Ofgem has launched a formal statutory consultation on proposals to introduce a new license condition to stop electricity generators from making excessive profits through the Balancing Mechanism.
The Balancing Mechanism is National Grid ESO’s (ESO) primary tool for balancing the supply and demand on Britain’s electricity transmission network by allowing the ESO to ensure it buys the appropriate amount of electricity from generators to balance the system.
Ofgem identified various behaviours from some electricity generators attempting to gain “excessive financial benefits at a cost to customers.”
This includes some thermal generators scheduling to cease their output early in the afternoon which – due to generators requiring six hours to cool down before they can operate again – made them unavailable during the evening peak consumption period.
The Balancing Mechanism would then be used by the generators in question to offer a higher price to the ESO in order to keep operating throughout the afternoon and be available for the evening peak period.
During the coolest days, these generators have been offering extremely high prices of up to £6k/MWh to be kept on by the ESO for longer durations (5-6 hours).
This resulted in higher balancing costs which are ultimately paid for by customers.
Ofgem began its “deep dive” into the issue last year and is now in the process of introducing a new license condition to halt this practise and insulate consumers from unfair practises.
The latest version of the regulator’s license condition has been revised following industry feedback from an early consultation in February 2023.
This most recent statutory consultation is due to close on 27 July with Ofgem expected to publish its final decision this year.
“Ofgem is committed to protecting consumers and ensuring they pay a fair price for their energy. The proposed new license condition will ensure electricity generators don’t take advantage of existing rules to make excessive profits in the Balancing Mechanism,” said Eleanor Warburton, acting director for energy systems management and security at Ofgem.
“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.”