Government plans to review incentives for smaller-scale power generators risk driving up power prices without sufficiently incentivising new gas power stations, according to an independent report.
Cornwall Energy, commissioned by The Association for Decentralised Energy, outlined a number of thorny issues thrown up by the Department of Energy and Climate Change’s plans. Tim Rotheray, the ADE’s director, said the review could inadvertently reduce rather than increase security of supply.
Decc announced the review of embedded benefits along with changes to the Capacity Market, which is intended to increase security of supply by paying generators to be available when needed.
The department also wants the capacity market to incentivise developers of new gas plant. However, auction clearing prices to date have been too low. Much of the contracts have been awarded to existing coal and gas plants, as well as some small-scale diesel plant, which are able to undercut large plant because they have either no investment to make, or very little compared to the cost of building a large new CCGT.
In response, the department has asked Ofgem to review the so-called embedded benefits regime, whereby generation connected to the distribution system receives payments for helping to reduce congestion on the national transmission system as well as the local distribution system
These payments come in various forms and the report finds that some payments, particularly those relating to the capacity market, may be over-weighted, thereby distorting competition.
However, after detailing Ofgem’s apparent inability to deal with the issue over the last decade or so, and the significant increase in National Grid’s allowed revenues for transmission investment, it warns that sweeping cuts to embedded benefits could at best create unintended consequences. At worst it would pile costs onto UK businesses without delivering sufficient incentives for investors in new gas power stations. Broadly speaking, the report found the current level of embedded benefit was appropriate.
Cost to industry
The ADE said that the changes being considered by Decc and Ofgem could hit I&C firms by £170m a year. Some manufacturers could see bills rise by £3m per site, it suggested. ADE members Boots and British Sugar warned government against making the UK economy less competitive.
Director Tim Rotheray said government was right to try and curb growth of diesel farms but warned against misguided policymaking. He said that “a confused series of interventions” had created complex policies and “a lot of noise” that risked undermining the principles of charging to use the electricity networks.
“People seem to be looking at the money for connected distribution, thinking that money can be reallocated to those on the transmission system and as a result, they will all build gas plants. The evidence from the work we have had done is that unequivocally won’t happen,” said Rotheray.
“Government must be very careful. It has a genuine concern about design of the capacity market, but that concern is constrained by a limited desire to go back through the State Aid process. Therefore its focus has been directed to areas outside of capacity market and State Aid.” The upshot, he said, is that “it is likely to end up with a situation of worse security of supply not a better one”.
Rotheray pointed out that National Grid had been allowed “very substantial” increases in the revenues it is allowed to recoup from investments in transmission, which in turn increased benefits for those that do not use the transmission system. Because of that “some change [to charging regimes] is likely”, he said, urging generators on the distribution system to ensure their voices are not “drowned out by larger, more singular voices”.
The report accepts that Transmission Network Use of System (TNUoS) embedded benefits may be overstated. It puts forward an alternative method for Triad charging, by which large businesses and generators are charged and rewarded for their consumption or generation over the three tightest half hour periods over winter. It suggests recovering long-term transmission investment from diminishing demand over a one-year period is flawed and suggests the Triad charge could instead be determined based on the maximum half hourly demand over the last ten years. Rates could be inflated, for example, by 5-10% to reflect any additional spare capacity within the network.
An adjusted Triad charge calculated based on network capacity aligns the long term revenues with the long term capacity of the network and therefore provides a more effective estimate of the avoided costs of embedded generation, states the report.
The report suggests reflective Triad charges could be around 25% lower and should be socialised and recovered on a volume rather than demand basis. However, it found that the distribution network benefits may be understated, particularly for non-intermittent generation.
Cornwall Energy also said that the Competition and Markets authority should not change the current transmission losses arrangements, which split transmission losses between demand and generation, as it would effectively remove an embedded benefit. It said that the current level of benefit under distribution losses arrangements was appropriate.
The report warned against making generators pay for the constraint issues they cause on networks (such as when it is windy or sunny and there is insufficient demand on the system). While constraint costs (whereby generators are paid to stop exporting) are increasing, Cornwall Energy said the current approach of spreading those costs across all energy bills should continue. However, Amber Rudd warned in her reset speech that intermittent generators would be made to pay more reflective costs under her watch.
Cornwall Energy suggested government was right to review benefits for embedded generators within the capacity market, whereby they are effectively being paid twice under current rules, distorting prices.
However, the report concluded that overall, the current level of benefits paid to embedded generators was “broadly appropriate”. It recommended taking a whole system approach to network charging in order to create more consistent and robust regulation than the current set of independently-created rules.
See the report, which explains how embedded charges work and their system costs, here.