Posted on: 27/06/2017
Renewable energy bodies have criticised Ofgem for confirming what have been described as“ruthless” cuts to embedded benefits.
Eligible generators that are connected to the distribution network instead of the transmission network currently receive ‘triad’ payments of £47/kW for output at peak periods.
In confirmation of plans under a ‘minded to’ decision published earlier this year, the payments will reduce to between £3/kW and £7/kW over three years from 2018-21.
Ofgem said the current £47/kW price was double the clearing price for the 2016 Capacity Market auction and said it was forecast to increase to £70/kW over the next four years.
Manufacturers’ costs ‘to rise by £160m’
Dermot Nolan, Chief Executive at Ofgem, said: “We are concerned that the current level of the payment is distorting the market and is set to increase further.”
“Our role is to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.”
The Association for Decentralised Energy (ADE) argued that power generators received the embedded benefits for helping to “keep the lights on at peak times”, meeting 13% of peak demand, and that the changes would push up the costs to industrial manufacturers of generating their own power by more than £160 million.
Transmission prices ‘rapid’ rise
The ADE said more than 8GW of small generators received contracts in the Capacity Market auction and some have stated they are unlikely to build this capacity as a result of these changes.
Tim Rotheray, Director of the ADE, said: “The decision 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 £943 million in 2007 to £3.7 billion in 2021.”
Nina Skorupska, Chief Executive at the Renewable Energy Association, added: “This ruthless cut will be damaging to the development of next-generation flexibility and energy storage technologies.
“Many manufacturing sites across the country have chosen to strengthen their bottom lines and reduce their carbon footprint by investing in onsite energy generation. Despite Government rhetoric about supporting manufacturing through the Industrial Strategy, these sites too will be impacted by increased costs, potentially in the millions of pounds for larger installations.”
Finance and projects expert Jeremy Chang of law firm Pinsent Masons said that the cuts would "impact revenues on generation and could lead to some projects being put on ice or scrapped completely".
"For this reason, it wouldn't be a surprise if this decision was appealed or ultimately challenged by judicial review to halt changes that could be a disincentive to investment into the energy industry," he said.
"Ofgem's decision risks undermining the government's drive to promote a smarter and more flexible energy industry given the knock-on impact this could have on energy storage projects.
Storage could play a major role in addressing supply and demand challenges, but removing these benefits could reduce value of these projects.
Ultimately the UK risks reduced deployment at a time when innovative energy technologies are most needed," he said.
"While a period of phasing will soften the blow of these changes somewhat, we should prepare ourselves for ongoing regulatory uncertainty with knock-on effects on investment.
This will be brought into sharp focus if Ofgem unwinds these changes in light of its review of transmission charging," he added,.