Ofgem's cuts to the benefits enjoyed by embedded generators is damaging
Ofgem’s plans to cut the benefits enjoyed by embedded generation is a short-term move that will damage investor confidence in the renewables sector.
The energy sector has long struggled with knee-jerk decisions that can change the direction of travel at a moment’s notice. The recent plans outlined by Ofgem to cut embedded generator benefits by up to 95 per cent is just one example of an industry change seemingly at odds with a wider aim for the UK’s energy system, but this short-termism could have a damaging long-term impact.
To achieve a smarter, more flexible and low carbon grid, we need a multitude of market players and technologies, including the participation of distributed generators and industrial and commercial users. Small-scale generators are beginning to play a crucial role in keeping the system balanced; while the number of these assets has risen significantly in recent years, they are yet to become a fully established part of the market or reach the volume needed to meet the UK’s energy targets.
Removing revenue from these projects will not only be detrimental to investor confidence – it threatens to pull the plug on the very burgeoning technologies that government wants to play a larger role in the energy system.
When Levy Exemption Certificates were removed in 2015 it had a negative effect across the renewables industry. Small-scale generators and industrial and commercial users are again facing a loss of revenue that could have significant financial consequences. Business cases were built on predicted revenues that could now be lost should triad payments be slashed from £45/kW to £2/kW by 2020/21, as set out by Ofgem.
While Ofgem stated that prudent investors know charging arrangements are subject to change, removing revenue from both new and existing projects creates an alarmist sentiment in the industry and undoubtedly dissuades investors from backing projects in a market with a reputation for such unexpected measures.
Creating an equal market for all players
The manner in which these decisions are made is also concerning for the UK’s energy future. Changes introduced and considered by a small group of larger industry players are creating piecemeal decisions that have far-reaching consequences and do not always represent the needs of the system as a whole.
The current structure of the energy market is already skewed against smaller market players. They have less resource to actively participate in the industry bodies and panels that review and determine market and charging arrangements, and less access to wider market opportunities: a farmer’s biogas plant may receive triad payments as an embedded generator, but it is far harder for that farmer to access the kind of wholesale market opportunities that a larger power plant takes for granted, from the balancing mechanism to short-term price spikes.
One of the driving factors behind Limejump’s virtual power plant is to create a level playing field for the market, giving smaller players the access to all market opportunities through cloud-based technology and a portfolio approach to market participation. We monitor the wholesale markets and act on short-term opportunities as well as ensure assets are optimised across a variety of schemes, from frequency response to the capacity market. This approach gives all generators and businesses the same opportunities to earn revenue, artificially creating the equal chances that don’t currently exist in the market.
The energy market must enable equal access and participation for all technologies and players if we are to respond to the challenges created by increasingly intermittent supply on the system. Piecemeal decisions must be replaced by a whole-system analysis that creates a framework in which consistent and fair decisions are made and clear pathways are plotted out.
The UK urgently needs a long-term roadmap to give clear direction to meeting its goal of creating a smarter, flexible grid. The UK needs to drive investor confidence in bringing forward new technologies and solutions that can provide desperately needed flexibility for our future energy system. A more measured, solution-driven approach must be taken to provide a clear forward view for investors, generators, and the wider market alike.
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