Ofgem sets out concerns on network charging for small electricity distribution connected generators

Publication date
29th July 2016
Information types
Policy areas

Ofgem has published an open letter on the network charging arrangements for small electricity distribution connected generators (called embedded benefits). These benefits include both payments that these generators receive and also charges that they avoid paying.

We are particularly concerned about specific payments that these generators receive 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. Generators connected to the high-voltage transmission network and larger generators connected to the lower voltage distribution network do not get these payments. This puts them at a competitive disadvantage. Small generators connected to the distribution network who get these payments include some diesel, gas and combined heat and power plants.

The electricity system is changing rapidly and there has been a major increase in generators connecting to the distribution networks over the past couple of years. The level of these payments has increased significantly and is due to rise even further. 

Ofgem thinks that these arrangements may be distorting energy markets and that there should be a level playing field for all generators. This could also impact on the decisions to either build or close large power stations which also play an important role in delivering security of supply.

Ofgem is asking for views on these concerns which will feed into our thinking including on several proposals that have been raised by industry parties to change network charging rules. Ofgem encourages industry stakeholders to respond to the open letter and engage in the consultation process for these rule changes before they come to us for a decision. Ofgem will also consult on some other aspects of embedded benefits and related matters in the autumn.

Notes to editors

  1. See our open letter on charging arrangements for embedded generation
  2. The largest benefit which smaller plant connected to the lower voltage distribution network receive from suppliers is for helping them to avoid the biggest element of the transmission charges they face by generating in the ‘triad’ demand periods. These are the three half-hour periods each winter when electricity demand was highest in the UK. The size of this benefit paid by suppliers to these generators is currently around £45/kW – more than double the clearing price for the 2015 Capacity Market auction. This is forecast to increase in four years to £72/kW.
  3. Intermittent generators such as solar are unlikely to be affected by any changes to these payments. They do not receive these payments as they are usually unable to generate during triad periods, since these fall outside daylight hours. This is true to a lesser extent for wind farms. 
  4. This benefit is one of a range of payments that certain embedded generators receive. The others include payments resulting from the supplier avoiding high charges from National Grid for balancing the system. This autumn Ofgem will set out further thinking on these other benefits and some other targeted areas of the charging arrangements.

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Further information

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