Ofgem 'closely monitoring' bidder behavior in UK balancing mechanism

UK energy regulator Ofgem is monitoring the accuracy of generator information submitted to National Grid Electricity System Operator in the light of soaring balancing mechanism costs, Ofgem said in an open letter Dec. 20.

Over GBP1 billion was spent on balancing the transmission system between September and November 2021, double the cost incurred in the same period last year. Daily Balancing Mechanism costs reached an all-time high of GBP60 million on Nov. 24.

"We will not hesitate to take action if we find evidence of market manipulation," Ofgem said.

The regulator was "closely monitoring the accuracy of the information" submitted to the ESO both regarding generators' intention to operate during peak periods, and regarding the operating characteristics of their units, it said.

"Market participants will be aware of a number of actions that we have taken against companies that have been found to have breached their obligations under REMIT and the Grid Code in recent years," it said.

On Nov. 26 National Grid ESO launched its own review into high BM costs.

"Our review will seek to ensure that, at a time when households' budgets are under strain, consumers can continue to have confidence in the market," it said.

The trend in rising balancing costs has been driven by acceptance by the ESO of coal- and gas-fired generator bids into the mechanism exceeding GBP3,000/MWh at times.

To some extent high BM bids can be attributed to steep rises in fuel and emission costs, which have seen wholesale prices rocket as well.

S&P Global Platts assessed the price of UK day-ahead baseload power at GBP384.00/MWh ($509/MWh; Eur451/MWh) on Dec. 20, up 57% since the start of the month.

"However, the increase in costs does not alone appear likely to fully explain the scale of the increases we have seen in offer prices submitted by some generators in the BM," Ofgem said.

"With increasing frequency, we have observed instances of extremely high prices (accounting for around 40% of total spending by the ESO on offers for gas-fired units in recent months), implying extremely high margins over direct costs," it said.

Record BM constraint payments to gas plants in October of GBP144 million were up from GBP41 million in September.