The UK energy watchdog, Ofgem, has criticized power station owners for exploiting the system to generate excessive profits and outlined measures to curb this behaviour.
The regulator’s probe revealed that some power generators intentionally withheld supplies to increase their prices in the backup market, resulting in higher costs for consumers during the energy crisis. Ofgem launched the investigation following an unprecedented surge in supply and demand balancing costs in November 2021, when network operator National Grid spent £60mn in a single day.
Costs during the high-demand winter of 2021-22 reached £1.5bn, more than three times the average of the three previous winters. Ofgem plans to regulate “several behaviours” identified among generators seeking disproportionate financial benefits at the expense of consumers.
The proposed measures include a new licensing condition that will prevent electricity generators from using existing rules to generate excessive profits, according to Eleanor Warburton, Ofgem’s acting director for energy systems management and security. The proposed condition, including financial penalties for violations, could be implemented before the next winter season.
UK chancellor Jeremy Hunt earlier this week pressed regulators, including Ofgem, to take further action to reduce consumer costs. The regulator believes intervention is crucial to prevent power generators from gaining undue benefits, which ultimately increase consumer costs.
The regulator did not disclose the names of the companies involved. However, a Bloomberg investigation earlier this year revealed that traders at firms like Vitol, Uniper, and SSE had manipulated National Grid by shutting down power plants ahead of tight supply periods and restarting them once higher prices for power were secured.
Ofgem discovered repeated instances of generators falsely alerting National Grid about shutdowns, only to offer to restart at higher prices in the “balancing market,” which the network operator had to accept.
Energy consultancy firm Stonehaven’s head of policy, Adam Bell, stated that while Ofgem might request power generators to return some of the undue profits, its enforcement power beyond that is limited.
Labour chair of the Business and trade select committee, Darren Jones, criticized this behaviour as “immoral profiteering”. The proposed license condition change aims to cap the prices that generators charge in the balancing mechanism to their costs “plus a reasonable profit”.
Bell warned that while market reforms might be necessary, Ofgem’s proposals might discourage companies from offering energy supplies when needed. “The people primarily at fault here are clearly the ones that were gaming the system, but it’s not a straightforward issue to solve,” Bell said. “There will almost certainly be some legitimate behaviour that will also be removed by these proposals.”
Trade group Energy UK previously noted disagreement among power generators over the proposed license condition, fearing it could disrupt the market and harm investments. The energy department expressed support for Ofgem’s actions to protect consumers and urged the regulator to use all its powers if necessary.
