The Competition and Markets Authority (CMA) is looking to begin an investigation into the liquidity of the energy sector, and in particular, the power trading markets.
Despite new regulations being brought into effect in April 2014 by Ofcom, the CMA says that the UK energy market is not liquid enough. These ‘Secure and Promote’ regulations have boosted trading in specific areas, but have not increased the liquidity of the sector, and may have decreased the willingness of financial institutions to trade in some circumstances. The April 2014 regulations meant that some trading windows were more narrow, and the regulations surrounded minimum bids and levels of participation during the trading windows. This has meant that some commodity traders have not been investing or selling due to the minimum involvement regulations. The new regulations also limit when trades can occur, and with banks all over the world being involved in the UK energy sector, the ability to trade at any time is important to keeping the trading activity high.
There is a concerning trade within some of the UK financial institutions, of backing away from energy commodities trading. Last year Barclays became the first large financial institution to publically remove themselves from the energy trading market. The reason they gave was that they wanted to invest their money in more profitable ventures, and that the risk vs. reward within the energy sector was too high.
Many others have now followed in Barclays footsteps, including Merrill Lynch and Deutche Bank. The UK energy market needs trading and financial institution involvement if it is to continually progress. The CMA will be releasing their findings and all of their notes to the public and the financial institutions in July/August this year, and hopefully they will bring new perspectives and ideas to help boost a weakening trading market for UK energy commodities.