FOA launches UK power market initiative

The Futures and Options Association (FOA) has launched an initiative that aims to introduce a new design for wholesale UK power markets.

The FOA has issued a Request For Proposals (RFP) seeking providers of clearing and other infrastructure services to put forward proposals to deliver a central clearing service for the trading of prompt power, compile a set of power reference prices and establish an auction market.

The delivery of these services is expected to help enhance transparency throughout the forward price curve, reduce bilateral counterparty risk and, in due course, introduce a hedging facility to manage price volatility, according to an FOA spokesman. It is envisaged at this stage that the futures contract should be cash-settled in order to attract the financial traders into this market as a means of further enhancing liquidity.

A broad-based panel of market users has drawn up the RFP. At present eleven companies have requested the RFP and the response date for submissions is the end of July. It is hoped the process of choosing a supplier will be completed by the end of September.

“The UK power market is, uniquely, taking an opportunity to redesign itself with products designed to ease barriers to entry and thus boost forward liquidity,” says Paul Beynon, vice president of UK power trading, RWE Trading and chairman of the FOA’s power trading committee. “It is already the most competitive European energy market with highest level of fundamental data, but with a new suite of services and products, it has the capacity to become a leading market place for wholesale electricity trading in Europe.”

Anthony Belchambers, chief executive of the FOA, feels that in recent years market activity has drifted, and the market needs more structure to help build turnover, facilitate risk management activity and smooth out volatility.

“The requirements described in the RFP, which is the culmination of a lot of hard work by the Market Design Group and our legal advisers Berwin Leighton Paisner, will lay the foundations of these developments,” he says.