Ofgem, the energy regulator in the UK, has accused power station owners of manipulating the system to gain excessive profits. In response, Ofgem has outlined measures to curb this practice. The investigation conducted by Ofgem revealed that some generators purposely withheld supplies to raise prices in the backup market, resulting in increased costs for consumers during the energy crisis. The costs associated with maintaining a balanced supply and demand reached record levels in November 2021, with the network operator National Grid spending £60 million in a single day. Throughout the winter of 2021-22, when demand is at its highest, these costs reached £1.5 billion, more than triple the average over the previous three winters.

Ofgem intends to address various behaviors that it has identified among certain generators, which seek to exploit existing rules for excessive financial gain at the expense of consumers. To achieve this, Ofgem proposes a new license condition that will prevent electricity generators from taking advantage of the current regulations to make excessive profits. Eleanor Warburton, Ofgem's acting director for energy systems management and security, explained that the new license condition will restrict generators' ability to profit and will include financial penalties for any breaches. Ofgem aims to implement these changes in time for the upcoming winter season.

The pressure on regulators, including Ofgem, to mitigate consumer costs intensified following calls from UK Chancellor Jeremy Hunt earlier this week. Ofgem justified its intervention by stating that it is necessary to prohibit behaviors that result in generators reaping excessive benefits, as these costs ultimately burden consumers. Although the watchdog did not disclose the names of the companies involved, a previous investigation by Bloomberg indicated that some traders at firms like Vitol, Uniper, and SSE would notify National Grid of plant shutdowns before periods of tight supply, only to restart them once they had secured higher prices for their power.

To ensure a balance between electricity supply and demand and avoid blackouts, National Grid employs the "balancing market" to incentivize generators to switch on or off at short notice. Ofgem found instances where generators informed National Grid of their intention to switch off, only to offer to resume operations at higher prices in the balancing market, a situation that the network operator had little choice but to accept.

SSE stated that it fully complies with the rules, while Vitol declined to comment but previously emphasized that its VPI power business adheres to all relevant regulations and fulfills commitments to deliver power to the grid. Uniper did not respond immediately to requests for comment.

Adam Bell, head of policy at energy consultancy Stonehaven, explained that Ofgem could potentially request generators to return some of the excess profits earned through the balancing mechanism. However, beyond that, Ofgem possesses limited enforcement power. Bell noted that while market reforms may be necessary, Ofgem's proposals run the risk of reducing companies' ability to provide energy supplies when needed. He acknowledged that the primary culprits in this situation were the ones exploiting the system, but finding a straightforward solution is challenging, as these proposals may also remove legitimate behaviors.

Energy UK, the trade group, has expressed differing opinions among generators regarding support for the proposed license condition. Some are concerned that it could distort the market and harm investment. The Department of Energy has voiced support for Ofgem's actions to safeguard consumers and encouraged the regulator to utilize all available powers to take further steps if necessary.