Small power plants clobbered by Ofgem subsidy change

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By Paul Homewood

h/t Patsy Lacey

As expected, OFGEM has acted to close a loophole, which pays unjustifiably large subsidies to small peak loader power plants, such as diesel generators:

Energy watchdog Ofgem has decided to slash generous subsidies paid to small power plant owners in a move it says will cut consumers’ energy bills.

Ofgem has cut subsidy payments for small plants producing electricity at peak times from £47 per kilowatt to between just £3 and £7 per kilowatt. The change will be phased in from next year, to be fully implemented by 2021.

The regulator believes the changes will prevent market distortion and reduce consumers’ energy bills by up to £370m a year.

But small power plant owners immediately criticised the decision, saying it would threaten the UK’s ability to keep the lights on and deter smaller players from entering the market.

Mark Draper, chairman of the Flexible Generation Group, said: "This decision poses a significant challenge to our growing industry and makes it even more difficult for new entrants into the energy market to compete with established players.

"Its impact will inevitably push up prices for consumers, stifle innovation and investment in the energy sector and put existing Capacity Market agreements at risk, threatening security of supply."

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OFGEM explain their decision:

Ofgem has decided to reduce a specific payment that some small electricity generators receive for producing electricity at peak times. This payment cost customers around £370 million last year.

Embedded generators are power plants 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 their charges to use the transmission network. These payments are in addition to the price these generators get for selling their electricity.

The current level of this payment is around £47/kW (double the clearing price for the 2016 Capacity Market auction). It is forecast to increase over the next four years to £70/kW. Ofgem’s view is that the level of the payment is distorting the wholesale and capacity markets and if no action is taken the distortion will increase.

Ofgem has decided to accept an industry proposal to phase in a reduction in the payment to between £3/kW and £7/kW* over three years from 2018-21. Ofgem believes the reforms will make the energy system more efficient overall.

There is around 30 GW of embedded generation capacity on Britain’s electricity distribution networks. Those most impacted by the reforms are generators that can control when they produce electricity including diesel and small gas, combined heat and power plant, and biomass generators, which together account for roughly one third of embedded generation. Around two thirds of the total embedded generation capacity, mainly renewable generation (solar and wind farms), will not be affected to the same extent because generally they do not receive this payment.

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