FORWARD MARKET STRENGTHENING LEGAL FRAMEWORKS

1. Introduction

Forward market strengthening legal frameworks are regulatory mechanisms designed to improve the liquidity, transparency, accessibility and reliability of forward electricity markets. A forward electricity market allows generators, suppliers, traders and large consumers to agree today on the price and delivery of electricity at a future date. These contracts help market participants manage price volatility, revenue uncertainty and procurement risk.

In Great Britain, forward-market regulation operates within the broader framework of the Electricity Act 1989, electricity licence conditions, competition law, market codes and regulatory oversight by the Gas and Electricity Markets Authority (GEMA/Ofgem). Ofgem has historically regarded inadequate wholesale liquidity as capable of creating barriers to effective competition.

2. Importance of Forward Market Liquidity

A strong forward market requires sufficient numbers of buyers and sellers, meaningful trading volumes and reasonably narrow bid-offer spreads. Liquidity enables suppliers to hedge future electricity purchases while allowing generators to secure predictable revenues.

Weak liquidity can particularly disadvantage independent generators and smaller suppliers because they may find it difficult to obtain appropriate contracts or competitive prices. It can also weaken the reliability of forward price signals, making investment and risk-management decisions more difficult.

Accordingly, strengthening frameworks seek to establish market access, transparent price formation, effective competition and adequate hedging opportunities.

3. Ofgem’s Secure and Promote Framework

An important UK regulatory intervention was Ofgem’s Secure and Promote initiative. It was developed specifically to improve liquidity in the wholesale electricity market. The framework pursued three principal objectives: availability of products supporting hedging, reliable reference prices across the forward curve, and an effective near-term market.

Its principal mechanisms included Supplier Market Access Rules, a Market Making Obligation (MMO) and reporting requirements.

The Market Making Obligation required specified major vertically integrated electricity companies to post bids and offers for designated forward products during particular trading windows. The objective was to ensure that market participants could actually buy and sell important hedging products.

Ofgem subsequently reported that the MMO reduced bid-offer spreads for targeted forward contracts, although its effect on overall traded volumes was mixed.

4. Competition and Market-Access Principles

Forward-market strengthening must also protect non-discriminatory access. Regulatory rules should prevent dominant firms from withholding liquidity, manipulating reference prices or creating contractual barriers that exclude smaller participants.

The legal framework therefore interacts with competition principles concerning market power, discriminatory behaviour and barriers to entry. Reporting, monitoring and disclosure requirements additionally enable regulators to identify unusual trading behaviour and determine whether regulatory intervention remains necessary.

5. Case Law

Case Name/Citation

R (SSE Generation Ltd & Others) v Competition and Markets Authority [2022] EWCA Civ 1472

Facts

The dispute concerned GEMA's modification of the methodology governing electricity transmission charges payable by generators. SSE challenged regulatory decisions concerning the legally permitted charging framework.

Legal Issue

The Court considered, among other matters, the regulator's powers and duties where an existing electricity regulatory system was legally non-compliant and whether a staged approach towards compliance could lawfully be adopted.

Judgment

The Court of Appeal concluded that the lower court had erred in treating GEMA's staged approach to achieving compliance as unlawful. The judgment examined the relationship between regulatory discretion, statutory responsibilities and compliance with governing electricity rules.

Legal Principle/Ratio Decidendi

Energy regulators possess significant regulatory responsibilities, but their interventions must operate within the governing statutory and regulatory framework. Regulatory decision-making can accommodate practical transitional arrangements where legally justified rather than requiring an unrealistic instantaneous restructuring of complex electricity arrangements.

Significance

Although the dispute concerned transmission charging rather than forward contracts directly, it is important for forward-market regulation because strengthening electricity markets frequently requires licence modifications, market-code reforms and phased regulatory intervention.

6. Regulatory Design for Stronger Forward Markets

An effective strengthening framework should combine liquidity obligations, accessible trading arrangements, market surveillance, transparent reference prices and proportionate regulatory intervention. Ofgem's experience demonstrates that mandatory market-making can improve certain liquidity indicators, but structural market developments can reduce the effectiveness of rules designed around particular categories of firms.

Consequently, forward-market regulation must remain adaptable to changes in generation ownership, renewable penetration, supplier structure and trading technologies.

7. Conclusion

Forward market strengthening legal frameworks are essential components of modern electricity-market governance. They transform forward trading from a purely contractual activity into a regulated environment supporting hedging, competition, transparent price discovery and investment certainty. The UK experience illustrates that regulators can strengthen liquidity through market-access obligations, market-making requirements and reporting mechanisms, while judicial oversight ensures that regulatory interventions remain legally authorised, rational and consistent with the governing electricity-law framework.