Compliance of Beatrice Offshore Windfarm Limited with the TCLC
Decision
Publication date
Company
Industry sector
Generation and Wholesale Market
Following a period of compliance engagement with Ofgem, Beatrice Offshore Windfarm Limited (BOWL) has accepted that it breached condition 20A of the Electricity Generation Standard Licence Conditions (known as the Transmission Constraint Licence Condition, or TCLC). As an alternative to Ofgem opening a formal enforcement investigation into the matter, BOWL has made immediate changes to its bid pricing policy and agreed to make a payment of £33.14 million into the redress fund.
A transmission constraint is defined in the TCLC as any limit on the ability of the national electricity transmission system, or any part of it, to transmit the power supplied onto the system to the location where the demand for that power is situated. In order to manage transmission constraints, the electricity system operator (ESO) routinely uses the balancing mechanism (BM) to increase and decrease the amount of electricity produced by different generators.
Typically, when managing a transmission constraint, the ESO will only have a limited number of alternatives available to it. This creates a risk that generators could exploit their position by charging excessive bid prices to reduce their output in constraint periods. The TCLC prohibits them from doing so.
BOWL is the owner of the 588MW Beatrice offshore wind farm in northern Scotland. The unit is located behind several key thermal transmission constraint boundaries, and since 2021 has regularly had bids accepted in the BM to reduce its output and to ensure that the relevant transfer limits are not exceeded.
BOWL holds an Investment Contract (an early form of the Contract for Difference (CfD)), guaranteeing it a fixed level of income for the power that it generates. Where wholesale power prices are below the relevant “strike price” and intermittent CfD units like Beatrice receive instructions from the ESO to reduce their output, the generator loses the subsidy top up that it would otherwise have received under its CfD. Typically generators seek to pass this additional cost of being curtailed through to the ESO via the bid prices that they submit in the BM, to ensure that they are not left worse off as a result of having a bid accepted.
Conversely, 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. This became an increasingly common occurrence in the second half of 2021 and across 2022, as wholesale prices reached historic highs. Where such avoided repayments are not factored into bids, this will result in the generator receiving an additional benefit from being curtailed.
In light of concerns around BOWL’s approach to bid pricing in periods with high wholesale prices, we initiated a review looking at whether BOWL was likely to have received an excessive benefit from reducing generation during transmission constraint periods as a result of the bid prices the licensee submitted in the BM. Our review identified some significant concerns, in particular:
- In the period, BOWL placed a cap on its bid prices – ie a minimum amount that it would charge the ESO for a reduction in generation in £/MWh, irrespective of the costs or benefits of having a bid accepted. The effect of this cap was that, when wholesale prices rose, BOWL was able to capture a large part of the avoided repayments to the Low Carbon Contracts Company (LCCC), rather than passing those savings back to consumers via less expensive bid prices (and so, ultimately, reduced balancing charges). This led to a substantial profit for the generator in financial years 2021 and 2022.
- 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. In particular, the non-marginal cost component of BOWL’s bid prices was set by benchmarking against the bid prices of other generators, without any attempt made to estimate the current or future costs that were actually being incurred as a result of curtailment. BOWL has submitted that in its view estimating these costs was not possible at the time given the limitation of available data and that it was therefore necessary, in BOWL’s view, to use comparable generator analysis to seek compliance with the TCLC. While we recognise that the company may have legitimately faced some uncertainty around the costs of reducing its output – especially in the period immediately following commissioning – in our view this should not have prevented it from making any attempt to estimate its incurred and expected costs using the information that was available to it in the period; and
- That BOWL did not give meaningful consideration to its compliance with the requirements of the TCLC, or to document the limited consideration that it did give its compliance with these requirements.
Had BOWL submitted bid prices in the period which were fully reflective of the avoided repayments to the LCCC where it was curtailed due to a transmission constraint, we consider that this would have led to substantively lower balancing costs for consumers. As was the case in our similar review into the conduct of Dorenell Windfarm Limited, it is possible (and BOWL has submitted) that under certain conditions this could also have caused Beatrice to be curtailed ahead of thermal generation, which could in principle have created economic inefficiency and led to negative environmental consequences (in that demand would then have been met by a lesser amount of renewable energy). Work is ongoing to consider a modification to the Balancing and Settlement Code which is related to potential distortions in the merit order arising from the interaction between the design of the BM and the CfD scheme.
BOWL has co-operated fully with Ofgem in its enquiries, and sought to resolve the matter quickly once informed of our concerns. This includes making immediate changes to its bid pricing policy, and agreeing to make a payment into the consumer redress fund. BOWL has told Ofgem that in its view the breach was inadvertent and that at the time of submitting the bid prices, it had considered that it was compliant.
In light of the extent of the consumer detriment and financial gain that we consider BOWL’s approach to bid pricing is likely to have given rise to, we have required as a condition of the matter being resolved without formal enforcement action that BOWL should make a payment of £33,140,000. The payment will be made to Ofgem’s consumer redress fund.
Taking into account BOWL’s acceptance of the breach, the steps it has taken to avoid future reoccurrence of a breach and the redress it has agreed to pay, Ofgem has now closed this matter without the need for a formal enforcement action under the Electricity Act 1989, in line with the “Alternative Action” process described in our Enforcement Guidelines.