Ofgem cracks down on excessive generator profits

Ofgem is pushing ahead with proposals to prevent electricity generators from making excessive profits through the Balancing Mechanism (BM).

A statutory consultation, published on Thursday (29 June), follows on from proposals announced in February this year to introduce a new licence condition to prevent generators obtaining excessive profits by first signalling their intention to cease generating and then raising their prices to remain on.

Specifically, the regulator found that some thermal generators scheduled themselves to cease output early in the afternoon. As they take up to six hours to cool down before they can run again, switching off at this time makes them unavailable for the evening peak period.

These generators then used the Balancing Mechanism to offer a price to the Electricity System Operator (ESO) to keep operating throughout the afternoon and therefore be available for the evening peak.

“On the costliest days these generators have been charging very high prices (up to £6k/MWh) for long durations (5-6 hours) to be kept on by the ESO. This has led to high balancing costs that are ultimately paid for by consumers,” Ofgem said.

As such, the regulator is pushing ahead with plans to introduce the Inflexible Offers Licence Condition (IOLC) to stop generators making these excessive profits.

In the latest consultation, Ofgem is proposing to limit the applicability of the IOLC to times when a generator with a Minimum Zero Time (MZT) of longer than 60 minutes has revised their Physical Notification (PN) from a positive MW value to 0MW within the operational day.

It explained: “In such circumstances generators will be prohibited from gaining excessive benefit from their BM offers in relation to the relevant time period. Therefore, generators’ BM offer prices must reflect only their costs plus a reasonable profit.

“The licence condition will not apply to generators with an MZT of 60 minutes or less, or those which submit non-zero PNs for the relevant settlement period in question. In these circumstances generators will continue to have the ability to efficiently price their BM offers provided that they do so in accordance with the existing regulatory and legislative framework.”

Ofgem added that it is aware that generators which submit 0MW PNs prior to the operational day could use their inflexibility in a way that leads to high balancing costs. In light of this, the regulator said it would continue monitoring market behaviour post implementation.

“We will intervene further if we believe the submission of 0MW PNs at the day ahead stage is creating outcomes and costs that are not in consumers’ interests,” it added.

Eleanor Warburton, Ofgem’s acting director for energy systems management and security, said: “Ofgem is committed to protecting consumers and ensuring they pay a fair price for their energy. The proposed new licence condition will ensure electricity generators don’t take advantage of existing rules to make excessive profits in the Balancing Mechanism.

“Following on from our previous consultation we are now inviting final feedback from across the industry on the proposed changes, which we hope to have in place to protect consumers this winter.”