Electricity companies will no longer be allowed to use a controversial strategy that raises bills for consumers, according to the energy regulator. Ofgem has introduced new rules aimed at curbing companies’ “excessive” profits during the winter months. These regulations are designed to prevent manipulation of the complex system that ensures stability in Britain’s electricity grid. Ofgem has warned that electricity generators could face significant penalties, up to 10% of their revenue, if they breach these rules.
The balancing mechanism is the main tool used by the National Grid electricity system operator to address gaps in supply and demand on the grid. It allows for last-minute deals between the operator and generators to ensure a balanced electricity supply and prevent disruptions such as power outages. Generators are paid varying rates for adjusting their output in response to demand fluctuations. However, the costs of this system are ultimately passed on to consumers through network costs included in their bills.
Ofgem has taken action in response to concerns that some generators were taking advantage of the balancing mechanism, resulting in significant costs for consumers. In previous winters, certain generators deliberately shut down early in the afternoon and then offered to resume generating power later in the day, taking advantage of the higher prices offered via the balancing mechanism.
According to Ofgem, the annual balancing costs tripled during the winter of 2021-22, reaching £1.5 billion compared to an average of £500 million in the previous three years. Daily balancing costs hit a record of £60 million on a single day. These costs are ultimately borne by consumers, with the total annual balancing cost for consumers reaching £3.1 billion during that financial year.
The new regulations, called the Inflexible Offers Licence Condition (IOLC), will ban this practice and apply to any generators that switch off their plant for more than an hour. Ofgem has the authority to fine companies up to 10% of their revenue and require them to compensate consumers under the existing licence conditions.
Eleanor Warburton, Ofgem’s acting director for energy systems management and security, stated that these new licence conditions demonstrate Ofgem’s zero tolerance towards generators attempting to exploit the balancing mechanism for excessive profits. Ofgem aims to strike a balance between protecting consumers and ensuring fair energy prices, while also maintaining a competitive electricity market that provides fair returns for generators.
The trade body Energy UK, representing energy firms including electricity generators, supports Ofgem’s measures to reduce balancing costs. They believe that a more competitive and transparent market, along with leveraging low-carbon flexible assets such as energy storage and demand-side response, will help reduce balancing costs in the long run.
While some companies such as VPI and SSE have stated their compliance with regulations, Uniper has not yet provided a comment on the matter.
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