Energy companies have overcharged households and businesses up to £600 million by manipulating the electricity market, ministers have said.
By Rowena Mason, Political Correspondent 10:00PM BST 21 Aug 2012
The Government believes companies have been “profiting unfairly at the expense of [the] consumer” by overloading the national grid with electricity.
They are then able to claim “unduly high” compensation payments to switch their wind farms and power plants off when the system becomes too full.
Official estimates suggest that some companies have been over-claiming for up to five years at a cost of up to £125 million per year – the equivalent of £25 for every household in Britain.
Two of Britain’s biggest energy companies — Scottish Power and SSE, which supply energy to six million homes — have been investigated for alleged abuses by Ofgem, the regulator.
All bill-payers in Britain have to bear these extra costs, regardless of who their energy supplier is.
The scale of the alleged abuses comes after energy companies announced large profits at a time when households are struggling to pay record bills.
Charles Hendry, the energy minister, is planning to ban such “exploitative behaviour” by the owners of wind farms and gas and coal plants, after warnings from Ofgem that compensation payments are rising out of control.
New rules will go to consultation this autumn. They would force firms to surrender 10 per cent of turnover if they charge excessive compensation in future.
John Robertson, an MP on the energy committee, will write to the Department for Energy and Climate Change (DECC) demanding a full inquiry.
“This is a lot of money and consumers are having to pay for it,” he said. “There has to be some kind of retribution. If this has been happening, it is shocking and must be investigated.”
In 2009, Ofgem dropped the investigation into Scottish Power and SSE, the owner of Southern Electric, after concluding that the chances of a successful prosecution were “low”. The companies strongly deny breaking any rules.
However, the regulator still believes that some of Britain’s dozens of power companies have been able to manipulate the system for years without penalty.
According to Ofgem, the level of compensation payments has risen sharply over the past few years from £84 million in 2005 to around £325 million last year.
The problem has been made worse by vast numbers of new wind farms in Scotland, where the grid is regularly unable to cope.
Last year, some of the biggest compensation payments in the wind market went to Scottish Power, SSE and RWE npower.
Ofgem says power firms are able to “exacerbate or create” too much electricity for the grid to cope with in areas where capacity is limited, such as the border between England and Scotland. The power plants and wind farms are then able to claim compensation — constraint payments — for having to switch off their plants when the network becomes “unbalanced”.
Officials estimate the proposed ban on “exploitative behaviour” will reduce compensation levels by £300 million over the next five years. Energy UK, the body representing Britain’s energy firms, said: “Generating companies have contracts to fulfil and being ‘constrained off’ the system and unable to supply their customers can prove very expensive to them.
“That’s why they have to bid for what seem to be significant payments to be ‘switched off’. In the long run, the answer to these issues will be more investment in the network.” On Tuesday night, energy companies said they always act within the rules.
A spokesman for SSE said: “We have been working with the DECC throughout the consultation period and are confident that we have always been and will continue to operate within the given industry framework.”
A spokesman for ScottishPower said: “We’re looking forward to seeing the guidelines from Ofgem and don’t envisage having to make significant changes to what we’re doing.”
British Gas, E. ON, EDF and npower did not return requests for comment.
The DECC says constraint payments only add £4 per year to household energy bills, most of which is legitimate. The rest is footed by businesses, which will ultimately pass their costs on to consumers.