Ofgem has indicated it will move quickly to first cap and then reduce the payments earned by generators connected to the distribution network. The outcome of its review could have significant implications for companies with on-site generation.
The regulator was asked earlier this year by the then department of energy and climate change to review the so-called embedded benefits regime, which makes up a large part of the revenue earned by generation connected to the distribution network.
The department believed that the current arrangements distort the capacity market because embedded generation, due to some of those revenues, could bid low in the auction, effectively pricing new-build large thermal plant out of the market.
Financial analysts have suggested that the auction outturn would have to more than double to sufficiently incentivise developers of new large gas power stations. Ofgem is therefore reviewing the embedded benefits regime and looks set to change the rules – despite warnings it may simply drive up bills while failing to incentivise new gas.
The largest payment under the regime relates to payments to small generators from energy suppliers for turning on during peak demand Triad periods.
It is called the Transmission Network Use of System (TNUoS) demand residual payment and currently stands at around £45/kW, according to Ofgem.
The regulator predicts that payment will rise to £72/kW by 2020. It is this element that Ofgem plans to cut, indicating that it will make its move so that the next capacity auction stands a chance of incentivising, for example, large new gas plants. The regulator said it saw no benefit in delaying any rule changes later than 2019/20. In the meantime, it also plans to stop the payments rising beyond the current level of £45/kW.
Two energy suppliers have already tabled rule changes around embedded generation payments. Scottish Power mooted preventing embedded generators connecting to the distribution network from June 2017 from receiving TNUoS benefit. EDF has essentially proposed leaving the rules alone – except for generators that receive capacity market contracts. Taking TNUoS benefits away from those with capacity market contracts would effectively solve that particular distortion, argued the firm. However, others have described the move as market protection, suggesting that a lack of grandfathering within the proposal would destroy market confidence.
Ofgem said it has also seen several alternative suggestions, but now wants industry views by 23 September before taking action.
See Ofgem’s open letter here.