Ofgem confirms phased cuts to embedded benefits for small electricity generators

The final payments will, however, be slightly higher than originally estimated by Ofgem in its 'minded to' proposal, published for consultation in March. The payments are currently around £47 per kilowatt supplied to the distribution network, and will be cut to between £3/kW and £7/kW by 1 April 2020.

Finance and projects expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com, said that the cuts would "impact revenues on generation and could lead to some projects being put on ice or scrapped completely".

"For this reason, it wouldn't be a surprise if this decision was appealed or ultimately challenged by judicial review to halt changes that could be a disincentive to investment into the energy industry," he said.

"Ofgem's decision risks undermining the government's drive to promote a smarter and more flexible energy industry given the knock-on impact this could have on energy storage projects. Storage could play a major role in addressing supply and demand challenges, but removing these benefits could reduce value of these projects. Ultimately the UK risks reduced deployment at a time when innovative energy technologies are most needed," he said.

"While a period of phasing will soften the blow of these changes somewhat, we should prepare ourselves for ongoing regulatory uncertainty with knock-on effects on investment. This will be brought into sharp focus if Ofgem unwinds these changes in light of its review of transmission charging," he said.

'Embedded benefits' is a catch-all term for the payments that small generators receive in return for connecting to the distribution network, as well as the charges that these generators avoid paying. Ofgem began seeking industry views on the treatment of these payments last year, in response to concerns that that cost of the payments to a larger number of small generators was becoming unsustainable as well as inadvertently providing incentives that could affect plans to build or close much-needed larger generating plant.

The changes relate to one of these payments, known as the Transmission Network Use of System (TNUoS) demand residual payment, or 'triad' benefit. This is paid by suppliers to smaller embedded generators with less than 100MW capacity to help them reduce the biggest element of the electricity transmission charges they face at periods of highest demand, in addition to the payment they receive for selling their electricity. They will be introduced by way of two modifications to the Connection Use of System Code (CUSC) as proposed by the industry.

There is currently around 30GW of embedded generation capacity connected to electricity distribution networks in Great Britain, according to Ofgem. Demand residual payments currently cost consumers around £370 million each year, and this figure will continue to increase as more small generators are connected to the grid. By fully implementing the reductions as planned, this cost would be reduced to more realistically reflect the cost that Ofgem would otherwise have had to invest in additional capacity at grid supply points.

Diesel, small gas, combined heat and power plant and biomass generators will be most impacted by the reforms, as they can control when they produce electricity, according to Ofgem. Renewable generation, including solar and wind farms, will not be affected to the same extent because the nature of their generation means that they do not generally receive these payments. Ofgem intends to publish a full impact assessment on 22 June.