Texas price spike - could it happen here?

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Dear Office of Gas and Electricity Markets,

One of the stories coming out of the recent Texas electricity disaster is that wholesale price spiked to amazing levels, with the result that many people have lost their savings. Whilst I am aware that individuals don't have access to the wholesale price here, this event raises issues:

1) Such a price spike could bankrupt private and public sector organisations who do buy at the spot price - is there a mechanism to protect them?

2) Would our electricity retailers be caught in the middle to the extent of going bankrupt in the same way as some Texas ones apparently were, having to supply retail customers are fixed prices but being faced by massive wholesale prices?

3) Is there a maximum price for electricity in the wholesale market imposed by OFGEM?

Yours faithfully,

John Davidson

Matthew Tregear, Office of Gas and Electricity Markets

3 Attachments

 

Dear Mr Davidson,

 

Thank you for your email to the Office of Gas and Electricity Markets.

In your request you noted the wholesale price spikes during the events in
Texas had resulted in many people losing their savings, and posed three
questions regarding the potential impacts of high wholesale prices here
(even though individuals don’t have access to the wholesale price).    

 

Our responses to your questions are as follows:

 

1) Such a price spike could bankrupt private and public sector
organisations who do buy at the spot price - is there a mechanism to
protect them?

 

No -  there is currently no protection for buy side participants in the
wholesale market if by protection you mean a limit or some indemnity.
However, the extent to which suppliers or other large private and public
organisations are exposed to high prices depends on whether they are
exposed to real time prices due to a lack of hedging in the forward
markets.

 

2) Would our electricity retailers be caught in the middle to the extent
of going bankrupt in the same way as some Texas ones apparently were,
having to supply retail customers are fixed prices but being faced by
massive wholesale prices?

 

As in any competitive market, suppliers can fail. Energy suppliers need to
manage all of their costs responsibly, including wholesale costs. This
includes forecasting customer demand and hedging ahead, and ensuring they
have sufficient liquidity to meet their ongoing costs.

 

3) Is there a maximum price for electricity in the wholesale market
imposed by OFGEM?

 

No. There are technical limits set in the day ahead exchanges and intraday
auctions but the OTC forward contracts do not have a maximum.

 

 

Kind regards,

 

Matthew Tregear

 

 

 

Matthew Tregear

Senior Economist

Energy Systems Management & Security

10 South Colonnade

Canary Wharf

London

E14 4PU

Tel:

[1]www.ofgem.gov.uk

 

 

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Dear Matthew Tregear,

Wow - a rapid and very complete response. Thank you very much; very helpful.

Yours sincerely,

John Davidson