Embedded benefit reforms could lead to capacity shortfall

Reforms to embedded benefits to reduce the triad avoidance payments available to small-scale distributed generators could lead to a capacity shortfall, Aurora Energy Research has warned.

Some developers with capacity market agreements are likely to find they are better off walking away from contracts, despite the financial penalties they would face.

“We’ve heard a lot of evidence that a number of the peaking plants that won contracts in the first T-4 auction two years ago are actually not going to deliver,” Aurora Energy Research executive director Ben Irons told Utility Week.

“They haven’t officially reneged yet, but given the way triads are going and other market developments, its frankly cheaper to just walk away and pay any penalties than it is for them to deliver an unprofitable project. Just because a contract has been awarded there’s no guarantee of delivery.”

Ofgem announced in January it was reviewing network charging arrangements after large numbers of diesel engines won capacity market contracts in the first two auction rounds. The so-called embedded benefits enjoyed by small-scale generators connected to distributed networks – most significantly triad avoidance payments – played a large part in their success.

Distributed generators with a capacity of less than 100MW are exempt from Transmission Network Use of System (TNUoS) charges and can also earn triad avoidance payments from suppliers for reducing their TNUoS charges. They are able to do this because the power they generate is treated as net negative demand during the triad periods used to set the charges.

The regulator said last month it is focused on two possible changes to triad avoidance payments and expects to make a decision in the first half of this year.

Meanwhile, consultancy firm EnAppsSys has said new emissions limits for small-scale generators being considered by the Department for Environment, Food and Rural Affairs could also contribute a capacity shortfall.

Asked by Utility Week whether any of the diesel plants which secured agreements in the most recent four-year-ahead (T-4) auction were likely to renege on their agreements, EnAppSys director Paul Verrill responded: “Absolutely, yes. They’re backing out now.”

Verill said this may not be much of an issue if the clearing price remains low in future auctions as developers could transfer their contracts to alternative plants fuelled by gas. However, he added: “The problem is that’s only really of interest if the capacity market stays at this level. If the capacity market is rising year-on-year then it’s not a good deal to swap a site that could win a contract at £25/kW with a contract at £22/kW.”

UK Power Reserve, a company that has secured numerous capacity market contracts for distributed generation, told Utility Week in November that reforms to embedded benefits to ward off diesel are an “overreaction” which will harm investment in new capacity.