An overview of constraint payments

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15 April 2025

Each year over 300 terawatt hours (TWh) of energy flow around the UK’s electricity system, with demand for electricity across the country, both domestic and commercial, fluctuating on a constant basis. This is influenced by a vast number of factors – from the season and weather conditions, to the time of day, and even when there’s a major sporting event taking place.

Whilst some of these factors follow predictable trends, such as overall demand being higher in the colder winter months than in the summer, many are unpredictable and require constant surveillance and a wide range of tools to ensure demand is met and a stable supply of energy flows across the grid at all times. This process is known as ‘balancing’ the grid, with the primary tool to buy and procure the right amount of electricity known as the Balancing Mechanism (BM).

Balancing the grid is an extremely intricate process. It requires round the clock work from the expert team at the Control Centre of the National Energy System Operator (NESO), who monitor daily peaks and troughs of demand, as well as maintaining the voltage and frequency of the electricity flowing into homes and businesses to ensure appliances and equipment are able to function efficiently.

When the demands on the system are acutely high, a variety of tools are deployed to ensure the grid is not overwhelmed and the costs of running it are minimised, which in turn keeps bills down. ‘Constraint payments’ are one of these tools.

What are constraint payments?

Any piece of grid equipment has a physical limit on the amount of power that can safely be transmitted through it, and exceeding this limit will cause it to overheat or malfunction and could cause failure. Where there are physical constraints on the network, due to these pieces of equipment reaching their safe capacity limit, or when planned outages due to reinforcement works occur, a bottleneck forms and action needs to be taken.

Take the example of an offshore wind farm on a particularly windy day, when the abundant energy it produces will be cheaper than the alternative from a gas-fired power station. This energy will enter the UK’s transmission network - the National Grid - at a specific point, but this could be a significant distance from where demand is located and where it is needed. Infrastructure is therefore required to safely move the power across the country, but this is not always sufficient due to the limitations of the system, meaning sometimes power cannot physically be transferred from one region to another.

In this case, the generator feeding into the system (the wind farm) may be asked to vary and reduce its output until the bottleneck has been cleared. This curtailment is done to maintain overall stability and avoid a scenario in which power surges and overwhelms the grid, which would result in damage to infrastructure, domestic and commercial appliances, and potentially blackouts.

Until further grid infrastructure and energy storage solutions are further developed, this is the most cost-effective way to safely operate the country’s electricity system.

Do constraint payments apply to all forms of electricity generation?

A wind farm being paid not to operate on a particularly windy day can appear strikingly counterintuitive, so it is no surprise that this has been seized upon by certain sections of the media and society. However, contrary to some prevailing narratives, the vast majority of constraint costs (76%) relate to gas generators, which are typically paid to increase output at certain times and replace constrained generation from other sources to ensure demand is met.

Although compensation paid to wind farms accounted for just 24% of overall constraint costs, based on the latest NESO data covering April 2024 to January 2025, these payments are likely to increase in the short term in the absence of significant expansion and reinforcement of the grid. As more onshore and offshore wind generation is connected in the next few years, predominantly in the north of England and Scotland, the transmission system will need to be capable of handling significant flows of electricity to the south of the country where demand is frequently concentrated.

Do generators profit from constraint payments?

Constraint payments are not a source of additional income for wind farm developers, but rather a form of compensation for lost marginal revenue.

Wind farms throughout the UK have connection agreements with the network operator which obliges them to pay transmission network charges and entitles them to receive a service in return, namely the transmission of electricity through the grid network. When the flow of energy needs to be constrained, they are effectively paying for a service they no longer receive and are thus entitled to compensation under the terms of their agreement, which are strictly controlled by Ofgem via Transmission Constraint Licence Conditions (TCLC).

Given wind farms have already sold their energy in the wholesale market, compensation is relatively constant and low because it is limited to these marginal losses. The components of this are technical and will vary from generator to generator, but are broadly comprised of lost subsidies - such as payments due under the Renewables Obligation and Contracts for Difference (CfD) schemes - and the value of the lost Renewable Energy Generation Certificate (REGO).

But why is it so expensive?

The biggest driver of constraint cost variation is the wholesale price of electricity - not because wind farms are paid more to turn down, but because gas generators are paid more to turn up when prices are high. Unlike payments to wind farms, which are limited to the lost marginal revenue incurred (as explained above), gas generators can charge the market rate when asked by NESO to increase their output.

NESO’s Electricity National Control Centre (ENCC) has tended to default to gas when taking constraint actions through the BM, which is partly explained by IT, data and process limitations, and has been identified by NESO as a priority area to address. The need to make better use of alternative energy sources and allow technologies such as battery storage to compete has also been highlighted, and this is now the focus of a reform programme within NESO as it looks to move towards cheaper options than gas to help bring down constraint costs.

Recently we have seen overall constraint costs rise sharply, due to something of a perfect storm where high market price payments made to gas generators have combined with a large volume of new generation coming online without a corresponding increase in overall network capacity.

What can be done to bring costs down?

Some organisations have argued that wind farms need to be built closer to areas of high demand to alleviate transmission costs, but this ignores the reality that wind farms have to be built in areas where there is high wind resource, sufficient land or sea space, and where planning permission can be obtained. There is also the need to secure a network agreement prior to construction, and we have seen the buildout of network capacity fail to keep pace with the requirements of new generators, particularly in key areas such as the boundary between Scotland and England.

NESO’s recently launched Constraints Collaboration Project aims to alleviate pressure in the short term by finding solutions for thermal constraints as more renewable projects come online, delivering benefits in the absence of immediate expansion of grid capacity.

However, there is wider acknowledgement that the development of new energy generation must be accompanied by investment in corresponding network infrastructure, at a significantly accelerated rate. The Government has recognised the need for it to plan and coordinate this at a central level, with its Clean Power 2030 Action Plan emphasising the importance of ensuring that “the network expands rapidly so that our vast supply of clean electricity can be transported to centres of demand”. There is also recognition that the market cannot efficiently align and coordinate this itself, and NESO’s upcoming Strategic Spatial Energy Plan (SSEP) is expected to set out the next steps in more detail.

Alongside this, there is a need to reform the BM, both in terms of making better use of alternative energy sources and technologies when seeking to alleviate constraints, as well as investing in IT and process improvements to aid NESO’s ENCC and reduce its reliance on gas-fired power stations. This comprehensive programme of reform is estimated to offer potential savings of £18 billion to consumers by 2030, of which a significant portion will come from reduced constraint costs.