Paradise Lost: The changing face of Embedded Benefits

Current electricity market arrangements give rise to the concept of “embedded benefits”. These are predominantly supplier costs that are reduced or avoided via contracting with small-scale generation connected at the distribution network level instead of the national transmission system. Distributed generation does not generally attract charges for using the national transmission system and so offers a cost advantage to suppliers. In addition value from the distributed generation may be further increased if Generation Distribution Use of System credits (GDUoS) is payable where the generator offsets the need for reinforcement in the distribution network.

Embedded benefits have risen in value as network charges, in the round, have increased for suppliers primarily due to the required investment in electricity networks to replace ageing assets, reinforce existing parts of the network to accommodate changing supply and demand patterns, and the construction of new assets to connect new sources of generation – i.e. offshore wind stations. In addition, the downward trend in consumption observed since the middle of the last decade has resulted in increased revenues being collected from a diminishing demand base, which further increases the unit value of embedded benefits.

These factors have led to the regulator, and in some instances, the government, making the case that embedded benefits are valued above the financial value that distributed generation offers. Alongside this, the vast majority of distributed generation is not ‘visible’ to the Electricity System Operator and reduces the ability of the assets to provide balancing services to manage supply and demand, although this is changing. 

Distributed generation has relied on suppliers sharing a high proportion of the embedded benefit via Power Purchase Agreements (PPAs) to pull through investment. Within the last year there have been several rule changes that have resulted in these benefits being reduced:

  • CMP264/265 – this Connection and Use of System Code (CUSC) modification created the concept of an “Embedded Export Tariff”, dramatically reducing the triad embedded benefit available for embedded generators. The outcome of this decision has resulted in triad benefits reducing by approximately one third in 2018-19 (depending on location), and will see the value reduced further in 2019-20 and 2020-21. As early is 2019-20 the triad value will be £0/kW for some regions in Scotland and the north of England
  • Capacity Market embedded benefit – the Capacity Market (CM) will be charged on a gross basis from the 2018 CM year (October to September). This will mean that embedded generation during CM-liable charging periods will no longer offset a supplier’s liabilities for the cost of the scheme and remove the embedded benefit that was previously available by exporting during CM-liable charging periods, and
  • P354 – this Balancing and Settlement Code (BSC) change removes the additional spill payments available for embedded power stations that are utilised in National Grid’s balancing services, such as Fast Reserve or non-balancing mechanism (non-BM) Short Term Operating Reserve (STOR).

The rapid successive implementation of these changes, combined with the regulator’s stance on what it perceives as market distortions, point to the ongoing erosion of embedded benefits. As a result of this, there are a number of fundamental change programmes that will likely further reduce the value of embedded benefits, or possibly even remove the concept altogether. The change programmes are looking at separate elements of network charging, but the overarching direction of travel is that generation should be charged and treated on a more equal footing irrespective of where it is located in the network – e.g. changes that result in more ‘cost-reflectivity’ in recognition that the physical system has changed significantly since the present market arrangements and charging structures were put in place.

Change programmes that will impact on embedded benefits include:

Network charging reform under the:

  • Targeted Charging Review – particularly impacting the residual element of network charges (the element that cover the costs of the existing infrastructure). Ofgem’s push throughout the workstream has been that payment of residuals should not be avoidable and that they should be applied fairly across users of the network with minimal distortion between charging methodologies
  • Forward-Looking Charges and Network Access workstream – proposals outlined by Ofgem in its consultation on 23 July 2018 suggest that the current blanket embedded benefits applied to High Voltage (HV) and Low Voltage (LV) connected generators will be reformed. This includes the charging methodologies including a definition of demand and generation-dominated areas, users paying for depth of access to the network, and the possibility for tradeable access rights
  • Improved visibility of distribution assets – BSC Issue 70 Settlement of Secondary BM Units using Metering at the Asset seeks to align the Balancing and Settlement Code (BSC) with European Balancing Project TERRE requirements by investigating whether data from operational metering can be used for settlement purposes, or what the workarounds might be in other instances. This would improve the ‘visibility’ of embedded generation to central settlements and could drastically change the industry’s application of a number of embedded benefits to small scale generators.

Figure 1 outlines the current and forecast position of embedded benefits available to small scale generators, ranked by likely value.

Figure 1: Status and outlook for embedded benefits

Cornwall Insight produces a range of services to help parties understand and prepare for these risks:

  • Embedded Benefits Calculator – provides a bottom-up assessment of the value of embedded benefits to wind, solar, baseload and peaking plant.
  • Training Courses – the GB Energy Networks course explains the current charging regimes and highlights the fundamental charging reforms presently taking place in the electricity and gas markets
  • Consultancy – Cornwall Insight can answer specific questions you may have about embedded benefit reforms

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