On 12 December 2016, Ofgem published an open letter regarding scarcity pricing, reminding stakeholders of the importance of adhering to their legal obligations in the wholesale energy markets, in light of concerns raised with Ofgem regarding certain behaviours that may be taking place within the market.
Ofgem recognises that pricing will reflect scarcity and price rises should encourage investment in production or a demand side response which will benefit future energy consumers. REMIT and other rules of market conduct are not intended to interfere with the proper application of market forces and do not prohibit prices rises linked to scarcity.
However, in accordance with the Grid Code, Physical Notifications to the National Grid regarding available capacity and planned output must represent a “best estimate” of the relevant expected input or output and comply with good industry practice which requires “the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected from a skilled and experienced operator engaged in the same type of undertaking under the same or similar circumstances”. Submitting misleading Physical Notifications or other physical parameters has the potential to give rise to a breach which may attract enforcement action or a criminal prosecution.
Whilst Ofgem is yet to take any enforcement action against market participants for a breach of REMIT, the letter is a reminder that Ofgem is monitoring the market and may investigate suspicious conduct by individual market participants which may lead to the imposition of significant sanctions.
View Ofgem letter on scarcity pricing and conduct in the wholesale energy market, 12 December 2016