Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Local generation benefits energy system, research finds

Two major pieces of research published in the past month have sought to highlight the benefits to the system of local electricity generation: that is, projects that are connected at the distribution, rather than the transmission, level.

The two studies, undertaken by the Association for Decentralised Energy (ADE) and KPMG, argue that these projects result in lower costs to consumers and improve energy security.
As a consequence, both express concern about the prospect of government policy changes that could be set to undermine the development of distributed energy in the future.
Local generation
Hundreds of industrial manufacturers and other large energy users in the UK generate their own power onsite and use the local electricity networks instead of the national transmission network.
The number of these projects has increased significantly in recent years. As these projects do not use the transmission network, they avoid certain network costs, and therefore do not pay towards its upkeep and maintenance. These and other financial incentives available to distributed generation schemes are referred to as embedded benefits.
Such benefits are expected to increase in the coming years, as transmission network costs rise.
The revenue that National Grid is allowed to recover from its customers is increasing from £2.47bn in 2014-15 to £3.79bn in 2020-21, a 53% increase. This is due to several factors including the connection of a large number of wind and solar farms, as well as more variable demand.
Under review
The government announced in March that it had asked the energy regulator, Ofgem, to undertake a review of embedded benefits, in part owing to concerns that diesel engine projects were winning too many contracts in the government’s capacity market auction: a mechanism that provides revenues to generators for guaranteeing to provide a secure supply of power when it is needed.
The government is concerned about the success of small diesel plants for two reasons: firstly they emit a high level of CO2, undermining the government’s climate ambitions; secondly, contracts for small diesel engines means there is less money available for large new gas-fired power stations, which are a key part of the government’s energy strategy over the medium term.
But, as the ADE noted, the review will not simply impact on diesel engine projects, but may damage the competitiveness of all local generation—including that belonging to industrial manufacturers, and hospitals.
The ADE estimates that the changes being considered by the review could increase the energy costs of industrial manufacturers and other local energy users by more than £170mn overall, with some manufacturers seeing their energy bills rise by nearly £3m a year.
Dr Tim Rotheray, director of the ADE said: “Asking a local generator to pay for the transmission network is akin to charging drivers for the use of a toll road even when they took alternative routes.”
Industry urges caution
UK business leaders have backed the findings of the report and called on policy-makers to provide certainty over the future of embedded benefits.
Steve Reeson, head of climate change and energy policy for the Food and Drink Federation said: “With around 400MWe of combined heat and power (CHP) plant installed in our sector, and more planned, any reduction in the embedded benefit would adversely impact the economics of operating CHP plant. This risks undermining our sector’s competiveness and the ongoing energy efficiency and environmental benefits that CHP undoubtedly delivers.”
Steve Freeman, director of energy & environmental affairs for the Confederation of Paper Industries said: “This review is creating significant uncertainty for these manufacturers, at a time when they are under significant pressure from high energy costs and increasing imports. It is absolutely vital that the government continues to recognise the benefits that local industrial generation provide to UK competitiveness as well as supporting the wider operation of the national grid.”
Enhanced security
The research was supplemented by a paper released on 1 June by KPMG, which focused on the benefits to Britain’s energy security offered by local generation.
The analysis showed that removing embedded benefits would reduce the UK’s “distributed generation”, increasing the risk to security of supply at a time when short-term capacity margins are already tight.

KPMG found that, if these embedded benefit payments were removed, 2.1GW of small generators that were due to be built in the coming year could be scrapped, with “significant impacts on near-term security of supply”.

There is little detail yet on Ofgem’s plans for the review. A spokesperson said the regulator was looking at whether it would be in consumers’ interests to consider changing the charging arrangements for distribution connected generators. It will set out a proposed way forward in the summer, including whether to consult on making any changes.
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