02 March 2017

Ofgem have proposed dramatically reducing ‘embedded benefits’ received by distributed generators from £45 per kW to £2 per kW. This would be phased in between 2018 to 2020. The proposals are open for consultation until 10 April and are available here.

The way use of the network is charged is fiendishly complicated. However, the financial signals it sends as to where and when power is generated and used have a major impact on investment. You may find our recent paper “Network Charging for a Flexible Future” a useful guide to the issues and why we are calling for a full review of charging rather than piecemeal change.

Andy Burgess from Ofgem will be at Smart Energy Marketplace, providing an opportunity to discuss the proposals direct with Ofgem before the end of the consultation period.

What is changing?
Users of electricity pay towards the cost of the Transmission network. This payment is based on the level of demand at the three peak demand times of the year, the Triads.

Currently embedded generation – generators that are connected to the distribution rather than transmission network – are treated as ‘negative demand’ as they reduce the demand on the Transmission Network. If they generate during Triads they receive a credit, usually via their PPA provider. It is this credit, the “TNUoS demand residual (TDR) payment” that is being largely removed.

Other, smaller, embedded benefits will remain. Embedded generators do not, for example, pay any charge towards the use of the transmission network. These changes won’t affect distribution network charging and any benefits generators may receive from that.

What is the impact?
One major impact is on storage. Exporting power during Triad periods is part of the business case for many storage projects. For example, the two Low Carbon projects successful in National Grid’s auction for the Enhanced Frequency Response stated they would not provide the frequency response service during typical Triad hours. Business cases for many storage projects will be looking substantially less attractive this morning.

Another major impact of these changes is on stand-alone non-intermittent generation such as diesel or gas peaking plant, which will lose a significant income source. On the renewables side this is likely to include AD and biomass.

Behind the meter generation or storage that reduces high energy users demand at peak times won’t be impacted. However, many of those high energy users aim to export power during Triad periods. There will no longer be an incentive to do so. The proposals will, therefore, tend to encourage investment in behind the meter projects where all the power is used to offset demand.

The value of embedded benefits for wind projects is very variable depending on whether the wind is blowing during Triad periods. For a typical 1 MW wind farm asset operating in Cornwall at an average 30% capacity factor, that hits the Triads and has a 90% benefit pass through PPA, the combined embedded benefits of TNUoS and BSUoS payments have been calculated at circa £17- 18k per annum or £6-7 per MWh. Given a wholesale price of power around £50 per MWh losing most of this income is significant. However, it must be stressed the current level of benefits will vary greatly between projects and years.

The changes will have no impact on solar projects as they don’t have significant generation during Triad periods. However, emerging solar plus storage models will be heavily affected.

Smoke filled rooms
These are perhaps the single most complicated, jargon laden, set of proposals we have ever read. Given the number of regulatory documents Regen has worked through over the years the bar for that prize is set pretty high.

Ofgem’s core proposal is a good example “Our provisional view is that WACM 4 best facilitates the CUSC objectives and our statutory duties”

Partly this impenetrable language is due to the strange process by which network charging is set. Industry participants come up with proposals, which they then consider and vote on themselves, before making proposals to Ofgem. This process is dominated by large incumbents with obvious vested interests and is essentially impossible for anyone outside the inner sanctum to penetrate. Such a process may have been fit for purpose when generation came from 50 power stations connected to the transmission network, but it is clearly not fit for a decentralised, flexible system. It is disappointing Ofgem has not moved to reform it.

Longer term change
Ofgem have stated they will carry out a full “Targeted Charging Review” and will be consulting soon on this process. This will be an important opportunity to reshape network charging to support a smart, flexible and low carbon energy future.

What should we do?
Ofgem has convinced itself it is on the side of consumers in making these changes and has stuck to its guns despite criticism. Whilst it seems unlikely they will change tack at this point we would encourage members affected to respond to the consultation with detailed numbers on the level of impact to show this is a significant issue.

The broader lesson of this experience is we need to engage early and fully in the Targeted Charging Review. Smart Energy Marketplace will be a good opportunity to begin that engagement.

Author: Merlin Hyman

Contact: mhyman@regensw.co.uk

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