Embedded benefits: Ofgem proposes reducing TRIAD Avoidance Benefit by 95%

Ofgem recently published a minded to decision and draft impact assessment on proposals to change electricity transmission charging arrangements for embedded generators.

Potentially the most significant publication for distributed generation since NETA, if implemented the proposal would see TNUoS demand residual benefit or TDR (which together with the TNUoS locational charge is more commonly referred to as “TRIAD Avoidance Benefit”) being cut from approx. £45/kW today to less than £2/kW.

What is happening and why?

Historically, a smaller generation plant which is directly connected to a distribution system has not paid charges associated with usage of the transmission system. In essence, this is because they have been regarded as netting off demand within a distribution area, reducing the volume of electricity flowing from the transmission system to a distribution system at a grid supply point. The value of these savings may have been paid directly by National Grid to the generator or more usually transferred to the generator by the supplier under the generator’s PPA.

TRIAD Avoidance Benefit is one of several benefits accruing to distributed generators – others include benefits associated with the TNUoS Generation Residual, Areas of Assistance (AAHDC), Capacity Market Supplier Charge and BSUoS charges. The combined value of embedded benefits has grown significantly over the last decade. There are various reasons for this and opinions as to its impact differ, but it is in part a consequence of the increasing costs of paying transmission owners, particularly for off-shore transmission and increasing balancing costs. The value of the TDR element of the TRIAD Avoidance Benefit has itself increased from a little over £10/kW in 2005/6 to £42/kW today. Ofgem is of the view that this may be distorting investment decisions as to the type, location or plant being proposed for the GB system.

The regulator has looked at the structure of transmission pricing and embedded benefits on a number of occasions over the last decade but without taking any significant steps. However, in May 2016, two proposals (CMP 264 and CMP 265) were made to change the treatment of the TRIAD Embedded Benefit by EDF and Scottish Power, under the industry process for modification of the CUSC – the industry code for the use of and connection to the national transmission system. It is the outcome of these industry modifications which is the subject of Ofgem’s minded-to decision.

As well as proposing a reduction in the TDR element of the TRIAD Avoidance Benefit, the regulator is proposing that the change is introduced for all embedded generators within three years because of the scale and rate of increase in benefit and the potential for further impact on the capacity market.

The proposed value of the benefit will be reduced by a third each year from 2018 until it reaches the level of avoided grid supply point costs (currently £1.62/kW) and it would then be set at the start of each RIIO period. There would be no grandfathering for existing plants.

Ofgem has refused to carry out a wider significant code review but has stated it will carry out a Targeted Charging Review looking at other elements of charging.

Why is this important?

The proposed changes to the CUSC and Ofgem’s position regarding the need or otherwise for a Significant Code Review have generated significant debate, and indeed controversy, over the last few months across the industry.

If implemented as proposed:

• New and existing distributed generation are likely to see a reduction in income.
• A change in law under PPAs may be triggered and, if not, the change in the level of income may flow through to the level of debt coverage and hence financial ratios under financing documents.
• The change could particularly hit distributed generation which has won contracts under the capacity market for new build, whether raising finance or already under construction.

What next?

Ofgem’s minded-to decision and draft impact assessment is open to consultation until 11 April 2017. Ofgem is expecting to publish its final decision in May of this year. If implemented as currently framed, the phased reduction in the TDR element of the TRIAD Avoidance Benefit would start in 2018.

If you would like assistance in preparing a consultation response or in understanding the impact of these proposals, please contact Simon Hobday or your usual Osborne Clarke contact.