Ofgem has issued a notice of its proposal to require electricity generator SSE Generation to pay nearly £10m in breach of its Generation Licence, following an investigation.
The £9.78m penalty relates to Ofgem’s finding that SSE secured excessive payments from National Grid Electricity System Operator (NGESO) during periods of what is known as “transmission constraint”.
In October 2021, Ofgem opened an investigation into SSE’s compliance with the Transmission Constraint Licence Condition (TCLC) in relation to Foyers pumped storage power station, located in Northern Scotland and regularly operates in transmission constraint periods.
Ofgem has found that in May 2020 SSE took the decision to make the bid prices it charged NGESO to reduce Foyers’ output significantly more expensive – including in periods of transmission constraint.
This change was made to bring Foyers in line with what it believed was the market practice of other pumped storage operators and to increase profit.
Following the change, SSE’s prices were set with reference to the prices of selected other generators frequently bid down due to a constraint, rather than the costs and benefits of being bid down.
Its revised prices were expensive relative to several relevant comparators and were not compliant with the TCLC.
The bids submitted resulted in higher balancing charges, ultimately increasing costs for consumers.
Ofgem has not seen any evidence which suggests that the breach was deliberate, that is that SSE changed its pricing strategy for Foyers knowing that the revised strategy would breach the TCLC.
However, Ofgem considers that it should have been clear to SSE (including senior management) that its revised approach carried a significant risk of breaching the TCLC.
Cathryn Scott, Director of Enforcement and Emerging Issues at Ofgem said: “Protecting consumers is a priority for Ofgem, and we will continue to monitor the wholesale energy markets in Great Britain and ensure their integrity on behalf of energy users.
“This enforcement action sends another strong signal to all generators that they must put in place controls to ensure that their bid prices are set in a way that ensures that they do not obtain excessive benefits during transmission constraint periods.
“If they fail to do so, they will face significant consequences.”
As part of the resolution of the investigation, SSE has committed to put in place a new pricing methodology designed to properly reflect the costs and benefits to SSE of reducing its generation at Foyers.
SSE co-operated and engaged constructively during the investigation and by settling this investigation early, the company has qualified for a discount compared to the £11.58m it would otherwise have been required to pay.
Typically, when managing a transmission constraint, NGESO will only have a limited number of alternatives available to it.
This creates a risk that generators could exploit their position by charging the NGESO excessive prices to reduce their output.
This investigation is part of the ongoing compliance work undertaken by Ofgem to ensure that the market is fair for everyone.
Ofgem expects licensees to be fully aware of their legal obligations (including compliance with the TCLC) and have adequate procedures in place to prevent breaches from occurring.
Any written representations or objections to Ofgem’s proposal must be received no later than 27 June 2023 and will be considered prior to Ofgem reaching its final decision on whether to impose a penalty on SSE.