Ofgem stands firm on cuts to embedded benefits

Residual element of triad avoidance payments will be almost entirely removed

Ofgem will move ahead with plans to drastically cut the triad avoidance payments available to distributed generators after making a final decision on reforms to embedded benefits.

The residual element of the payments will be almost entirely removed over the course of three years, in line with the regulator’s minded to decision in March.

The payments

Triad avoidance payments are one of a series of financial advantages – or embedded benefits – which are available to generators embedded within distribution networks.

Embedded generators receive the payments for helping suppliers to reduce their Transmission Network Use of System (TNUoS) charges. They are able to do this because they are effectively treated as negative demand during the triad periods of peak demand which are used to set the charges.

TNOuS charges contain a locational element, which reflects the cost of the reinforcements needed to accommodate new generation in different regions, and a residual element, which covers the sunk costs of the existing transmission network.

The changes

At a meeting on Thursday (15 June), Ofgem confirmed plans to introduce the WACM4 code modification put forward by SSE during a working group of the Connection and Use of System Code (CUSC) panel. The panel, which reviews changes to the rules governing the use of the transmission network, considered 25 different proposals in total – two core options submitted by EDF Energy and Scottish Power and 23 variations suggested in the working group.

Under the WACM4 modification, the portion of the triad avoidance payments relating to the residual element of the TNUoS charges will be slashed from the current level of around £47/kW to between £3/kW and £7/kW.

The new level of the payments is equivalent to the avoided costs from reinforcements at the grid supply points where transmission and distribution networks meet due to reduced demand at the threshold. National Grid previously estimated this figure at just £1.65/kW.

The locational element of the triad avoidance payments will be unaffected.

Ofgem is introducing the reforms due to concerns that the payments are giving an unfair advantage to distributed generators. The residual element was otherwise forecast to increase to £70/kW over the next four years.

Ofgem chief executive Dermot Nolan said: “We are concerned that the current level of the payment is distorting the market and is set to increase further.”

“Our role is to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.” 

The changes will be introduced over a period of three years beginning on 1 April 2018. They will not be grandfathered in, despite the protestations of developers which won new build contracts for distributed generation in the early capacity market auctions and were hoping for some form of exemption.

In an open letter to stakeholders, Ofgem says it announced the final decision to “ensure that commercially sensitive information is released as soon as possible”.

“We understand that knowledge of the authority’s decision is likely to impact on stakeholders’ investment decisions in relation to the financial commitment milestone of 22 June 2017 for the 2015 capacity auction,” the letter adds.

The regulator says it received 86 responses to the consultation on its minded-to decision. “Since the consultation closed, we have been engaged in carefully considering the representations made. This has included updating the modelling analysis and other aspects of our impact assessment.”

The final impact assessment will be released by this Thursday (22 June).


Industry reacts to embedded benefits decision:

Mark Draper, chairman, Flexible Generation Group

“We are disappointed that Ofgem has not listened to our fears and chosen to go ahead with their decision despite huge political uncertainty, presenting the new administration with a decision before assessing it against the broader policy background.”

“We have repeatedly raised our concerns that Ofgem’s current governance structures give large energy firms undue influence over the reform process and changes in regulation. The decision makers on the Connection and Use of System Code (CUSC) panel overwhelmingly represent companies, including EDF Energy, SSE, Scottish Power and Uniper, which will benefit from what is being proposed. It is their recommendations which Ofgem has endorsed in its ruling.

“Small generators and new entrants have no representation on this panel, despite requests to have their voices heard and interests represented. This decision - and its timing - reinforces in the minds of many that the large power generators wield excessive and undue influence within Ofgem’s regulatory processes.”

“We are now considering our options.”

Felix Lerch, UK chairman, Uniper

“We welcome the announcement from Ofgem as we believe that reducing embedded benefits in this way creates a more level playing field for all generators, reduces distortion in the market, and also delivers a good result for the consumer.

“The working group which looked at possible changes to embedded generation benefits reflected a wide range of industry views, with two thirds of the members representing small, embedded generation interests. The process took almost six months.”

Tim Rotheray, director, Association for Decentralised Energy

“We are disappointed that the much larger national benefits that small generators deliver by reducing use of transmission networks remain unexamined, and Ofgem’s new review must investigate how lowering use of the transmission network can save consumers money over the long term.

“The decision today does not address the heart of the issue, which is Ofgem’s approval for the rapid rise in the cost of the transmission network from £943 million in 2007 to £3.7 billion in 2021.”

Jonathan Marshall, energy analyst, Energy and Climate Intelligence Unit

"This backwards step from Ofgem will directly hit small and flexible power stations, exactly the sort needed in the UK to keep the grid balanced and ticking over as we generate more and more power from renewable sources.

“Rather than looking to the future where the electricity system is decentralised, democratised and decarbonised, this ruling will play into the hands of the big six, who have long been lobbying against progressive changes.

“By turning its back on the power system of the future, Ofgem’s decision is likely to add to energy bills and could force planned projects to be cancelled – undoing technological progress from recent years that has kept the lights on and ensured costs stay low.”

Nina Skorupska, chief executive, Renewable Energy Association

“This ruthless cut will be damaging to the development of next-generation flexibility and energy storage technologies. Additionally, several gigawatts of already installed renewable generation capacity will be negatively impacted. This comes on top of 18 months of damaging and sudden policy changes to the sector which are not only hammering the financial viability of new low-carbon projects, but now the viability of existing ones now too.

“This move will clearly benefit larger, incumbent companies compared to the innovative renewable energy players that have burst onto the market in the past decade.

“This decision flies in the face of where the market is headed. Other nations are actively supporting the deployment of embedded renewable generation and further decentralisation. They see this as leading to a grid that is cheaper, cleaner, and will strengthen jobs and consumers.”

Author: Tom Grimwood,
Channel: Markets & Trading , Policy & Regulation , Finance & investment

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