Generator faces £24m penalty for licence breach

Ofgem has ordered the owner of the South Humber Bank gas power station to pay £23.63 million in redress for gaining an “excessive benefit” from a transmission constraint.

It would be the third such action the regulator has taken this year after ordering Drax and SSE to pay £6.12 million and £9.78 million respectively for similar licence breaches.

In October 2021, Ofgem launched an investigation into the bid prices submitted by EPSHB – a subsidiary of the Czech energy company EPH – between October 2019 and May 2021. Prior to this period, the company’s average bid prices for the South Humber plant were in line with the average for combined-cycle gas turbine generators, tracking trends in wholesale gas prices.

However, starting in October 2019, the company began regularly submitting bid prices of £0/MWh, meaning it would no longer pay the Electricity System Operator (ESO) for reducing its output, despite the substantial benefits it would receive through avoided fuel, emissions and balancing costs.

Ofgem said this change in behaviour coincided with an increased need for the ESO to turn down the plant to manage the risk it posed to stability of the electricity system in the event of a transmission fault outage. In particular, the ESO was concerned about the impact the plant would have on the Rate of Change of Frequency if it was disconnected from the network during certain system conditions.

The regulator said in its view “this risk could only be practically and economically resolved” by instructing the plant to reduce its output, meaning the ESO had “little choice” but to accept its bids, despite them being much lower than most other gas-fired generators. It said the ESO ultimately accepted more Balancing Mechanism bids from the plant than any other generator in Great Britain during the period.

Ofgem said it has therefore concluded that the company breached its licence condition that prevents generators from obtaining “excessive benefits” from reducing their output due to a transmission constraint.

EPSHB claimed it did not know that its bids were being accepted due to a transmission constraint or that it was gaining an excessive benefit. Ofgem said it had found no evidence that the company had intended to breach its licence conditions, but said the firm recognised that the high proportion of its bids that were system flagged should have made it apparent that the ESO’s acceptances were related to a transmission constraint.

Ofgem has proposed to impose a financial penalty of £1 provided the company also makes a £23.63 million payment to its Energy Redress Fund, which supports energy-related charities and community projects that support vulnerable customers. The regulator said the amount reflects the scale of the excessive benefits garnered by the company and the extended period of the breach. It also includes a penal component.

Cathryn Scott, director of enforcement and emerging issues at Ofgem, said: “Protecting consumers is a priority for Ofgem, and we will continue to monitor the wholesale energy markets in Great Britain and ensure their integrity on behalf of energy users.

“This latest enforcement action sends another strong signal to all generators that they must put in place controls to ensure that their bid prices are set in a way that ensures that they do not obtain excessive benefits during transmission constraint periods.

If they fail to do so, licensees should expect to face large penalties, particularly in light of the repeated warnings which have been given regarding our expectations of generators”.

The deadline for objections to the penalty notice is 10 November.