Energy Trading

My name is Martin and I’m an engineer working for a major Scottish energy company. I am a founding member of the Utilities Scotland group.

A lot of focus is rightly placed on rising energy prices and the retail side of the business. Less focus is placed on the impact the link between the generation of energy and trading activity has on the price the consumer pays. This OFGEM factsheet explains how the system is supposed to work and NGT explain how they balance the system here.

There have been claims that the UK’s wholesale gas market has been manipulated by big power companies. It is alleged that the prices for wholesale gas may have been manipulated by suspicious trading on 28 September, which is the end of the gas financial year. This is being investigated by the FSA and OFGEM.

These allegations raise legitimate questions about the regulation of energy markets. OFGEM has announced it was taking various initiatives to improve transparency in the energy markets, but refused to implement the key recommendation of its own consultants from the accounting firm BDO who had proposed that OFGEM should “require the reporting of trading function results” by energy companies. OFGEM was also warned almost a year ago that there were serious shortcomings in energy trading, but it appear they did nothing.

Energywatch made a detailed submission on these issues in 2008, they recommended:

  • Mandatory trading: firms to trade a defined level of output through the over the counter wholesale markets to enhance liquidity.
  • Regulatory reporting requirements: firms to submit information to the regulator on purchase costs to ensure only efficient cost pass through.
  • Disclosure requirements: firms to publish trading data including prices and segmented financial and operating data about their electricity and gas production and retailing operations to aid price discovery.
  • Simplifying market rules and entry requirements: a fundamental make-over of the market rules (including cash-out and third party access) to ensure smaller and low carbon operators can access markets and consumers fairly.
  • Information transparency: greater transparency of information on gas flows from Europe and the North Sea.
  • Investment incentives: creation of investment incentives for long term strategic storage.
  • Price controls: reintroduction of supply price controls for certain consumer groups if alternative measures are unsuccessful.
  • Separation of vertically integrated firms: if other measures are considered insufficient divestment of plant or function.

Some of these recommendations reflect their touching faith in markets. Such as relying on new entrants and ending vertical integration. However, the transparency points are valid. Revealing the trading arm activity of energy companies is fundamental to an understanding of what is really going on in energy markets. There are claims that companies under-report profitability of generation and only greater transparency can address this.

Those of us who work in the industry can see major weaknesses in the way the so-called market is supposed to work. A huge amount of resource goes into creating an artificial market that is open to manipulation. Unlike the allegations in the gas market these are entirely legal and above-board, but they all add to the final cost. The bottom line is that the consumer pays.


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