The energy regulator, Ofgem, has launched a formal statutory consultation on proposals to introduce a new licence condition to prevent electricity generators from making excessive profits through the Balancing Mechanism.
The Balancing Mechanism is the electricity system operator’s (ESO’s) primary tool used for balancing supply and demand on Britain’s electricity transmission network. The ESO uses the Balancing Mechanism to ensure it buys the right amount of electricity from generators to balance the system.
Following an Ofgem ‘deep dive’ into the issue, which began last year amid concerns that some generators might be taking advantage of the existing rules, Ofgem signalled earlier this year that it would be cracking down on various behaviours it had identified among some generators, who have been attempting to gain excessive financial benefit at a cost to consumers. This has involved some thermal generators scheduling themselves to cease output early in the afternoon – and because these generators take up to six hours to cool down before they can run again, switching off in the afternoon then makes them unavailable for the evening peak period. The generators in question have then been using 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 have been charging very high prices (up to £6k/MWh) for long durations (5-6hrs) to be kept on by the ESO. This has led to high balancing costs that are ultimately paid for by consumers.
Ofgem is therefore now in the process of consulting on introducing a new licence condition to curb this practice and protect consumers. The regulator’s latest proposals for the new licence condition have been revised following industry feedback from an earlier consultation in February.
Eleanor Warburton, Acting Director for Energy Systems Management and Security, said:
“Ofgem is committed to protecting consumers and ensuring they pay a fair price for their energy. The proposed new licence condition will ensure electricity generators don’t take advantage of existing rules to make excessive profits in the Balancing Mechanism.
“Following on from our previous consultation we are now inviting final feedback from across the industry on the proposed changes, which we hope to have in place to protect consumers this winter.”
Statutory Consultation on the Inflexible Offers Licence Condition (IOLC) is now published on Ofgem's website. Any interested parties can submit their feedback via firstname.lastname@example.org.
The statutory consultation is due to close on 27 July 2023 and Ofgem expects to publish its final decision later this year.
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 system.
On 13 February 2023 we published a consultation on our proposal to introduce a new licence condition called the Inflexible Offers Licence Condition (“IOLC”). This proposed new licence condition would bring in tighter profit controls targeted at some generators’ actions to undertake sharp practices whereby they attempt to operate inflexibly and gain excessive benefit.
In our consultation we received feedback from the industry that some aspects of our proposals may act as a disincentive to generators who were not seeking to make excessive profits and undermine security of supply.
We took this feedback on board and have amended our proposals accordingly, by refocussing the licence condition to apply only when generators attempt these practices close to real time (ie within the operational day).
It is our view that our proposals strike the right balance in protecting consumers from excessive balancing mechanism costs, while also enabling generators to make a reasonable profit.