Ofgem promises action if it sees ‘sharp practice’ in electricity balancing markets

Ofgem has promised to take action if it finds “sharp practice” in energy markets.
There have been rising concerns about the prices taken in the so-called Balancing Market. Balancing costs refer to actions taken by the system operator, NGESO, at the time of electricity dispatch – ie after the ‘gate closes’ on trades between various parties in the wholesale market in 48 half-hourly periods throughout the day.
These costs, which NGESO recovers from market participants via ‘transmission use of system’ charges, have increased markedly and reached £1.5 billion last winter, up from a third of that level in previous winters and peaking at £60 million on 24 November.
NGESO has completed an investigation into pricing in the Balancing Market and how costs reached that total and the industry is waiting for it to be published and for a response from Ofgem.
Richard Smith, energy systems management and security director at Ofgem, said “the behaviour of some generators goes beyond what we expect, even when margins are high”. Smith said there was “a big difference between responding to the sharp price signals that our system is designed to produce, and sharp practice”.
He said the regulator was ready to explore “near term interventions” in energy markets if they were required.
He did not offer details of what interventions Ofgem might consider but highlighted parties who were acting in a way that was “within the rules but undesirable”, saying, “you need to be able to close the gap”.
In an open letter, Ofgem set out several measures it could take to address ‘sharp practice’. They included:
• Direct measures to restrict BM offer prices, via an explicit price cap or the existing Transmission Constraint Licence Condition.
• Requiring more notice from generators who amend their planned operating schedules, such as by requiring them to submit and keep to their day ahead schedules.
• Restricting Balancing Market access or bidding flexibilities for generation capacity that is withdrawn with little notice.
• Changing the rules for how parties structure their BM bids to minimise costs incurred by the ESO.
• New licence obligations that require generators to operate and behave in a manner that delivers in consumers’ interests.

Download Ofgem’s open letter on balancing costs here