An investigation by UK energy regulator Ofgem has found that SSE Generation Ltd breached its licence after securing excessive payments from National Grid ESO in exchange for reducing output at Foyers pumped storage power station – during periods of the so-called ‘transmission constraint’.
As a consequence, on 6 June Ofgem proposed to require the company to pay £9.78 million into the Energy Redress Fund
Where constraints on the transmission system exist, NGESO will take action to manage flows across the network, including using the balancing market to increase and decrease the amount of electricity produced by different generators.
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. The Transmission Constraint Licence Condition (or TCLC) prohibits them from doing so.
In October 2021, Ofgem opened an investigation into SSE’s compliance with the TCLC in relation to Foyers pumped storage power station. Ofgem 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, however Ofgem considers that it should have been clear to SSE senior management that its revised approach carried a significant risk of breaching the TCLC. 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.