Engie proposes further cuts to embedded benefits

Engie has suggested changes to the charging methodology for balancing services to end an exemption for distributed generators and stop them collecting avoidance payments from suppliers.

According to the proposal document, the current arrangements distort the market in favour of distribution-connected generators, resulting in higher energy bills for consumers.

Balancing Services Use of System (BSUoS) charges are used to recover the balancing costs incurred by the electricity system operator (ESO) at National Grid.

The charges are levied on both demand and transmission-connected generation, with a roughly even split between the two. The rate is set on a per megawatt-hour basis for each half-hour settlement period.

Distributed generators are not only exempt from the charges themselves but can also receive avoidance payments from suppliers. This is because suppliers are charged according to their net demand on the transmission network at each grid supply point and can therefore reduce their exposure by buying power from local distributed generators.

They are similar in nature to the triad avoidance payments that small-scale (less than 100MW) distributed generators can collect from suppliers in exchange for reducing their transmission charges. Ofgem confirmed plans in June 2017 to almost entirely remove the residual element of triad avoidance payments over the course of three years, starting in April 2018.

The favourable charging arrangements enjoyed by generators connected to distribution networks are collectively known as embedded benefits.

First Hydro Company, a subsidiary of Engie, has proposed a modification to the Connection and Use of System Code (CUSC) called CMP307 that would apply BSUoS charges to exports to the power grid from distributed generators, ending their current exemption. Suppliers would also be charged according to their gross demand rather than net demand, meaning distributed generators would no longer be able to collect avoidance payments.

The firm said these changes would increase costs for distributed generators by £5/MWh. Consumers would save £230 million per year, with half coming from lower BSUoS charges and the rest from lower power prices.

The modification will be presented to the CUSC panel on 28 September. The panel undertake an assessment and provide recommendations to Ofgem, which will then have the final say on whether to adopt the proposal.

First Hydro Company has called for the changes to be implemented by April 2021.

Meanwhile, EDF Energy is considering submitting another code modification that would remove the liability from all generators to pay BSUoS charges and shift the burden onto demand.

In a document published on the ESO’s website, the company raised concerns that the current arrangements are creating unfair competition for domestic generators, as balancing charges in interconnected countries are typically levied solely on demand and interconnectors are exempt from BSUoS charges.

The modification would be a carbon copy of a proposal put forward by National Grid Electricity Transmission in 2012. Despite expressing broad support for its aims, Ofgem eventually rejected CMP201 in 2014 on the basis that it would increase costs for consumers.

EDF Energy said the changes should now be reconsidered in light of the expected growth in interconnector capacity, which is set to rise from 4GW currently to almost 18GW by the mid-2020s.

They would mirror the reforms to residual transmission charges proposed by Ofgem in November 2017 as part of a significant code review.