Compliance of Dorenell Windfarm Limited with the TCLC
Decision
Publication date
Company
Industry sector
- Generation and Wholesale Market
- Transmission Network
Licence type
Electricity Generation Licence
Following a period of compliance engagement with Ofgem, Dorenell Windfarm Limited (DWL) has accepted it unintentionally (in DWL’s view) breached condition 20A of the Electricity Generation Standard Licence Conditions (known as the Transmission Constraint Licence Condition, or TCLC). As an alternative to Ofgem taking formal enforcement action, DWL has agreed to make a payment of £5.53 million into the redress fund in respect of the breach.
A transmission constraint is defined in the TCLC as any limit on the ability of the national electricity transmission system, or any part of it, to transmit the power supplied onto the system to the location where the demand for that power is situated. In order to manage transmission constraints, the electricity system operator (ESO) routinely uses the balancing mechanism (BM) to increase and decrease the amount of electricity produced by different generators.
Typically, when managing a transmission constraint, the ESO will only have a limited number of alternatives available to it. This creates a risk that generators could exploit their position by charging excessive bid prices to reduce their output in constraint periods. The TCLC prohibits them from doing so.
DWL is the owner of the 177MW Dorenell wind farm in northern Scotland. The unit is located behind several key thermal transmission constraint boundaries, and since 2020 has regularly had bids accepted in the BM to reduce its output and to ensure that the relevant transfer limits are not exceeded.
DWL holds a contract under the Contracts for Difference (CfD) scheme, guaranteeing it a fixed level of income for the power that it generates. Where wholesale power prices are below the relevant “strike price” and intermittent CfD units like Dorenell receive instructions from the ESO to reduce their output, the generator loses the subsidy top up that it would otherwise have received under its CfD. Typically generators seek to pass this additional cost of being curtailed through to the ESO via the bid prices that they submit in the BM, to ensure that they are not left worse off as a result of having a bid accepted.
Conversely, where CfD units have a bid accepted and wholesale power prices are above the strike price, generators no longer have to make a repayment under the CfD scheme. This has been an increasingly common occurrence since late 2021 as wholesale prices have reached historic highs. Where such avoided repayments are not factored into bids, this will result in the generator receiving an additional benefit from being curtailed.
In light of concerns around DWL’s approach to bid pricing in periods with high wholesale prices, we initiated a review looking at whether the prices the licensee charged in the BM in transmission constraint periods were likely to have been excessive when considered in the context of the costs and benefits that it might reasonably have expected to incur when reducing output at Dorenell. Our review identified some significant concerns, in particular:
- That DWL’s strategy was to place a cap on its bid prices – ie a maximum bid amount in £/MWh that it would submit, irrespective of the costs or benefits of having a bid accepted. The effect of this cap was that, where wholesale prices rose, DWL was able to capture a large part of the avoided repayments to the Low Carbon Contracts Company (LCCC), rather than passing those savings back to consumers via less expensive bid prices (and so, ultimately, reduced balancing charges). This led to a substantial windfall profit for the generator in financial years 2021 and 2022.
- That DWL’s approach to estimating the costs it expected to incur when it had a bid accepted appeared likely to lead to it recovering more revenue via its bid prices than was necessary to cover the costs incurred as a result of curtailment. In particular, its failure to update forward looking assumptions about likely curtailment volumes based on experience following commissioning is likely to have led to an over-recovery of fixed administration costs. DWL also included in its methodology a profit margin allowance which appeared likely to result in a profit that would be above what we would consider reasonable.
Had DWL submitted bid prices in the period which were fully reflective of the avoided repayments to the LCCC where it was curtailed due to a transmission constraint, we consider that this would have led to substantively lower balancing costs for consumers. It is possible (and DWL has submitted) that under certain conditions this could also have caused Dorenell to be curtailed ahead of thermal generation, which could in principle have created economic inefficiency and led to negative environmental consequences (in that demand would then have been met by a lesser amount of renewable energy). The purpose of the TCLC is limited to ensuring that licensees that are subject to a transmission constraint do not obtain an excessive profit by virtue of their market power. However, we note the work that is ongoing to consider a modification to the Balancing and Settlement Code which is related to potential distortions in the merit order arising from the interaction between the design of the BM and the CfD scheme, and we will follow the progress of that modification with interest.[1]
Our review shows that DWL did give detailed consideration to the requirements of the TCLC when setting its bid prices (including considering the different costs and benefits of being bid down establishing a methodology for estimating those costs and benefits, and documenting that process). While it now accepts Ofgem’s position that its approach was not compliant with the TCLC, DWL has told us that at the time of submitting the bid prices, it considered that it was acting in compliance with the TCLC due to the existence of a number of factors which in its view justified imposing a cap on its bid prices, in line with DWL’s interpretation of the available guidance on the TCLC at the time. This included what it saw as the potential environmental benefit of avoiding being bid down ahead of thermal generation (albeit in practice the ESO’s balancing requirements were often such that Dorenell was frequently bid down alongside thermal generation, despite its bid price cap), as well as certain other operational concerns specific to DWL.
DWL has co-operated fully with the Authority in its enquiries, and sought to resolve the matter quickly once informed of our concerns. This includes making immediate changes to its bid pricing policy, and agreeing to make a payment in respect of the breach. DWL maintains that the breach was inadvertent and was not in any way motivated by the intention to obtain an excessive benefit.
In light of the extent of the consumer detriment that we consider DWL’s approach to bid pricing is likely to have given rise to, we have required as a condition of the matter being resolved without formal enforcement action that DWL should make a payment that is equal to what would likely be the maximum amount payable under the relevant legislation were DWL to have been found to have breached the TCLC following a formal investigation – ie 10% of its expected turnover for 2023 at the time of engaging in discussions with Ofgem, or £5,530,000. The payment will be made to Ofgem’s consumer redress fund.
Taking into account DWL’s acceptance of the breach, the steps it has taken to avoid future reoccurrence of a breach and the redress it has agreed to pay, Ofgem has now closed this matter without the need for a full investigation.
[1]P462 'The removal of subsidies from Bid Prices in the Balancing Mechanism’ - Elexon BSC