Ofgem has introduced new rules to prevent electricity generators “artificially inflating energy prices and forcing up household bills”.
The rules aim to tackle the “excessive profits” that were able to be made by generators through the Balancing Mechanism (BM). This will be achieved via the introduction of the new Inflexible Offers Licencing Condition (IOLC).
IOLC will ban a practice whereby electricity generators would schedule themselves to stop generating early in an afternoon, which, due to plant shutdown times, would mean they were switched off for the crucial evening peak in demand. Generators would then offer to resume generating later that same day, at a greatly increased price.
According to an investigation by Ofgem, balancing costs tripled in the winter of 2021/22, to over £1.5 billion between November 2021 and February 2022, compared to average annual winter balancing costs of just under £500 million for between 2017 and 2020.
The record-breaking daily costs peaked above £60 million on 24 November 2021, driving up the ESO’s overall balancing costs, which are ultimately paid for by consumers, to £3.1 billion that financial year.
The new rules apply to any electricity generators with plant shutdown times of over an hour and anyone caught breaching the new rules could face “stiff penalties” for breach of licence conditions including being subject to provisional and final orders and fines of up to 10% of their regulated turnover.
The new condition will come into force on 26 October 2023.
Eleanor Warburton, acting director for Energy Systems Management and Security at Ofgem, said: “This new licence conditions shows Ofgem will not tolerate electricity generators attempting to take advantage of the Balancing Mechanism system to make excessive profits through inflexible generation.
“We believe the new licence condition strikes the right balance between protecting consumers and ensuring they pay a fair price for their energy while also enabling a competitive electricity market that provides fair returns for generators.
“We’ll be monitoring the effectiveness of it to ensure it’s doing what it was designed to do.”
