Energy regulator Ofgem has closed a loophole that allowed generators to secure hundreds of millions of pounds extra on the UK’s balancing market last year.
Designed to ensure supply meets demand in real-time, the balancing market sees generators offer to vary output in return for payment from National Grid PLC (LSE:NG.)’s system operating wing.
Companies had effectively been planning to turn off generators at times of peak demand, before offering them back up to the system operator at a higher price closer to the time, Ofgem explained in a statement.
This meant balancing market costs tripled to £1.5 billion between November 2021 and February 2022, compared to £500 million in each of the three winters beforehand.
These additional costs, though charged to the system operator, ultimately ended up being footed by the consumer, with increased balancing costs added to already-higher bills.
Ofgem warned breaches of the new rules, which apply to generators with plant shutdown times of over an hour and come into force in October, could result in “stiff penalties”, such as fines of up to 10% of companies’ regulated turnover.
“This […] shows Ofgem will not tolerate electricity generators attempting to take advantage of the balancing mechanism system to make excessive profits,” director Eleanor Warburton said.
“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.”
Both SSE PLC (LSE:SSE) and Drax Group (LSE:DRX) have previously faced fines for breaching balancing market licensing conditions, which ultimately resulted in both securing “excessive payments” to alter energy generation.