Notice of penalty - SSE Generation Limited
Penalty notice
Publication date
Company
Industry sector
Generation and Wholesale Market
Licence type
Electricity Generation Licence
Following a detailed investigation, Ofgem has decided to impose a financial penalty on SSE Generation Limited (SSE), requiring it to pay £9.78 million in relation to a breach of its Generation Licence. Full details of our decision can be found in the decision notice, linked below.
The penalty relates to our finding that SSE secured excessive payments from the Electricity System Operator (“ESO”) during periods of what is known as ‘transmission constraint.’ In order to meet our electricity needs, power must get from where it is produced to where it is consumed. Where constraints on the transmission system exist, then the ESO will take action to manage flows across the network, including using the balancing market to increase and decrease the amount of electricity produced by different generators.
Situations which could cause transmission constraints might, for example, include where there is insufficient network capacity to transport power out of a particular area in which local generation exceeds demand.
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 the ESO excessive prices to reduce their output. The Transmission Constraint Licence Condition (or “TCLC”) prohibits them from doing so.
In October 2021, Ofgem opened an investigation into SSE’s compliance with the TCLC in relation to Foyers pumped storage power station, which is located in Northern Scotland and regularly operates in transmission constraint periods. Ofgem has found that:
- In May 2020 SSE took the decision to make the bid prices it charged the ESO to reduce Foyers’ output significantly more expensive – including in periods of transmission constraint.
- This change was made to bring Foyers in line with what it believed was the market practice of other pumped storage operators, and to increase profit.
- Following the change, SSE’s prices were set with reference to the prices of selected other generators frequently bid down due to a constraint, rather than the costs and benefits of being bid down. Its revised prices were expensive relative to several relevant comparators, and were not compliant with the TCLC.
- The bids submitted resulted in higher balancing charges, ultimately increasing costs for consumers.
Ofgem has not seen any evidence which suggests that the breach was deliberate, that is that SSE changed its pricing strategy for Foyers knowing that the revised strategy would breach the TCLC. However Ofgem considers that it should have been clear to SSE (including senior management) that its revised approach carried a significant risk of breaching the TCLC.
As part of the resolution of the investigation, SSE has committed to put in place a new pricing methodology designed to properly reflect the costs and benefits to SSE of reducing its generation at Foyers.
SSE co-operated and engaged constructively during the investigation and expressed a willingness to settle the case. By settling this investigation early, the company has qualified for a discount compared to the £11.58m it would otherwise have been required to pay.
A single response was received to our notice of 6 June 2023 setting out our intention to impose a penalty on SSE. We have considered this response carefully, and for the reasons set out in the decision notice linked below, we remain of the view that our approach to assessing the excessiveness of SSE’s bid prices is correct, and that a breach of the TCLC has occurred.
This investigation is part of the ongoing compliance work undertaken by Ofgem to ensure that the market is fair for everyone. Ofgem expects licensees to be fully aware of their legal obligations (including compliance with the TCLC) and have adequate procedures in place to prevent breaches from occurring.