Ofgem confirms its decision to slash embedded benefits

United Kingdom

Ofgem has decided to confirm its ‘minded to’ decision to implement an industry modification that will reduce the main element of the embedded benefits received by certain generators for producing electricity at peak times, after a consultation with stakeholders.

Under current arrangements for embedded benefits, smaller generators of less than 100 MW that are connected to distribution networks receive payments from suppliers for helping to reduce their Transmission Network Use of System (TNUoS) charges during the triad periods of peak demand. The TNUoS charges consist of a locational element reflecting the cost of reinforcing grid supply points in different regions, along with a residual element covering the sunk costs of the existing transmission network.

At a meeting on Thursday 15 June 2017, Ofgem confirmed its intention to adopt the industry modification known as WACM4, under which the portion of triad avoidance payments relating to the residual element of the TNUoS charges will be gradually reduced by a third each year over a three-year period, starting in April 2018. These payments are to be reduced from £47/kW to between £3/kW and £7/kW, which represents a marginal increase on the £2/kW which Ofgem had initially proposed in its ‘minded to’ decision letter (which we previously reported on here). The locational element of the charges remain unaffected, although each element of the TNUoS charges is (along with various other charges and benefits) currently the subject of a separate consultation by Ofgem.

As the change is due to be phased in over three years from April 2018 to 2010, embedded benefit payments for this winter will not be affected. However, the change will apply to all existing and new-build embedded generators.

Ofgem has briefly set out the reasons for its decision here. In addition, on Thursday 22 June 2017 it published an Impact Assessment covering its assessment of the impact of the various industry proposals, alongside its formal direction that WACM4 and consequential changes to embedded benefits are to be made.