On 16 July, the GB energy ministry DECC announced its
decision on a Transmission Constraint Licence Condition
(TCLC), intended to prohibit generators from exploiting
periods when there are transmission bottlenecks. The
TCLC is now before Parliament for approval, and the
intention is that it should come into force on 29
October. The drafting of the TCLC leaves a number of
important issues unclear, but market participants must
wait until the TCLC comes into force for Ofgem’s revised
guidance.
The Energy Act 2010 gave DECC
a power to impose a condition in generators' licences, limiting their ability to
exploit periods when there is insufficient capacity to transmit electricity from
where it is generated to where it is consumed. During such periods, National
Grid, as system operator, must balance the system by paying generators to
increase generation, or accepting a payment from them or paying them to reduce
generation (to be “constrained off”). In some situations, National Grid has been
required to pay significant sums to generators to do this. These costs are
ultimately borne by consumers. The energy regulator Ofgem has long been
concerned about this situation, suspecting that some generators have even sought
to create or exacerbate transmission constraints. It has unsuccessfully
attempted to use its competition law powers to address this type of conduct.
DECC considers that a specific licence condition will also give greater clarity
than tools such as the Regulation on Wholesale Energy Market Integrity and
Transparency, REMIT. In December 2011, DECC consulted on a proposal to exercise
its power to impose a licence condition, and Ofgem consulted on proposed
guidance on the enforcement of the condition.
The proposed licence
condition will prohibit 2 types of conduct:
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Where a generator creates or exacerbates a transmission
constraint by deciding to generate or not to generate with a particular plant
when it had more economic options available to it, and then seeks or charges an
excessive price for reducing or increasing generation in the Balancing Mechanism
(BM), from its notified position; and
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| • |
Where a generator exploits a period of export transmission
constraint (where there is more generation within an area than can be
transmitted out of it) by paying or bidding to pay excessively low amounts to
reduce its generation, or by being paid or seeking to be paid excessively high
amounts (ie. negatively-priced bids) to reduce generation. It should be noted
that there is no comparable prohibition on excessive pricing during period of
import constraints.
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DECC decided not to proceed
with its proposal to include in the TCLC the charging of excessively high
amounts for the arming of inter-trips - devices allowing National Grid to trip a
generating plant off the transmission system automatically.
Although the final version of
the TCLC makes a number of improvements to the wording of the consultation
draft, some of the deficiencies remain. For example, the TCLC continues to treat
as the creation or exacerbation of a constraint the despatch or withholding of
generation when the licensee had more economic options available to it –
irrespective of whether those other options would also have created or
exacerbated the constraint. In addition, the drafting does not reflect entirely
accurately a number of the technical definitions relating to the operation of
the BM and transmission constraints.
DECC explains that Ofgem will
issue revised guidance on the date on which the TCLC comes into force. Given the
lack of certainty in the TCLC itself on a number of key issues, including the
question of when a price is “excessively” high or low, it is unsatisfactory not
to have definitive guidance sooner.
Breach of the TCLC will be penalised
in the usual way, with Ofgem having the power to impose a penalty of up to 10%
of the licensee's turnover. However, in this case an appeal will lie to the
Competition Appeal Tribunal. The appeal will be a rehearing on the merits rather
than merely a review of the legality of Ofgem's decision.
Comment
The TCLC will impose
significant obligations on generators in constrained areas – currently mainly in
Scotland but potentially also in other areas as more generation is developed in
remote areas. Each dispatch decision will need to be carefully weighed against
other potentially more economic options, and bids will need to be priced
carefully by reference to avoidable costs. The practice of high-priced "sleeper
bids" will come under close scrutiny. One question that remains unanswered at
this stage, however, is whether the TCLC will have the unintended consequence of
deterring generators (in particular flexible generators) from bidding into the
BM at all, so as not to risk accusations of breaching the prohibition, and
thereby reducing the options available to the system operator to balance the
system.
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