UK Politics

Ofgem proposes reform after finding some power station owners held back supplies to secure higher prices

The British energy regulator has accused power station owners of trying to game the system for excess profits, as it set out steps to try and clamp down on the practice.

Ofgem said on Thursday that an investigation had found some generators had withheld supplies in order to fetch a higher price for them in the back-up market, pushing up costs for consumers at the height of the energy crisis.

It launched the probe after the costs of keeping supply and demand matched through the so-called balancing market hit record levels in November 2021 at the start of the energy crisis, with £60mn spent by network operator National Grid on one day alone.

Ofgem said those costs during the winter of 2021-22 — when demand is highest — hit £1.5bn, more than triple the level of the average over the preceding three winters.

The watchdog said it would crack down on “various behaviours it had identified among some generators, who have been attempting to gain excessive financial benefit at a cost to consumers”.

It is proposing a new licence condition to “ensure electricity generators don’t take advantage of existing rules to make excessive profits”, said Eleanor Warburton, Ofgem’s acting director for energy systems management and security.

The new licence condition, which will restrict generators’ ability to profit and include financial penalties for breaches, could be in place in time for winter, Ofgem said.

The intervention comes after UK chancellor Jeremy Hunt earlier this week stepped up the pressure on regulators, including Ofgem, to do more to keep consumer costs down.

Ofgem said: “We believe it is necessary to intervene to prohibit behaviours that result in generators realising excessive benefits, which are costs ultimately payable by consumers.”

The watchdog did not name the companies involved. However, an investigation by Bloomberg earlier this year said some traders at firms including Vitol, Uniper and SSE would tell National Grid they were shutting down power plants ahead of periods of tight supply only to start them up again once they had secured higher prices for the power.

Electricity supply and demand has to be constantly matched to avoid blackouts. National Grid smooths out any mismatches, using the “balancing market” to pay generators to switch on or turn off at short notice.

Ofgem said it identified “repeated instances” of generators telling National Grid they were going to switch off, and then offering to turn back on at higher prices in the “balancing market”, which the network operator has little choice but to accept. SSE said it “fully complies” with the rules. Vitol declined to comment but had previously said its VPI power business abided by “all relevant regulations and fulfils any commitments to deliver power to the grid”. Uniper did not immediately respond to a request for comment.

Adam Bell, head of policy at energy consultancy Stonehaven, said Ofgem could in theory ask generators to return some of the excess profits earned through the balancing mechanism, but it had little enforcement power beyond that.

“What they’re alleged to have done was within the letter of the rules, even if not in the spirit of the rules,” he said.

Darren Jones, Labour chair of the business and trade select committee, said: “This is another example of company executives getting away with immoral profiteering. But as immoral as it is, it isn’t illegal. Ministers will decide if that’s acceptable or not.”

The proposed change to the licence conditions would limit the prices generators charge in the balancing mechanism to their costs “plus a reasonable profit”.

Bell warned that while reforms to the market may be necessary there was the risk that Ofgem’s proposals could lead to companies being less able to offer energy supplies when needed.

“The people primarily at fault here are clearly the ones that were gaming the system but it’s not a straightforward issue to solve,” Bell said. “There will almost certainly be some legitimate behaviour that will also be removed by these proposals.”

Energy UK, the trade group, has previously said there was disagreement among generators over whether to support the licence condition, with some concerns that it could distort the market and damage investment.

The energy department said it welcomed all actions taken to protect consumers and backed Ofgem in using all the powers at its disposal to go further if needed.