Electricity companies will no longer be able to deploy a controversial tactic that forces up bills at the expense of consumers, the energy watchdog has said as it unveiled rules designed to curb firms making “excessive” profits in the winter.
Ofgem said electricity generators could face “stiff penalties” of up to 10% of their revenue for breaching the new regulations, which aim to prevent manipulation of the complex system that keeps Britain’s electricity grid stable.
The “balancing mechanism” is the main tool used by the National Grid electricity system operator (ESO) to plug gaps between supply and demand on the network. It allows the ESO to do deals with generators at short notice to ensure the right amount of electricity supply to maintain relative equilibrium on the grid, preventing imbalances that can cause problems such as power outages.
Under the balancing mechanism electricity generators get paid varying rates for turning their output up or down, on a minute-by-minute basis. The cost of this system is ultimately borne by bill payers via “network costs” included on bills.
Ofgem said it had acted on concerns that some generators were “taking advantage” of the balancing mechanism, at a cost of hundreds of millions of pounds to households already struggling with sky-high energy costs.
The watchdog said that in previous winters some electricity generators had deliberately stopped generating power early in the afternoon, meaning plants were switched off during the crucial evening spike in demand. They would then offer to resume generating power later in the day, cashing in on the greatly increased prices on offer via the balancing mechanism.
Annual balancing costs tripled in the winter of 2021-22, as power prices surged to record highs, rising to £1.5bn compared with an average of £500m in the previous three years, Ofgem said.
Daily balancing costs hit a record of £60m on a single Wednesday, 24 November 2021, while the total annual balancing cost paid for by consumers reached £3.1bn during that financial year.
Ofgem’s measures affect the companies that generate electricity at power plants, rather than the suppliers that charge households directly. However, the costs of the balancing mechanism are ultimately passed on to consumers through their bills.
According to an investigation by Bloomberg this year, the companies that benefited from inflated electricity prices include SSE, the German state-owned power firm Uniper, and VPI, which is owned by the commodities trading firm Vitol.
Ofgem said the new Inflexible Offers Licence Condition (IOLC), which comes into effect on 26 October, would ban this practice and would apply to any generators that switched off their plant for more than an hour.
Firms can be fined up to 10% of their revenues and forced to make redress to consumers under Ofgem’s existing licence conditions.
Eleanor Warburton, the regulator’s acting director for energy systems management and security, said: “These new licence conditions show Ofgem will not tolerate electricity generators attempting to take advantage of the balancing mechanism system to make excessive profits through inflexible generation.
“We believe the new licence condition strikes the right balance between protecting consumers and ensuring they pay a fair price for their energy while also enabling a competitive electricity market that provides fair returns for generators. We’ll be monitoring the effectiveness of it to ensure it’s doing what it was designed to do.”
The actions Ofgem’s new rules are designed to prevent were not in breach of electricity generators’ licence conditions at the time they took place.
The trade body Energy UK, which represents energy firms including electricity generators, said: “Balancing costs are ultimately paid by customers so it’s right that Ofgem looks at ways to reduce these costs through this measure and other changes to the balancing mechanism.
“The best way to reduce balancing costs over the long term will be through enabling a more competitive and transparent market and an approach to balancing that capitalises on the increasing amounts of low-carbon flexible assets across the UK, from energy storage to demand-side response.”
A spokesperson for the power company VPI said it was a “responsible participant” in the UK power market and would continue to abide by all relevant regulations. VPI was investing £500m to increase power generation capacity, it said.
A spokesperson for SSE said: “As a responsible operator SSE fully complies with all relevant rules and regulations.”
The Guardian has approached Uniper for comment.
