Ofgem’s response to balancing costs in winter 2024 to 2025
- Publication type:
- Policy
- Publication date:
- Topic:
- Electricity generation, Security of supply, Energy pricing rules, National Energy System Operator (NESO)
- Industry sector:
- Generation and Wholesale Market,
- Supply and Retail Market
- Licence type:
- Electricity Generation Licence
Our views on the high prices seen in the Balancing Mechanism last winter, including our analysis of the market impact of the Inflexible Offers Licence Condition.
We introduced the Inflexible Offers Licence Condition (IOLC) in October 2023. The IOLC ensures that inflexible generators do not obtain, or seek to obtain, an excessive benefit on offers submitted to the Balancing Mechanism (BM) after revising their generation schedules to 0MW within the operational day.
We have evaluated the impact that the IOLC has had since its introduction and whether the current rules are fit for purpose going forward. Our analysis showed that the IOLC has been effective in moderating the BM prices offered by power plants that decide at short notice not to produce electricity during the evening peak on tight-margin days.
However, the analysis returned mixed results about the BM prices inflexible plants offer when entering a tight-margin day without a plan to generate, with some instances of very high prices materialising over the latest two winters, including on 8 January 2025. Although these latter pricing decisions are not currently regulated by the IOLC, we remain closely focused on whether the existing market rules are achieving the best possible results for the system and ultimately consumers.
We will continue to monitor how day-ahead scheduling and pricing strategies develop to assess whether trends of concern for consumers are emerging. If we see continuing evidence of high prices exacerbating periods of scarcity and adding to consumer costs, we will consider further intervention.
We will continue to work closely with the Department for Energy Security and Net Zero to ensure market arrangements support the government’s net zero goals, whilst also balancing costs to consumers and ensuring security of supply.