EXCLUSIVE: Pending Ofgem decision to 'level the playing field' for energy generators will damage renewables rollout, claims former Energy and Climate Change Secretary
Former Energy and Climate Change Secretary Sir Ed Davey has warned a pending decision to shake-up the UK's network charging arrangements could prove a "massively bad decision", leading to a drop in low-carbon energy generation, higher security risks and higher energy prices for consumers.
Speaking to BusinessGreen this week on the sidelines of an event hosted by the Carbon Trust, Davey said moves by Ofgem to cut payments to decentralised energy generators without looking at the wider system would be a "huge mistake".
Ofgem launched a review into the current network charging arrangements earlier this year at the request of the now-defunct Energy and Climate Change Department.
In July it published an open letter to the industry outlining its concern about payments which smaller generators on the distribution network receive from suppliers for exporting energy to the local power distribution network during peak periods, which helps to reduce net electricity demand.
These smaller generators include some wind power, energy from waste and combined heat and power installations.
According to Ofgem, these 'embedded benefits' payments come in addition to the price smaller generators receive for selling their electricity. However, larger generators do not get these additional payments, which Ofgem said puts them at a "competitive disadvantage" and may be distorting the energy market.
In an industry consultation, which closed last week, the regulator indicated it is considering a range of options to reform the system, including scrapping these 'embedded benefits' altogether. Ofgem is also keen to make swift progress with any changes as it fears consumer costs are increasing as a result of the 'embedded benefits' regime, and is "concerned with these costs increasing further before any change to the embedded benefits regime are implemented".
According to the July letter, Ofgem would therefore prefer to avoid a carrying out a much longer, more time-consuming assessment of the 'embedded benefits' system in the form of a Significant Code Review (SCR).
But changing the 'embedded benefits' system without considering the system as a whole would be a "huge mistake", Davey warned. "This whole embedded benefits review is justified in the sense that clearly the costs in transmission aren't right and the field isn't level," he said. "I get that. But they are approaching it with a slither of the problem when you need a holistic approach, when you look at all the system costs."
Davey, who is now chair of community energy specialist Mongoose Energy, said he feared the government will end up paying more to deliver additional capacity through the capacity market if removes embedded benefits for small scale generators. "There will be some energy security risks," he predicted, "there will certainly be less low-carbon [power]. So they need to think very carefully otherwise they are sleepwalking into a really bad mistake which looks technical but actually has far-reaching ramifications."
He pointed to a review he commissioned in 2014 during his time in office, which he said would offer a starting point for a more holistic way of addressing network charging. He said the review, conducted by Frontier Economics, considers a range of scenarios based on different assumptions about the UK energy mix, and looks at the system costs for each. A spokesman for the Department of Business, Energy and Industrial Strategy (BEIS) told BusinessGreen the government is looking to publish the review "soon".
Davey's comments echo concerns raised by the Association for Decentralised Energy (ADE) earlier this summer, which warned the proposals would mean increased costs for bill payers as well as for local, low-carbon energy generators and storage providers. ADE claim the current proposals are "being rushed through an industry process without sufficient analysis or review".
But Ofgem insists the changes to embedded benefits are being carried out as part of a holisitic reassessment of how the grid operates. "The largest payments are made to embedded generators when they produce power at peak times," a spokesman told BusinessGreen. "So we are focusing on this first and we are looking closely at the responses to our consultation. This autumn we will consult on the next phase - a wider review into the range of other issues. Alongside this we are working closely with government on what needs to be done to make the electricity system more flexible. This includes encouraging and removing barriers for storage and demand side response."
Ofgem also stressed it is carefully considering the impact any changes to the current network charging system may have on energy security and costs, and indicated it is considering whether a phased or delayed implementation is appropriate. "Our key focus is how the consumer is affected therefore our assessment will take into account concerns about security of supply and any increase in capacity market payments," the spokesman said.
Ofgem said it expects to take a decision on the proposals in early 2017.
The Department for Business, Energy and Industrial Strategy was considering a response at the time of going to press.
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