FORWARD ELECTRICITY MARKET LIQUIDITY RULES

1. Introduction

Forward electricity market liquidity rules are regulatory measures designed to ensure that electricity can be bought and sold efficiently for future delivery. A liquid forward market contains sufficient trading volume, active participants, transparent prices and reasonably narrow bid-offer spreads. It enables generators, suppliers and large consumers to hedge future price risk, while producing reliable forward price signals for investment and retail pricing.

In Great Britain, liquidity became an important regulatory concern because vertically integrated electricity companies could internally match generation and supply requirements, reducing their need to trade openly. Ofgem considered weak liquidity capable of creating barriers for independent suppliers and generators.

2. Regulatory Basis

The principal statutory framework is the Electricity Act 1989, under which the Gas and Electricity Markets Authority (GEMA/Ofgem) regulates electricity licences and promotes consumer interests and effective competition.

Ofgem introduced the Secure and Promote special licence condition in March 2014. Its objective was to improve wholesale electricity liquidity and ensure effective market access. The framework included Supplier Market Access rules and, historically, a Market Making Obligation applying to specified large vertically integrated companies.

The government subsequently confirmed that Secure and Promote had been introduced through Ofgem's Electricity Act powers and was intended to improve liquidity and competition.

3. Market-Making and Forward Products

Market-making rules seek to ensure that market participants can obtain electricity products at different points along the forward curve. A market maker normally posts both a price at which it is prepared to purchase electricity (bid) and a price at which it is prepared to sell (offer).

The difference constitutes the bid-offer spread. Excessively wide spreads can indicate weak liquidity because market participants face greater transaction costs.

Ofgem's liquidity policy particularly sought to secure:

availability of hedging products,
robust reference prices along the forward curve, and
effective near-term electricity markets.

These requirements are important for smaller suppliers that cannot internally hedge through vertically integrated generation portfolios.

4. Supplier Market Access

Liquidity regulation also addresses non-discriminatory access. Under Secure and Promote, large generators were required to follow Supplier Market Access rules when dealing with smaller independent suppliers. The objective was to prevent contractual or trading practices from making wholesale products practically inaccessible to smaller competitors.

Consequently, liquidity regulation is not simply concerned with the quantity of electricity traded. It concerns whether market participants can obtain suitable products on commercially workable terms and whether forward prices provide credible information.

5. Competition and Regulatory Significance

Low liquidity may weaken price discovery, increase hedging costs and create barriers to market entry. Conversely, deeper forward trading can improve the reliability of wholesale price benchmarks and allow suppliers to manage exposure to volatile spot-market prices.

Ofgem therefore monitors indicators such as traded volumes, churn ratios and bid-offer spreads. Evidence following the original reforms showed improvements in some liquidity indicators, although regulators cautioned that causation could not always be attributed exclusively to Secure and Promote.

6. Case Law – British Gas Trading Ltd v GEMA [2019] EWHC 3048 (Admin)

Case Name/Citation

R (British Gas Trading Ltd) v Gas and Electricity Markets Authority [2019] EWHC 3048 (Admin).

Facts

British Gas challenged aspects of Ofgem's implementation of the statutory domestic energy price-cap framework. The dispute concerned regulatory treatment of wholesale costs and the methodology affecting licensed electricity and gas suppliers.

Legal Issue

The central question was whether GEMA had lawfully exercised its regulatory powers when establishing the relevant price-cap methodology.

Judgment

The High Court examined Ofgem's statutory duties and the legality of its regulatory decision-making. The case demonstrates that energy-market regulation remains subject to public-law requirements, including proper interpretation of statutory powers and rational regulatory methodology.

Legal Principle / Ratio Decidendi

A specialist energy regulator possesses substantial technical regulatory responsibilities, but its decisions must remain within the governing statutory framework and are reviewable by the courts.

Significance

The principle is relevant to forward-market liquidity regulation because licence conditions affecting trading, hedging and market access must have a proper statutory basis, regulatory purpose and defensible methodology.

7. Conclusion

Forward electricity market liquidity rules connect competition law, licence regulation, market transparency and risk management. Their central purpose is to maintain accessible forward products, reliable price signals and meaningful hedging opportunities. The British experience with Secure and Promote demonstrates how regulatory intervention can address structural liquidity problems while remaining subject to statutory duties and judicial oversight.