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UTILITY Week 26th May 2017

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18 | 26TH MAY - 1ST JUNE 2017 | UTILITY WEEK Operations & Assets Analysis M ore than any other type of genera- tion, peaking plants have been the big winners in the capacity market. With the energy market becoming increas- ingly volatile and aided by a substantial and growing revenue stream from triad avoid- ance payments, these small, flexible, dis- tribution-connected reciprocating engines have consistently won out over the larger, more fuel efficient combined-cycle gas tur- bines (CCGTs), which the government clearly wants built. However, the business model behind peaking plants is set to take a hit aer Ofgem announced plans to almost entirely remove the "residual" element of triad avoidance payments available to distributed genera- tors because of concerns they were getting an "unfair advantage". The regulator argues that the payments – part of a ra of so- called embedded benefits – are distorting the wholesale, capacity and ancillary ser- vices markets and thereby increasing costs to consumers. The industry is now having to come to terms with Ofgem's "minded-to" decision; mulling over the implications of the move and what it means for peaking plants. Peaking plant outcry "Even in a worst-case scenario, we do not expect market exit by smaller embedded generation to have a major impact on secu- rity of supply." That was Ofgem's assertion in its consultation document setting out its intention to implement the triad avoid- ance payments cull without grandfathering arrangements to ease the transition. Developers with existing capacity con- tracts responded angrily, telling the regula- tor they may be forced to renege on their agreements. Rupert Shaw from Pioneer Point Partners says Ofgem's argument is "complete rubbish" as these payments make up "30, 40 per cent of your revenues". Shaw, a partner in the firm, which was formerly a major investor in peaking plants insists "a lot of these plants won't get built as result". Mark Draper, chief executive of developer Peak Gen, says Ofgem's move is certainly an issue for his firm's portfolio: "We sit here now with capacity market contracts from the 2015 round and we really don't know when and how we can build them out… We're in the very unhelpful position of maybe hav- ing to withdraw or not fulfil those contracts, which is not what we'd like to do." Consultancy firm Aurora Energy Research has confirmed that it expects up to half of the 2.2GW of the peaking plants that won new-build contracts in the first two auctions to give up their 15-year agreements. With contracts secured in the 2015 auction due to start in the winter of 2018, the only real option to replace any cancelled projects would be to contract more existing capacity in the year-ahead auction. This would likely mean extending the lives of carbon-intensive coal plants and a higher clearing price. Ofgem counters not only that fears of a capacity shortfall are unfounded but that grandfathering would harm competition, prevent future changes to the charging arrangements for the affected plants and add to the regulator's administrative workload. It is not that peaking plant developers expected triad avoidance payments to con- tinue along the same trajectory. The amount paid out to embedded generators had been growing steadily for years and had reached proportions that – it was widely agreed across industry – needed curbing. "Everyone knew that system might be changed but it was expected if it ever was changed, it would be phased out in a sen- sible way; in a way which did not inflict significant pain on people operating in the sector," says Shaw. But he insists that discussions in the lead up to Ofgem's minded-to decision could never have led developers to expect such a harsh termination of triad avoidance payments. Shaw believes the regulator scapegoated peaking plants for the failure of the capacity market to entice more investment in CCGTs. Welsh Power finance director Mathew Tucker agrees: "There's a sense that CCGTs are considered to be a good in and of them- selves and if the capacity market is deliver- ing new CCGTs then its functioning, and if it isn't there's something wrong." Process protest It is not just the sudden and extreme nature of Ofgem's proposed cuts that have caused outrage among peaking plant developers. As Utility Week has documented, many are furi- ous about the way the changes came about. Several developers have taken issue with the processes and make-up of the Connec- tion and Use of System Code (CUSC) panel, which administers the contractual frame- work for connection to, and use of, National Grid's high-voltage transmission network. The panel recommended the triad reforms to Ofgem and peaking plant developers pro- test that its members, the majority of whom are employed by large energy incumbents, have "skewed" reforms in their own favour. Ofgem and the panel's chair Mike Toms have both denied the charge. The regulator What now for peaking plants? Ofgem's abrupt slashing of triad avoidance payments to embedded generation has thrown the development of peaking plants into turmoil. Tom Grimwood asks, should we care? A FUTURE FOR EMBEDDED GENERATION AFTER REFORM 105 Gas recips gross margin, average 2020-25 (£/kW/year) 38 Before triad reform Source: Aurora Energy Research Triad removal Capacity market With reduced triads Balancing mechanism scarcity Wholesale market scarcity 11 11 4 92 13

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