Ofgem, the UK energy regulator, is reviewing incentive schemes for small gas, diesel-fired power plants – a withdrawal of subsidies could make developers scrap 2,000 MW of planned capacity. Operators of larger combined-cycle gas power plants argue, however, that payments to distributed gensets have led to a ‘market distortion’ which discourages investments in CCGTs.
Industry groups like the Association of Decentralised Energy and UK Power Reserve warn that withdrawing embedded benefits threatens to undermine the flexibility of the UK power system and could cause power shortages in the coming winters.
Small gas and diesel-fired plant (with up to 20 MW capacity each) have “taken on a vital role in stabilising the power grid”, they say, as the contribution of larger coal and nuclear plants shrinks due to shut-downs.
The Association of Decentralised Energy, which represents CHP operators, said that removal of these benefits from so-called captive power plants that are run by energy-intensive industries would raise their electricity costs by up to 20% and threaten jobs.
Brawl over embedded benefits
Disputes over subsidies for small-scale generators exemplify the growing tension between energy utilities, regulators and the government over the best way to bring about much-needed investments in Britain’s ageing energy infrastructure.
Distributed generators cash in on £45/kW in embedded benefits in addition to selling electricity.
Concerns about market distortion were raised and the regulator signalled that it would reform the matter. Back in late July 2016, Ofgem said these embedded benefits, paid by power suppliers to distribution grid-connected generators, mostly run on gas and diesel, “seem to put the latter at an advantage over larger plants connected to the high-voltage grid.”
Reform stipulated
When initiating a review that might lead to a reform of embedded benefits, Ofgem particularly addressed small diesel, gas and combined heat and power generators connected to the distribution network who get these payments – even though they don’t have to pay grid fees as they supply electricity directly into the local distribution networks.
“We are particularly concerned about specific payments that these generators receive from suppliers for helping them to reduce the biggest element of the electricity transmission charges they face at peak times,” the UK energy regulator stressed. Some UK power suppliers are even said to pay embedded generators in order to avoid high charges from National Grid for balancing the system.
With the number of distributed generators on the rise, Ofgem finds that “the level of these payments has increased significantly and is due to rise even further.” The amount paid by suppliers to these embedded generators is currently around £45/kW – more than double the clearing price for the 2015 Capacity Market auction. This is forecast to increase in four years to £72/kW.
Level playing field
A KPMG report, commissioned by UK Power Reserve, finds that scrapping embedded benefits could lead to the shutdown of up to 2,100 MW of existing distributed capacity while putting about 500MW of planned capacity. Tim Emrich, chief executive of UK Power Reserve conceded that the contested benefits need to be reined in, but he underlined that any cuts should not be applied retrospectively as this would put project at risk that are already underway.
Investment in energy infrastructure, made on the basis that the existing system of embedded charging was deemed ‘fit for purpose’, should Emrich’s view receive “appropriate and fair protection from the regulator.”
In contrast, Ofgem argues that most intermittent power sources are “unlikely to be affected by any changes to these payments.” Intermittent generators are usually unable to generate during ‘triad period’, since these fall outside daylight hours – so they do not tend to receive the controversial embedded benefits, stressed the British energy regulator.