Ofgem has confirmed its ‘minded to’ proposal to reduce the ‘embedded benefit’ small electricity generators receive for producing electricity at peak times. The regulator said the payment cost customers around £370 million last year.

Ofgem has decided to accept an industry proposal to phase in the reduction over three years from 2018-21. The payment will in future be limited to £3-7/kW – slightly higher than the £2/kW anticipated in Ofgem’s ‘minded-to’ paper but dramatically lower than the current level, which is around £47/kW (double the clearing price for the 2016 Capacity Market auction). Ofgem said that wthout action the benefit would have increased over the next four years to £70/kW. It says the level of the payment is distorting the wholesale and capacity markets and if no action is taken the distortion will increase.

Companies who have invested in small generation plant reacted angrily to Ofgem’s initial decision, warning that the regulator was likely to face judicial review and that the change could mean lower investment to meet electricity needs and even removal of existing plant, which is small and transportable.

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.”

There is around 30GW of generation connected at distribution level. Ofgem said that 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.

Further reading

Briefing: behind the embedded benefits discussion

Gas engines ‘could be transplanted overseas’ despite Capacity Market penalties if Triad benefits are not grandfathered

Smart energy suffers a ‘big blow’: industry responds to Ofgem’s Triad proposals

Ofgem ‘minded to’ cut payments to embedded generators

Distributed generation needs investor confidence as much as central generation does