Ofgem, the UK’s energy regulator, has published an open letter raising concerns about the current network charging arrangements for generators embedded within a local electricity distribution network. The letter follows work by Frontier (Europe) to support Ofgem in its analysis of embedded benefits and the options for reform.
Under the current charging arrangements, generators connected to the transmission network face some charges which embedded generators are exempt from (so-called ‘embedded benefits’). Embedded generators also often receive payments from suppliers for helping to reduce their exposure to a variety of network charges.
Lower network charges for embedded generation may be justified if these embedded generators help avoid investment in the transmission network by virtue of being located closer to demand. However, Ofgem believes that the size of the benefits provided under the current arrangements is likely to exceed the true value of any avoided network costs, thereby distorting market outcomes. Ofgem note that the current arrangements may:
- Distort generation decisions, as embedded generators provide power even when cheaper, transmission network-connected generators are available; and
- Distort capacity market outcomes, by placing embedded generation at an unfair competitive advantage relative to those connected to the transmission network.
- Ofgem’s letter requests stakeholder views with a deadline for responses of September 23rd.
Frontier regularly advises both companies and regulators on issues related to transmission charging, system costs and market efficiency.
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