LONDON (Reuters) - The energy regulator wants more authority to stop electricity generators from manipulating the power market for profit when supplies are tight, Ofgem said on Monday.
The regulator is worried the electricity market is open to abuse because network operator National Grid has to pay utilities handsomely to turn their plants on or off to balance supply and demand.
This might encourage companies to shut their plants down when supplies are tight so that they can get paid a higher price to start up again -- increasing the system balancing costs at the expense of consumers.
"The sector is vulnerable to such exploitation, both when there are constraints on the electricity transmission system and more generally at times of system tightness," the regulator said in its consultation published on Monday.
"The resultant costs are likely to be borne by consumers in terms of increased retail bills."
In January, Ofgem dropped an investigation into alleged abuse of market by Scottish & Southern Energy and Scottish Power, saying it would be more effective to deal with the wider problem than pursuing the case further.
The regulator now wants to introduce a new licence condition applicable to all generators which would allow it to fine those found to be manipulating the market.
The watchdog also said changes to how the balancing mechanism is priced could make it easier to detect exploitation of power and that asset sales by generators might help in some areas, particularly in Scotland.
"One option to address constraint related market power problems arising in the GB wholesale sector could therefore be to require physical divestment of some of SP's and/or SSE's flexible generation in Scotland to reduce concentration levels," Ofgem said.
The wholesale electricity market is increasingly vulnerable to system balancing problems because of transmission bottlenecks due to maintenance work, environmental limits on some power plants and new renewable generation being connected.
The cost of balancing the system increased from 70 million pounds in 2007/08 to an estimated 238 mln for 2008/09 and an expected 258 mln pounds in 2009/10, with most of the costs incurred in Scotland, according to Ofgem.
Final proposals for tackling market power issues are expected by the end of summer.
Britain other big energy suppliers are British Gas owner Centrica, RWE npower, EON UK and EDF Energy.
Reporting by Daniel Fineren