Ofgem denies rushing embedded benefits review

Regulator says process has lasted for more than a year and that swift action is needed

Ofgem has denied rushing through a review of embedded benefits, saying the process has been going on for more than a year and that swift action is needed to prevent investor uncertainty and market distortions.

The regulator has also disputed claims that the process was led by the interests of large-scale coal and gas generators at the expense of small-scale distributed generators.

“We don’t agree that it’s a rushed review. We set out our concerns last March and have been reviewing this for almost a year now,” said a spokesman for Ofgem. “We are expected to reach a decision in May, which will be 14 months from when we announced the review, during which time we have engaged heavily with industry.”

Ofgem was responding to comments made by Association for Decentralised Energy (ADE) director Tim Rotheray after the regulator revealed plans to slash the value of the residual element of the triad avoidance payments available to small-scale distributed generators from its current level of around £45/kW to just £2/kW. Ofgem said the changes could save consumers up to £7 billion by 2034.

According to Rotheray the decision followed a “rushed industry review, led by large coal and gas generation interests”. He accused Ofgem failing to conduct the “robust evidence gathering that we would expect for a decision worth hundreds of millions of pounds”. The ADE is one of several organisations to have called for a significant code review to deal with the issue of embedded benefits.

“Postponing a decision on the modification proposals for the triad benefit pending a wider review of network charging for [embedded generation] would cause considerable delay – at least 18 months if we used a significant code review,” the Ofgem spokesman said.

“During that time, the triad payments to [embedded generation] would continue to escalate, with the risk of further sustained and significant market/investor uncertainty and distortion.”

“Also, it’s not led by large coal and gas,” he added. “Our biggest concern is the cost to consumers of the triad benefit. Solar and wind schemes will not be significantly impacted by today’s (2 March) proposals as for the most part they do not get this payment.”

Here’s a round-up of how industry figures have reacted to the proposals:

Tim Rotheray, director, Association for Decentralised Energy

“Ofgem’s proposal will support increased coal generation at the expense of the smarter, more flexible and innovative energy solutions we should be supporting.

“Ofgem has depended on a rushed industry review, led by large coal and gas generation interests, and has not undertaken the kind of robust evidence gathering that we would expect for a decision worth hundreds of millions of pounds. Ofgem’s assumptions for consumer savings are entirely dependent on new large gas power stations being built, an assumption which was not born out by the last capacity market auction.”

“Ofgem chief executive Dermot Nolan’s statement yesterday that Ofgem will launch a wider, more formal review on network charging is welcome. We call on Ofgem to take a more cautious approach now, with more protections for existing generators and a lower reduction of the embedded benefit, until they have undertaken that fuller review.”

James Court, head of policy and external affairs, Renewable Energy Association

“This decision flies in the face 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.”

Stefan Leedham, acting head of governance, Electralink

“The energy industry has been grappling with how best to address this issue for a number of years. The plans outlined today will affect a large number of generators. Cutting embedded benefits could impact much needed investment in the sector and more broadly affect the energy market which is already in flux. The level of the proposed changes demonstrates the impact that could occur if these issues are not addressed quickly.

“The increasing volume of embedded generation has meant that more grid supply points have started to export energy as the volume of embedded generation increases.  We continue to believe there is value in undertaking a holistic review of the electricity charging regimes covering transmission and distribution to ensure they are set up to accommodate increasing levels of storage and smart grids; and avoid step changes which harm investor confidence.”

Tim Emrich, chief executive, UK Power Reserve

“We agree that reform is needed which balances the requirements for security of supply, value to consumers and decarbonisation of power generation. However, the current proposal to reform the long-standing triad system so quickly cuts across the need to maintain investor confidence by not enacting retrospective changes on historic investment decisions.

“Our analysis demonstrates that changes of this sort, whilst superficially appearing to deliver short term benefits for consumers, will in the long run result in higher costs: further subsidies will be required to keep old and unreliable coal plant open as investment in new, flexible gas plant is deterred.

“The energy system is already hugely biased towards maintaining the status quo. And the result of these changes will be to sustain legacy coal and gas power stations which are dirty, inflexible and uneconomic.  Our journey towards a smarter, cleaner and more affordable energy system is being dealt a big blow today.”

Felix Lerch, UK chairman, Uniper

“We don’t believe the proposal is likely to support coal or disadvantage other energy solutions – but it may well avoid the need for unnecessary closure of gas assets. Ofgem’s proposal is about providing a level playing field for all generation types, which in turn will lead to lower bills for consumers.”

“Ideally, we’d prefer the proposal to be implemented immediately rather than following a three-year phased approach so that consumers can benefit from lower bills more quickly.”

Gareth Miller, interim chief executive, Cornwall

“If the weighting of priorities has been wrong, so in our view has the ordering of events. As part of the minded-to decision yesterday Ofgem have signalled a targeted charging review, potentially widening to a significant code review if required, focussed on wider embedded benefits – such as balancing charges – and no doubt behind the meter arrangements. The regulator states that this will be launched later this month.

“If they were considering doing this anyway, why not defer the triad decision so it can form part of that more comprehensive exercise or cap the current level of payment? We do seem to have got the cart before the horse.

“Perceptions of regulatory risk in the GB market are already significant, and this latest development further jar investors nerves. If we do not learn lessons from this process, and repeat similar approaches in the work to come on the design of a smart, flexible market, then it is highly likely the transition will be bumpier and costlier than it needs to be. In fact, the minded-to decision has probably already guaranteed that this will be the case.”

Jeremy Chang, energy partner, Pinsent Masons

“Any changes to the charging regime for those generating the UK’s energy supply will have a far reaching financial impact on the energy industry. Tackling embedded benefits has always been about creating a level playing field. But while this agenda is laudable the method in which you achieve this is crucial.

“After widespread concern that the rug would be ripped from under their feet, there will be a relief in some quarters that 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 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.”