Last month, Ofgem updated its Transmission Constraint Licence Condition guidance. In this article, we will cover the key updates whichlicenced generators (including battery storage asset owners) and third parties submitting balancing mechanism bids on behalf of licenced generators (including battery optimisers) should now consider.
The Transmission Constraint Licence Condition
Constraints occur when the electricity transmission system is unable to transmit power from the location of its generation to the location of electricity demand, due to congestion at one or more parts of the transmission network. The electricity system operator (ESO) is tasked with balancing the electricity system and with managing constraints.
The ESO achieves this through a number of mechanisms, the key one being the centralised balancing mechanism (BM) whereby market participants submit bids and offers to reduce or increase generation or demand to balance the system and manage constrains.
The regulatory regime recognises that generators in particular areas can hold significant market power in relation to constraints in those areas. This is because the ESO may have limited options to manage the constraint other than reaching an agreement with a particular generator to increase or reduce its planned output.
Standard licence condition 20A of the electricity generation licence – the Transmission Constraint Licence Condition (TCLC) – exists to prevent licenced generators from abusing this position of elevated market power during transmission constraints. The TCLC prohibits licensees from submitting balancing mechanism bids during transmission constraint periods at a level that would obtain an excessive benefit for the generator if accepted by the ESO.
Transmission constraint periods have become more common in recent years due to the changing generation mix, which is becoming more diverse, both in terms of location of assets and technology type. Failure to comply with the TCLC can lead to significant financial penalties for generators (often multi-million-pound payments to the Ofgem consumer redress fund).
Ofgem publishes guidance to help licensees understand their obligations under the TCLC and Ofgem's approach to enforcement. This guidance was last updated in 2017. Following a consultation in December 2023, last month Ofgem published its decision to update the TCLC guidance. The updated guidance, along with a version that shows a comparison to the previous version, is available to view on Ofgem's website.
The updated guidance provides a greater level of detail in terms of Ofgem's expectations in terms of TCLC compliance. However, it's important to note that the TCLC itself remains unchanged.
Scope of the TCLC
Although already clear from the TCLC itself, a footnote has been added to the updated guidance to clarify that the TCLC applies to all licenced electricity generators (including storage operators with a generation licence).
Party responsible for compliance
The updated guidance makes clear that the generation licensee is the party ultimately responsible for compliance with the TCLC, even if balancing mechanism bids are submitted by a third party (e.g. a battery storage optimiser). Although already common practice, generators should ensure that their contracts with relevant third parties contain an obligation to comply with the TCLC. This will usually be covered by a wider obligation to not cause the generator to be in breach of its licence conditions or applicable law.
REMIT
The guidance reminds market participants that (separate from the TCLC) Article 5 of REMIT (Regulation on Wholesale Energy Markets Integrity and Transparency) prohibits wholesale market participants from engaging in or attempting to engage in market manipulation. Updates have been made to emphasise that the prohibitions under REMIT are broader than the TCLC and extend to a wider range or market participants (i.e. they are not limited to licensed generators).
Visibility of transmission constraints
There is no requirement under the TCLC that a generator must know that a constraint exists in order for the obligation that it should not obtain (or seek to obtain) an excessive benefit to apply. But, where a breach is found, one factor that Ofgem will typically have regard to when considering whether a penalty is appropriate (and the level of any such penalty) is whether a party could reasonably have been expected to anticipate that a transmission constraint period was likely to have been in effect.
The updated guidance adds a footnote to make clear that Ofgem's assessment of whether a licensee could reasonably have been expected to anticipate that a transmission constraint period was likely to have been in effect will depend on the circumstances of the case. The footnote also states that the Ofgem assessment will generally include an analysis of the information that was available to the generator at the time, as well as the steps taken by the generator to seek out and understand whether it was likely to be bidding in relation to a transmission constraint period.
The costs and benefits of being bid down
A primary consideration in Ofgem's assessment of whether a bid breaches the TCLC is the costs and benefits incurred (or expected) by the generator as a result of having its bid accepted.
A non-exhaustive list of potential costs and benefits that may be taken into account is set out in the guidance. The updated guidance adds some additional details, as well as some new examples of potential costs. The new cost examples include:
- particular costs or risks arising from specific engineering issues, such as where a unit is in a testing or commissioning phase;
- for accredited intermittent sites, any opportunity costs associated with foregone Renewable Energy Guarantees of Origin certificates; and
- for thermal sites, costs associated with the lower efficiency of running at lower levels of output.
The Ofgem decision stated that one respondent to the consultation noted that batteries providing frequency response may submit very expensive bid prices to ensure that they have sufficient volumes to provide the contracted service and that such bids are not intended to be accepted (and so should not be treated as subject to the TCLC). The decision makes clear that such bids will be subject to the TCLC. The guidance has been updated to make clear that there may be occasions where the cost to a generator of a bid acceptance is very high, and that in such circumstances the bid should still be cost-reflective.
Profit/contribution to indirect costs
As well as taking into account the costs and benefits of being bid down, the TCLC allows generators to seek to recover a reasonable level of profit and/or contribution to their indirect costs via their bid prices.
The guidance has been updated to acknowledge that generators may face significant uncertainty about bid acceptance volumes – both with respect to the volume of bids that the generator will have accepted in transmission constraint periods, and the volume of bids it would have had accepted in those same periods if it were not subject to a transmission constraint. The updated guidance acknowledges that this can create challenges for a generator when putting in place a bid pricing policy which places controls on the profit / contribution to indirect costs. Ofgem has clarified that it will take this uncertainty into account in its assessment of compliance with the TCLC.
The guidance has also been updated to clarify that Ofgem does not expect a generator to price bids at a loss in order to compensate for a previous temporary over-recovery arising as a result of bid volumes exceeding the expected level (just as it would not expect generators to price bids at a higher profit margin in order to compensate for a previous temporary under-recovery arising as a result of bid volumes coming in under forecast). However, Ofgem does expect licensees to base any forward-looking assumptions they make around bid acceptance volumes on an appropriate and well-evidenced methodology, and to keep bid acceptances and the profits obtained in transmission constraint periods under close review.
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