In this alert, we provide a summary of the recent actions taken by the Office of Gas and Electricity Markets (Ofgem). In particular, this alert focuses on: (i) the recent REMIT fines Ofgem has imposed on energy suppliers; (ii) the latest developments relating to the Supplier Licensing Review (as also considered in previous client alerts1); (iii) the impact of COVID-19 on suppliers; and (iv) a reminder of some of the steps suppliers should be taking as part of their Brexit planning.
1. REMIT fines
There has been an increased incidence in recently reported enforcement activity issued under Regulation (EU) No. 1227/2011 (REMIT)2 by Ofgem. Ofgem is the National Regulatory Authority (NRA) for REMIT purposes in the UK and will continue to be so until 31 December 2020, which marks the end of the Brexit transition period (Transition Period).3 We consider below the impact of two recent fines issued by Ofgem for REMIT breaches.
Ofgem announced on 3 September 2020 that it had fined SSE £2.627 million for a breach of article 4 of REMIT.4 Article 4 of REMIT requires a market participant to publicly disclose inside information it has in respect of business or facilities it, or its parent or related undertaking, owns or controls, in a timely and effective manner.
Ofgem found that, although SSE did publish inside information, it did not do so in a timely manner. On 22 March 2016, SSE signed a non-binding heads of terms with National Grid in relation to Fiddler’s Ferry power station, in which it was agreed that the power station would provide ancillary services to National Grid from any of three available units which previously had been scheduled to close. SSE also made the decision to retain Transmission Entry Capacity equivalent to the capacity of the three available units.
SSE did not disclose this prospective arrangement to the market until 30 March 2016, the date on which the contract was executed and signed.
Ofgem found that, on 22 March 2016, the fact that SSE had signed a non-binding heads of terms, and had made the decision to retain Transmission Entry Capacity, was in itself inside information for the purposes of REMIT and should have been disclosed to the market.
Ofgem found that SSE’s delay consequently resulted in four days of trading without the market knowing that the power station was not going to close, which Ofgem concluded was likely to have led to some market participants paying more for wholesale electricity.
In recognition of the fact that SSE admitted to the breach, and agreed to settle the matter during the early settlement window, Ofgem discounted the fine by 30 per cent to £2.06 million.
This decision turned on the question of of whether the information was sufficiently ‘precise’ to be inside information, on which question ACER introduced new guidance in the fifth edition of its REMIT Guidance (8 April 2020). This case further underlines the tendency of regulators to adopt a broad interpretation of the term ‘precise’. This case has far reaching implications for market participants, who may need to ensure they make disclosure about transactions even while negotiations are ongoing. Firms also will need to ensure that early disclosure of deals which are not then concluded is not taken to have misled the market.
On 15 April 2020 Ofgem announced that it had fined power generation firm InterGen £37.2 million for breaches of article 5 of REMIT, which prohibits market participants from engaging in, or attempting to engage in, market manipulation on wholesale energy markets. The market manipulation occurred in respect of the GB Balancing Mechanism.5
Ofgem’s investigation concluded that InterGen engaged in market manipulation, on four days in October and November 2016, by submitting false or misleading ‘Physical Notifications’, which misrepresented its best estimate of expected generation for particular time periods to the system operator. These Physical Notifications falsely indicated that InterGen would not be generating at all during the high demand period of the 'Darkness Peak’ (from around 5 – 7pm), in order to induce the system operator to pay it to generate during this period. It was alleged that InterGen also deliberately sent misleading signals about its power plant capabilities, which required the system operator to purchase a higher volume of power in order to ‘extend’ the power stations to ensure they were available at the Darkness Peak.
InterGen was found to have made £12.8 million through its manipulation of the market. The company has been ordered to pay this amount in restitution to parties affected by its REMIT breach, and a financial penalty in the sum of £35 million (reduced to £24.5 million for early settlement) to Ofgem.
Although one cannot assume this is representative of Ofgem’s timeline from infraction to enforcement, it does show that (a) some matters still can take a long time to process, and (b) Ofgem’s field of vision extends some way still into the past.
2. Supplier Licensing Review
Following the introduction of stricter entry requirements for energy suppliers, in July 2019, Ofgem commenced a consultation in October 2019, setting out a proposed package of reforms to the ongoing requirements on suppliers and market exit arrangements for suppliers (October Consultation). In February 2020, Ofgem provided an update on the timing and next steps of this Supplier Licensing Review.6
Ofgem confirmed in this update that the approach to be taken to the majority of the Supplier Licensing Review proposals, including milestone assessments, fit and proper tests and independent audits, will remain unchanged. A statutory consultation, which will be the final opportunity for interested parties to comment on these reforms prior to their implementation, will have to take place. This had been due to take place in spring but was delayed. However, as a result of the responses received to the October Consultation, Ofgem will take a phased approach to introducing its cost mutualisation protection proposals. The cost mutualisation process is one in which a failed supplier’s consumer credit balances and unpaid contributions towards government schemes are required to be met by the remaining active energy suppliers. Ofgem’s cost mutualisation proposals are aimed at minimising those costs in the event of a supplier failure.
