Summary and Background Part 2: Electricity Market Reform Chapter 6: Access to markets etc.
26.Wholesale market liquidity is an important feature of a competitive market. It provides market participants with a route to market, risk management opportunities and investment and operational signals. Liquidity is important to the success of the electricity market reform programme and in attracting the investment required in the Great Britain generation market over the next ten years. A more liquid market would facilitate market entry, improve competition and increase the robustness of the contracts for difference (CFD) reference price.
27.The electricity market in Great Britain is characterised by low levels of liquidity with especially poor liquidity in the forward markets. The Authority first identified liquidity as a significant barrier to entry in its 2008 Energy Supply Probe and has undertaken a number of market assessments and consulted on a range of proposals since then. In April 2013 the Authority took a “minded to” decision to intervene in the wholesale electricity market to improve liquidity. The Authority consulted on the detailed design of the ‘Secure & Promote’ package in June 2013. The Authority has now taken an “in principle” decision to proceed with the package with a view to a final decision in January 2014 and implementation in early 2014.
28.Independent developers have played an important role in delivering new capacity in the renewable and gas generation sectors and could play a key role in meeting the Government’s goals and deliver essential investment and competition in the future, provided market conditions are right. Independent developers usually require a long-term contract for the sale of their power (a Power Purchase Agreement (PPA)) with a credit-worthy counterparty before lenders will provide finance for a project, as it provides comfort that revenues are reasonably secure and risks will be appropriately managed.
29.Responses to a DECC call for evidence in May 2012 showed that the market for PPAs has shifted and generators are finding it difficult to secure PPAs on terms that will meet the requirements of their financiers. The measures set out in the Act, particularly the Contracts for Difference, will reduce the risks that independent generators face and should improve the situation. However, there is a risk that the PPA market may not respond in the way the Government expects and that a more targeted intervention is necessary.
30.The powers in this Chapter enable the Government to intervene in the market to address the problem of low levels of liquidity in the wholesale power market and the difficulties faced by independent generators in securing long-term contracts for the sale of their electricity. They allow the Secretary of State to modify the conditions of electricity generation and electricity supply licences and their related codes to address low liquidity and facilitate participation in the GB market. They also allow the Secretary of State to modify the conditions of electricity supply licences and their related codes to facilitate investment in electricity generation by means of a power purchase agreement scheme, which is a scheme to promote the availability to electricity generators of PPAs.