UK energy regulator Ofgem is set to clamp down on power companies for their “manipulation” of the energy market using a manoeuvre that has reportedly generated millions of pounds in profit.
The practice involves electricity generators threatening to shut down plants during peak demand and then offering to keep them running in exchange for excessive “balancing” payments, which, when passed on to consumers, have led to higher bills.
Although this practice is not against existing market rules, Ofgem is introducing a new obligation into electricity generation licenses to prevent it.
So far, Ofgem has not found conclusive proof of market players violating their obligations under REMIT, the Competition Act 1998, or their generation license conditions. Nevertheless, the regulator remains worried about the conduct of certain electricity producers, which it deems excessive.
In January, it was announced that electricity generator Drax admitted to inadvertently breaking a condition of its generation licence.
The company agreed to pay £6.12 million into the Voluntary Energy Redress Fund. Drax had received excess Balancing Mechanism (BM) payments from the National Grid Electricity System Operator (NGESO) during times of ‘transmission constraint.’
An Ofgem spokesperson told ELN: “Our first job is to protect consumers – and all attempts by energy companies to exacerbate tight market conditions, whether intentional or not, are in not their interests.
“We are taking action to introduce a new obligation into electricity generation licences. This will prohibit generators from affecting the balancing mechanism in this way for excessive financial gain.
“We expect to make a final decision on implementing this new obligation for generators this summer, however, it’s crucial that we take the time to ensure our regulatory interventions are well-considered and that they will be effective in curbing this practice.
“We ran a sector-wide call for input into this new set of rules late last year. National Grid has already noted improvements by a number of participants, as well as reducing year-on-year costs associated with this kind of behaviour regarding the balancing mechanism – all of which suggests our strong message is having a positive effect.”
A Department for Energy Security and Net Zero spokesperson told ELN: “It is critical in all times that consumers pay a fair price for their energy, so this practice is clearly completely unacceptable.
“The regulator Ofgem is aware of this concerning behaviour from a handful of participants involved and is urgently looking into this further.”