Ofgem introduces incentives and penalties scheme to avoid powercuts

The National Grid Company (NGC) could be fined up to £12 million a year if it allows major powercuts such as the ones that occurred in the south-east and the West Midlands in 2003, to happen again.

The penalties would be balanced with an incentive of earning up to a maximum of £8 million a year for improving performance on the grid.

Regulator Ofgem announced its decision to introduce an incentive and penalty scheme last year, after its investigation into power cuts which left London Underground and train networks paralysed for over half an hour in August, and over 40 minutes in Birmingham in September 2003.

Each blackout affected several hundred thousand customers and together they were branded the worst powercuts since the hurricanes of 1987. Despite this, Ofgem found that they were caused by a series of unrelated events and that the mistakes made by NGC were not material enough to be in breach of its legal obligations.

Alistair Buchanan, Chief Executive of Ofgem said: “It was clear from our investigation into the London and Birmingham powercuts that strengthening the incentives on NGC to maintain and improve the performance of the National Grid would help to better protect customers’ interests. Under the new incentive scheme NGC could face penalties of over £10 million if we were ever to see a repeat of these blackouts.”

The scheme is based around rewarding or penalising NGC in accordance with its annual performance in running a reliable network. It will be rewarded on a sliding scale up to 1.0 per cent (around £8 million) of its national grid revenue in the event that all demands for energy are met, or penalised on a sliding scale of up to 1.5 per cent (around £12 million) in the event that approximately 650MWh or more is unsupplied in a given year.

In the event of a major powercut, NGC could still be subject to an investigation by Ofgem to see if it has breached its legal obligations. If it were found to be in breach of its legal requirements, an additional financial penalty could be imposed on top of any payment under the incentive scheme.

The new incentive/penalty scheme comes into force this month.

By David Hopkins

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