New rules damage UK energy security – help big producers

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Big Utilities need backup power

British energy regulator Ofgem has moved a step closer to removing a significant revenue stream for off-grid electricity production, which could impact the quantity of new large-scale generation in future.

Ofgem says it intends to accept a proposal from two huge Utility companies to reduce payments made to small-scale distributed generators by suppliers for providing off-grid electricity during peak winter hours. Suppliers can save on system transmission charges as a result.

The so-called triad payments, which off-grid generators receive for providing electricity during three half-hour periods of the highest demand across winter, will drop from the current level of approximately £45/kW to around £2/kW. The reforms will be phased in over three years from 2018 to 2020.

Previous forecasts had been for the payments to increase to £72/kW over the next four years.

Last year, a report by global advisory KPMG warned that just over 2GW of new embedded generation contracted by the UK government under its capacity market could fail to deliver if off-grid financial benefits were removed. The report, which was commissioned by off-grid generator UK Power Reserve, argued for transitional arrangements to be put in place.

However, Ofgem disagreed in a statement last week. “We believe the proposed reforms would not have a material impact on security of supply,” it said.

While a potential reduction in consumer bills is the main motivation behind Ofgem’s proposals, concerns have been raised that the level of so-called ‘embedded’ benefits has distorted the market in favour of small-scale generation.

As a result, developers of larger new gas-fired generation – some of which are also subject to system transmission charges that off-grid generators escape – have been unable to compete in capacity market auctions and bid in low enough to meet the clearing price awarded for capacity contracts.

The reforms proposed by Ofgem were sparked by network code modification proposals submitted by utilities Scottish Power and EDF.

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