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ESO fined for inaccurate demand forecasting

National Grid Electricity System Operator (ESO) has agreed to make a £1.5 million redress payment after an investigation by Ofgem found it had breached its licence conditions by failing to provide accurate and unbiased demand forecasts.

The regulator said it does not believe the ESO deliberately set out to breach its licence conditions but “did not put in place adequate senior oversight and compliance controls to identify and mitigate this behaviour.”

Ofgem said the breaches occurred between April and July of 2017 and then again in October of that year. It said the ESO’s 7-day ahead demand forecasts during these months were periodically either over or under demand outturn.

Senior management at the ESO were made aware in April that the forecasts were oscillating within month and did attempt to take some remedial action in May: “However, that action was both late and ineffectual, with the contravention continuing until July 2017 and recurring in October 2017.”

Ofgem described the failure as a “serious breach” of its licence conditions, noting that wholesale market participants make decisions on how much electricity buy and sell on the basis of these forecasts.

The regulator said it not possible to give a precise estimate of the financial harm caused by the breach due to the inherent difficulty of modelling what alternative decisions market participants would have made in a counterfactual scenario but said acting on inaccurate information has the potential to increase costs across the market which can be passed on to consumers over time. It said the ESO’s actions may have also damaged the confidence of traders, undermining the credibility of its forecasts.

By contrast, Ofgem said the ESO may have made a financial gain of up to nearly £131,000 and avoided penalties of up to £312,000 by issuing inaccurate forecasts.

The £1.5 million voluntary redress payment is less a symbolic penalty of £1. Ofgem said it considers a voluntary redress payment to be of more benefit to consumers but said it would have imposed a higher fine if the ESO had not agreed to one. By settling the investigation early, the ESO qualified for a 30 per cent discount on the £2.1 million penalty that was being proposed.

Ofgem director of enforcement Cathryn Scott said: “In 2017, National Grid ESO did not meet its obligation to provide accurate and unbiased 7-day ahead electricity demand forecasts which ultimately may have risked pushing up the cost of electricity for consumers.

“National Grid ESO plays a vital role in coordinating and managing the supply and demand of Britain’s electricity. Many suppliers rely on accurate electricity demand forecasts to buy electricity for their customers.

“Ofgem’s rules on publishing accurate information are clear and must be followed. The £1.5 million payment sends a strong message to the system operator that it must follow the rules.”

Summer outlook

The announcement came on the same day that the ESO published its annual Summer Outlook, which predicted that electricity demand would return to nearer normal levels over the season as coronavirus restrictions are eased in line with the government’s roadmap.

According to its central forecast, weather corrected demand on the transmission network is expected to bottom out at 17.2GW compared to 16.2GW last year and 17.5GW in 2019.

Last summer, the ESO was forced to pay EDF to reduce output from its Sizewell B nuclear plant and launch a new downward flexibility service as demand was supressed due to the first coronavirus lockdown. This was necessary to make room for enough synchronous gas generation to maintain the inertia of the electricity system.

The ESO said national demand – the “natural” demand in Great Britain – fell to a record low of 13.4GW on 28 June but actions it took such as electricity trading and activating pumped hydro storage pushed demand on the transmission network to 17.8GW. The lowest transmission demand over the summer was recorded on 31 May at 16.6GW, when natural demand stood at 16GW.

It said there was substantially less demand suppression during the most recent lockdown after Christmas as industry and businesses had adapted to continue working within the restrictions. Nevertheless, the ESO said unusual weather and a return to lockdown could still see transmission demand fall to as little as 15.7GW during one week this summer.