Ofgem action delivers £33.14 million back to energy consumers

28 May 2024 01:49 PM

Energy regulator Ofgem has today announced that electricity generator Beatrice Offshore Windfarm Limited (BOWL) has agreed to make a payment of £33.14 million after admitting it breached energy market rules.

• Electricity generator Beatrice Offshore Windfarm Limited (“BOWL”) has accepted that it breached one of its licence conditions and will make a redress payment of £33.14m as a result
• In BOWL’s view, this was an unintentional breach and it has committed to making changes to its bid pricing policy to avoid any future breaches
• BOWL has co-operated fully with Ofgem in its enquiries to resolve the issue quickly and fairly

Following an Ofgem review, BOWL, the operator of an 84-turbine wind farm off the North  East coast of Scotland, has accepted it breached one of its licence conditions (Condition 20A of the Electricity Generation Standard Licence Conditions, known as the Transmission Constraint Licence Condition, or “TCLC”) by charging excessive prices to reduce its generation output when this was required to keep the electricity grid balanced, thereby pushing up costs for consumers.

After engaging with Ofgem, BOWL agreed to make the payment into Ofgem's Redress Fund, which funds projects and schemes to support energy consumers, particularly those in vulnerable situations. The scale of the payment has been determined with reference to both the significant consumer detriment and the financial gain to the licensee that Ofgem considers the breach is likely to have resulted in. 

In summary Ofgem’s review identified the following concerns: 

• BOWL’s prices did not properly reflect the financial benefits of reducing its output related to avoided payments that the company would otherwise have been required to make under the Government’s Contracts for Difference scheme.
• BOWL’s approach to setting the part of its prices that was not related to subsidy payments carried a risk of the company recovering more revenue than was necessary to cover the costs incurred as a result of curtailing its output.
• BOWL failed to give meaningful consideration to its compliance with the requirements of the relevant licence condition, or to document the limited consideration that it did give its compliance with these requirements.

This action follows the announcement at the end of last year that Ofgem secured £77.2m in payments from companies into the Redress Fund in 2023 alone.

Whilst BOWL now accepts Ofgem’s position that its approach was not compliant with the relevant licence condition, BOWL has told Ofgem that in its view the breach was inadvertent and at the time of submitting the bid prices, it had considered that it was compliant.

BOWL has co-operated fully with Ofgem in its enquiries to resolve the issue quickly and fairly.  Since Ofgem’s review, BOWL has in addition to agreeing to make the redress payment also committed to making changes to its bid pricing policy to ensure a breach does not happen again. 

This is the fifth action that Ofgem has taken against electricity generation companies since the start of 2023 in relation to breaches of this licence condition. Other cases were: 

• Drax Pumped Storage Limited (£6.12 million paid into the Redress Fund)
• SSE Generation Limited (£9.78 million paid into the Redress Fund)
• EP SHB Limited (£23.63 million paid into the Redress Fund), and
• Dorenell Windfarm Limited (£5.53 million paid into the Redress Fund) 

Taking into account BOWL’s admission, the steps it has taken to avoid future reoccurrence of a breach and the redress it has agreed to pay, Ofgem has now closed its compliance review into the matter without the need for formal enforcement action under the Electricity Act 1989.  

Read more detail of Ofgem’s decision on the matter.

Ofgem has been clear that electricity generators must put in place controls to ensure that their prices are set in a way that ensures that they do not obtain excessive benefits during the periods where they are required to reduce output due to the limitations of the transmission network. If they fail to do so, they should expect to face large penalties.

Notes to Editors:

• 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.
• A transmission constraint is defined in the TCLC 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.  
• In order to manage transmission constraints, the ESO routinely uses the balancing mechanism (BM) to increase and decrease the amount of electricity produced by different generators.
• In the BM, generators submit offer prices to turn up generation, or bid prices to turn down generation. Bid prices are the amount a generator is willing to pay (if positive) or be paid (if negative) by the ESO 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. 
• BOWL is the owner of the 588MW Beatrice offshore windfarm in northern Scotland. Our review relates to bid prices submitted by BOWL in the BM during transmission constraint periods. The unit is located behind several key thermal transmission constraint boundaries, and as a result BOWL has regularly had bids accepted in the BM to reduce its output and to ensure that the relevant limits are not exceeded. 
• Typically, when managing a transmission constraint, the ESO will only have a limited number of alternatives available to it. This creates a risk that generators could exploit their position by charging excessive bid prices to reduce their output. The TCLC prohibits them from doing so, by requiring that generators must not submit bid prices which would result in them obtaining an excessive benefit in transmission constraint periods. 
• In December 2023 Ofgem launched a consultation on an update to the guidance which sets out our approach to interpreting and enforcing the TCLC. The proposed amendments were intended to bring the guidance up to date, and to provide generators with a greater level of detail in relation to Ofgem’s expectations regarding compliance with the TCLC. We expect to provide an update in relation to this consultation shortly.
• Alongside the guidance consultation, in December 2023 Ofgem also published a call for input inviting views from industry participants on whether any changes are required to the TCLC, in order to ensure that it is as effective as possible in keeping bills down.
• Work is also ongoing to consider a possible modification to the Balancing and Settlement Code which is related to potential distortions in the merit order arising from the interaction between the design of the BM and the CfD scheme.