Ofgem action drives £5.53 million back to energy customers

5 Mar 2024 02:23 PM

Energy regulator Ofgem recently (04 March 2024) secured another win for customers, with electricity generator Dorenell Windfarm Limited (DWL) to make a payment of £5.53 million following a breach of energy market rules.

• Electricity generator Dorenell Windfarm Limited has accepted that it breached one of its licence conditions  
• In Dorenell Windfarm Limited’s view, this was an unintentional breach and it has committed to making changes to its bid pricing policy to avoid any future breaches 
• Dorenell Windfarm Limited has co-operated fully with Ofgem in its enquiries to resolve the issue quickly and fairly.

Following a period of engagement with Ofgem, DWL, who generate electricity in Northern Scotland, will pay £5.53 million into Ofgem’s Redress Fund, which takes payments from companies that have breached market rules and directs it into projects and schemes to support energy consumers in vulnerable situations.  

This follows the announcement at the end of last year that Ofgem has secured over £100 million in payments from companies who have breached market rules so far since the Redress scheme began.   

On this occasion, following a review carried out by Ofgem, DWL has accepted it breached one of its licence conditions. Ofgem considers that DWL charged excessive prices to reduce output where this was required to keep the system balanced and the breach pushed up costs for consumers. Ofgem’s review found that:  

• DWL’s prices did not properly reflect the financial benefits of reducing its output related to avoided payments that otherwise would have been required by the Government’s Contracts for Difference scheme. 
• Some of the assumptions used by DWL when setting its prices likely led to it recovering more than was necessary to cover the costs of reducing its output.   

Director of Enforcement for Ofgem Cathryn Scott recently said:  

“Another win for customers through Ofgem’s robust enforcement work has been secured. This company has accepted its error and has agreed to make a significant payment to put it right. Customers – particularly those in vulnerable situations – will rightly benefit from over £5 million as a direct result. We hope this sends a clear message that licence breaches will simply not be tolerated.”  

Since 2020, DWL has regularly been required to reduce its output due to the physical limits of the transmission system which restrict the amount of power which can be moved from the wind farm’s location in the North of Scotland to demand centres further south. Market rules prohibit generators from charging excessive prices in such circumstances, helping to keep consumer bills down.   

Whilst DWL now accepts Ofgem’s position that its approach was not compliant with the relevant licence condition, DWL has told Ofgem that at the time of submitting the bid prices, it had considered that it was compliant. DWL has co-operated fully with Ofgem in its enquiries to resolve the issue quickly and fairly.  

Since Ofgem’s review, DWL has committed to making changes to its bid pricing policy to ensure a breach does not happen again and agreed to make a payment into the Redress Fund in respect of the breach. DWL maintains that the breach was not deliberate and was not in any way motivated by the intention to obtain an excessive benefit.  

This is the fourth action that Ofgem has taken against electricity generation companies since the start of 2023 in relation to breaches of licence conditions. 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), and  
• EP SHB Limited (£23.63 million paid into the Redress Fund)  

The regulator 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.  

Taking into account DWL’s acceptance of the breach, the steps it has taken to avoid future reoccurrence of a breach and the redress it has agreed to pay, Ofgem has now closed this matter without the need for a full investigation.   

Notes to Editors

* Condition 20A of the Electricity Generation Standard Licence Conditions (known as the Transmission Constraint Licence Condition, or “TCLC”)  

• 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. 
• DWL is the owner of the 177MW Dorenell windfarm in northern Scotland. The breach relates to bid prices submitted by DWL in the Balancing Mechanism (“BM”) during periods where what is known as a ‘transmission constraint’ occurred. The unit is located behind several key thermal transmission constraint boundaries, and as a result DWL 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.  
• 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.