Videographer: Tom Skipp/Bloomberg

Consumers Foot the Bill for Traders ‘Manipulating’ UK Power Market

Power Plays

Some of the UK’s biggest energy companies have received £525 million from a practice that regulators say drives prices higher.

When the sun sets, Britain turns the lights on. Demand for energy peaks.

This is the time of day when the electricity grid is most under stress.

Power traders know this — and take advantage of the system. Consumers ultimately foot the bill.

Story by Gavin Finch, Jason Grotto and Todd Gillespie

Graphics by Sam Dodge

Published: March 22, 2023, 8:01 PM EDT | Updated: March 23, 2023, 2:22 PM EDT

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.

Bloomberg News is examining energy markets in the UK and elsewhere.
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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.

Fred Smith, managing director at H&E Smith Ltd. Photographer: Joanne Coates/Bloomberg

Source: Bloomberg analysis of data from the Balancing Mechanism Reporting Service

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.”

Tile workshop — Tile manufacturer H&E Smith Ltd. has seen a 150% jump in its power costs. Photographer: Joanne Coates/Bloomberg

Tiles dry — Tile manufacturer H&E Smith Ltd. has seen a 150% jump in its power costs. Photographer: Joanne Coates/Bloomberg

In response to detailed questions, most firms featured in this story provided brief statements saying they comply with regulations. VPI, which is majority owned by Vitol, one of the world’s largest private companies, “operates fully within the rules of the power market,” a spokesperson said. SSE, one of the UK’s largest renewables developers, said in a statement that it’s committed to investing “more than it earns in profits” to expand supply in the power market. Uniper did not respond to requests for comment.

The UK energy regulator, the Office of Gas and Electricity Markets, or Ofgem, has announced plans to tighten its rules. In a statement to Bloomberg, Ofgem said it intends to prohibit firms from “manipulating” the market by saying they’ll shut off their generators only to seek extra-high prices to fill the gap they helped cause.

On Thursday, a spokesperson for Prime Minister Rishi Sunak criticized the practices described in this article. “Ofgem is aware of this concerning behavior from a handful of participants involved and is urgently looking into it further,” the spokesperson said. “It’s critical that at all times consumers pay a fair price for their energy. So this practice is clearly completely unacceptable.”

The regulator has characterized these practices as “immoderate” and “sharp” and said they drive up prices. Following a surge in the grid’s payments for such maneuvers in late 2021, Ofgem conducted an investigation but said it found no “conclusive” or “clear” evidence of rule-breaking.

Note: Vitol’s VPI unit owns five power stations, four of which were purchased in early 2021; Uniper owns seven; and Seabank Power Ltd owns one. SSE co-owns Seabank.

Source: Bloomberg analysis of data from the Balancing Mechanism Reporting Service

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.

Read more from Power Plays, a series about the ways consumers lose on energy bills

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. In a separate statement Thursday, a spokesperson for the regulator said that it was not attempting to characterize any particular company’s behavior, but was describing its broader effort to push back against market abuse.

If Ofgem wants people to stop doing it, then it needs to change the rules.

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.

Simple line drawing animation of a kettle boiling water

On that day, traders at Vitol’s VPI unit made their move with Rye House, a gas-powered turbine station with three gray smokestacks looming over riverbanks in Hertfordshire, 19 miles outside central London. One person familiar with the firm’s strategy said traders were aware of a likely supply shortfall — due to a massive drop in wind power — and believed the extreme scarcity justified the price hike. Nevertheless, the £6,000 per megawatt-hour that it received was likely more than 15 times what it cost to produce the energy, according to estimates by industry consultancy EnAppSys Ltd.

Generators that use coal or gas need some leeway in the prices they charge. They sit idle when cheaper forms of renewable power are abundant but must be maintained and staffed so they’re ready to step in when wind is low or supply is otherwise disrupted. Without the ability to charge extra in those tight moments, there’s a risk that some plants may no longer be economically viable, constricting supply even further and potentially costing consumers more, said Phil Hewitt, director of EnAppSys.

Still, many coal and gas plants have made bumper returns during the past two years — and aren’t subject to the UK government’s windfall tax on energy companies. Vitol’s VPI unit owned only one gas generator until early 2021, when it bought Rye House and three others for £186 million just as other plant closings in the country left the grid more reliant on them. VPI Power’s annual profit before tax that year more than quintupled to £140 million, according to filings.

Among the companies that said they would cut power to the grid ahead of peak demand only to provide it at a premium, VPI received the most money overall: £189 million, all of which came after VPI’s 2021 purchases. Bloomberg’s analysis found that Uniper, which took a €35 billion ($38 billion) German government bailout to avoid collapse last year, was second with £153 million from 2018 through 2022. SSE took in £33 million from the plants it owns outright over that same period, while Seabank power station, which it co-owns, pulled in £87 million more. The analysis does not account for how much the companies would have made if they hadn’t deployed this practice, because such data is unavailable.

