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Barriers to broader participation in the UK power market need to be further redu ...

Barriers to broader participation in the UK power market need to be further reduced/eliminated if it is to maximise its competitiveness, liquidity and efficiency, according to the FOA’s Power Trading Forum (PTF). A number of specific problem areas have been identified by the Power Trading Committee (PTC) and good progress is being made in tackling them. Reference prices: The PTC has been discussing with UKPX and the energy brokers of LEBA the process of data provision and price aggregation in order to facilitate reference pricing. The FOA has also started work on a set of guidelines that the industry believes should be followed by price aggregators. These are in draft form and are currently being reviewed by market participants. Credit risk: The PTC’s Credit Risk Management Working Group has produced a first draft set of guidelines, which has been reviewed by lawyers Clifford Chance. The final draft will be circulated for review and comment to all members of the Power Trading Forum shortly. In relation to credit risk a PTC Working Party has been established to review the cost/benefit of clearing as a credit risk mitigant. Meetings have taken place with LCH.Clearnet as well as with UKPX/APX. The solution proposed by LCH.Clearnet has been the subject of a response by the Working Party. Standardised industry documentation: This is being updated. The PTC’s GTMA Working Group has produced a number of additions and revisions to the established GTMA Agreement, which has been reviewed by Denton Wilde Sapte and is now under further and final review by the Working Group before final dissemination to the members of the PTF. The Working Group has worked with ISDA on the extension of its Master Agreement to include a UK Power Annex to sit alongside its existing European gas annex to facilitate the development of a common documentary platform for the trading of power and gas. This work has been undertaken by Allen and Overy and is awaiting the outcome of the current review of the GTMA. In addition, a set of standardised terms for the trading of ROCs (renewable obligations certificates) has been developed by the PTC’s Renewables Working Group and is currently under review at Denton Wilde Sapte. The role of the Transmission System Operator: This is being reviewed following consultations with PTF and discussion with NGT. These discussions are still confidential, but improved communications and greater transparency is being sought to reassure market participants as to the exercise of NGT’s trading motivation. This is being addressed to an extent by NGT within the scope of its Balancing Services Transparency Review, the details and progress of which will be communicated via industry bodies such as the NGT’s industry Operational Forums. Regulation of power trading: The FOA has undertaken considerable work to (i) ensure that the basis for inclusion of commodity derivatives, including power derivatives, within the Markets in Financial Instruments Directive (otherwise known as ‘ISD 2’) is effective and practical; (ii) address the need for proportionate capital treatment of commodity derivatives business, particularly in the context of the forthcoming Capital Requirements Directive (‘CAD 3’) and has retained KPMG to work with it in this area for the rest of the year; and (iii) agree with the FSA the basis on which freight rate and storage/warehousing derivatives will be covered within the scope of the specialist oil and energy market participant regimes. The need for proportionate capital treatment of commodity derivatives business and specialist commodity dealers is a matter of major economic significance, firstly, to maintain the international competitiveness of EU-based commodity market participants (bearing in mind that other jurisdictions are unlikely to impose Basle Committee type requirements on their own market participants); secondly, to sustain and improve participation and liquidity on EU commodity markets; and, thirdly, to avoid undermining the underlying economics of commodity trading and risk management. Anthony Belchambers, Chief Executive of the FOA, said: ‘Liberalisation of the UK power market will become of maximum benefit to producers and consumers once it has fulfilled its potential to become a larger, more liquid and more efficient market. In the 12 months since the PTF was launched an enormous about of work has been undertaken to build the foundations of an efficient market and we expect further substantive progress during this year.’ Phil Levermore, PTC Chairman, agreed: ‘UK power markets post-deregulation remain patchy. We need to attract more participants. One way to do this is to commoditise the market more and progress on reference pricing, credit and documentation issues will help achieve this.’

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