UK generators could exploit a regulatory loophole to inflate market prices this winter as National Grid seeks to secure power supply, industry sources have warned.

The concerns raised by industry participants for the coming winter bear a strong resemblance to those raised over possible price inflation in 2008, and come just weeks after Ofgem warned the market that it has begun investigating possible market abuse.

Wholesale power prices typically spike in the event of a capacity crunch. But behind closed doors at an industry seminar this month concerns were raised that generators may be able to exploit this shortfall by demanding dramatically higher National Grid payment before the reserve capacity can be used.

National Grid has removed three power plants from the market this winter to form a backup reserve to prevent blackouts. But the operator can only call on these units after all available plants in the market have been ramped up.

This means the final market plant could name a price well above its costs with the guarantee that National Grid will have to accept the offer before it can draw on the supplemental balancing reserve (SBR).

A similar phenomenon was seen in 2008 when Ofgem was forced to put in place rules to prevent generators ‘gaming’ the market at times of physical transmission constraint between Scotland and England.

An abundance of Scottish generation capacity and insufficient power links to the rest of the country meant National Grid needed to accept offers to turn down thermal generation at times of high renewable energy output to keep the system balanced. But allegations surfaced that generators were able to inflate their prices ahead of an expected overload to take advantage of National Grid’s position.

Now, when a transmission constraint appears likely National Grid can issue a ‘constraint flag’ which limits the actions participants can take. But no similar action will be taken this winter with regards to capacity constraint because the UK market is now governed by rules made at an EU level.

UK power traders told Utility Week that although it is now technically possible to take advantage of the tight supply by inflating ‘offer prices’ to National Grid few would be willing to take the risk of falling foul of European market rules.

“Is it really worth it? It would mean an investigation and a whole load of very negative publicity. And while the initial profit may look big, the fall out would be massive,” one trader said.

Ofgem wrote an open letter to traders last month saying it is investigating activities which might amount to market manipulation, and has already engaged certain participants about these behaviours. The regulator warned the market to be mindful of European market regulation which includes rules against behavior which inflates price signals.

An Ofgem spokesman confirmed in a statement to Utility Week that the EU’s REMIT market rules would guard the market against abuse and manipulation.

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