Update on the Future Trading Arrangements Process

Publication date
19th February 2014
Information type
Policy area

Dear Colleagues,

This letter sets out our plans over the next six months for the work on future electricity trading arrangements.  We plan to hold the next Future Trading Arrangements Forum in the summer.

Following consultation with stakeholders, Ofgem has launched a Future Trading Arrangements (FTA) programme to consider the wide range of issues impacting on the electricity wholesale market.  These include: Government’s Electricity Market Reforms (EMR); increased levels of renewable generation; greater European integration; and technological developments such as smart meters and storage.  Through the programme, we aim to take a holistic, coherent and timely approach to addressing the impact of developments on the market and to limit uncertainty.

In May 2013 we launched the FTA Forum. It provides an opportunity for Ofgem and DECC to meet jointly with the industry to consider the key issues affecting the electricity trading arrangements and to discuss how the arrangements could evolve.

During 2013, the Forum established a number of working groups to consider the key principles that should underpin the electricity trading arrangements and to identify the priority issues for consideration in the Programme.  The latter topic reflected feedback from many stakeholders that while they supported the FTA Programme, it needed to be carefully scoped and prioritised given the range of initiatives in the electricity sector and the competing pressures on stakeholders, especially in the run up to the introduction of EMR.

Feedback from those attending the Forum has been positive.  Stakeholders generally found it helpful, and agreed that it should continue in some form.  We appreciate industry’s input into our FTA work, the opportunity to include DECC in the discussions and the positive feedback.  We intend to continue with the Forum.  We propose to hold the next meeting of the Forum in the summer to allow the industry to focus on EMR implementation in the first half of the year.

In the meantime, and ahead of the next Forum, Ofgem will commence one priority workstream discussed in the Forum and will give more consideration to the scope of other work for inclusion in the FTA Programme.  This is explained in more detail below.

One priority workstream – locational pricing

Members of the Forum were in agreement that a priority was to develop an analytical framework for assessing the case for introducing locational pricing in GB.  At present we have a single electricity market across GB.  However, a new European network code, which is expected to come into force later this year, will require regular assessments of whether the boundaries should be drawn according to enduring network constraints instead.  The Forum identified the need for the development of this framework as a preparatory step ahead of the new requirements coming into effect.

Over the next few months we will develop our thinking on the challenges posed by locational pricing and on the appropriate analytical framework to apply to this issue.  We will bring our initial work to the Forum during summer 2014, and consult more widely on this framework as appropriate.

Areas for potential further work

The Forum considered three other potential workstreams, as follows:

  • Workstream 2 – Managing intermittency: This would examine measures to promote liquidity close to real-time and to consider measures and tools for market participants to better manage imbalance risk.
  • Workstream 3 – Ancillary services, wider balancing and reserve review: Changes to the structure of generation are likely to increase the residual balancing role of the SO.  This workstream would consider whether the SO has the correct tools to ensure the most efficient dispatch of the system overall is achieved.    More widely, this workstream could also consider whether the division of responsibilities between the market and the SO is correct.
  • Workstream 4 – Long-term market arrangements: There is a degree of uncertainty regarding the future because of the range of significant developments facing the market.  There is also a concern that without greater clarity, changes to the market arrangements could happen in a piecemeal manner.  Consequently there is a call for a better understanding of how the arrangements will evolve, while recognising that it is not appropriate to be overly prescriptive or deterministic.  The FTA Forum has usefully developed draft high level guiding principles for the market.  We are keen to take this work further so there is a more useful output to give greater certainty for current and potential market participants.

When we meet with the Forum in the summer we will share our further thinking on how the above three workstreams should be taken forward. Further details of the proposed workstreams can be found on the dedicated Ofgem FTA micro-site.  If you have any comments or questions on the content of this letter, please contact Andrew Ryan at wholesale.markets@ofgem.gov.uk.

Yours sincerely,

Rachel Fletcher

Interim Senior Partner, Markets