Industrial manufacturers and other high energy users could see their annual energy bills increase by millions as a result of a government-ordered review which could block companies from avoiding national transmission charges through onsite generation.
The Association for Decentralised Energy (ADE), whose members include manufacturers British Sugar and Boots UK, has claimed that a review being conducted by Ofgem could damage the business case for the ‘embedded benefit’ of renewable energy systems.
Instead of using the national transmission network and paying the associated costs, hundreds of industrial manufacturers in the UK generate their own power on-site and use the local electricity networks instead.
ADE says the analysis currently underway will result in a reduction in the embedded benefit of renewable energy systems, damaging the competiveness of all local generation, including that of private firms.
This could increase industrial manufacturers and other local energy users’ energy costs by more than £170m, according to ADE, with some manufacturers seeing their energy bills rise by nearly £3m a year.
The claims follow a report compiled by Cornwall Energy, which found that removing the embedded benefit would fail to have the government’s desired effect of bringing new gas-fired stations into the capacity market.
Dr Tim Rotheray, director of ADE, said: “Asking a local generator to pay for the transmission network is akin to charging drivers for the use of a toll road even when they took alternative routes.
“There is now a risk that the outcome of any review will hurt industrial manufacturers around the country for no real benefit. The independent analysis is clear that the changes being considered are likely to reduce the number of gas power stations being built, and are unlikely to result in any of the large investments the government wants.”
Cornwall Energy’s findings also suggest UK households will be hit by any changes in this area as the embedded benefit’s removal would increase the capacity market price by £4.70/kW, leading to increased consumer costs of £214m.
Cornwall Energy’s analysis also found that removing the Embedded Benefit would impact the wholesale market, with peak wholesale power prices likely to increase by between £0.63/MWh and £2.84/MWh, increasing consumer costs between £10m and £45m a year.
The market intelligence firm therefore believes the current system should remain unchanged. Director Nigel Cornwall, said: “Embedded generation reduces the cost of operating distribution and transmission networks and therefore benefits the end consumer. It is only right that these generators should be rewarded for this and our analysis suggests that the overall level of this reward is appropriate when considered in the round.”
The report also pointed to the dangers of any immediate changes to the current system and states: “Network charging is a complicated and integrated area, with knock-on effects across the energy system. Any review should not be taken lightly or suddenly, but must instead be careful, holistic and systematic.”
It adds that the decision to review the Embedded Benefit comes unexpectedly, with the issue having been consulted on twice in recent years. The ongoing review is expected to set out a new strategy this summer, which Cornwall Energy suggests could be a mistake.
“To rush through changes now would be a short-term response to a complicated, long term issue, and could cause significant harm to industrial manufacturers, a wide range of distributed generators, and long-term storage ambitions,” the report adds.
Due to the fast-paced activity surrounding this issue, it is likely to become more central to corporate energy users currently not generating their own power, or doing so at low levels, as transmission network costs are on the rise. Ofgem has already increased how much National Grid is able to recover from its customers, with the network operator increasing its allowed revenue significantly to 2020-21.
