Ofgem is set to implement deep cuts to the revenues earned by small power generators. The regulator plans to reduce the Triad benefit, currently £45/kW, to £2/kW over three years, starting in 2018.
While Ofgem suggests the Triad component of so-called embedded benefits is spiralling out of control, over-rewarding small generators and distorting the outcome of the capacity market, small generators are aghast at the proposal.
“The consequences for industrial manufacturers, hospitals, and local authorities who generate their own power could be devastating,” said Tim Rotheray, head of the Association for Decentralised Energy (ADE).
Rotheray suggested that Ofgem was wrong to “depend on a rushed industry review, led by large coal and gas generation interests” and had ignored independent analysis by Cornwall Energy about the level of benefits accrued by small generators. He repeated calls for the regulator to take a full review of network charging. Until that review was undertaken, Rotheray urged Ofgem to make softer cuts to the payments.
Embedded benefits – what’s the issue?
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. As it stands, the capacity market has failed to encourage investment in large scale new build combined cycle gas power stations. Ofgem, which was accused of effectively kicking the can down the road on embedded benefits for many years by Cornwall Energy, appears to be attempting to make a quick fix.
That leaves smaller generators facing a pincer movement, as government is also moving to slash their revenues in a bid to achieve different outcomes from the capacity market.
BEIS outlined plans last October to change the rules so that the capacity market supplier charge is collected based on gross, instead of net demand. That will remove a large chunk of revenue from embedded generators with capacity market contracts.
Currently, those generators receive an income stream both from the capacity market contract itself, and the money suppliers pay them for helping them to reduce their use of the transmission system. By changing the charging methodology, government will remove the latter element, which it suggests is worth around £15/kW – almost as much as capacity market payments.
Ofgem has issued a consultation on its ‘minded to’ position on embedded benefits. If the regulator proceeds with its plans, generators under 100MW will see their Triad benefit reduced by around a third each year for three years from 2018.
However, Ofgem could face legal challenges from smaller generators, according to specialist energy developer and generator site, New Power.
See Ofgem’s consultation here.
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The energy industry has been grappling with how best to address this issue for a number of years. The plans outlined today will affect a large number of generators. Cutting embedded benefits could impact much needed investment in the sector and more broadly affect the energy market which is already in flux. The level of the proposed changes demonstrates the impact that could occur if these issues are not addressed quickly. The increasing volume of embedded generation has meant that more GSPs have started to export energy as the volume of embedded generation increases. There is value in undertaking a holistic review of the electricity charging regimes covering transmission and distribution to ensure they are set up to accommodate increasing levels of storage and smart grids; and avoid step changes which harm investor confidence.Stefan Leedham, ElectraLink.