Ofgem reveals plans to slash embedded benefits

Regulator to consult on cut to residual element of triad avoidance payments from £45/kW to £2/kW

Ofgem has revealed plans to slash the residual element of the triad avoidance payments available to embedded generators from the current level of around £45/kW to just £2/kW.

The changes will “reduce costs for consumers and prevent market distortion”, according to the regulator, potentially saving up to £7 billion between now and 2034 - the equivalent of around £20 per household per year. They will be phased in over three years between 2018 and 2020.

Ofgem said in the absence of reforms the value of the payments is forecast to increase to £72/kW over the next four years. A review was launched by the regulator in January after the payments helped distributed generators to win the lion’s share of contracts for new capacity in the initial capacity market auctions.

“Our view is that the current level of payments is distorting the wholesale and capacity markets. If action isn’t taken now, this distortion will only escalate,” Ofgem said in a statement.

Triad avoidance payments are one form of embedded benefits – exemptions from transmission and balancing charges – which are available to small-scale (less than 100MW) distribution-connected generators.

The Transmission Network Use of System (TNUoS) charges are split between a ‘locational’ element, which varies from region to region and reflects the resulting cost of network reinforcement from additional generation in the area, and a ‘residual’ element, which covers the ‘sunk’ costs of the existing transmission network. The charges are levied on both generators and the suppliers.

The reforms proposed by Ofgem would keep the locational element of the triad avoidance payments in place but significantly reduce the residual element. The suggested value of £2/kW for the residual element reflects avoided costs from investing in capacity at the grid supply points - the boundaries where the high voltage transmission network meets the lower voltage distribution networks. Ofgem will now consult on the proposals before reaching a final decision in May.

The changes were suggested by SSE in a working group for the Connection and Use of System Code (CUSC) panel which reviews modifications to the code governing the use of the transmission network. The panel considered a total of 25 different proposals – two core options submitted by EDF Energy and Scottish Power and 23 variations put forward in the working group.

Commenting on today’s ‘minded to’ decision, Association for Decentralised Energy director Tim Rotheray said: “Ofgem’s proposal will support increased coal generation at the expense of the smarter, more flexible and innovative energy solutions we should be supporting.

He said the regulator has depended on a “rushed industry review, led by large coal and gas generation interests” and has failed to conduct the “robust evidence gathering that we would expect for a decision worth hundreds of millions of pounds”.

UK Power Reserve has previously told Utility Week the code modification process is dominated by incumbents, descibing the panel as “mafia-like”.

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