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Ofgem eyes regulation changes as concerns over high BM costs mount

Imbalance costs in the BM reached £4,000/MWh on several occasions last winter. Image: Getty

Imbalance costs in the BM reached £4,000/MWh on several occasions last winter. Image: Getty

Ofgem has stated it is ready to use its powers to change market rules if necessary in light of balancing costs doubling between September and November.

Over £1 billion has been spent on balancing the transmission system in that time, double the cost incurred in the same period last year, while daily Balancing Mechanism (BM) costs reached an all time record of more than £60m on 24 November 2021.

As a result, the regulator has outlined its concerns in an open letter to all BM participants over the level and frequency of high prices in the BM, alongside the limited flexibility that National Grid ESO has to consider alternative options.

Indeed, the ESO has, on a number of occasions, had to bring units online at extremely high prices in order to operate the system, while the regulator has observed on a number of occasions generators submit final physical notifications which indicate that, absent any action from the ESO, they will be de-synchronising at a time which appears designed to maximise the number of periods for which the ESO must pay them to run in the BM.

It added that the ability for generators to choose whether to self-dispatch or make themselves available in the BM has meant that at times, last minute changes have resulted in the ESO having to make the decision to instruct a unit to generate at short notice, limiting its ability to explore alternatives.

As it stands, market rules don’t stop generators from submitting high offer prices in the BM, nor from charging high prices for the power they produce in other wholesale markets. This is because occasional high prices in wholesale markets in periods with tight margins can help companies to recover their costs, as well as incentivising investors to bring forward additional generation when there is a scarcity of capacity.

However, Ofgem said that given the implications of the rising prices for balancing costs, imbalance prices and customer bills, it is “actively considering whether the existing arrangements provide adequate protection against companies exercising market power”.

It is therefore closely monitoring the outcome of the ESO’s review of recent events in the balancing market and “stands ready” to use its powers to change the market rules if necessary.

Last winter saw imbalance prices in the BM reach £4,000/MWh on several occasions, while prices hit £4,037.80/MWh in September 2021.

National Grid ESO is expecting that further periods of tight margins over the winter will result in significant price spikes in the BM, outlining in its Winter Outlook that it expects to issue a similar number of Electricity Margin Notices (EMNs) to last year, when there were six. The first EMN of the 2021/22 winter period was issued on 3 December.

The rise in balancing costs has been driven by a large rise in how much coal and gas-fired units have charged the ESO to generate in the BM in certain periods, Ofgem said.

In January 2021, EDF’s West Burton B CCGT plant achieved the highest daily revenue from the Balancing Mechanism, receiving over £7.5 million in a single day as low winds and cold temperatures resulted in high demand and low generation.

The rise in how much coal and gas-fired units are charging is in part attributed to rises in fuel and emission costs as well as higher balancing services use of system (BSUoS) costs and greater volatility in imbalance prices.

However, the regulator added that the increase in costs doesn’t alone appear likely to fully explain the scale of increases in offer prices submitted by some generators, with instances of extremely high prices increasing in frequency, implying high margins over direct costs.

It continued that alongside the rising prices, it has been closely monitoring the accuracy of the information submitted to the ESO both regarding generators’ intention to operate during peak periods and regarding the operating characteristics of their units.

"We will not hesitate to take action if we find evidence of market manipulation," Ofgem said.

In August, ESB Independent Generation and Carrington Power were fined £6 million due to market manipulation, having submitted inaccurate data to National Grid ESO.

It followed Ofgem fining EDF £6 million late last year after it sent signals that inflated the minimum amount of power its West Burton B generator plant could supply between September 2017 and March 2020, as well as fining InterGen £37 million for sending National Grid misleading signals.

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