Unforgivable unforseenability

Hindsight is a wonderful, if often frustrating gift. It provides clarity on events that is impossible while the events are still in progress, and it also gives one a warm sense of awareness of the world and knowledge of its workings. Of course, all of this is rather spoiled by the frustration of “Why didn’t I see this earlier?”, the answers varying from “I couldn’t have seen it. No one could have” to “Because I’m so stupid.”

There are, however, events and developments that you don’t need hindsight to see the outcome of, and one of these developments just surprised the life out of Britain’s energy regulator. Energy traders, if you could believe it, are “hoarding” interconnector capacity so they can ask obscene prices for electricity when there’s not a lot of supply and push comes to interconnector imports.

In an open letter to, well, to capacity hoarders, Ofgem said it had noticed that on multiple occasions since 2022, energy traders participating in UK interconnector auctions had submitted bids with extremely high prices while reserving “a very large share of available capacity” “for the delivery period in question”, thus effectively leaving the grid operator with no option but to buy at the asking price.

And here I thought interconnectors were a bad idea because the exporting country might decide to ask too high a price for its electricity. It’s like watching your step in the garden at night to not step on the rake, only to step on the shovel instead, and I think this is a beautiful lesson in something that once upon a time used to be a default human setting called, yes, planning ahead and anticipating potential outcomes of actions.

The phenomenon of capacity hoarding that so upset Ofgem reminded me of another development in electricity markets that I wrote about last year: massive investments in battery storage so the investors could “profit from extreme intraday price swings caused by renewables’ boom.” Among the investors were Vitol and Trafigura, quick to sense a profit opportunity whenever it presented itself. Which brings me to the unpleasant point of this post. The transition tenesmus has created opportunities for profiteering that even Big Oil would consider slightly unseemly. It has also killed business ethics once and for all.

Here’s how one of those battery investors explained the opportunity at the time: “It is the ultimate fast and scalable way to pick those instances of extreme volatility and address that volatility. You don’t see Brent moving from minus $50 a barrel to plus $3,000 a few times every week. And that’s what power allows you to do.” Feel the salivation and weep for the loss of even the most basic decency. I am.

Now, Ofgem is discovering something that would have been so obvious to even a passing glance as long as that glance was attached to a working brain. If you leave loopholes for speculators to take advantage of, they will take advantage. Oh, but it was against the law, Ofgem said in its letter, yet not a single mention was made of potential repercussions for those engaging in the practice of capacity hoarding — a practice that, apparently, led to asking prices of 1,000 pounds per MWh and even going all the way to 3,000 pounds on several occasions, per the FT. For reference, day-ahead prices currently sit around 100 pounds per MWh, also per the FT.

Transition profiteers, then, have us all — governments included — coming and going. They’re building battery arrays to store surplus power and then ask whatever price they like when the sun comes down but demand for electricity jumps. They’re “hoarding” interconnector capacity to eliminate competition and, again, ask whatever price they like when demand necessitates the use of those interconnectors because with electricity, you can’t hang a sign on a pump saying “Out of juice, come back tomorrow.” With electricity, we need it now, always. Which is fertile ground for profiteering.

So, is Ofgem recommending action against that? Punishment? Sanctions? No. Ofgem will be monitoring the situation, which as we know is a popular sport in European political and regulatory circles. Some people have got so good at that, they can monitor situations in their sleep, often closely, and produce stern statements that lead to no action whatsoever, lest the slightest shadow of wrongfulness falls on the visage of the energy transition.

Per an expert from Montel, “Ofgem is issuing a warning that they have noticed a potential wrong behaviour and will keep monitoring the situation closely, taking action if a similar behaviour were to be seen again.” See? Monitoring: check. Closely: check. Will take action: all right. What might that action look like? Interconnector capacity quotas, perhaps? Fines? We don’t know but I’m looking forward to seeing how those who sowed winds try to reap the storms while pretending they are harvesting sunrays.