Ian Holyoak
Posted on 20 Jun 2017

Reduction in embedded benefits for smaller electricity producers

Since July last year, when Ofgem published an open letter on the topic, there has been an increasing likelihood that 'smaller' (sub-100MW) embedded generators would see a reduction in the level of embedded benefits they receive from electricity suppliers, in particular for helping them to avoid or reduce the costs of using the transmission network at peak times. The times of high demand in winter, known as the TRIADs, are particularly relevant in this respect. Ultimately, this imposes an additional burden on consumers. Because of changes in the profile of generation, including the growth of renewable energy, the costs for consumers have been rising. Ofgem estimates that the current arrangements would result in a shift of costs from embedded generators to consumers of £650m by 2020/2021. 'Non-intermittent' generators, such as gas, diesel, CHP, AD and hydro are likely to be the most affected, although the impact will vary, depending on the individual deals between the generators and the licensed electricity suppliers who receive power from these sources.

On 20 June 2017, Ofgem announced (in outline) its decision to adopt a proposal to address this issue. At this point, further acronyms become unavoidable. The preferred proposal is known as 'WACM 4'. Through a collaborative process with the industry, 25 proposals were explored for modification of the rules governing the use of the transmission system, known as the 'Connection and Use of System Code' or CUSC. 23 of the possible approaches were known as 'Workgroup Alternative CUSC Modification proposals' (WACM). The key concern of Ofgem was that the payments received by embedded generators referred to in the consultation as 'the Transmission Network Use of System (TNUoS) Demand Residual or 'TDR' were too high. This, they say, has resulted in a distortion of the sharing of the burden of the costs of the transmission network, to the point where the whole of the electricity market is or might be affected.

In essence, WACM 4 will result in the reduction of TDR, so that it is at the same level as avoided Grid Supply Point (GSP) costs. A GSP is the place where the transmission and distribution networks meet. Ofgem acknowledge that the use of embedded generation can reduce the need to reinforce the GSPs and, therefore, their decision is that the benefit which flows through to embedded generators in future should reflect that reduction in cost.

There is a lack of consensus over the impact of this change but, in broad terms, triad avoidance payments to generators seem likely to drop to around 10% of current levels by 2021 (and, perhaps, to only 5% of the levels of payment which would have prevailed by 2021, if no changes were made to the CUSC).  Figures suggesting overall impacts on the total revenues of renewables generators of between 5% and 12% are being quoted by those affected. On the other side of the coin, Ofgem suggest that the change will save £20 per household per year.

Ofgem appear to have decided against any 'grandfathering' of existing generators, so all projects will be subject to the new approach, although this is to be phased in from 2018 to 2020. There is further information yet to come from Ofgem, as well as a wider-ranging review of the costs of the transmission network which is still ongoing. 

Ofgem were due to announce their decision back in May, but the election intervened. There are other 'stalled' announcements affecting the energy sector which are likely to emerge in the next few weeks from BEIS / Ofgem. Watch this space!

UPDATE:

On 6 October, 2017, the following update appeared on Ofgem's website:

"Ofgem has been served with a claim for judicial review concerning its decision to approve WACM4 of CUSC modifications CMP264 and CMP265.   This decision stands unless quashed by the court. We are defending the claim. National Grid Electricity Transmission plc has been named by the claimants as an interested party to the proceedings."

Press reports indicate that the claim is backed by a number of generators who have bid for contracts in recent capacity market auctions, who are concerned about the impact on their projected revenue streams.

For further information, please contact Ian Holyoak at ian.holyoak@michelmores.com