Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Ofgem slashes benefits to cut bills

Ofgem Slashes Embedded Benefits to Cut Consumer BillsOfgem announced its decision on 20 June to significantly lower the payments allocated to small local generators for producing electricity at peak demand times, in a move intended to lower end users energy bills.

In March Ofgem held a consultation on industry modification proposals CMP264 and CMP265. The regulator decided to implement an alternative modification, which would see cuts of as much as 95% to so called “triad” embedded benefit payments.

Affected embedded generators include diesel, biomass or wind generators of small scale – under 100MW capacity. These generators are connected directly to the local distribution network and bypass the transmission network when supplying electricity. Suppliers pay triad embedded benefits to these small-scale generators for helping them to minimise transmission charges during times of peak demand. The subsidy is received in addition to the price that generators get for selling their electricity.

Regulator’s decision

The regulator issued its decision to approve Workgroup Alternative CUSC Modification (WACM) 4 of CUSC proposals CMP264 and CMP265. This will change the transmission charging arrangements by removing the Transmission Network Use of System demand residual payments to smaller embedded generators. It also introduces a new much smaller payment, equivalent to the avoided Grid Supply Point costs.

The outcome could slash embedded benefit payments by 95%, reducing payments from £47/kW down to between £3/kW and £7/kW. This is higher than the previously proposed level of £2/kW. The changes will be introduced through a three-year phased implementation, beginning on 1 April 2018.

Ofgem claimed that the payments cost consumers around £370mn every year. It said the changes would lead to a cumulative customer saving of £2.2bn by 2024, and £7.5bn to 2034.
Chief Executive of Ofgem, Dermot Nolan, commented: “We are concerned that the current level of the payment is distorting the market and is set to increase further. Our role if to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.”

Potential consequences

The proposed changes have attracted extensive criticism. The Association for Decentralised Energy (ADE) called for an urgent independent review of proposals in August last year, claiming that they were rushed without sufficient examination into the benefits of the reduced use of transmission networks delivered by embedded generators.

Energy intensive industries who generate electricity locally could see increases in energy costs of up to £160mn, the ADE estimated. This includes organisations such as hospitals, farms and energy storage providers. Sectors, such as steel and chemicals, could see their energy bills rise by up to £5mn; exposing the risk of plant closures, ultimately putting jobs under threat.

Research published by Cornwall Insight in May 2016 found the triad embedded benefit has helped to avoid billions of pounds in networks costs and its removal could hinder the expansion of new gas power stations.

Analysis found that the removal of the triad benefit could increase the Capacity Market price by £4.70/kW, directly increasing consumer bills by £214mn.

Furthermore, small scale generators secured over 8GW in the recent Capacity Market auction – the government’s flagship energy security policy – , and some have stated they are unlikely to build this capacity because of the changes to embedded benefit payments. As a result, the government could need to re-secure this capacity from new generators at a higher cost, which will be reflected in consumer bills.

Industry protests

The decision received backlash from industry as groups criticised the move for removing incentives for flexible power stations. Small and medium-sized developers, utilities, and developers of new flexibility technologies were deeply concerned by the decision.

ADE Energy Director, Tim Rotheray, expressed disappointment: “The decision today does not address the heart of the issue, which is Ofgem’s approval for the rapid rise in the cost of the transmission network from £943mn in 2007 to £3.7bn in 2021”.

Energy Analyst at the Energy and Climate Intelligence Unit, Dr Jonathan Marshall, added that the decision was a “backwards step”. Marshall explained that the cut would impact small and flexible power stations that are vital in balancing the grid as more renewable capacity is placed on the system.

He said: “By turning its back on the power system of the future, Ofgem’s decision is likely to add to energy bills and could force planned projects to be cancelled- undoing technological progress from recent years that has kept the lights on and ensured costs stay low.”

The Renewable Energy Association (REA) was surprised that the cut in subsidies was enforced as the renewable energy and clean technology industry had already seen over a dozen of sudden and negative policy changes hamper its development in the past 18 months.

Dr Nina Skorupska, Chief Executive at REA, said: “This ruthless cut will be damaging to the development of next-generation flexibility and energy storage technologies”.

The long-term impacts of the decision will be closely scrutinised, particularly the delivery of Ofgem’s projected consumer savings.

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