Approximately £250 million was paid by National Grid in constraint payments (see box) last year, £24 million of which was paid to windfarms. Energy regulator Ofgem has estimated that, over the course of a year, the potential cost of exploitation during periods of constraint could be as high as £125 million. National Grid passes such costs through to generators and suppliers and they are ultimately picked up by customers.
On 8 December 2011, the Department of Energy and Climate Change (Decc) issued a consultation on its proposal to introduce a Transmission Constraints Licence Condition (TCLC) to prohibit exploitative behaviour by energy generators during periods of transmission constraint. Specifically, the proposed terms of the TCLC prohibit:
l the creation or exacerbation of transmission constraints by generators making uneconomic dispatch decisions (for example, generating with one plant when there was a more profitable plant available that would not have created or exacerbated a constraint);
l the placing of excessively low or negative bids in a period of an export transmission constraint (such as generators offering to pay National Grid excessively low sums not to generate electricity or generators requiring National Grid to pay them an excessive amount not to generate electricity);
l generators charging excessive amounts to “trip off” the transmission network (for example, if a transmission line becomes overloaded following a fault).
Ofgem intends to monitor compliance with the TCLC by reviewing a database that contains detailed information on energy trades. The database will contain automatic alerts that highlight when, for example, it appears that more economic options were available to the generator or where bid prices appear to be considerably above cost or are out of step with the rest of the market.
In addition to the TCLC, the European Union’s Regulation on Energy Market Integrity and Transparency (Remit) came into force on 28 December 2011 (see feature page 18). Remit has introduced a new explicit prohibition on market manipulation, attempted market manipulation and insider trading in the European wholesale
energy market.
It also introduced an obligation on market participants to publish inside information and notify the Agency for the Co-operation of Energy Regulators and competent national regulatory authorities (NRAs – Ofgem in Great Britain) in case of delayed publication of inside information. Those professionally arranging transactions on the wholesale energy market were, from 28 December 2011, obliged to establish effective arrangements to identify breaches of prohibitions and notify NRAs in case of a reasonable suspicion of market abuse.
Industry concerns about both Remit and the TCLC relate to a lack of certainty in relation to how the relevant provisions will be implemented in practice and how they will be enforced by Ofgem. On the TCLC in particular, the decision about whether there has been a licence breach will be highly subjective. For example, the proposed prohibition is that the licensee must not obtain an “excessive benefit” from electricity generation during a constraint period. What constitutes an “excessive benefit” will have to be a subjective judgment by Ofgem. Similarly, Ofgem will also have to take a subjective view as to what amounts to an uneconomic option in relation to a bid.
If challenged, the licensee will have to justify to Ofgem why its bid decision was not uneconomic or otherwise try to objectively justify the bid pricing. The uncertainty of this may result in generators being reluctant to bid in the balancing mechanism, or it may create an Ofgem imposed price control mechanism by the back door.
Great Britain seems to be taking a different approach to many of its European neighbours in this matter. At European level, the focus has been on unbundling the vertical integration of the transmission operators and the generation capacity. While the focus at a European level is still on encouraging a fully competitive market, Ofgem appears to be resorting to greater regulation of the market in an attempt to prevent perceived or potential market abuse.
Ofgem’s proposal to introduce greater regulation in this area may follow from its investigation into Scottish Power and Scottish and Southern Energy in 2008, in respect of alleged withholding of generation plant from the wholesale forward market, while supplying balancing power to National Grid at (allegedly) excessive prices. Ofgem closed the investigation in 2009, stating that it had concerns with the behaviour observed during the periods under investigation, but it considered the likelihood of making an infringement finding under the Competition Act to be low. This may reflect the difficulty of applying existing competition rules, given the transience of any position of “dominance” in complex energy markets. The TCLC seeks to address this through amendments to licence conditions.
It is concerning that Ofgem is resorting to greater regulation in this area, at a time when the imposition of Remit at European level has created onerous new responsibilities for energy market participants. Only time will tell whether the proposed new licence condition will change behaviour in the energy market. However, we note that many windfarms, which have been the target of much press comment on this issue, will be exempt from the regulation under the TCLC because their generation capacity will be below the 100MW minimum requirement.
Nicola Williams is a partner and Claire Bertram an associate at Eversheds.
What is a transmission constraint?
The transmission network has a finite capacity to transmit electricity between any two locations. Transmission constraints occur where the capacity of the network is insufficient to transmit the electricity from where it is generated to where it is required. This can occur as a result of planned events, such as the closure of a generating plant, or unplanned events, such as faults or breakdowns or varying levels of generation from renewable generators due to weather conditions.
For example, after Hurricane Katia last year, National Grid had to pay various plant not to generate electricity. One such payment to a windfarm in the Scottish borders was £1.2 million (£999 per megawatt hour). According to a report in The Daily Telegraph, this was ten times greater than would have been paid had the turbines remained on (the typical payment for which would have been in the region of £100 per megawatt hour).
The number of transmission constraints looks set to rise temporarily over the coming years as National Grid works to upgrade its network, although this will increase the capacity for electricity to flow between regions and will hopefully reduce the number of constraints in the long term.
This article first appeared in Utility Week’s print edition of 17 February 2012.
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