Traders have the upper hand when demand is high and insufficient renewable capacity exists.

The strategy sounds straightforward: pay up or go dark. Some traders have taken a somewhat less collaborative approach to the energy issue this winter when hundreds of thousands of British households read by torchlight to cut electricity usage during peak hours.

Both the government and the opposition have demanded an investigation into Bloomberg News‘s claim that certain traders at firms such as Vitol, Uniper, and SSE claimed they would shut down power plants ahead of periods of tight supply, only to restart them and produce more expensive power for the UK national grid via the “balancing mechanism” used to prevent blackouts.

This tactic, known as an off-on manoeuvre, is not novel. 

Since 2021, when prices began to rise, the escalating cost of balancing mechanisms has been a source of concern. In November 2021, National Grid ESO, which manages the energy grid, identified “very high-cost days” — for which customers eventually pay — and initiated an investigation.

It is also not against the law. There are various reasons why power plants shut down, often with little notice. The regulator, Ofgem, has described this as a “sharp” practice instead of a more severe one.

But its February consultation on adding a licence condition “prohibiting electricity generators from gaining excessive benefit from inflexible offers in the balancing mechanism” suggests that it believes that some market participants have reaped windfalls by gaming the current system in recent years.

The ESO and Ofgem review did not uncover “specific evidence” of rule violations. 

However, the underlying data would only sometimes provide evidence of questionable conduct. “It is very difficult to distinguish between a fake maintenance outage and a real one,” a market analyst said of a common reason for a plant’s shutdown. “This is sloppy conduct. It is unbecoming. But I am uncertain of your options unless you can place an inspector in each power plant.”

Price surges are a feature of the current market rather than a flaw. The balancing mechanism is intended to stimulate the addition of generating capacity to the grid during peak demand. When there were energy shortages across Europe, the interconnectors on which the UK relied for energy security failed. More renewable energy on the grid results in periodic power outages.

When it’s gloomy and the wind stops blowing, some generators can generate substantial returns, which is part of the agreement.

SSE, which claims to “fully comply” with all rules, has recently commissioned a new gas plant in North Lincolnshire. Vitol’s power firm VPI, which claims to “comply with all applicable regulations and fulfil any commitments to deliver power to the grid,” has lately grown in the UK market, purchasing four power plants from Drax in 2020 and constructing three more. Uniper declined to comment in response to a request.

The governing body is evaluating its regulations and the bar for taking enforcement action, as it should. But the demands of the shift to cleaner energy will also necessitate reevaluating who provides the backstop for our power needs when sources are in short supply: the UK’s pipeline of battery storage projects has grown enormously, partly due to the pricing signals given in times of scarcity.

It also highlights a common trend in the current energy market: the necessity for massive investment and, equally as crucial, the ability to get things done. 

This necessitates increased generation and a modern, adaptable electricity grid to meet fluctuating demand. “These are substantial physical assets, and upgrading them is not simple,” explained energy analyst Peter Atherton. Then, planning a new line across a rural location takes ten years, and the grid needs dozens of them.

This week, the government will unveil its plan to increase the nation’s energy security and assist it in fulfilling its carbon reduction goals. Reform planning is essential for rapid advancement towards a more robust system. It appears unlikely to occur.