Ripples in the Pool

Well, he’s said it again, this time last week at Labour Party Conference, where I happen to have been (along with 11000 others, it must be said….)

Ed (Miliband, that is) has spoken out once more on the way he thinks transparency in energy companies’ dealings on wholesale and retail supply can be secured: we need a pool system for electricity trading in the future.

The statements (both of them, the first being in July) look very simple but have considerable implications and they are, and have to be, far more than simple wishes, or vague pronouncements on future policy.  I am sure Ed understands this, since otherwise he would not have said it twice.

But first, and before we unwind that, what did he mean exactly?  It is, I think, that the present trading system for packages of electrical power (most of which are bilateral contracts to supply and receive, some of which are bids into the balancing body for half hour “clips”) should be replaced by a single system whereby all producers sell their output to a “pool,” essentially to a single buyer such as a Government agency, who then sells on or auctions the contents of the pool to whoever wants to buy.

In this way , it can be argued, a major present problem can be overcome, which is the apparent ease with which energy companies that are largely vertically integrated (i.e. they own and control both generation and retail activity) can transfer price their contracts and make  it impossible to trace whether the deal actually reflects prevailing prices.

I think Ed is right to suggest that there should be a pool for the future.  As part of a wider reform of present electricity markets that currently work on a no longer fit for purpose BETTA trading arrangements, it looks a superior way of doing things, especially since the emergence of substantial amounts of wind capacity is likely to mean that contracts to supply will have to have their own balancing agreements in them.  Purchasers will expect the suppliers to put the means to balance the variable power on offer and supply a known amount of power into the contract thereby. But at present, suppliers just sell packages of energy. There will be no guarantee under present arrangements that anyone will purchase even after the seller has added considerable risk by essentially hedging their own deal. A pool would overcome this problem.  So there’s another reason why, in addition to transparency, a single buyer pool makes future sense.

But… it’s not exactly future sense we are talking about.  For the debate on the future structure of the electricity market is upon us now, and indeed the white paper on EMR has been published by the government with no sniff of a “pool” in sight.  Indeed, a major and rather stark feature of the whole thing if we ignore the bells and whistles of capacity payments, contracts for difference and so on, is that the trading arrangements stay exactly as they are.

So a pool proposal would indeed create a number of ripples, so to speak, in what is going forward now, which will be expected by many to bring about arrangements that will last for the next decade at least, and will provide some certainty for the development of the market. The ripples will affect both this assumption and certainty some of the said bells and whistles.

If you have a pool, for example, you probably need some obligation to buy from it in some sort of hierarchy with renewables at the top, otherwise some of the contract problems relating to renewables will simply recur, depending on gas price and other factors. So you will need an obligation system on purchase, which at present is due to go with the end of ROCs in 2017.  A continuing obligation system of some kind will in turn affect what form capacity payments might take, since an effective obligation would in itself resolve at least some future capacity considerations.

The questions for the future which the market might ask are: does that mean you will throw the whole structure of EMR into the bin if you come back to government in 2015; or could it perhaps be a declaration that “son of electricity markets as set out in the White Paper will have a limited life of, say, ten years at the most (by which time it will certainly not work as proposed if the projected energy supply mix is achieved) and that preparations for a pool will be undertaken in the years before; or will Labour try to get the present EMR proposals radically reformed (and perhaps fail to do so) as the next Energy Bill goes through Parliament? There’s a bit more to come on this, I can’t help thinking.

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