This week Ofgem, the energy regulator for Great Britain, announced (click here) a significant action against Beatrice Offshore Windfarm Limited (BOWL) for breaching condition 20A of the Electricity Generation Standard Licence Conditions (commonly referred to as the “TCLC”) for bidding behaviour in the Balancing Mechanism (BM) in the GB power market specifically in relation to the Contract for Difference (CfD) arrangements established for renewables generators.
BOWL is the owner of the 588MW Beatrice offshore wind farm in northern Scotland to which this action by Ofgem relates. This follows in a long line of similar actions taken by Ofgem, the most recent being this one in March against Dorenell Windfarm Limited, also a large windfarm located in Northern Scotland. Notably, Ofgem have again applied the passive “non-investigation” label to this case lauding full cooperation, lack of intent while concluding with the voluntary transfer of a large sum of money to Ofgem’s redress fund.
The facts of the case that can be gleaned from Ofgem’s Decision are summarised below:
- BOWL holds an Investment Contract (an early form of the CfD arrangement), guaranteeing it a fixed level of income for the power that it generates;
- Under this arrangement, where power prices are below the “strike price” and intermittent units like BOWL receive instructions from the system operator (SO) to reduce their output (i.e. curtailment), the generator loses the subsidy top up that it would otherwise have received under its CfD;
- The BOWL windfarm is located behind several key thermal transmission constraint boundaries;
- Since 2021 BOWL has regularly had its bids accepted in the BM to reduce its output and to ensure that the relevant transfer limits are not exceeded;
- Generators typically seek to pass the additional cost of being curtailed through to the SO via bid prices submitted in the BM to help ensure that they are not left worse off as a result of having a bid accepted;
- The opposite applies when prices are above the strike price - where CfD units have a bid accepted and wholesale power prices are above the strike price, generators continue to receive income for the power that they would have produced if they had not been curtailed, but no longer have to make a repayment under the CfD scheme;
- The above practice became a common occurrence in the second half of 2021 and over 2022 when wholesale prices were historically high - where such avoided repayments were not factored into bids, this resulted in the generator getting additional benefit from being curtailed;
- Ofgem initiated a review of BOWL’s bidding practices for the period of high prices to determine whether they received excessive benefit from reducing their generation during periods of grid constraint and their concomitant bids to the BM;
- Ofgem noted several concerning practices:
- BOWL placed a cap on its bid prices irrespective of the costs or benefits of having a bid accepted – this meant that when prices rose, BOWL was able to capture a large part of the avoided repayments to the Low Carbon Contracts Company (LCCC) under the CfD-like contract (instead of passing the savings back to consumers via less expensive bids);
- BOWL’s approach to estimating the costs it expected to incur when it had a bid accepted carried a risk of it recovering more revenue via its bid prices than was necessary to cover the costs incurred as a result of curtailment – the non-marginal cost component of their bid prices was set by benchmarking against the bid prices of other generators and no attempt was made to estimate the current or future costs that were actually being incurred from curtailment;
- BOWL did not give “meaningful consideration” to compliance with the requirements of the TCLC and they did not document the (limited) consideration that it did give.
- Ofgem claim that had BOWL submitted bid prices fully reflective of the avoided repayments to the LCCC where it was curtailed, it would have led to lower balancing costs for consumers;
- In mitigation, Ofgem acknowledge that this approach could also have caused BOWL to be curtailed ahead of thermal generation creating economic inefficiency and resulting in negative environmental consequences. As such, a modification (click here) to the Balancing and Settlement Code (BSC) was in flow to address such distortions (a point also acknowledged in the Dorenell Windfarm case);
- Ofgem note that BOWL co-operated fully with Ofgem including making immediate changes to its bid pricing policy and agreeing to make a payment into the consumer redress fund;
- Ofgem, as for the Dorenell case, resolved the case without formal enforcement action on agreement that BOWL part with GBP 33,140,000….
Other recent cases from Ofgem involving BM bidding practices include Drax Pumped Storage Limited in January 2023 where £6.12 million was paid (click here), SSE Generation Limited in July 2023 where £9.78 million paid was paid (click here) and EP SHB Limited in December 2023 where £23.63 million paid (click here).