Ofgem to decide on ’embedded benefits’ in first half of 2017

Ofgem expects to decide on changes to the so-called 'embedded benefits' experienced by distribution-connected generators in the first half of 2017.

In an open letter to stakeholders, the regulator said it will take “early action” to tackle triad avoidance payments as they are becoming “unsustainable” and increasingly distortionary.

“We remain concerned that this distortion is having an impact on the capacity and wholesale markets, driving up costs to consumers,” wrote Ofgem partner for energy systems Frances Warburton. “Our current view is that taking early action to address rising demand residual payments is likely to be in consumers’ interests.”

The regulator announced in January it was reviewing the network charging arrangements for distribution-connected generators after large numbers of diesel engines won capacity market contracts in the first two auction rounds. The financial advantages – or embedded benefits – they experience by being connected to the distribution network played a large part in their success – in particular triad avoidance payments.

Under the current charging arrangements embedded generators are exempt from Transmission Network Use of System (TNUoS) charges and are also able to secure payments from suppliers for reducing their TNUoS charges. This is done by effectively reducing suppliers’ demand on the transmission network during the triad periods used to set the charges for half-hourly metered non-domestic customers.

In another open letter in July, Ofgem revealed it was focused on two potential changes to the charging arrangement to address its concerns over the payments. The first, put forward by Scottish Power, would prevent embedded generators connecting after June 2017 from receiving any triad avoidance payments whatsoever. The second, proposed by EDF, would prevent embedded generators with capacity market contracts from receiving triad avoidance payments relating to the ‘residual’ – or sunk cost – element of the TNUoS charges, starting in 2020.

Ofgem held a consultation on the proposals which concluded on 23 September. It now says it expects to make a decision on them in the first half of 2017, following a further consultation on a “minded to decision” and draft impact assessment in the early part of the year.

The regulator said it heard calls for a wider ranging ‘significant code review’ and concerns over the impact of potential changes on storage and combined heat and power as well as security of supply and investor confidence.

However, it said postponing a decision whilst a review took place would cause “considerable delay to such reform”, during which triad avoidance payments would “continue to escalate, with the risk of further sustained and significant market/investor uncertainty and distortion”. It said the proposed changes are “unlikely to materially alter the short-term risks to security of supply”.

“We recognise the desire from industry to consider wider reform of the regulatory and market arrangements governing the energy system, and we will set out our initial thinking on this in our draft forward work programme later in December”, added Warburton.

Market research firm Cornwall Energy (now Cornwall) warned in October that “rushed changes” to embedded benefits could have significant unintended consequences.