The UK energy regulator is preparing to ban companies that threaten to turn off their power plants at short notice from then demanding “excessive” prices to remain operational.
(Bloomberg) — The UK energy regulator is preparing to ban companies that threaten to turn off their power plants at short notice from then demanding “excessive” prices to remain operational.
The Office of Gas and Electricity Markets, or Ofgem, wants to clamp down on an “off-on” trading tactic that led National Grid Plc’s grid operator to pay record amounts to power companies last winter to address shortfalls. The new license condition, designed to prevent companies’ profiting from supply gaps that they helped create, will be announced in a consultation paper that’s scheduled to be published later today. The rules are likely to be in place by October.
The move follows an investigation by Bloomberg News in March, which showed that the controversial tactic added more than £525 million ($664 million) to consumer bills in the five years through 2022. Nearly 90% of that amount came in the last two years. Plants controlled by VPI, a unit of Vitol Group, and by German state-owned Uniper SE together accounted for £321 million of the total.
Ofgem is targeting the high prices typically charged by gas-fired power plants in a special side market called the balancing mechanism. There, the grid pays a premium to make final adjustments to ensure there’s enough supply to meet demand — costs that are ultimately picked up by consumers in their bills. Prices in this corner of the market have soared in recent years, thanks in part to the off-on tactic, adding to consumers’ burdens amid an historic energy crisis.
Read More: Traders ‘Manipulating’ Power Market Means Higher Bills in the UK
“Ofgem is committed to protecting consumers and ensuring they pay a fair price for their energy,” Eleanor Warburton, Ofgem’s acting director for energy systems management and security, said in a news release. “The proposed new license condition will ensure electricity generators don’t take advantage of existing rules to make excessive profits.”
Ofgem has previously called out generators for using the inflexibility of their gas-fired power plants — which take about six hours to cool down before they can be switched on again — to their advantage. Firms that threaten to switch off ahead of the evening demand peak have pushed the grid operator into a tight corner. To keep such plants available when they’re needed most, the grid has to pay higher than normal prices for hours longer than necessary to ensure the lights stay on.
Under the planned rules, if generators that require more than one hour to cool down reverse previous plans and announce they’re shutting down within hours, they won’t be allowed to charge significantly higher prices than they would have if they’d simply continued generating.
After Bloomberg’s report in March, Prime Minister Rishi Sunak’s spokesman called the trading behavior it revealed “unacceptable,” and Energy Secretary Grant Shapps called on the regulator to do more to restrict such practices.
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