Ofgem warns Balancing Mechanism players


Rocketing costs of last-minute interventions needed to balance Britain’s power grid have prompted an Ofgem warning that it stands ready to tighten market rules to beat manipulators.

In an open letter this week, the regulator reminds Balancing Market (BM) participants that it will not hesitate to use its statutory powers to impose fines, if manipulation can be proved.

Over the two months to November, BM fees topped £ 1 Billion, double 2020’s equivalent.  A single day, 24 November, posted a record of over £60 million.

The unusually late stages at which BM participants are declaring availability of generating resource, underlie the regulator’s concern.

No prohibition exists under current rules against generators occasionally bidding expensively into the BM or into wholesale markets.  Such autonomy permits players in theory to recover costs and widen margins at times of tight supply.  Nominally it also incentivises more capacity to be built and offered for balancing and FR services.

But in recent experience, Ofgem says it has repeatedly noticed BM participants disclosing generation availability at times “apparently intended to maximise the durations for which National Grid-ESO must reward them to continue in the BM”.

In plain language, Ofgem suspects gaming may be going on.

As a result, Ofgem says in the letter that it is “actively considering whether the existing arrangements provide adequate protection against companies exercising market power.”

Last month, National Grid ESO brought in external consultants to assist in a review of recent pricing events in the BM.  Ofgem makes clear it is ‘closely monitoring the outcome of the ESO’s review’.

“We stand ready to use our powers to change market rules if necessary”, says the regulator.

The accuracy of disclosures made by generators about their intentions to operate during peak periods, and about the characteristics of available plant, also concern Ofgem.   “We will not hesitate to take action if we find evidence of market manipulation,” it says

The agency reminds BM market makers of three episodes since April 2020, where it has fined four players for presenting faulty or non-compliant information.  In the latest in August, Ofgem fined Carrington Power and ESB Independent Generation Trading a total of £ 6 million.

Signed by the regulator’s joint directors of energy systems security, Ofgem’s letter reminds BM participants of the unfair trading provisions of the 1998 Competition Act.

It also points out their duties under the Grid Code, under REMIT rules banning manipulation and false signalling in markets, and the Transmission Constraint Licence Condition.

The latter bans generation licensees from submitting bid prices into the BM which are excessively expensive during a period in which a transmission constraint occurs.

Away from the Balancing Mechanism, Ofgem has been faced criticism from consumer groups for its tolerance of under-capitalised licensee suppliers, 26 of whom have failed this year.  Citizens Advice alleges that the agency’s ‘lax’ oversight of energy supply for a decade has cost Britons a total of £2.6 billion.


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