Five things you should know about secondary markets
Secondary markets are not widely discussed across flexibility markets and so the term is not always familiar to those not carrying out “secondary trades”. In this blog, we’ve outlined five things you should know about secondary markets.

1. What are secondary markets?

Secondary trading is the transfer of one flexibility provider’s contracted flexibility obligations to another suitable Flex Provider. Put simply, secondary markets are where secondary trading takes place.

This type of transfer could take place within a company, where one asset transfers their obligations to another asset, or between two companies such as when a Flex Provider is unable to fulfil its obligations for a reason such as maintenance.

2. What’s the value?

  • Additional revenue streams! The most obvious benefit is the opportunity to source another revenue-stream. As business models become increasingly diversified, secondary trading provides an opportunity to pick up and stack more revenue.
  • Revenue stream “flexibility” - The ability for companies to transfer away their obligations in a market de-risks long term commitments and enables Flex Providers to sell their flexibility contracts when more lucrative opportunities come up.
  • De-risking participation - Unpredictable events are always a risk and incidents such as unplanned maintenance can leave Flex Providers at risk of incurring penalties for failing to provide a contracted service. Having a competitive secondary market provides security to Flex Providers participating in these markets that if they needed to they could trade away their obligations.

3. Which markets have secondary trading?

One example of an established secondary market is the Capacity Market, which in 2020 was worth around £55m. Not every flexibility market has a secondary market and this type of trading currently makes more sense for longer term flexibility markets.

It is likely that there will be new secondary markets in future, for instance Ofgem recently published their RIIO-ED2 methodology decision, which included the provision that “DNOs shall facilitate secondary trading of distribution flexibility services and curtailment obligations.”

4. Is it easy to take part?

In the case of the Capacity Market, to take advantage of secondary trading participants must qualify with the EMR Delivery Body Portal, find a “Acceptable Transferee”, agree terms and have their trade request accepted.

Much of this process is done manually (via email) and there’s no transparent way to find opportunities you might be interested in taking on or advertising contracts you want off your hands. What’s more, if you do find the perfect partner for a secondary trade again the contract negotiation and bidding is done manually. The time it takes can be burdensome and the process won’t always result in the optimal price for any party.

5. How could an independent platform improve things?

So far, Piclo has earned its bread and butter facilitating DSO flexibility markets. On Piclo Flex, flexibility services are advertised, bids are then entered by qualified Flex Providers to provide these flexibility services and the offer is subsequently accepted or rejected by the DSO.

Competition is driven by the opportunities being visible to the entire ecosystem, the platform matching and notifying Flex Providers of relevant competitions they qualify for and the System Operator being able to accept the best price offered for the service.

The same principles can be applied to secondary markets. The platform would be able to list and match relevant opportunities to interested and qualified Flex Providers, establishing the optimal price through transparent price negotiations that could be received from multiple parties bidding.

Key to this is an independent, neutral and trusted platform, which is able to facilitate these trades. Through the BEIS FleX Exchange Project, Piclo will provide Flex Providers with a common platform to access multiple flexibility markets, including secondary markets. Stay tuned to be updated with the progress over the coming months!