As small-scale generators prepare for potentially big changes in their revenue from so-called ‘embedded benefits’, industrial and commercial customers who use backup generation to help provide demand response are also facing a financial challenge. Scottish Power has proposed tightening the rules on how ‘behind the meter’ power plants can participate in the Capacity Market.

It says the current rules, which allow such plant to be built and operated as part of an ‘unproven demand-side response (DSR)’ contract, mean the plant has a market advantage. The rules were intended to support new types of demand-side response, but Scottish Power says that in fact they are subsidising proven engines that should be competing on a level playing field with other generation. It also says savings from the plant can be ‘double counted’.
Companies that aggregate demand response to bid into the Capacity Market reacted angrily.

Yoav Zingher, chief executive of Kiwi Power, said he was in favour of using “only true backup generation” in the CapacityMarket. He said the proposed change was “very bad” because “unproven DSR is already at a huge, almost insurmountable, disadvantage by being limited to one-year contracts while still needing to post a bid bond as if it were receiving a 15-year contract”.
“Limiting the assets that could participate would be unfair and have no benefit to consumers, only to large generators by removing competition.” Zingher noted that “the same generator built in a diesel farm, providing no service whatsoever to anyone, can get 15 times the money due to the longer-term contract.”
Smartest Energy said: “The proposals leap to a conclusion of everything being ‘anti-competitive’ without really offering any evidence of this.”
The company added that two issues were being confused in the proposed change. One was performance, but the company said that it expected that to improve as companies gained experience. “We fail to see how making the rules more complicated for participants will help drive performance,” it said.
The second issue was that such plant undermined the business case for peaking plant elsewhere. But Smartest Energy said: “We are not aware of anyone specifically building on-site generation as a result of the Capacity Market payments, not least because they can only get one-year contracts. Participation in this type of scheme gives consumers the opportunity to utilise the assets that they have effectively, and is part of the journey that will help them to understand other areas where they can also participate, potentially through turn-down DSR.”

The proposed rule change will be considered by regulator Ofgem, which will consult on them and on other Capacity Market rule change proposals before the next auction.

Meanwhile, modifications elsewhere in the complex system of charging regimes and support mechanisms could also affect small peaking plant on customer sites.
This is in respect of charges for using the low-voltage lines owned by distribution network operators (DNOs). The common distribution charging methodology (CDCM),   has much higher prices during ‘red’ periods when the network is most congested – a measure intended to encourage users to reduce their consumption at those times.
Previously, the higher prices were charged directly back to those customers with highest consumption during ‘red’ periods. But a modification to the regime (228) will share the cost among all users, meaning those with high use at peak times have less incentive to cut use or use on-site power at those times.