Ofgem closes its compliance engagement with Drax Pumped Storage Limited in relation to a breach of the Transmission Constraint Licence Condition (TCLC)
Penalty notice
- Publication date
- Company
- Drax Pumped Storage Limited
- Industry sector
- Generation and Wholesale Market
- Licence type
- Electricity Generation Licence
This compliance engagement related to excessive payments Drax secured from National Grid Electricity System Operator (‘NGESO’) in the Balancing Mechanism (‘BM’). Ofgem considers that Drax obtained the payments by submitting excessively expensive bid prices to curtail its generation during times of transmission constraint, with the effect of increasing balancing costs which are ultimately borne by consumers. The Transmission Constraint Licence Condition (TCLC) prohibits such behaviour. Drax has admitted to inadvertently breaching the TCLC, and has cooperated fully with the Authority. The Authority 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. As such Drax has informed Ofgem that it has implemented a revised bid pricing methodology [1] designed to ensure that any such breaches do not happen again, and agreed to pay £6.12 million to the Voluntary Redress Fund.
Between 1 January 2019 and 31 July 2022, Ofgem considers that Drax submitted excessively expensive bid prices in the BM to curtail generation at its Cruachan pumped storage power station in Argyll and Bute, Scotland. Bid prices are the amount in pounds per megawatt hour that a generator is willing to pay (if positive) or be paid (if negative) by NGESO in the BM to turn down its generation when needed to help balance the transmission system. Cruachan regularly operates in periods in which a transmission constraint occurs due to its position behind a number of key thermal constraint boundaries in Scotland and Northern England. This is particularly the case in periods of high wind generation in Scotland.
Ofgem considers that during the period in question Drax regularly had system flagged bids accepted for Cruachan at negative prices in transmission constraint periods [2], often at a price of around -£60/MWh. In Ofgem’s assessment, the negative bids submitted by Drax were excessively expensive because they did not adequately reflect the necessary costs incurred and benefits accrued by Drax in curtailing its generation at Cruachan. These prices were noticeably lower than the bids historically submitted for Cruachan prior to 1 January 2019, when Drax took ownership of the power station.
The TCLC was first implemented by Ofgem in 2012 in response to increasingly high transmission constraint costs. Following consultation, in May 2017 Ofgem decided to make the TCLC a standard condition of the generation licence, implementing it as Standard Licence Condition 20A.
The objective of the TCLC is to protect against the exploitation of market power by generators operating behind transmission constraints. Transmission constraints routinely lead to electricity generators in particular areas or in some instances with particular characteristics, holding a position of market power in a given settlement period, with the ESO having limited options to manage the constraint other than reaching an agreement with the generator to curtail their planned output. If generators were free to take advantage of this market power in their agreements with the ESO, this would increase balancing costs (which are ultimately passed onto consumers) and create harmful incentives regards future generation investment.
The TCLC requires that generators must not obtain an excessive benefit from electricity generation in relation to a Transmission Constraint Period. In practice, this means that – where a transmission constraint occurs, and where the generator intends to export power (thereby making that constraint worse) - generators must not submit bid prices in the Balancing Mechanism at a level which would result in them obtaining an excessive benefit, were that bid accepted by the NGESO. A Transmission Constraint Period is any period when there is any limit on the ability of the transmission system, or any part of it, to transmit power from the location it is supplied to the location where demand is situated.
In Ofgem’s assessment Drax received excessive payments from NGESO, in relation to numerous Transmission Constraint Periods between 1 January 2019 and 31 July 2022. Consequently, Ofgem considers that Drax has breached the TCLC.
Drax has co-operated fully with the Authority and has admitted that the breaches occurred, but maintains that they were inadvertent and were not motivated by the intention to obtain an excessive benefit. Following compliance engagement with Ofgem, Drax has agreed to pay £6.12 million to the energy redress fund. Drax has also informed Ofgem that it has implemented a revised bid price methodology designed to properly reflect the costs and benefits of Cruachan being bid down, and to prevent future breaches.
Taking into account Drax’s admission of the breaches, the steps it has taken to avoid future reoccurrence and the redress it has agreed to pay, Ofgem has now closed this matter without the need for a full investigation. This compliance engagement sends a strong signal to all generators that they cannot obtain or seek to obtain excessive payments in the BM during times of transmission constraint and when this happens Ofgem is willing to take a strong position to tackle such behaviour.
[1] Drax has explained the purpose of the revised methodology to Ofgem. For the avoidance of doubt, Ofgem does not approve generators’ bid price methodologies. Regardless of the methodology used, generators have the ultimate responsibility to ensure that bid prices are not excessive.
[2] Transmission Constraint and Transmission Constraint Period are defined in SLC 20A(9) of the Generation Licence.