Under an agreement, Shell Plc has traded electricity on behalf of Seabank since October 2021. “We operate in compliance with legal and regulatory obligations and in line with market practice,” a Shell spokesperson said.

The traders are targeting a corner of the market known as the balancing mechanism, where the grid pays a premium to make the final adjustments to ensure there’s enough supply to meet demand — costs that are ultimately baked into consumers’ bills. Over the past few years, thanks in part to the off-on maneuver, prices in this side market have soared. Experts call it a herd effect: Once one plant succeeds at charging a super-high price, others follow suit. Overall, the grid’s balancing costs have increased 284% since 2018.

Ofgem’s spokesperson said its planned rule change “will prohibit generators from manipulating the balancing mechanism in this way for excessive financial gain.” Increased balancing costs push up the regular wholesale cost of power too, some of the traders said, because some key benchmarks in the wider market are pegged to the balancing price.

Many countries operate similar balancing markets. A recent European Union watchdog report suggests those systems are at risk of exploitation. The EU’s oversight is weakened by “loopholes” that open the door to “abuse and manipulation,” the report said, yet regulators have done little to find or prevent it.

In the UK, the energy crisis has hit the poor disproportionately: More than three million low-income households in Britain can’t afford to heat their homes, according to research from the Joseph Rowntree Foundation, a poverty alleviation charity. As temperatures plunged below freezing this winter, some resorted to wearing coats, scarves and hats indoors, did without cooked meals and rationed the use of electric light. Local councils established public “warm rooms” for people who can’t afford to heat their homes.

Warm Space — A warm spaces session at a community hub in Croydon, London. Photographer: Jose Sarmento Matos/Bloomberg

It’s daylight robbery what they are doing and they should be held accountable for it.

After her energy bills almost doubled in December, Shereen Townsend, a single mother in Tonbridge, Kent, began turning the heat on for just an hour a day and trying to use as little electric light as possible. “It’s like a dark cloud hanging over you from the moment you wake up,” she said, her voice faltering. When it gets really cold, she and her 11-year-old son put on extra layers of clothing — including a onesie for him — and they sit on the sofa under a thick blanket.

Townsend, a speech and language support assistant at a primary school, said she was outraged by Bloomberg’s findings. “It’s daylight robbery what they are doing, and they should be held accountable for it,” Townsend said. “It’s disgusting.”

Each time a Briton flips a switch and the light turns on, a complex chain of events reaches its payoff. Every day, about 50 major power plants across the UK convert wind, coal, water, biomass and gas into electricity. Most households and businesses get charged the same price regardless of the time of day, but that’s not how it works for the suppliers that secure the power for them. They buy and sell electricity in the wholesale market, where traders swap electricity like other commodities, hashing out delivery agreements sometimes as far as years in advance — or as close as a half hour.

Electricity is difficult to store, and the price can fluctuate wildly. A drop in wind generation on a cold day, for example, can create a sudden shortfall. That’s where the grid operator, National Grid Plc, steps in on behalf of consumers — seeking to keep costs as low as possible and to prevent blackouts.

For the system to work, power stations must tell the grid each day how much electricity they are planning to supply. The grid’s staff members match those figures to their own demand forecasts. If they’re running short, they use the balancing mechanism to pay power stations to switch on or increase output.

In times of especially high demand, operators call on older, gas- and coal-fired plants that rarely find it cost-effective to operate in normal conditions. Only a handful of producers — including Vitol’s VPI, which owns five gas-powered plants in the UK — operate such facilities, giving them real market power in the balancing mechanism when conditions get stressed. Nearly 75% of the £525 million captured by Bloomberg’s analysis came on tight days when the grid would have already been under pressure.

Moreover, gas plants are unwieldy; they typically take about six hours to cool down before they can run again — and Ofgem said power traders use that inflexibility to their advantage. By telling the grid they will power down before the daily demand peak — between 5 and 6 p.m. — traders are putting the grid operator in a bind. If a plant goes offline, it’s lost for the rest of the day. So, to keep it available for the evening, the grid operator must agree to accept its offer of electricity via the balancing mechanism beginning at around lunchtime — and pay higher-than-normal prices for hours longer than necessary.

To discover how frequently gas and coal power plants deploy the off-on maneuver, Bloomberg analyzed publicly available records from the Balancing Mechanism Reporting Service. Bloomberg’s analysis flagged each time a power station told the system operator in the morning that it would turn off before the peak yet still offered power to the grid via the balancing mechanism during that time.

