It starts of confusing and gets worse from there
There are many ways to divide up time; The Babylonians loved sixty and gave us minutes and seconds, The Romans and Norse Gods gave us the days of the week and the engineers of the UK Grid gave us the Electricity Forward Agreement (EFA) Calendar.
For those who don’t know, the EFA Calendar is, on paper at least, a fine way to standardise the year into neat and ordered periods. In theory we have two EFA seasons consisting on 26 weeks, which are broken down into four EFA Quarters consisting of 13 weeks and each of these consists of some three months. Each of these will consist of five week months (March, June, September and December) or four week months.
The EFA year starts on the 1st April (the 14th week of the calendar year) and runs until for 365 days, baring the odd leap year, with the Summer running from Weeks 14 to 39 (April to September) and the Winter running from Weeks 40 to 13 (October through to March). Hence, an annually traded product will be 52 weeks starting in Week 14 or Week 40 as opposed to the calendar year which is traded in Gas & European Power.
All of this is fine so far. Sure, it’s not ideal that the year starts in April but there are a whole swath of power products that have “non-standard” periods. However, we have a problem. In fact it’s a stinking pile of problems to be honest. 365 does not divide 4 evenly, the calendar year doesn’t divide neatly into nice units, the months don’t fall into nice four and five week blocks and I haven’t even mentioned that the EFA day starts at 11pm!
Time for reform certainly
A recent 2011 survey by the Futures And Options Association (FOA) found that more than three quarters (76.5%) of UK Power traders would prefer a calendar-dated contracts system and 71% saw the current approach as an entry barrier to those wishing to participate in the UK power market.
There were a wide range of reasons given for why this barrier was considered to be high; back end/reporting systems was most prevalent but spreads and the over complications in hedging against European power and gas products were also mentioned. According to the study, the current arrangement was “simply archaic, difficult to understand and created a perception that the UK power market was outdated and insular“.
However, reforming the system is not with out considerable risks itself. Certainly, there would need to be parallel running of and ‘old’ and ‘new’ market to ensure sufficient liquidity and EFA products will have traded many years in advance so there would be a long lead time.
But missing the point?
When asked to identify the biggest issues inherent in the UKpower industry, the EFA calendar ranked well down the list. The main issues were held to be regularity uncertainty, costs to enter the market and product liquidity. Is there a need for reforming the way power trades are structured? Sure, I think a more simple and transparent system can only be of benefit to the market, however, is it pressing when we consider the other issues at play? I’d argue not.
FOA Survey PDF – http://bit.ly/qAmoSe
ICIS Article – http://bit.ly/rjuDC7
EFA Calendar – https://www.theice.com/publicdocs/EFA_Calendar.pdf