- The first phase will seek to introduce a high-level principle, to encourage suppliers to take action to mitigate the extent of costs required to be mutualised in the event of a supplier failure. These will be delivered alongside the wider reforms in the statutory consultation.
- The second phase will build on the proposals set out in the October Consultation to introduce specific requirements on suppliers to put in place protections for costs that would otherwise be at risk of mutualisation. Ofgem has said it will carry out a further consultation in the summer of 2020 in respect of the second phase of reforms.
Ofgem has noted stakeholder concerns that any implementation period should be long enough to allow suppliers to adapt their business models and financial arrangements. Suppliers should, however, take steps to factor in these changes to their business plans going forward, in order to ensure they are prepared once the reforms come into force.
Suppliers should also note that the Department for Business, Energy and Industrial Strategy is considering whether changes should be made to the Renewables Obligation Scheme. Any such changes may interact with the reforms being made to the cost mutualisation process by Ofgem.
3. Impact of COVID-19 on energy suppliers
In an open letter on 8 April 2020,7 Ofgem set out a regulatory framework in response to the COVID-19 pandemic, in order to provide suppliers with some flexibility given the difficulties of performing certain regulatory obligations during the pandemic, which were due to continue until 30 June 2020. From 1 July 2020, Ofgem announced that further regulatory ‘expectations’ on suppliers have been implemented in response to COVID-19.8
Ofgem has set out nine categories in which it has renewed or revised its expectations of suppliers. We have set out a summary of those new expectations below.
- Risk management and governance
Suppliers are expected to take steps to manage risks and to meet their obligations, including the obligation to deliver good customer service. Ofgem has highlighted the importance of minimising risks to business disruption and the associated risks of customer harm during the COVID-19 outbreak and any further peaks of infection. Suppliers should therefore take steps to prepare for several scenarios, including the possibility of further outbreaks later in the year.
- Customer debt management
Suppliers should continue to uphold the voluntary agreement with the Department for Business, Energy and Industrial Strategy, to assist vulnerable customers, and to continue to provide support to those customers. Ofgem does, however, recognise that suppliers cannot extend unlimited credit to customers and so anticipates that suppliers will begin to restart debt management activities that may have been paused over the last six months. Suppliers should, however, ensure that they give careful consideration to customers’ circumstances and ability to pay. Any failure to do so may result in enforcement action by Ofgem.
- Reactive customer communications
Suppliers should ensure that customers can easily contact them across a range of channels, and that customers continue to receive swift responses and resolutions to their queries. In particular, any backlog of complaints and queries as a result of COVID-19 should be dealt with as quickly as possible.
- Home and non-domestic site visits
Suppliers are expected to continue essential and emergency visits as well as restarting any non-essential work that was previously deprioritised. Suppliers also are required to take all reasonable steps to achieve the Smart Meter Installation Code of Practice objectives. As regards collecting meter readings, suppliers must take steps to engage with customers where possible to ensure accurate meter readings are provided to mitigate any impact on the accuracy of bills. In all circumstances, suppliers should ensure they are complying with government guidelines in respect of social distancing and general COVID-19 safety measures.
- Guaranteed standards
Ofgem had previously taken the view that the impact of COVID-19 on suppliers’ operations would represent “exceptional circumstances beyond suppliers’ control” and could be used as a legitimate reason for suppliers not to pay guaranteed standards compensation. Going forward, Ofgem considers that COVID-19 will no longer constitute exceptional circumstances in the majority of cases, and suppliers will likely now be able to meet the requirements under the guaranteed standards, including the standards that came into force on 1 May 2020.
- Regulatory reporting
Ofgem has plans to significantly reduce the scope and frequency of its weekly COVID-19 monitoring request for information (RFI) from suppliers, which it issued in April 2020 in order to monitor the steps suppliers were taking in response to the pandemic and the impact of COVID-19 on the industry. Ofgem has reduced the scope and frequency of this RFI in order to ease reporting pressures on suppliers and has put in place an updated, shorter COVID-19 monitoring RFI from August 2020. The expectation is that this form will remain in place until at least March 2021.
- Regulatory engagement
During the peak of the pandemic, Ofgem temporarily paused external engagement on a number of areas. In the coming weeks, Ofgem has confirmed it will look to recommence regulatory engagement, including policy development
Suppliers must facilitate switch requests and all associated processes. Suppliers should ensure they are able to provide good levels of customer service to their existing customers and be confident that acquisitions of new customers will not result in a decrease in the levels of customer service.
- E-serve scheme payments
Suppliers must continue to comply with their scheme payments, including Feed-in-tariffs, Renewables Obligations and Warm Home Discounts.
4. REMIT reporting in preparation for Brexit
Finally, market participants registered with Ofgem should ensure that they re-register with another NRA prior to the end of the Transition Period if they trade in wholesale energy products for delivery in any EU 27 Member State. As Ofgem will no longer be recognised as an NRA for EU REMIT purposes, market participants currently registered with Ofgem must re-register with an EU 27 NRA (and obtain a new ACER code) to ensure that they are able to continue reporting their orders and trades following the end of the Transition Period.