
  • Closed: 23rd Apr 2010
  • Consultations and responses
  • 30 Associated documents
This document outlines problems caused by low liquidity in the GB wholesale electricity market.

  • Published: 8th Jun 2009
  • Closed: 3rd Jul 2009
  • Consultations and responses
  • 1 Associated documents
This document investigates liquidity in the GB wholesale energy markets and examines suggested reasons as to why liquidity is low, particularly in the electricity market. It also outlines possible measures to improve GB electricity market liquidity.

  • Published: 30th Mar 2009
  • Closed: 8th May 2009
  • Consultations and responses
  • 15 Associated documents
This consultation considers three broad approaches to tackling the issue of undue exploitation of market power in the GB wholesale electricity sector.

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