When they employ these maneuvers, traders are taking a gamble: If the grid operator doesn’t accept their offer, they end up with nothing or possibly even a loss. But if it does, then they’ll make much more than they would have in the wholesale market.

Bloomberg’s analysis found that the wager has paid off handsomely: Some firms have dramatically increased their revenues this way.

At times, traders amp up their market power even more by going one step further: The day before, they tell the system operator the plant will be running the next day through the peak. But come the morning, they pull the rug out, saying they changed their minds. Such abrupt changes amplify the traders’ market power because they give grid staff little time to react.

Wide-scale data for this type of maneuver is not publicly available, so it’s unclear how often it happens. An official analysis of the 10 highest cost days for the balancing mechanism between September and December 2021 offers a clue. Of the £338 million in charges on those days, £225 million went to firms using the maneuvers — and 57% of that amount involved traders changing their minds at the last minute.

Introduced in 2001, the balancing mechanism was intended to increase the flexibility and competitiveness of the UK power market. Over the past few years, the grid has grown more reliant on it as Britain endures a general shortage of supply — made worse by the shuttering of three gas-powered generators in the wake of the summer 2020 bankruptcy of Calon Energy Ltd.

These changes have also enabled traders to bring in significantly more money. In the first three years of Bloomberg’s analysis, the amount firms collectively took home employing the off-on maneuver never exceeded £23 million annually. In 2021, they received almost £329 million, and £141 million in 2022.

The most expensive day in the balancing mechanism’s history was Nov. 24, 2021, a day when outages combined with high demand. The grid paid firms £60 million that day, according to an official report — and Bloomberg found that about 73% of that haul — £42 million — went to companies deploying the off-on maneuver.

Connah's Quay — Connah’s Quay Power Plant in Flintshire. Photographer: Joanne Coates/Bloomberg

Uniper was one. Traders told the grid operator they were switching off one of the main generators at their Connah’s Quay power station in north Wales. But at the same time they were offering that supply back to the grid via the balancing mechanism at the price of more than £3,000 per megawatt-hour — five times higher than the wholesale price for the evening peak. Several other stations deployed the same maneuver.

Faced with the prospect of multiple generators withdrawing a staggering 2.6 gigawatts of power capacity, enough to supply a city the size of Birmingham, the system operator had to accept their offers. Uniper was paid £9.4 million, while SSE’s Medway and Seabank generators took home a combined £17.7 million. Vitol’s VPI received £12.6 million on the day.

No power station has received more from the off-on maneuver in the past two years than VPI’s Rye House plant. Built in the early 1990s, it’s less efficient and more expensive to run than newer counterparts, so when there’s plenty of supply available, it is seldom called upon. But when the market is tight, Rye House is often one of the last stations available.

From 2019 through 2020, the station rarely used the off-on maneuver, and it never made more than £158,000 from it on a single day.

That changed when Vitol, a behemoth well-known for capitalizing on chaos in commodities markets around the world, bought Rye House via its VPI unit, just after gas prices had started rising precipitously.

On Feb. 10, 2021, only days after it completed the purchase, Vitol’s VPI traders deployed the off-on maneuver for the first time with Rye House — and got paid £1.2 million in a single day, according to Bloomberg’s analysis. Less than a month later, it received £2.1 million in a day. About a month after that, the firm did it yet again and collected £5.8 million.

A former trader at one of Europe’s biggest energy suppliers described trading in the balancing mechanism as a game of cat and mouse with the regulator. Traders are incentivized to make as much money as possible while keeping on the right side of the law, and it’s naïve to expect them to behave differently, he said.

Consumer advocates offer a different perspective. “In the middle of a cost-of-living crisis, it’s totally unacceptable for the companies that generate our electricity to be making excess profits,” said Gillian Cooper, the head of energy policy at Citizens Advice. “The regulator has to ensure there is a fair system, so households aren’t left to pick up yet another bill.”

Back in Kent, Shereen Townsend doesn’t know how she is going to afford her monthly energy costs, which almost doubled to £158 in December.

She has cut back on food spending. She bought much of her son’s school uniform secondhand. But it’s not enough.

“I’ve had to say ‘no’ a lot more to my son, which can be really hard,” she said.

Townsend said she is considering taking on more private tutoring work to supplement her income, which is barely above the minimum wage of £9.50 an hour. Some of her colleagues work in grocery chain Sainsbury’s Plc before the school day starts to make extra cash, she said.

“The energy companies are getting away with blue murder,” she said. “And we’re the ones who are going to suffer for that. It feels like we’re easy pickings.”

Updates with comment from prime minister’s spokesperson and additional comment from regulator, beginning in 10th paragraph.

