Plans revealed by Ofgem to drastically cut the triad avoidance payments available to embedded generation could have a “dangerous unintended consequence”, law firm Pinsent Masons has warned.
The reduction in revenues could force some distributed generation projects to be “shelved or scrapped completely” leaving a shortfall in capacity which would need to be filled.
“Any changes to the charging regime for those generating the UK’s energy supply will have a far reaching financial impact on the energy industry,” said energy partner Jeremy Chang. “Tackling embedded benefits has always been about creating a level playing field. But while this agenda is laudable the method in which you achieve this is crucial.”
The term embedded benefits refers to the exemptions from both balancing and transmission charges for generation embedded in distribution networks. They include the triad avoidance payments which they are able to collect from suppliers by helping them to reduce their transmission charges. Embedded generators are able to do this because the power they sell to suppliers is counted as negative demand during the triad periods used by National Grid to determine the charges.
Concerned that they give an “unfair advantage” to distributed generation, Ofgem has proposed cutting the residual element of the triad avoidance payments from the current level of around £45/kW to just £2/kW.
The regulator said without the changes the value of payments will increase to £72/kW over the next four years due to a feedback loop. The locational element of the triad avoidance payments, which varies in value from £-5.09/kW to £6.54/kW, will remain in place. The changes will be phased in over three years between 2018 and 2020, subject to the outcome of a consultation.
“After widespread concern that the rug would be ripped from under their feet, there will be a relief in some quarters that charging exemptions will not be scrapped wholesale with a phasing out of benefits helping to soften the blow,” said Chang.
“Despite this helpful cushion, this won’t be plain sailing for generators. It could mean some projects are rendered uneconomic when charges are imposed with the potential for them to shelved or scrapped completely.
“At a time when safeguarding the UK’s security of supply is of paramount importance this seems like a dangerous unintended consequence.”
Responding to today’s (3 January) announcement, the ADE said that 13 per cent of electricity demand is currently met by embedded generators at peak times. “Any local energy plant closures as a result of the changes will reduce security of supply over the winter making blackouts more likely.”
Any shortfall which results from the changes could well be filled by extending the lives of existing coal plants. “Ofgem’s proposal will support increased coal generation at the expense of the smarter, more flexible and innovative energy solutions we should be supporting,” argued ADE director Tim Rotheray.
Ofgem has disputed the claim saying it is does expect to see any “material impact on security of supply”. The regulator will make a final decision on the proposals in May.