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
- 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
- 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.
- * 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.
- 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
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.
Further information for media
For further information, contact:
Chris Lock: 0207 901 7225
Media out of hours mobile: 07766 511470 (media calls only)
Further information for investors
Martin Young, head of investor relations: 0207 901 7114
Latest News from
Suppliers must do more to help those in debt, as report shows customers accrue more than £600 on average in unpaid bills17/10/2017 12:15:00
Suppliers must do more to help those in debt, Ofgem has said, as new research shows that customers are building up on average over £600 in unpaid bills on their gas and electricity accounts before suppliers step in to help them manage paying it back.
Ofgem extends price protection to 1 million more vulnerable households this winter11/10/2017 15:15:15
Around 1 million households will save £120 a year on average when Ofgem extends its prepayment safeguard tariff for more vulnerable people this winter.
Ofgem cuts £200m from electricity distribution network company allowances18/09/2017 10:15:00
Ofgem has confirmed that the allowances of some of Britain’s electricity distribution network operators (DNOs) will be reduced by around £200m in total following a review of performance in their previous price control (2010-2015).
Latest data on Consolidated Segmental Statements, Supplier Cost Index and standard variable tariffs31/08/2017 12:25:00
Ofgem has published complete annual data1 on the profit margins from the six large energy suppliers’ Consolidated Segmental Statements2 which Ofgem requires them to submit.
Ofgem’s response to National Grid’s proposed network upgrade to connect the new Hinkley Point C nuclear power station31/08/2017 09:15:00
Ofgem yesterday said that an upgrade to the high-voltage grid is needed to connect the new nuclear plant at Hinkley Point, but considers that the costs to consumers of the upgrade can be reduced.