Ofgem proposes lower payments for embedded generators to reduce costs for consumers

Publication date
1st March 2017
Information types
Policy areas

Ofgem is consulting on a proposal to lower the payments that some embedded generators receive for producing electricity at peak times. This should reduce costs for consumers and prevent market distortion.

Embedded generators are plant connected to the lower voltage distribution networks. Smaller embedded generators (with less than 100 MW capacity) can receive specific payments from suppliers for helping them to reduce the biggest element of the electricity transmission charges they face at peak times. These payments are in addition to the price these generators get for selling their electricity. Our view is that the current level of payments is distorting the wholesale and capacity markets. If action isn’t taken now, this distortion will only escalate. 

Ofgem proposes to accept an industry proposal to reduce the payments from the current level of around £45/kW to around £2/kW* with the reforms to be phased in over three years from 2018 to 2020. We are consulting on this proposal and are seeking further views and evidence before reaching a final decision in May. We believe the proposed reforms would not have a material impact on security of supply. 

In our impact assessment published today on the reforms, we say that the proposals could potentially save consumers up to £7 billion by 2034 (around £20 per household per year). This is because consumers are funding these payments as part of the network charges they pay on bills. Reducing the payments should also make the energy system more efficient overall.

Notes to editors

  1. See the impact assessment.
  2. There are a range of other payments made to embedded generators. The amounts paid are smaller than those for generating at times of highest demand, but they could still be distorting decisions by generators on when and where to invest. This is a less pressing issue but it does need to be examined, so later in March we will launch a review of these arrangements alongside other matters.         
  3. Last March we called on electricity distribution network operators (DNOs) to speed up connections for smaller generators. Last month we published a report showing that since then DNOs have made more than 3.7 GW of capacity available through taking smarter approaches to connections. For further information read our blog on flexibility for local grid owners.
  4. *The specific payments suppliers make to embedded generators are for providing electricity in the three half-hour periods each winter when demand in GB is highest. The size of the benefit paid by suppliers to these generators is currently around £45/kW – double the clearing price for the 2016 Capacity Market auction. This is forecast to increase in four years to £72/kW. Ofgem is proposing to accept an industry proposal to phase in a reduction in these payments to around £2/kW. This is the estimated cost of investing in capacity at the grid supply points (the boundaries where the high voltage network meets the lower voltage distribution networks). The payment that embedded generators would receive under the reforms reflects the avoided cost of investing in this capacity. This is because less electricity would have to flow across the boundaries as embedded generators are providing their electricity to the lower voltage grids.

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