The Department of Energy and Climate Change has promised to review the charges paid by generation that is connected to local, low-voltage distribution networks. Such plant, connected close to demand, does not need to use the high-voltage transmission network. This is a benefit to the system. At the moment it is rewarded for this by a patchwork of ‘embedded benefits’. Does that patchwork allocate costs and benefits fairly? Decc has asked regulator Ofgem to investigate.
Our brief summary of embedded benefits:
Plant connected to the low-voltage network is not liable for Transmission Network Use of System (TNUoS) charges. Because distributed generation is assumed to be used locally, it is considered to reduce the net power exchange with the high-voltage network.
Since TNUoS charges are related to the amount of power on the high-voltage network, any supplier with distributed generation in its portfolio pays lower charges – it is billed ‘net’ of distributed generation. How much of that saving is passed on to the distributed generator depends on how it has negotiated a power purchase agreement with the supplier.
This also means there are indirect benefits to distributed generation. There are several other charges that are calculated on the basis of the supplier’s ‘net’ power usage. These include balancing charges and credit and collateral requirements, and payments in respect of Contracts for Difference and the capacity market. Again, how much of those savings are passed on to the distributed generator depends on how the power purchase agreement is structured.
Separately, embedded generators allow large electricity users to avoid so-called Triad charges – an incentive on customers to avoid using power at peak periods.
Other embedded benefits apply in respect of chargeback for energy lost on the transmission system. The distribution of these benefits and charges may change as a result of the Competition and Markets Authority decision to place those charges wholly on generators.
Colin Prestwich of Smartest Energy considered some of the embedded benefits that could be in Ofgem’s sights during a review:
Transmission losses – the benefit associated with offsetting losses on the demand side is likely to be lost as a result of the CMA proposal to put 100% of losses on generation. This, however, is almost certainly an unintended consequence.
Capacity Mechanism Supplier Obligation – In the EMR design DECC deliberately chose to charge this to suppliers on a net basis so that there would be an additional incentive to load manage/ramp up generation at times of system stress.
TNUoS – if the largest of the embedded benefits changed from net to gross charging this would be a major intervention. It would lead to the immediate removal of triad payments for all distributed generators which are not “behind the meter” and would risk security of supply due to plant suddenly becoming uneconomic.
BSUoS – Removal of Demand Side Balancing Reserve (DSBR) and Supplemental Balancing Reserve (SBR) costs from BSUoS into a ‘Demand Security Charge’ has recently been proposed. It has also been argued that embedded generators which participate in the BM should be denied the BSUoS embedded benefit. It is inappropriate to focus on the pressures intermittent renewables bring to the system without also assessing the costs large baseload imposes (e.g. increased in-feed loss which is not currently properly allocated in TNUoS.)