Beatrice Offshore Windfarm Limited (BOWL) has agreed to make redress of £33.14 million after accepting that it breached energy market rules. BOWL also made immediate changes to its bid pricing policy.
The electricity system operator uses the balancing mechanism (BM) to ensure supply matches demand but it has limited options when there is a transmission constraint. This creates a risk that generators could exploit their position by charging excessive bid prices to reduce their output in constraint periods. This is prohibited by a licence condition.
BOWL’s 588MW Beatrice offshore wind farm is 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 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.
BOWL now accepts Ofgem’s position that its approach was not compliant with the relevant licence condition, but said that in its view the breach was inadvertent and at the time of submitting the bid prices, it had considered that it was compliant.
Ofgem said the company may have legitimately faced some uncertainty around the costs of reducing its output, but that 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