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Embedded benefits and what their loss could mean
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Embedded benefits and what their loss could mean

Earlier this year, in an attempt to help new generators in the capacity market, the Department of Energy and Climate Change (DECC) handed down orders to Ofgem to consider the embedded benefits enjoyed by existing distribution generators, or DGs.

The basis for this is that DECC is keen to remove, or at the very least reduce, some of the benefits of decentralised energy generation in favour of larger plants such as CCGTs, which it believes are needed for long term security of supply. Basically, the government doesn’t trust cumulative, localised generation and would rather invest in potential white elephant projects (hello Hinkley).

This means it is looking at ways to curtail distributed generation, which place power onto the distribution network and therefore avoid a lot of the costs associated with general upkeep of the national transmission grid. These are the embedded benefits Ofgem is investigating and, as transmission costs have increased, they represent considerable cash savings for DGs.

DECC is concerned that these savings give DGs an unfair advantage when bidding into the capacity market, as it is unsure whether the benefits reflect the avoided costs of distributed generation and storage. Hence the Ofgem review, which could result in significant changes to the embedded benefits regime.

Some of the embedded benefits up for review:

  • Transmission System Use of System Charge (TNUoS) – this reflects the cost of installing, operating and maintaining the transmission system. Given DGs do not deliver electricity via the transmission network, they are not subject to generator TNUoS charges
  • Triads - three half hour periods of peak demand on the electricity transmission network during November-February which are used to determine the TNUoS charges applied to electricity suppliers. They are charged based on how much electricity is being consumed by their customers during Triad periods, with a portion of these costs passed on to the customers. If these consumers are able to reduce their demand with DG or storage technologies during these peak periods, their TNUoS charges will reduce.
  • Balancing Service Use of System Change (BSUoS) - recovers the cost of day to day operation of the transmission system. Generators and suppliers are liable for these charges, which are calculated daily as a flat tariff across all users. DGs avoid this, creating embedded benefit, while suppliers can lower their BSUoS charges by using DG as the charges are based on net demand. Generators can negotiate with offtakers to receive a portion of this saving, creating another embedded benefit. What’s more if a generator has a Bilateral Embedded Generation Agreement (BEGA), it can receive the full saving directly.

Of course the level of changes are anyone’s guess as Ofgem have made very little known about the scope of their review. However the potential fallout of any changes to the current system have sparked comment, reports and even a level of fear as many face seeing their embedded generators lose value. While DECC is keen on seeing existing diesel generators taken out of the capacity market so that new – and more expensive – generators like CCGTs are able to have a chance, the impact of any changes are likely to be far reaching.

As Frank Gordon, senior policy analyst for the Renewable Energy Association, told CEN this week: “It's a bit of a baby and the bath water situation. They've decided to do it to kick diesel out but it's going to impact all renewables.”

And it is this point that could be a concern for corporates, manufacturers and any other large going concerns that have invested, or are planning to invest, in renewable technologies. The business case of combined heat and power (CHP) systems for example, some of which incorporate solar and other renewables, could take a heavy hit if embedded benefits are altered.

A recent report by Cornwall Energy claimed that the changes being considered by the review could result in an increase of £170m in energy costs to industrial manufacturers who generate their own power - some could see their energy costs go up by nearly £3m a year.

It is therefore plainly obvious that changes to the system will further damage the business case for technologies that have already suffered at the hands of the UK government in the last year.

According to Gordon, a few years ago embedded benefits were valued at around £20 per kW of installed capacity and this will have only grown since. Not only would changes – retrospective or otherwise – risk the potential of renewables and other onsite generation techs, they would likely see existing systems hit.

"In terms of the direct impact it would have a bigger impact on the generator side because you're receiving these benefits at the moment. They go away and all of a sudden your grid charges go up massively,” Gordon explained.

Lee Richards, onshore programme manager for RegenSW, added: “If you took the worst case scenario and there were no more embedded benefits at all, or they were vastly reduced and it was a very plain argument in that sense - and I do caveat with that - then clearly, the business case won't stack up as well.”

There are of course cases where systems will be less affected – storage system time shifting demand away from peak; high energy demand buildings using all the power generated by their solar panels etc. – but inevitably there will be instances where firms are caught in the cross-fire between DECC and its own capacity market tinkering.

Of course there are no certainties here – multiple reviews of embedded benefits have been carried out in the past by the National Grid which have concluded the same as Cornwall Energy: DGs are being fairly rewarded for the costs that they avoid on behalf of network operators, when both transmission and distribution level embedded benefits are considered.

The fact that this review is being carried out by Ofgem at the behest of the government adds a new dimension to proceedings, and a potentially dangerous one at that.

“There is some political emphasis behind it whereas previously it's been industry led and National Grid looking at it. There's a political agenda at play that's going to change things but I don't think any political aspects have considered the impact,” Gordon explained.

However, there is some belief that changes are long overdue, particularly for solar and the BSUoS charge. Currently solar generators receive an embedded benefit from this as they are not part of the transmission network that BSUoS charges are used for.

However, it has been argued that intermittent generation like solar is responsible for pushing up the cost of balancing the grid system, as they place increasing power onto the distribution network which is inevitably pushed onto the transmission network. As this cannot be dialled down, it requires other generators to do so (usually by being paid), consequently pushing up costs for National Grid which intermittent generators do not contribute to.

Cornwall Energy’s Andy Pace explained: “There's probably a justification for saying of all the types of embedded generation solar is probably the one that's not reducing the balancing market costs. If anything it's probably increasing the balancing market cost. Should they get a benefit for avoiding it when actually they're driving some of the costs?”

Putting this issue to one side for a moment, the fact is that BSUoS charges are avoided by solar systems and as such have been factored in to the business case for existing and future installations. Were this embedded benefit to change, the consequences could be severe – Pace estimated that BSUoS avoidance makes up about 25% of solar’s embedded benefits.

Add to these woes the series of other knock on effects outlined by a recent KPMG report, including damage to investor confidence, affordability and decarbonisation efforts, and changes to embedded benefits could be severe.

Doom-saying aside, the fact is that no one really know what Ofgem are even doing specifically. When approached by CEN to explain, a spokesperson said: “We will set out a proposed way forward on this matter in the summer, including whether to consult on making any changes, and what those changes might be.”

If anyone thinks that’s a clear answer please do get in touch but unfortunately the content and scope of the review are wrapped in a question mark. However, we do know that changes are intended to be carried out in some form in time for the next capacity market auction – recently brought forward to January 2017 – so they could be rushed which as everyone should realise is not a good sign.

Gordon sums up this situation well when addressing DECC: “What's driving this at the moment is the next capacity market auction which is coming up surprisingly soon. Don't just rush what is a massive decision for the whole industry just to suit the capacity market.”

Time will tell if they listen to this but obviously, not that much time is left.

David Pratt's photo
Editorial

David Pratt Deputy UK Editor, Current±

David Pratt joined Solar Media in November 2015 after spending two years writing for the construction sector. He had a particular focus on energy efficiency and government policy, before moving into the renewables and clean energy sector.

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