Tim Emrich, chief executive of UK Power Reserve, warns that a piecemeal approach to changing the charging regime will damage investor confidence and could face legal challenge
We are constantly striving to better explain the value of embedded generation in the UK energy mix. Recently we have been struck by the success of the GB cycling team that rode to glory at this year’s Olympics. The team’s success has been credited to John Major for setting up the National Lottery, which renewed investment in sport, and former director of British Cycling Sir Dave Brailsford who pursued the “aggregation of small gains”, which he believed combined could be the difference between winning and losing. The energy sector could learn from this.
Embedded generation has a critical role in the UK’s generation mix and its capacity market auctions. Small plant by small plant, aggregator by aggregator, it is making a difference to the UK’s generation mix. It is providing resilience and flexibility in an inexpensive way. We think it is crucial that the government and regulator protect this quiet, effective form of generation.
We’re the ones who in a period of almost complete stasis for large-scale infrastructure are getting on and building.
UK Power Reserve has a 700MW portfolio, including 185MW of built assets and a further 500MW due to be up and running by 2018. This capacity provides services to the wholesale, capacity and balancing service markets to ensure end consumers receive continuity of supply at the lowest possible cost. The capacity provided by UK Power Reserve and its peer group of embedded generators totals around 2GW.
Established in 2010, UK Power Reserve bid into the 2014 and 2015 capacity markets, which were set up to secure existing and new-build generation capacity while encouraging development of demand-side response (DSR) and participation of interconnectors to start supplying capacity to consumers from 2018 and 2019, respectively.
Stranded asset risk
Because of the more rapid than anticipated phasing out of older coal and gas powered generation, National Grid may not be able to balance the electricity network properly on days when the sun does not shine or the wind does not blow.
In this context, we are gravely concerned about Ofgem’s ongoing review process of embedded generation charging and the parallel modification process taking place, notably the submission of CMPs 264 and 265 by Scottish Power and EDF, respectively.
The review strongly risks stranding new-build assets that undertook new-build 15-year capacity market obligations, if proper arrangements are not put in place to protect them, protect security of supply and most importantly, protect the consumer.
The participation by embedded generation in the capacity markets has been blamed for lowering the outturn price, which has made it unviable for the auction to attract larger scale, more expensive generation such as CCGTs. Regardless, the auctions attracted sufficient capacity to address supply requirements.
Having committed to build generation against the existing and affirmed charging framework, which clearly influenced the price at which we were able to bid into the auction, we now find that Ofgem is considering pulling the rug out from under our feet by radically altering that charging framework.
There is a high risk that we will no longer be able to viably deliver that 500MW if that happens without some form of protection via grandfathering or carefully implemented transitional arrangements. The end consumer needs continuity of supply at an affordable price without risking the environment and therefore any potential stranding of committed best available technology new-build capacity secured prior to Ofgem’s review of embedded benefits should be avoided to enable the transition and delivery of the optimal generation mix of the future.
UK Power Reserve’s ‘best available technology’ lean gas-reciprocating engines represent excellent value for the consumer compared with new-build CCGTs, which lose efficiency at the kinds of lower load factors they are likely to run at to fit in the future generation mix.
UK Power Reserve recognises that the current embedded charging system is unsustainable. It recognises that there is a need for a review and for changes to be implemented to the charging system in the future. The cost to the consumer of paying for the Triad system is forecast to continue to grow significantly and many argue that it is no longer cost-reflective.
While we recognise that changes need to be made to the charging system, we believe these should be made holistically and with consideration for other areas of the UK charging system to avoid simply moving costs around – ultimately landing them with the consumer.
We believe that it is appropriate that the embedded benefits should continue to be received by new-build embedded generation that entered into long-term financial and performance commitment obligations in 2014 and 2015. It has banked on the value of the service being delivered to the end consumer. We accept that having been given due warning by Ofgem that a review would take place, any future new-build via the 2016 capacity market auction and forward can no longer be eligible for the Triad element of embedded benefits until such time as enduring reform is implemented.
This would enable the industry and regulator to take stock of the charging arrangements to ensure they deliver value to the end consumer and the playing field is levelled for transmission and distribution connected new-build projects bidding into the capacity market auctions in future.
Ofgem must publish its evidence
The energy sector has entered an extremely unstable and uncertain time, made all the more challenging by Brexit and the government shake-up, and by political decisions around flagship, large-scale infrastructure such as Hinkley Point.
Investment in a declining market (by demand) is inherently risky and Ofgem must do everything it can to protect what investment there is by conducting a proper impact assessment into embedded charging, its place within the broader charging frameworks and the role of distributed generation going forward. It strongly risks undermining investor confidence and security of supply in the UK by being minded to adopt modifications put forward by the big six and further skewing the playing field in the direction of the status quo.
We will be calling on Ofgem to demonstrate evidence for the various assumptions it has made in its Direction of Travel letter, including around investor confidence and the impact on future infrastructure, the value to consumers of transmission versus distributed generation and the perceived difficulties in grandfathering existing assets.
We are concerned that an incomplete and unbalanced assessment and outcome could result in significantly prolonged uncertainty for investors and consumers alike, for example because of the high risk of Judicial Review or calls for a significant code review.
We therefore continue to seek reassurance that there will be an appropriately timely conclusion to the ongoing process, at the very least relating to committed new-build assets, so we can proceed as planned with our portfolio, avoid the stranding of assets, and enter the 2016 capacity market and forward on a level and visible playing field with all generators.
We believe this would be the most efficient way to avoid paralysing the industry for two or more years and deeply damaging investor confidence, diversity and innovation in smaller corporates and security of supply.
First published in the September 2016 issue of New Power.
Further reading:
Beware an embedded benefits review by stealth
Review of embedded benefits opens fault lines among industry players
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