Designated Liquidity Provider Regulatory Schemes

1. Introduction

A Designated Liquidity Provider Regulatory Scheme is a regulatory arrangement under which certain large electricity-market participants are required to provide regular opportunities for other market participants to buy and sell electricity.

The basic purpose is to prevent a wholesale electricity market from becoming too difficult to trade in. A liquid market should allow participants to buy or sell electricity without causing a large change in price.

In the UK, the clearest example was Ofgem's Secure and Promote regime. It was introduced in 2014 to improve liquidity in the Great Britain wholesale electricity market. The regime included a Market Making Obligation (MMO) imposed on certain large vertically integrated electricity companies. (Ofgem)

2. Meaning of Liquidity

Liquidity means the ability to buy or sell an electricity product relatively quickly, at a reasonable price and without causing a major movement in the market price.

Low liquidity can create several problems:

smaller suppliers may struggle to obtain electricity;

generators may find it difficult to sell their output;

forward price signals may become weaker;

new market entrants may face higher costs; and

competition can be reduced.

The UK Government's recent security-of-supply report continues to recognise that poor wholesale-market liquidity can weaken competition and price signals and can ultimately affect investment in generation. (GOV.UK)

3. The UK Secure and Promote Scheme

Ofgem introduced Secure and Promote in 2014 using its electricity-licensing powers.

The scheme had three main components:

1. Supplier Market Access Rules

These rules were designed to make it easier for smaller independent suppliers to trade with large electricity companies.

2. Market Making Obligation

Certain large vertically integrated companies were required to provide continuous or regular buy and sell prices for specified electricity products.

3. Reporting Requirements

Relevant licensees had to provide information to Ofgem concerning their trading activities under the scheme. (Ofgem)

Therefore, the scheme was not simply a voluntary market arrangement. It was implemented through electricity generation licence conditions.

4. Who Were the Designated Liquidity Providers?

The original Market Making Obligation applied to six large vertically integrated companies:

Centrica;

EDF Energy;

E.ON;

RWE npower;

SSE; and

ScottishPower.

The companies were required to provide regulated bid-and-offer prices for specified forward electricity products through an accessible trading platform. (Ofgem)

The important legal idea was that a firm with significant market presence could be given an additional regulatory obligation because its conduct could have a substantial effect on market liquidity.

5. How the Market-Making Obligation Worked

A market maker generally provides two prices:

Bid price → price at which it will buy

Offer price → price at which it will sell

The difference between the two is the bid-offer spread.

The regulatory scheme controlled aspects of the trading obligation, including the products, trading windows and maximum spreads.

The objective was to ensure that smaller suppliers and other participants could find counterparties and obtain meaningful market prices.

Ofgem reported that the MMO had a positive effect in reducing bid-offer spreads in the targeted forward contracts, although its effect on total trading volumes was more mixed. (Ofgem)

6. Legal Foundation

The scheme was introduced through the electricity licensing framework under the Electricity Act 1989.

Ofgem's statutory consultation proposed adding a special licence condition to the generation licences of major electricity companies. (Ofgem)

This is legally significant because Ofgem was not simply asking companies to participate voluntarily. The obligation operated through their regulated licence conditions.

The Energy Act 2013 also contained wider powers concerning electricity-market liquidity, but the later government review noted that Ofgem's Secure and Promote intervention was introduced under existing Electricity Act powers. (GOV.UK)

7. Relationship with Competition Law

Liquidity regulation is closely connected with competition law.

A market dominated by a small number of large firms may create concerns about:

foreclosure;

exclusion of smaller suppliers;

strategic withholding of products;

excessive bid-offer spreads; and

manipulation of market access.

The Competition and Markets Authority's energy-market investigation considered whether large vertically integrated firms could reduce liquidity in important traded products. It concluded that the Secure and Promote requirements made it difficult for the major firms to significantly reduce liquidity in the products covered by the rules. (GOV.UK)

Therefore, a liquidity scheme can operate as a preventive competition mechanism, rather than waiting for an abuse to occur.

8. Case Law: British Gas Trading Ltd v GEMA

The broader electricity regulatory framework has been examined in cases concerning Ofgem's statutory powers and licence decisions, including challenges involving GEMA and electricity licence conditions.

