The Energy Regulation and Markets Review - Stikeman Elliott

United Kingdom
as possible. Prices in the balancing market are used to derive the imbalance price at which
out-of-balance parties are cashed out.
Credit support
For completeness, mention should be made of credit support as it is credit considerations
that typically dominate discussions between trading counterparties. Credit support of
some sort in respect of the mark-to-market value of each counterparty’s relative position
is often required, the nature of which will depend on the creditworthiness of each entity.
Counterparties with a poor credit rating may find themselves having to post daily
cash collateral under margining arrangements. More modern forms of standard form
contracts such as ISDA and the GTMA contain material adverse change (MAC) clauses
that allow one party to call for additional credit support if there is a deterioration in the
creditworthiness of the other party. In the older forms of contract such as the NBP ’97
it is very unusual not to see an amendment incorporating similar language. It is also
common to see cross-commodity master netting agreements in place in respect of gas,
electricity and carbon positions.
ii Energy market rules and regulation
As previously described, participants in the energy markets may require a licence, and
will need to be party to the relevant industry codes. Depending on the nature of a
particular entity and its particular activities it may also fall within the jurisdiction of
financial regulation. Traditionally, own-account energy trading was largely without the
realms of financial regulation, but particularly in the EU, we have seen an increasing
trend towards financial regulation of energy trading. A detailed analysis of this issue is
outside the scope of this review.
Another area of increasing influence from Brussels is in the area of market
manipulation. Until recently general antitrust law was used where market manipulation
was suspected. However in 2011 the EU enacted the Regulation on Energy Market
Integrity and Transparency (‘REMIT’), 22 which is aimed specifically at the wholesale
energy markets. Again, the details of REMIT and its application are outside the scope
of this review, save to say that REMIT substantially increases the regulator’s powers in
this area.
iii Market developments
The electricity supply market is dominated by the so called big six suppliers, 23 all of
whom are vertically integrated groups of companies with at least 2 million customers. As
previously mentioned, there is concern that this may be harmful to competition.
There has also been an exit from the market by several high-profile traders,
particularly US firms, in the past decade and in recent years the number of non-physical
22 Council Regulation (EU) No. 1227/2011 on Wholesale Energy Market Integrity and
Transparency.
23 Scottish Power, Scottish and Southern, EDF, E.ON, RWE (nPower) and Centrica (British
Gas).
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