Investigation into SSE Generation Limited
Following a detailed investigation, Ofgem has today issued a notice of its proposal to require electricity generator SSE Generation Limited (SSE) to pay £9.78 million in relation to a breach of its Generation Licence. The penalty relates to our finding that SSE secured excessive payments from National Grid Electricity System Operator (NGESO) during periods of what is known as ‘transmission constraint.’
- Ofgem has found that SSE Generation Limited breached its licence after securing excessive payments from National Grid ESO in exchange for reducing output at Foyers pumped storage power station
- As a consequence, Ofgem proposes to require the company to pay £9.78 million into the Energy Redress Fund
In order to meet our electricity needs, power must get from where it is produced to where it is consumed. Where constraints on the transmission system exist, then NGESO will take action to manage flows across the network, including using the balancing market to increase and decrease the amount of electricity produced by different generators.
Situations which could cause transmission constraints might, for example, include where there is insufficient network capacity to transport power out of a particular area in which local generation exceeds demand.
Typically, when managing a transmission constraint, NGESO will only have a limited number of alternatives available to it. This creates a risk that generators could exploit their position by charging the NGESO excessive prices to reduce their output. The Transmission Constraint Licence Condition (or TCLC) prohibits them from doing so.
In October 2021, Ofgem opened an investigation into SSE’s compliance with the TCLC in relation to Foyers pumped storage power station, which is located in Northern Scotland and regularly operates in transmission constraint periods. Ofgem has found that:
- In May 2020 SSE took the decision to make the bid prices it charged NGESO to reduce Foyers’ output significantly more expensive – including in periods of transmission constraint.
- This change was made to bring Foyers in line with what it believed was the market practice of other pumped storage operators, and to increase profit.
- Following the change, SSE’s prices were set with reference to the prices of selected other generators frequently bid down due to a constraint, rather than the costs and benefits of being bid down. Its revised prices were expensive relative to several relevant comparators, and were not compliant with the TCLC.
- The bids submitted resulted in higher balancing charges, ultimately increasing costs for consumers.
Ofgem has not seen any evidence which suggests that the breach was deliberate, that is that SSE changed its pricing strategy for Foyers knowing that the revised strategy would breach the TCLC. However Ofgem considers that it should have been clear to SSE (including senior management) that its revised approach carried a significant risk of breaching the TCLC.
Cathryn Scott, Director of Enforcement and Emerging Issues at Ofgem said:
“Protecting consumers is a priority for Ofgem, and we will continue to monitor the wholesale energy markets in Great Britain and ensure their integrity on behalf of energy users.
“This enforcement action sends another strong signal to all generators that they must put in place controls to ensure that their bid prices are set in a way that ensures that they do not obtain excessive benefits during transmission constraint periods. If they fail to do so, they will face significant consequences.”
As part of the resolution of the investigation, SSE has committed to put in place a new pricing methodology designed to properly reflect the costs and benefits to SSE of reducing its generation at Foyers.
SSE co-operated and engaged constructively during the investigation and expressed a willingness to settle the case. By settling this investigation early, the company has qualified for a discount compared to the £11.58m it would otherwise have been required to pay.
This investigation is part of the ongoing compliance work undertaken by Ofgem to ensure that the market is fair for everyone. Ofgem expects licensees to be fully aware of their legal obligations (including compliance with the TCLC) and have adequate procedures in place to prevent breaches from occurring.
Any written representations or objections to Ofgem’s proposal must be received no later than 27 June 2023 and will be considered prior to Ofgem reaching its final decision on whether to impose a penalty on SSE.
Notes to Editors:
- The Balancing Mechanism (BM) is operated by NGESO to ensure that the electricity transmission system is kept in balance at all times. Generators can submit offer prices to turn up generation, or bid prices to turn down generation, and are selected on a competitive basis by the NGESO according to the system need.
- Bid prices are the amount a generator is willing to pay (if positive) or be paid (if negative) by NGESO in the BM to turn down its generation when needed to help balance the transmission system. When turned down, the station can still sell power as if it were generating.
- Generators affected by transmission constraints can have market power during constraint periods because NGESO requires them to turn down in order to balance the system.
- A Transmission Constraint is defined in Condition 20A as any limit on the ability of the National Electricity Transmission System, or any part of it, to transmit the power supplied onto the National Electricity Transmission System to the location where the demand for that power is situated.
- The Energy Redress Fund provides money to charities to deliver energy related projects that support energy consumers in vulnerable situations. It also helps to deliver benefits to consumers, who were negatively impacted by the specific issue that triggered the redress payment. For more information about the fund, see: Ofgem appoints Energy Saving Trust to distribute payments from rule-breaking energy companies to charities.
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