Electricity companies will no longer employ a contentious strategy that raises bills to the detriment of consumers, as announced by the energy watchdog. Ofgem has introduced rules aimed at curbing companies from making “excessive” profits during the winter season. The new regulations could result in electricity generators facing substantial fines of up to 10% of their revenue for violating these guidelines. The primary goal is to prevent manipulation of the intricate system that maintains the stability of Britain’s electricity grid.
The linchpin of this system is the “balancing mechanism,” which the National Grid electricity system operator (ESO) uses to bridge the gaps between supply and demand on the network. It enables the ESO to strike deals with generators at short notice to ensure the optimal electricity supply to maintain equilibrium on the grid. This helps prevent imbalances that can lead to issues like power outages. Within the balancing mechanism, electricity generators receive varying payments for adjusting their output up or down on a minute-by-minute basis, and these costs are ultimately borne by consumers through “network costs” included in their bills.
Ofgem took action in response to concerns that some generators were exploiting the balancing mechanism, resulting in substantial costs for households already grappling with soaring energy prices. In previous winters, some electricity generators deliberately stopped producing power in the afternoon, causing plants to shut down during the crucial evening demand peak. They would then resume power generation later in the day to take advantage of the significantly higher prices offered through the balancing mechanism.
The winter of 2021-22 witnessed a threefold increase in annual balancing costs, reaching £1.5 billion compared to an average of £500 million in the preceding three years, according to Ofgem. Daily balancing costs also soared to a record £60 million on a single Wednesday in November 2021. These costs, totaling £3.1 billion for consumers during that fiscal year, are ultimately transferred to consumers through their bills.
Ofgem’s measures primarily impact electricity generation companies rather than the suppliers who bill households directly. However, the costs associated with the balancing mechanism eventually find their way into consumers’ bills. Companies such as SSE, Uniper (a German state-owned power firm), and VPI (owned by commodities trading firm Vitol) have been identified as beneficiaries of inflated electricity prices.
To address these issues, Ofgem is introducing the Inflexible Offers Licence Condition (IOLC), effective from 26 October, which will prohibit the practice of shutting down plants for more than an hour. Violators can be fined up to 10% of their revenue and may be required to compensate consumers under Ofgem’s existing license conditions.
Eleanor Warburton, the regulator’s acting director for energy systems management and security, emphasized that these new license conditions strike a balance between protecting consumers and maintaining a competitive electricity market that provides fair returns for generators. Ofgem will closely monitor the effectiveness of these measures to ensure they achieve their intended objectives.
It’s worth noting that the actions Ofgem’s new rules aim to prevent were not in violation of electricity generators’ license conditions at the time they occurred. Energy UK, representing energy firms including electricity generators, welcomed Ofgem’s efforts to reduce balancing costs, emphasizing the importance of a competitive and transparent market. Both VPI and SSE affirmed their commitment to complying with relevant regulations and investing in increasing power generation capacity.