EDF is pushing for market rule changes that would take money away from small generators with capacity market contracts, rendering them much less able to make low bids within the auction. The outcome would likely drive up capacity market clearing rates.
The energy company wants Ofgem to make a decision in September this year on its proposed modification as it believes embedded generators would otherwise have an unfair advantage over larger power stations in the next capacity auction, scheduled for December.
The system currently treats embedded generators – those connected to the distribution network – as negative demand for the purposes of transmission network charging. As a result, embedded generators do not pay generation transmission charges and also receive a benefit from suppliers because they reduce their demand transmission charges. This is often referred to as ‘netting off’.
EDF is not tabling wholesale changes to that arrangement. However, it proposes that embedded generation with capacity market contracts cannot be netted off within the residual component of transmission network charges, with new rules effective as of 2020. For those without capacity contracts, everything stays the same. But the change would take a significant chunk of revenue away from generators with capacity market contracts. EDF thinks that is necessary to stop smaller generators undercutting larger generators, such as itself, from securing contracts in the capacity auctions. Other industry parties have previously expressed similar views.
The issue has been kicked around for some time, but has come to a head partially because smaller generators are driving down prices in the capacity market. Due to the extra revenues they make from the current charging regime, they can bid lower and still make extra profit. Winning a capacity contract is therefore a bonus – as it is for all existing plant.
While that is arguably a good result for bill payers, who pick up a lower cost of what is effectively an insurance policy to keep the lights on, it has been estimated that auction clearing rates need to double in order to sufficiently incentivise large new gas plant. Getting new plant built was the original main aim of the capacity market, spawned as part of the interventionist Electricity Market Review (EMR) almost six years ago.
So far, there is not much new gas generation being built, so Decc is looking to change the rules. It has tasked Ofgem with reviewing the benefits received by embedded generators and wants the regulator to have some idea of what to do by summer. National Grid is also reviewing the transmission charging arrangements.
While industry experts have recently suggested that the embedded benefits regime is “broadly appropriate”, they accept that a review is necessary, provided it looks at the right things and doesn’t rush to achieve an outcome that backfires.
However, distributed generators are understandably concerned that their revenues may come out the other side significantly smaller, and that their voices will be “drowned out by larger, more singular voices”.