Liquidity Intervention Options

Analysis of the GB power market and identification of the key drivers of liquidity, considering the GB market structure, generation mix and interconnection, trading arrangements, availability of proxies, regulatory developments such as EMR and the Ofgem reform initiatives, industry structure including the degree of vertical integration, and financial arrangements such as credit and collateral requirements;

Analysis and design of potential intervention options. We considered the manner and degree to which design features could be flexed to achieve various outcomes (e.g. to stimulate liquidity in different areas of the curve, minimise delivery risk, impact on the trading requirements of different business models). We also analysed the technical arrangements required for the implementation and maintenance of the interventions in practice. The key intervention options which we evaluated included:

• Mandatory Auctions (obligations on certain players to participate in auctions of forward products);
• Mandatory Market Making (obligations on certain players to continually offer to both buy and sell volumes of power in the forward market);
• Self-Supply Restrictions (measures to restrict a vertically integrated utility from supplying power from its own generation); and
• Functional Separation (constraints on the internal organisation of vertically integrated companies separating up- and downstream trading activities and commercial decision making).

Development of a clear framework for assessing the different intervention options, balancing the potential liquidity benefits against the costs and risks associated with the intervention; and

Evaluation of each of the intervention options against the assessment framework together with our conclusions and recommendations.