Removing embedded benefits could dent energy security warns report

The UK’s energy security could be put at risk if “embedded benefits” are removed, according to a new report.

The UK Government has asked Ofgem to consider removing embedded benefits, which apply to generators connected to local distribution networks instead of the larger transmission networks.

Ministers are considering scrapping the benefits amid fears that so-called “diesel farms” are using the rules to win more Capacity Market auctions.

The new report, commissioned by UK Power Reserve and carried out by accountancy firm KPMG, estimated that if embedded benefits were immediately removed then 2.1GW of new distributed generation already in planning would be withdrawn.

The cost of replacing the lost capacity would be between £285 million and £945m over the typical 15-year lifespan for such new plant.

Price rises

The report also warned that the immediate removal would also push up bids in future Capacity Market auctions.

Costs could increase by as much as £1.3 billion, the report concluded. Last month the Association for Decentralised Energy (ADE) warned removing embedded benefits could push up energy costs for manufacturing businesses by £170 million.

The ADE, which represents large manufacturers including Boots and British Sugar, said some businesses could face an extra £3m a year on their energy bills.

Report recommendations

Tim Emrich, Chief Executive at UK Power Reserve, said: “Dramatic amendments to embedded benefits could jeopardise a significant amount of committed distributed generation and with it future long-term supply security.

“It is critical that the UK Government and Ofgem create a stable and predictable regulatory environment so that investors in the energy market can make the right decisions in order to protect competition and consumers.”

KPMG’s report recommendations include either introducing transitional arrangements rather than an immediate end to embedded benefits or revising the rules for the Capacity Market auctions.

> Read the report's executive summary