The importance of such cases is that regulatory licence modifications must remain within the statutory powers given to the regulator and must follow proper procedural requirements.

For a designated liquidity-provider scheme, this means that Ofgem must have a proper statutory basis for imposing obligations and must use its powers consistently with the purposes of the Electricity Act 1989.

9. Case Law: R (British Gas Trading Ltd) v GEMA

Judicial review principles are particularly relevant where an electricity company challenges regulatory intervention.

The courts generally examine whether the regulator:

acted within its statutory powers;

considered relevant matters;

ignored irrelevant matters;

followed required procedures; and

reached a legally rational decision.

These principles are important because designation as a liquidity provider imposes commercial obligations on a private company through public regulatory powers.

Thus, regulatory designation must have a lawful foundation.

10. Case Law: Tempus Energy Ltd v BEIS

The Tempus Energy litigation concerning the Capacity Market is also relevant by analogy.

The EU General Court examined whether the European Commission had properly assessed the UK's Capacity Market State-aid scheme before approving it.

Although the case was not directly about liquidity providers, it demonstrates an important principle for electricity-market regulation:

complex energy-market schemes must comply with wider competition and State-aid requirements.

This is relevant where government or regulators intervene in electricity markets in ways that may affect competition.

11. Suspension of the Market Making Obligation

The UK approach later changed.

In 2019, Ofgem suspended the Secure and Promote Market Making Obligation. The decision followed changes in the structure of the electricity market, including the reduction in the number of companies satisfying the relevant criteria. Ofgem was concerned that continuing the obligation could become less effective and impose disproportionate or unfair costs on the remaining obligated companies. (Ofgem)

This is an important lesson in regulatory design.

A liquidity obligation that is appropriate when there are several dominant vertically integrated firms may become inappropriate when market structure changes.

12. Current Position

The MMO remains an important historical example of a designated liquidity-provider scheme, but it is important not to describe it as a current general GB obligation.

Ofgem reopened the question of wholesale power-market liquidity in its December 2023 Call for Input, specifically because the MMO had been suspended in 2019. (Ofgem)

In its August 2024 response, Ofgem stated that it did not consider there was then a sufficiently clear and strong case for immediate market intervention such as a new market maker. (Ofgem)

The 2025 statutory security-of-supply report similarly records that the MMO remains suspended and that Ofgem had not identified a sufficiently strong case for intervention at that stage. (GOV.UK)

13. Advantages of a Liquidity-Provider Scheme

A designated liquidity scheme can:

Improve market access

Smaller suppliers can more easily purchase electricity.

Support competition

New entrants may face fewer barriers to obtaining wholesale energy.

Improve price discovery

Regular buying and selling can produce more reliable market prices.

Support hedging

Suppliers can use forward electricity contracts to manage price risk.

Improve investment signals

More reliable forward prices can help investors assess future electricity-market conditions.

14. Problems and Legal Challenges

However, mandatory liquidity obligations also create problems.

Cost

Market-making obligations impose trading and compliance costs on designated firms.

Regulatory distortion

Forcing particular companies to provide liquidity can interfere with normal commercial decisions.

Market changes

A scheme designed for one market structure may become inappropriate after mergers, exits or new entrants.

Proportionality

The regulator must ensure that obligations are not unnecessarily burdensome.

Legal challenge

Affected licensees may challenge licence modifications or regulatory decisions through the available statutory appeal or judicial-review mechanisms.

15. Conclusion

Designated Liquidity Provider Regulatory Schemes are a form of electricity-market regulation designed to ensure that participants can actually buy and sell electricity at transparent and reasonably accessible prices.

The UK's Secure and Promote regime provides the clearest example. Introduced by Ofgem in 2014, it combined supplier-access rules, reporting obligations and a Market Making Obligation for major vertically integrated electricity companies. (Ofgem)

The scheme demonstrates how licence conditions can be used to correct structural weaknesses in an electricity market. However, the suspension of the MMO in 2019 also shows that such intervention must respond to changing market conditions. (Ofgem)

For PhD-level energy law, the key legal issue is therefore the balance between market freedom and regulatory intervention. A designated liquidity provider scheme can improve competition and price discovery, but its obligations must have a clear statutory basis, be appropriately designed and remain proportionate to the actual structure of the electricity market.