Is the UK being held to ransom in the power market?
The strategy doesn’t sound a subtle one: pay up or blackout. This winter, as hundreds of thousands of UK households were reading by torchlight to reduce electricity demand at peak times, some traders are alleged to have taken a somewhat less collaborative approach to the energy crisis.
Both the government and the opposition have called for an investigation into the suggestion, made in an investigation by Bloomberg News, that certain traders at firms including Vitol, Uniper and SSE said they would shut down power plants ahead of periods of tight supply, only to revive them and produce more expensive power for the UK national grid via the “balancing mechanism” used to prevent blackouts.
This strategy — known as an off-on manoeuvre — is not new. Soaring balancing mechanism costs since prices started rising in 2021 were already causing alarm. National Grid ESO, which runs the electricity system, in November 2021 noted some “very high cost days” — the price is ultimately paid in customer bills — and launched a review.
It also isn’t against the rules. Power plants shut down for all sorts of reasons, even at short notice. Regulator Ofgem has characterised it as “sharp” practice, rather than anything stronger.
But its February consultation on adding a licence condition “prohibiting electricity generators from gaining excessive benefit from inflexible offers in the balancing mechanism” suggests that it believes some market participants have been reaping windfalls in recent years by gaming the current system.
The ESO review, with Ofgem, did not find “specific evidence” of parties breaching the rules. But the data underlying that review wouldn’t necessarily provide evidence of questionable behaviour. “It is very difficult to tell a fake maintenance outage from a real one,” said a market expert of one common reason that a plant would go down. “It’s extremely shoddy behaviour. It’s ungentlemanly. But unless you can put an inspector in each power plant, I’m not sure what you can do.”
To some extent, price spikes are a feature, not a bug of the current market. The balancing mechanism is designed to encourage generating capacity on to the grid when it is most needed. The interconnectors on which the UK has relied for its energy security didn’t work when there were shortages across Europe. More renewables on the grid means occasional shortfalls. More accurate weather forecasting offers scope to make big returns when it is cloudy and the wind stops blowing — which is part of the deal for some generators.
SSE, which says it “fully complies” with all regulations, recently brought a new gas plant online in North Lincolnshire. Vitol’s power business VPI, which says it “abides by all relevant regulations and fulfils any commitments to deliver power to the grid”, has expanded in the UK market recently, buying four power plants from Drax in 2020 with three more under construction. Uniper did not respond to a request for comment.
The regulator is rightly reviewing its rules — and the threshold for taking enforcement action. But the demands of the transition to cleaner energy will also mean rethinking who provides the backstop to our power needs when supplies run short: the UK’s pipeline of battery storage projects has expanded hugely, in part thanks to the pricing signals sent in times of scarcity.
It also underlines a familiar theme in today’s energy market: the need for vast amounts of investment and, as importantly, the ability to get things done. That means more generation and a modern, flexible grid that can supply power as it needed. “These are big physical assets and upgrading them isn’t straightforward,” said energy analyst Peter Atherton. “Then trying to put a new line through a rural area takes 10 years in planning and the grid needs dozens of them.”
The government will set out its strategy to boost Britain’s energy security and help it meet its carbon targets this week. Planning reform is crucial for quick progress towards a more resilient system. It seems unlikely to feature.
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