Clifford Chance

A recent Bloomberg investigation has once again shone the light on practices in Great Britain's wholesale electricity market, however Ofgem's response is indicative of the challenges that exist in taking enforcement action against market participants.

Much political comment has been made over the past week on a recent Bloomberg investigation into practices in the balancing mechanism, a crucial part of Great Britain's wholesale electricity market that enables the electricity system operator to balance electricity supply and demand.

The investigation found that the use of "off-on" manoeuvres by generators, whereby a generator notifies the system operator that they will be turning off a power station, only to simultaneously offer to keep it on in return for above market price payments in the balancing mechanism, was on the rise.

In response, a spokesperson for Prime Minister Rishi Sunak described the practice as "clearly completely unacceptable", stating that Ofgem was "urgently looking into" the matter further. Similarly, Labour's Ed Miliband has called for Ofgem to "urgently investigate" the practice.

Conduct of market participants in the balancing mechanism has long been a subject on Ofgem's radar. In April 2020 InterGen was required to pay £37m in penalties and redress payments in relation to conduct that bore many similarities with that highlighted by Bloomberg's investigation, with Ofgem finding that it had breached the market manipulation prohibition found in Article 5 of REMIT, along with relevant provisions of its electricity generation licences. Subsequently, EDF Energy (in December 2020) and ESB (in August 2021) both agreed to make payments of £6m to Ofgem's voluntary redress fund in relation to REMIT and licencing breaches regarding data submitted to the electricity system operator.

It is clear, however, that Ofgem has faced evidential challenges in taking action. Following investigative work undertaken in relation to high balancing costs experienced in winter 2021, Ofgem stated that it found "no conclusive evidence" of market participants breaching their legal or regulatory obligations, however Ofgem remained concerned "that evidence showed behaviours of some generators that appear to be immoderate".

One of the primary potential grounds for enforcement would be a breach of REMIT for submitting false or misleading data to the electricity system operator. However, there is nothing to stop generators changing legitimately-held intentions at short notice due to commercial considerations, as long as the data they submit to the system operator is updated to reflect these changed intentions. Evidential difficulties therefore exist in demonstrating that data submitted at any given point in time was false (i.e., contrary to the data submitted, there was always an intention to generate or not to generate), rather than merely reflective of a genuinely held intention at the time that subsequently changed.

It is perhaps for this reason that, rather than pursue further enforcement actions, Ofgem has chosen to address the perceived issues in the market (which it has described as "sharp practices", rather than conduct constituting legal or regulatory breaches) by proposing that a new licence condition is introduced that will prohibit generators from obtaining "excessive benefit" from offers in the balancing mechanism when their units are operated inflexibly in a manner that limits their responsiveness to market and system conditions.

It remains to be seen, however, whether it is sustainable for Ofgem's primary focus to be on revising the licencing regime, or whether the recent public and political scrutiny of the market will force Ofgem to tackle some of the evidential challenges that it faces and also pursue an enforcement-led response. Regardless, the one certainty is that, in the current climate, market participants can expect far greater scrutiny of their actions than they have received previously.