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UTILITY Week 27th January 2017

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UTILITY WEEK | 27TH JANUARY - 2ND FEBRUARY 2017 | 23 Finance & Investment Analysis T he current network charging arrange- ments give an "unfair advantage" to distributed generation – preventing a level playing field with transmission-con- nected generation and encouraging over- investment in the former. It was on this basis that Ofgem began a review of embedded benefits in January last year. However, there have been warnings from experts, industry groups and develop- ers that the proposed reforms amount to an overreaction. Utility Week has been told that, in trying to solve one problem, Ofgem may be creating several others. The Connection and Use of System (CUSC) panel, which is responsible for reviewing code modifications, has been looking at two potential charges that would reduce or elimi- nate triad avoidance payments (see box). The first, proposed by Scottish Power, would get rid of the triad avoidance pay- ments relating to both the locational and residual elements of transmission charges for distributed generation projects connect- ing aer June 2017. The second, put forward by EDF Energy, would remove payments relating to just the residual element for distributed generators with capacity market contracts. Cornwall Insights senior consultant Tom Edwards says getting rid of these payments would be a significant blow to embedded generators: "When you look at the rev- enue available to a distributed generator, especially one that's built itself around peak power prices or flexibility, the triad can be something like 40 per cent of the business model." Almost 6GW of embedded generation won contracts for new capacity in the first three four-year-ahead (T-4) capacity market auc- tions – mainly gas and diesel peaking plants. If triad avoidance payments are removed, Edwards says there is a "significant risk" that a "bunch" of this capacity will not be built. "We wouldn't be surprised if people start taking their termination fee options in the capacity market rather than develop a plant that can't make money." If this happens, he says the only solu- How to level the playing field Complex proposals to withdraw exemptions from balancing and transmission charges for embedded generators suggest a broader review of network charging is necessary. Tom Grimwood reports. What are embedded benefits? Embedded benefits refer to exemptions for distribution-connected generators from both balancing and transmission charges, although Ofgem's current concern is the transmission charges. Embedded generators are not only exempt from paying the charges themselves but are also able to receive triad avoidance payments for reducing the charges paid by the suppliers they sell power to. These triad avoidance payments are the focus of the reforms being considered. Transmission charges are split into "loca- tional" and "residual" elements, and Ofgem estimates that the triad avoidance payments relating to the residual element – the lion's share of the total – are worth about £45 a year for each kilowatt of capacity. tion will be to re-procure existing capacity through one-year-ahead (T-1) auctions, per- haps at a higher price, because alternative new capacity could not be procured and built in time. "So, we're going to pay some of the older power stations that missed out in the first round of the auction to stay around," he says. "That could be plant like Fiddler's Ferry or Eggborough – coal-fired power sta- tions which the government ostensibly wants to get rid of… There's not really much else we could do." Edwards says there could also be a "dou- ble whammy" as the overall capacity pro- cured may have to be increased. The triad avoidance payments have been suppress- ing peak demand and so getting rid of them would reverse that. Nevertheless, he does agree with Ofgem that there is an problem that has to be resolved, because the triad avoidance pay- ments are not only too high but grow- ing steadily because of a feedback loop. The transmission costs that aren't paid by embedded generators are loaded on those generators without an exemption. It means as more and more embedded generation comes online, the value of triad avoidance payments increases, encouraging still more embedded generation to be built. On the other hand, he says, the propos- als being considered go too far. Although the CUSC panel has looked at variations that are less drastic, the base modifications sug- gested by EDF and Scottish would reduce the value of the residual element of the triad avoidance payments to zero. "While the system was not sustainable, these proposals have not properly reflected the value that embedded generators bring to the wider network", he argues. National Grid estimates the true value of avoided network reinforcement to be just £1.65/kW. Cornwall puts the figure at £32.30/kW. Ofgem plans to reach a position on embedded benefits in the first half of 2017 aer consulting on a "minded-to decision" early in the year. It has dismissed calls for a significant code review, at least in the short term, because this would cause "consider- able delay" to embedded benefits reforms. Although the regulator has legitimate concerns about the high and rising value of embedded benefits, it will have to be careful to avoid overshooting and being le with a capacity shortfall that could be costly to fill. Over the long run, the need for a more com- prehensive examination of network charging is becoming ever more apparent.

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