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Ofgem decides to lower payments to embedded generators to protect customers

Ofgem has decided to reduce a specific payment that some small electricity generators receive for producing electricity at peak times. This payment cost customers around £370 million last year.

Embedded generators are power plants connected to the lower voltage distribution networks. Smaller embedded generators (with less than 100 MW capacity) can receive specific payments from suppliers for helping them to reduce their charges to use the transmission network. These payments are in addition to the price these generators get for selling their electricity. 

The current level of this payment is around £47/kW (double the clearing price for the 2016 Capacity Market auction). It is forecast to increase over the next four years to £70/kW. Ofgem’s view is that the level of the payment is distorting the wholesale and capacity markets and if no action is taken the distortion will increase.

Ofgem has decided to accept an industry proposal to phase in a reduction in the payment to between £3/kW and £7/kW* over three years from 2018-21. Ofgem believes the reforms will make the energy system more efficient overall.

Ofgem chief executive Dermot Nolan said: “We are concerned that the current level of the payment is distorting the market and is set to increase further.”

“Our role is to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.” 

Notes to editors

  1. Ofgem has made its decision after the industry developed and consulted on change proposals - Decision on industry proposals (CMP264 and CMP265) to change electricity transmission charging arrangements for Embedded Generators
  2. There is around 30 GW of embedded generation capacity on Britain’s electricity distribution networks. Those most impacted by the reforms are generators that can control when they produce electricity including diesel and small gas, combined heat and power plant, and biomass generators, which together account for roughly one third of embedded generation. Around two thirds of the total embedded generation capacity, mainly renewable generation (solar and wind farms), will not be affected to the same extent because generally they do not receive this payment.
  3. * This is the estimated cost of investing in capacity at the grid supply points (the boundaries where the high voltage network meets the lower voltage distribution networks). The payment that embedded generators would receive under the reforms reflects the avoided cost of investing in this capacity. This is because less electricity would have to flow across the boundaries as embedded generators are providing it to the lower voltage grids. National Grid estimate that this figure will be in the range of £3/kW-£7/kW when the proposals are implemented. The previous estimate was £2/kW. 
  4. The payment that some smaller embedded generators get for producing electricity at peak times helps suppliers reduce the biggest element of electricity transmission charges. There are a range of other benefits to embedded generators and these are unaffected by yesterday’s decision. We have proposed a targeted charging review to consider these. For background see blog: Spreading the costs of networks fairly

About Ofgem

Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.

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Further information for media

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Further information for investors

Martin Young, head of investor relations: 0207 901 7114

 

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