Ofgem has recently published a 'minded to' decision after conducting a review of certain 'embedded benefits' which distributed generation receives. The decision is still subject to consultation which will close on 10 April, but if Ofgem follows through on its proposals there will be a significant reduction in the financial benefit which embedded generators receive as a result of not having to be connected to the transmission network.
The benefits specifically targeted by Ofgem in its minded to decision relate to transmission network use of system charges (TNUoS).
What is distributed generation?
Distributed generation (or embedded generation) is the process of generating power on-site, at the point of consumption and is connected to the electricity distribution system. It is treated as 'negative demand' as, in theory, it reduces the demand on the transmission network. If generators then generate using during peak demand times of the year (so-called 'triads') they receive a credit usually via their power offtaker.
Why has Ofgem proposed a reduction in embedded benefits?
There has been concern within Ofgem for some time that the benefit of the TNUoS demand residual payments (which form part of the benefit) has been growing at an alarming rate. It is currently estimated to be worth approximately £45 a kilowatt and Ofgem has signalled that, over a three year period starting in April 2018, it wishes to bring that credit down. Estimates suggest it could drop to around £2 per kilowatt.
The fact that this payment and credit has been targeted by Ofgem should come as no surprise to any embedded generators (it affects not just renewable energy projects but any embedded generator). What probably is a surprise, is the extent of the cut proposed and generators will need to factor that in to their financial models going forward. Operating projects that have been receiving the benefit are not immune and will not be grandfathered.
How can Burges Salmon help?
Our award-winning energy lawyers have worked at the cutting-edge of on-site supply projects for the last decade. We have expert knowledge of the regulatory complications associated with on-site supply and can view legal issues from the perspective of generators, hosts and the supply chain. If you have any questions around on-site supply and embedded benefits, please contact Ross Fairley.