Ofgem proposes steep cuts to embedded benefits

Ofgem has unveiled proposals to cut the Triad embedded benefits paid to smaller generators - by up to 95% for some generators and to zero for others.

Embedded generators are connected to the lower-voltage distribution network instead of the main high-voltage transmission lines and receive specific payments from suppliers for helping them to reduce the biggest element of the electricity transmission charges they face at peak times.

Ofgem said its view was that the current level of Transmission Network Use of System (TNUoS) payments, known as Triad benefits, is distorting the wholesale and capacity markets.

“If action isn’t taken now, this distortion will only escalate,” it said.

Ofgem has quoted a drop from £45/kW to £2/kW which is an average across the 14 distribution zones, with seven falling to zero. If implemented, the changes will be phased in over three years from 2018 to 2020.

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‘Serious distortion’

But James Court, Head of Policy and External Affairs at the Renewable Energy Association, warned: “This decision flies in the face of where the industry is trying to move, making decentralised and renewable technologies more expensive whilst rewarding existing incumbent fossil fuels.

“Grid charging is complex, trying to unpick one area seriously distorts the whole market.

“We, along with the vast majority of the industry, have been calling for a significant code review to look at the entire area to ensure that charges are fair and appropriate.

“This highlights the problems of a selected few making decisions on behalf of the whole sector.”

‘Rendered uneconomic’

Jeremy Chang, a director at law firm Pinsent Masons, added: “After widespread concern that the rug would be ripped from under their feet, there will be a relief in some quarters that the charging exemptions will not be scrapped wholesale with a phasing out of benefits helping to soften the blow.

“Despite this helpful cushion, this won’t be plain sailing for generators.

“It could mean some projects are rendered uneconomic when charges are imposed, with the potential for them to be shelved or scrapped completely.

“At a time when safeguarding the UK’s security of supply is of paramount importance, this seems like a dangerous unintended consequence.”

SmartestEnergy, which works with a significant number of embedded generators in the UK, said although the proposal wasn’t final, it is a ‘minded to’ decision so is likely go through.

“However, Ofgem have hinted at plans to conduct a Significant Code Review of network charging, which we hope will result in a clear, fair and consistent outcome for generators,” it added.

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> Read Ofgem's proposals