From BBG today ...
"On the morning of Dec. 12, as plunging temperatures left poorer Britons struggling to heat their homes, traders for Vitol Group’s VPI Power Ltd. abruptly served notice that one of the London area’s largest power stations would begin turning off just after midday.
This change of plans left Britain’s power grid at risk of running low on electricity. But the traders had another offer on the table: They’d keep running their plant for as much as £6,000 ($7,340) per megawatt-hour, four times more than the regular market rate. With little choice, the grid operator paid up, an £11 million tab that was ultimately passed to UK consumers, many of whom are already contending with prices that have more than doubled in the last two years.
Traders at firms including Vitol’s VPI, Uniper SE and SSE Plc have frequently announced they would cut off electricity capacity — sometimes with just a few hours’ notice — ahead of the busiest evening periods. At the same time, they offered power from their plants in a special side market where they charged higher prices to meet the shortfalls they helped create. Traders dramatically increased their use of this practice — and the prices they charged — as the lifting of Covid restrictions and then Russia’s war in Ukraine brought turmoil to the UK electricity market, a Bloomberg News investigation has found. Current rules do not prohibit such off-on maneuvers.
An analysis of more than 100 million market records shows that firms rang up more than £525 million in inflated revenue using this practice between 2018 and 2022. Nearly 90% of that amount came in just the last two years. Plants controlled by VPI and Uniper together accounted for £321 million of the total.
The data analysis can’t account for why, on any individual occasion, a company acted in this way — and whether there were circumstances involved other than the pursuit of revenue. But in interviews, 13 current and former traders said that off-and-then-on-again supply-gaming is a widespread tactic that’s aimed at maximizing profit. A source familiar with VPI’s move on Dec. 12 said the firm raised its price in response to tight market conditions.
“Something is broken here,” said Fred Smith, the managing director of H&E Smith Ltd., a glazed tile manufacturer in the northern English city of Stoke-on-Trent. The firm has struggled with a 150% jump in its power costs as energy inflation hammers the UK economy. Around the time of VPI’s big payday in December, Smith was asking his 20 employees to take a week off work after Christmas to save on operating costs.
“We’ve got to get a grip on this,” said Smith, 62. “It’s extremely frustrating, and just plain wrong, that they are allowed to be getting away with it.”
The rules allow traders to turn power stations on and off — and to quote prices — as dictated by their commercial interests. Producers cannot submit “false or misleading signals” to the grid. But they are allowed to change their minds freely and make decisions solely based on profit, as long as they aren’t found to be dishonest about their intentions.
Ofgem has said it intends to ban power stations using these off-on tactics from charging “excessive” prices that lead to more than a “reasonable profit.” A final decision, after consultation with the industry, is expected in the summer. “We do not believe that any attempts by energy companies to exacerbate tight market conditions, whether intentional or not, are in line with consumers’ interests,” a spokesperson said. Ofgem said it has already seen a “notable reduction in year-on-year costs associated with this kind of manipulation” after sending multiple letters asking companies to stop deploying the maneuver.
Several traders told Bloomberg that this behavior was so widespread that they’d be putting their firms and themselves at a commercial disadvantage if they didn’t take part as well. One said that decisions to cut supply would usually require sign off from senior executives. The traders asked not to be named because the practices they described are controversial.
“This has been common practice from the very start,” said Chris Regan, a former power trading manager at Electricite de France SA, who is now the managing director at Brady Technologies, a software company that works with energy firms. “If Ofgem wants people to stop doing it then it needs to change the rules.”
A series of plant closures in the last decade left the grid with fewer options when demand peaks or wind speeds fall, constricting supply from renewables. This limited capacity gives outsize market power to large plants that are willing and able to tell grid operators they’re cutting off electricity. On exceedingly tight days like Dec. 12, they can largely name the price they’ll receive to keep generating."
Post edited at 12:21