Ofgem ‘minded to’ cut payments to embedded generators

Ofgem wants to go ahead with plans to reduce the amount of financial benefits gained by so-called ‘embedded’ plant (small units attached to the distribution system) because they are not connected to the transmission system.

In a ‘minded to’ position the regulator said “Our provisional view is that the level of Transmission Network Use of System Demand Residual payment to smaller embedded generation should be reduced to the level of avoided Grid Supply Point (GSP) costs, and introduction of the new arrangements should be phased over three years from 2018 to 2020.”

The decision could mean Ofgem faces legal action. Companies told New Power they will take action if the regulator does not safeguard existing investments with ‘grandfathering’ arrangements that shield them from changes in policy. They also wanted the regulator to open a significant code review (SCR) that would address charging arrangements across the industry.
The affected companies are developers of small (about 20MW) generators that were the surprise winners in the first capacity market (CM) auction and have continued to win long-term contracts in later auctions. Some are diesel engines and these have caused concern and prompted tighter environmental restrictions because of concerns about air quality. Others are largely gas engines – standalone projects or generators used as backup on industrial and commercial sites.
These plants have been able to use the embedded benefit, along with lower capital costs for individual sites, to reduce their bid price into the capacity market auctions and drive out large-scale combined cycle gas turbines (CCGTs), which the government regards as the key technology that should be brought forward by the CM.

CCGT developers argue that operators of small plant are taking advantage of a market failure and being over-rewarded by the embedded benefits, which arise because of the way the costs of investment in the transmission network are charged back to users. Transmission charges are rising rapidly partly because of major investment in new generation such as offshore wind. Some developers concede that they recognised the benefits, which have been increasing exponentially, were unlikely to remain untouched.Most developers want Triad benefits to be grandfathered at their current level, with some form of index linking.

When plans to change the charging regime emerged, separate analysis by Cornwall Energy and KPMG suggested that the change in benefits could drive existing or planned capacity out of operation, exacerbating fears about security of supply. Subscribers login to read the rest of this story (download the March issue)

Ofgem is seeking responses to its proposal by 10 April. Ofgem’s announcement

Further reading:

Opinion: What’s all the fuss about embedded benefits?

A Guide to Embedded Benefits

Beware an embedded benefits review by stealth

Demand response providers face new Capacity Market challenge

Login to read: Review of embedded benefits opens fault lines among industry players

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