Ofgem reveals plans to slash embedded benefits

Regulator to consult on cut to residual element of triad avoidance payments from £45/kW to £2/kW

Ofgem has revealed plans to slash the residual element of the triad avoidance payments available to small-scale distributed generators from the current level of around £45/kW to just £2/kW.

The changes will “reduce costs for consumers and prevent market distortion”, according to the regulator, potentially saving up to £7 billion between now and 2034 – the equivalent of around £20 per household per year. They will be phased in over three years between 2018 and 2020.

Ofgem said in the absence of reforms the value of the payments is forecast to increase to £72/kW over the next four years. A review was launched by the regulator in January after they helped distributed generators to win the lion’s share of new-build contracts in the initial capacity market auctions.

“Our view is that the current level of payments is distorting the wholesale and capacity markets. If action isn’t taken now, this distortion will only escalate,” Ofgem said in a statement.

Triad avoidance payments are one of series of financial advantages known as embedded benefits enjoyed by distribution-connected generators with a capacity of less than 100MW. They can earn the payments from suppliers for reducing their Transmission Network Use of System (TNUoS) charges and are able to do so because the power they produce is treated as net negative demand during the triad periods used to set the charges for half-hourly metered non-domestic customers.

TNUoS charges are split between locational charges, which reflect users’ impact on transmission network costs in different regions due to investments to reinforce the grid, and residual charges, which cover the sunk costs of the existing  network. They are levied on both generators and suppliers.

The reforms proposed by Ofgem would keep the locational element of the triad avoidance payments in place but significantly reduce the residual element. The suggested value of £2/kW for the residual payments reflects avoided costs from investing in additional capacity at the grid supply points where the transmission and distribution networks meet. Ofgem will now consult on the proposals before reaching a final decision in May.

The changes were suggested by SSE in a working group for the Connection and Use of System Code (CUSC) panel which reviews modifications to the code governing the use of the transmission network. The panel considered a total of 25 different proposals – two core options submitted by EDF Energy and Scottish Power and 23 variations put forward in the working group.

Commenting on today’s minded-to decision, Association for Decentralised Energy director Tim Rotheray said: “Ofgem’s proposal will support increased coal generation at the expense of the smarter, more flexible and innovative energy solutions we should be supporting.

He said the regulator has depended on a “rushed industry review, led by large coal and gas generation interests” and has failed to conduct the “robust evidence gathering that we would expect for a decision worth hundreds of millions of pounds”.

UK Power Reserve has previously told Utility Week the code modification process is dominated by incumbents, descibing the panel as “mafia-like”.