An investigation by Bloomberg News alleges that certain traders at firms such as Vitol, Uniper, and SSE have used a rather blunt approach to tackle the UK energy crisis: pay up or face blackouts.
While thousands of UK households have been encouraged to reduce electricity demand during peak times, some traders have allegedly threatened to shut down power plants ahead of periods of tight supply, only to later revive them and produce more expensive power for the national grid through the “balancing mechanism.”
This off-on manoeuvre is not a new strategy and is not against any regulations, although it has been characterized as a “sharp” practice by regulator Ofgem.
The UK government and opposition have called for an investigation into these allegations. The National Grid ESO had already noted “very high-cost days” in November 2021, causing it to initiate a review due to rising balancing mechanism costs, which are ultimately passed onto customers in their energy bills.
Some traders at firms like Vitol, Uniper and SSE allegedly threatened to shut down power plants ahead of times of tight supply, only to bring them back online and sell more expensive power to the UK national grid through the “balancing mechanism,” resulting in increased balancing mechanism costs.
While this manoeuvre is not new and is not against the rules, both the UK government and the opposition have called for an investigation. The National Grid ESO launched a review in November 2021 and noted some “very high-cost days”.
The February consultation on adding a licence condition prohibiting electricity generators from gaining excessive benefit from inflexible offers in the balancing mechanism suggests that the system is being gamed. However, the review did not find specific evidence of parties breaching the rules, and it is difficult to differentiate between genuine and fake maintenance outages.
The balancing mechanism is designed to incentivize generating capacity on the grid when it is most needed, resulting in price spikes being a feature of the current market.
SSE, Vitol’s power business VPI, and Uniper have been named in an investigation by Bloomberg News as firms whose traders threatened to shut down power plants ahead of periods of tight supply, only to revive them and sell more expensive power to the UK national grid through the “balancing mechanism”.
The government and the opposition have called for an investigation into the allegation. While the off-on manoeuvre isn’t new and is currently not against the rules, some market participants may have been gaming the current system to make windfall profits.
The regulator, Ofgem, is reviewing its rules and threshold for taking enforcement action. However, it’s important to note that price spikes are a feature of the current market, which is designed to encourage generating capacity when it’s most needed. The UK’s pipeline of battery storage projects has expanded significantly, thanks in part to pricing signals sent in times of scarcity.