Edited by Alex Campbell and John Voskuhl

With assistance from Will Mathis, Rachel Morison, Vernon Silver, Demetrios Pogkas and Jeremy Scott Diamond

Methodology

Bloomberg analyzed millions of records from the Balancing Mechanism Reporting Service to identify each time a British power station informed the national grid that it planned to turn off prior to 5 p.m., when demand usually peaks, only to offer energy to the grid’s balancing mechanism at the same time. The analysis covers 2018 through the end of 2022 and counts the number of times power stations engaged in this practice, adding together the amount of revenue received.

Traders report “final physical notifications” to the grid every morning, detailing how much electricity their generators intend to produce for each settlement period during the day. (Power stations can have multiple generators.) Settlement periods are half-hour intervals that begin at midnight. Because final physical notifications can be reported for intervals shorter than a half hour, Bloomberg calculated weighted averages to summarize the data for every half hour. Power stations also report the amount of time their generators must remain off before they can power up again, a physical constraint known as the minimum zero time. Reporters set a floor and a ceiling for each generator based on these factors, flagging records where traders said their generators would turn off during a time window that would make it impossible for them to turn back on in time for the peak. An extra settlement period was included on either end to account for the “ramp rate,” the time it takes to start up from zero.

Reporters also queried detailed system price records to capture when the grid accepted power from a generator for the balancing mechanism, how much energy the generator supplied, and how much the grid paid for the power. After combining these three datasets — the final physical notifications, the minimum zero time, and the detailed system prices — Bloomberg filtered for instances in which a generator’s final physical notification reflected a decrease in supply that went to zero within the time window described above while, at the same time, the generator was agreeing to provide power via the balancing mechanism.

Bloomberg applied the analysis only to power stations that run on gas or coal, which are usually the most expensive forms of generation. Known as marginal plants, they are also the generators of last resort when supply is tight. Balancing mechanism activities resulting from regulatory actions, referred to as “system flagged” actions, were excluded from the analysis; these include actions related to grid constraints. The publicly available data contain no information on why the generators engaged in the pattern uncovered by the analysis.

Power stations offer energy into the balancing mechanism throughout the day, with traders setting the price. These prices often vary significantly, especially on days when the system is tight. Using bid-offer data, Bloomberg examined instances where the accepted offer prices were higher than the lowest non-accepted offer prices earlier in the day and measured the average difference. Bloomberg found that in 2021, when power stations used the maneuver described above their average offer price was four times higher than the lowest non-accepted offer price earlier in the day. The prices were about 145% higher in 2022. Between 2018 and 2020, the average prices were never more than a third higher when the maneuver was employed.

Bloomberg also tested how often power stations used the tactic on days when the electricity supply was tight relative to demand. To do this, reporters relied on a widely used proxy for tightness from the BMRS called the de-rated margin, in this case the 8-hour de-rated margin.

Reporters used other sources to determine the ownership of the largest power stations, because the BMRS only tracks the companies that operate the plants, not the owners.

In addition to final physical notifications delivered in the morning of the day in question, power stations give an earlier indication of how much electricity their generators intend to provide. This is delivered the previous day and is known as the day-ahead physical notification. Numerous people told Bloomberg that traders will often report at the day-ahead stage that their generators will be running through the peak, only to reverse course on the final physical notification, which puts the grid in an even tighter spot because it allows the grid operator less time to ensure adequate electricity supply.

The BMRS does not publish detailed data on day-ahead physical notifications. Yet Bloomberg was able to examine differences between the day ahead and final physical notifications on two separate occasions: Dec. 12, when balancing mechanism prices surged to £6,000 per megawatt-hour, among the highest prices ever recorded; and Nov. 24, 2021, also among the system’s highest-cost days. To do this, reporters used indicated generation data from the Balancing Market Reporting Agent, an older system that collects data on the UK electricity market. Each power station operates inside a zone on the grid, with some contributing energy to multiple zones. The indicated generation data provides the total amount of energy all power stations within a zone said they would produce the following day.

By comparing that to the final physical notifications for all generators within a zone, reporters could discover differences between the amount of power traders offered to the grid on the day before versus the amount offered on the day of delivery. Reporters then examined which generators had dramatic drops in power, as reported in the final physical notifications, to identify those responsible for the bulk of the difference between the day-ahead values and the final values. Because the indicated generation data is provided by zone and not by balancing mechanism unit, the analysis was limited to zones encompassing relatively few units and could not be replicated on a large scale.

Consumers Foot the Bill for Traders ‘Manipulating’ UK Power Market

Power Plays

Some of the UK’s biggest energy companies have received £525 million from a practice that regulators say drives prices higher.

Total Cost

How the Cost Has Risen

Rapid Growth

How the Grid Picks Plants

Bigger Paydays

Rye House Ramps Up

Plants’ Pay

Methodology