Ofgem confirms decision to reduce payments to embedded generation

Ofgem, Britain’s energy market regulator, has today confirmed its decision to reduce the payments which embedded generators receive as a result of network charging arrangements. Frontier advised Ofgem throughout its consideration of this issue and contributed to the impact assessment which accompanied Ofgem’s decision.

Embedded generators produce electricity on the lower-voltage distribution network, typically closer to electricity customers. Under current charging arrangements, electricity suppliers’ network charges are based on the quantity of electricity they supply to end customers. However, any electricity generation from embedded generators is netted off metered demand in calculating suppliers’ network charges, thereby lowering the charges faced by the supplier. This created a system in which suppliers paid embedded generators – the so-called triad benefit – to help them reduce their network charge liabilities.

Ofgem’s decision was based on the fact that the financial payments received by embedded generators significantly exceed the social value these generators provide by, for example, producing electricity closer to sources of demand and therefore reducing the need for network infrastructure reinforcement. The discrepancy between the size of the payments and the value realised is believed to have both increased consumer costs and provided embedded generators with a significant competitive advantage over transmission-connected generation in the capacity market.

Frontier regularly advises both companies and regulators on issues related to network charging and electricity market design.

For more information, please contact Saskia Nett on s.nett@frontier-economics.com, or call +44 (0)20 7031 7000.

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Energy
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Regulation