Interconnector capacity hoarding

What this is about

Ofgem has issued an enforcement signal, not a rule change. The regulator says that withholding interconnector capacity to engineer extreme clears in NESO auctions breaches the capacity hoarding prohibition in the Electricity Regulation (the retained EU instrument that still governs interconnector access on the GB side). The accompanying paper reviews occasional price spikes in NESO interconnector auctions between 2022 and 2026 and lays out what traders must now be able to show to demonstrate they were not hoarding. No new licence condition, no new rule. What has changed is the burden of proof: an unexplained extreme clear is now a question the trader has to answer.

The framing is worth pulling apart. The Electricity Regulation already prohibits capacity hoarding. Ofgem has not legislated; it has signalled that it will enforce. That distinction matters for how participants should read this. It is not a consultation on whether to act, it is a notice that action has begun. The substance of the supervisory regime, what documentation is expected, what a defensible bidding rationale looks like, what an "occasional" spike is in the regulator's view, will be shaped by which cases Ofgem opens first.

Key points

- The legal hook is the Electricity Regulation, not the licence. The hoarding prohibition predates this paper. Ofgem is asserting that explicit interconnector auction bidding falls within scope and that the prohibition is enforceable against bidding strategy, not just against physical withholding after award.

- The trigger is occasional extreme clears, not sustained price levels. Ofgem flags spike clears between 2022 and 2026 as the pattern of concern. The economic mechanism it has in mind is straightforward: a participant with portfolio exposure on both sides of the cable has an option not to bid in capacity, and exercising that option can push the marginal clearing price up. The paper treats that as a hoarding behaviour even where no individual MW is physically reserved and unused.

- The burden of proof shifts to traders. Participants are expected to be able to demonstrate compliance. In practice that means documented bidding rationale, evidence that the bid reflected the trader's own commercial view of cross-border spreads, and an internal control framework that can be produced on request. The cost of producing that paper trail sits with the trader.

- The intervention treats the symptom, not the cause. Interconnector capacity is a scarce, lumpy, time-sliced resource allocated by explicit auction. The option value of withholding is real and rises with volatility on the cable's two sides. A participant who declines to bid is exercising an economically rational option created by the auction design itself. Conduct enforcement does not remove that option value; it raises the compliance cost of taking it.

- Compliance cost is a barrier to entry. A vertically integrated trader with desks on both sides of the cable can absorb a documented bidding framework, a compliance officer, and the risk of an Ofgem case. A smaller arbitrageur trading the spread cannot. Expect the participant base to narrow at the margin, which reduces competitive pressure on the very prices Ofgem is trying to discipline. The standard Stiglerian pattern: regulation demanded, or at least tolerated, by participants who can absorb it.

- The 2022-2026 window is doing work in the paper. It anchors the regulator's evidence base in cases that have already cleared and creates a retrospective dimension. Bids submitted years ago are now potentially subject to a compliance test that did not exist as a stated supervisory expectation at the time.

What happens next

Three things to watch.

First, the first case. Ofgem's supervisory standard will be defined by which auction outcomes it opens enquiries into, not by the wording of the paper. Until a case lands, the line between "I had no commercial reason to bid that day" and "I withheld to move the clear" is the trader's to interpret.

Second, the NESO auction design response. The structural fix to a hoarding incentive is to change the auction, not to police behaviour around it. Options include capacity-payment models that price the option of not bidding, use-it-or-sell-it obligations on awarded capacity, and bid-floor or reserve-price mechanisms. None of these are on the table in this paper, but NESO and Ofgem will face pressure to act on design if enforcement alone fails to suppress spike clears. Worth tracking whether NESO opens a workstream.

Third, participant behaviour into the next set of auctions. The immediate response from traders will be to document bidding logic, not to change it. The interesting question is whether the threat of enforcement compresses spreads at the top of the distribution, or whether it simply causes the smaller participants to exit and leaves portfolio players with a less contested auction. The second outcome would be the opposite of what Ofgem intends.

No consultation deadline attaches to this paper. The implementation timeline is enforcement-led: whenever Ofgem chooses to open its first case, the supervisory regime becomes real.