Ofgem embedded benefits update adds to uncertainty ahead of capacity market auction


800px-3D_Judges_GavelSmaller power generators hoping to secure capacity market contracts in this week’s auction will take little comfort from Ofgem’s update on the review of embedded benefits.

The regulator is trying to stop generation that is connected to the distribution network from receiving what it sees as too much money for helping suppliers avoid transmission network charges by effectively acting as negative demand during peak periods. The Transmission Network Use of System (TNUoS) demand residual payment, known broadly as the Triad payment, currently stands at around £45/kW, according to Ofgem. It predicts that will rise to £72/kW by 2020.

Both regulator and the government think that is too much – and is distorting the capacity market, because small generators, with £45/kW Triad benefit in their pockets, can bid low, undercutting the larger new generators that government wants to incentivise.

The capacity auction begins on Tuesday. In an open letter published Friday, Ofgem suggested that it may end up implementing one of the proposals tabled by EDF or Scottish Power as a short-term fix ahead of a broader review of network charging. Suggestions by those generators include stopping generators connecting to the distribution network from June 2017 from receiving Triad benefit, or allowing them to keep Triad benefit – unless they have a capacity market contract.

While Ofgem said it has yet to make a decision on what to do, it will do so by middle of next year. In the meantime, it warned those still thinking about bidding for capacity market contracts that they should bid as if their revenues would take the biggest hit from the potential fixes on the table.

“It would be prudent for participants in the CM auction to assume that by no later than 2020, TNUoS demand residual payments to embedded generators could be as low as the most significant reduction proposed in the code modifications and [amendments] under consideration,” warned the regulator.

The update was greeted with dismay from small generators. The Association for Decentralised Energy said it was “disappointed” that the regulator was going to follow “the rushed recommendations of large generation companies” instead of conducting a full review.

Director Tim Rotheray said the wrong decision would affect businesses and the public sector as well as security of supply. He called for existing rates for generators to remain unchanged, known as ‘grandfathering’.

Analysts have suggested that capacity market outturn rates would have to at least double to incentivise large new gas plants. Meanwhile, government has already proposed to change regulations so that the capacity market supplier charge is collected based on gross, instead of net demand.

That would effectively remove a large chunk of revenue from embedded generators with capacity market contracts.

In addition, generators mulling Tuesday’s capacity auction must also consider Defra’s proposals to limit emissions.

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Is Triad past its peak?

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