Ofgem clamps down on generators gaming the system after £3bn hit to households
Electricity generators will no longer be able to artificially inflate energy prices and drive up households bills, after an Ofgem clampdown on producers manipulating the electricity market.
The regulator has brought in new rules to prevent generators from effectively gaming the system to make vast profits at the expense of billpayers – which cost households £3bn last winter.
This follows an Ofgem investigation into concerns generators were switching off their assets ahead of periods of peak demand in order to extract higher prices for power generation when demand was stretched.
The electricity system operator relies on the so-called balancing mechanism to match demand and supply across the country and prevent blackouts and power surges.
It involves the ESO having to pay generators to turn off and on supplies at times of peak demand, typically in the evenings when consumption typically spikes.
Balancing costs tripled in the winter of 2021/22 to over £1.5bn between November 2021 and February 2022, compared to average annual winter balancing costs of just under £500m for between 2017 and 2020.
The record-breaking daily costs peaked above £60m on Wednesday 24 November 2021, driving up the ESO’s overall balancing costs, which are ultimately paid for by consumers, to over £3.1bn that financial year.
Under new rules, dubbed the Inflexible Offers Licencing Condition (IOLC), this practice will be banned, with firms facing penalties for breach of licence conditions. Penalties will include being subject to provisional and final orders and fines of up to 10 per cent of their regulated turnover.
The new conditions comes into force on 26 October 2023.
Eleanor Warburton, Ofgem’s acting director for energy systems management and security, 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.
“We’ll be monitoring the effectiveness of it to ensure it’s doing what it was designed to do.”
The latest developments for Ofgem come amid confirmation from ESO that the ‘Demand Flexibility Service’ will be in place for the coming winter.
This means households will be encouraged to save energy at peak times in exchange for reductions in their energy bills.
The service was used last winter amid sustained pressure on gas supplies from Russia following the invasion of Ukraine.