New rules to boost consumer protection for winter 2023/24
Press release
Publication date
Industry sector
- Transmission Network
- Generation and Wholesale Market
Licence type
Electricity Generation Licence
Tough new rules have been introduced to prevent generators artificially inflating energy prices and forcing up household bills, Ofgem has announced today (31 August).
The changes which will be in place before the winter are aimed at generators attempting to make excessive profits through the balancing mechanism, the electricity system operator’s (ESO’s) primary tool for balancing supply and demand on Britain’s electricity transmission network.
It follows an Ofgem deep-dive into the issue which began last year amid concerns that some generators may be taking advantage of existing rules after balancing costs tripled in the winter of 2021/22, to over £1.5billion between November 2021 and February 2022, compared to average annual winter balancing costs of just under £500m for between 2017 and 2020. The record-breaking daily costs peaked above £60m on Wednesday 24 November 2021, driving up the ESO’s overall balancing costs, which are ultimately paid for by consumers, to £3.1bn that financial year.
The new Inflexible Offers Licencing Condition (IOLC) bans a practice which had been identified in previous winters. Electricity generators would schedule themselves to stop generating early in an afternoon, which, due to plant shutdown times, would mean they were switched off for the crucial evening peak in demand. They would then offer to resume generating later that same day, at a greatly increased price. The new rules apply to any electricity generators with plant shutdown times of over an hour.
When the new condition comes into force on Thursday 26 October 2023, any generators found to be breaching it, could face stiff penalties for breach of licence conditions, including being subject to provisional and final orders and fines of up to 10% of their regulated turnover.
Eleanor Warburton, Ofgem Acting Director for Energy Systems Management and Security said: “This new licence conditions shows Ofgem will not tolerate electricity generators attempting to take advantage of the balancing mechanism system to make excessive profits through inflexible generation.
“We believe the new licence condition strikes the right balance between protecting consumers and ensuring they pay a fair price for their energy while also enabling a competitive electricity market that provides fair returns for generators.
“We’ll be monitoring the effectiveness of it to ensure it’s doing what it was designed to do.”
Find out more about the Introduction of SLC20B, the Inflexible Offers Licence Condition.
Ends
Notes to editors:
The Balancing Mechanism (BM) is the Electricity System Operator’s (ESO’s) primary tool to balance supply and demand on GB’s network.
The ESO uses the BM to buy the right amount of electricity required to balance the electricity system.
The Inflexible Offers Licencing Condition (IOLC) prohibits a practice which had been observed amongst some generators whereby they would schedule themselves to cease generation output early in the afternoon. Some generators take up to six hours to cool down before they can run again, switching off in the afternoon would make them unavailable for the evening peak period. The generators in question had then used the Balancing Mechanism to offer a price to the ESO to keep operating throughout the afternoon and therefore be available for the evening peak. On the costliest days these generators charged very high prices (up to £6k/MWh) for long durations (5-6hrs) to be kept on by the ESO.
The ESO’s subsequent independent review found the price spikes were primarily driven by increased offer prices, rather than increased volumes having to be purchased to balance the grid.
Ofgem began its ‘deep dive’ investigation into the Balancing Mechanism last summer, amid concerns that some generators may be exploiting existing rules to make unreasonable profits.
- In July 2022 Ofgem published an open letter setting out its concerns and its intention to respond.
- In November 2022 Ofgem published a call for input on options to address high costs in the Balancing Mechanism and held a stakeholder workshop to look at options for addressing the issue. Ofgem chose the option of introducing a new licence condition and in February 2023 published a consultation which was followed by a statutory consultation in June 2023on its proposed new licence condition.
How the IOLC will work in practice
IOLC applies when generators with a MZT (Minimum Zero Time – the minimal amount of time a generation plant could shut down for) of over 60 minutes revise their generation output to zero megawatts (MW) within the operational day. In these circumstances, the IOLC will ensure that generators would no longer be able, having said they won’t be generating, to then make a Balancing Mechanism (BM) offer to the ESO, to generate at a price that provided significantly greater profit than they would have obtained had they not revised their PN (Physical Notification) to 0MW.
The new licence condition does not apply when a generator does not revise their generation output to 0 MW within the operational day or has a MZT of 60 minutes or less. In these circumstances a generator is still allowed the ability to efficiently factor generation scarcity into their BM offers and price their offer to reflect that, provided that they do so in accordance with the existing regulatory and legislative framework.
Excessive financial benefit: Excessive benefit is where a generator seeks to sell their electricity at prices that are ultimately not in consumers’ interests. In the context of the IOLC, licensed generators would be considered to have obtained an excessive benefit (or have sought to have obtained an excessive benefit) from electricity generation if each of the following conditions apply:
- The licensee revises their PN (Physical Notification) from a positive MW value (they will provide energy) to zero MW (they won’t provide energy) for a period later that same day.
- The licensee and the electricity system operator enter, or have entered into, an agreement to provide energy for a trading period.
- The generation unit to which the Relevant Arrangements apply has a Minimum Zero Time which is longer than 60 minutes.
- The licensee either obtained or sought to be paid (by the system operator) a price that provided significantly greater profit than they would have obtained had they not revised their PN to 0MW.