Targeted Charging Review - how will it affect embedded generators?

For several years now, generators’ income has come under sustained pressure from regulatory change focussing on embedded benefits. Chris Smith, Head of Renewable Sales, provides an overview of the most recent changes that may occur from the Targeted Charging Review.

This year has seen significant changes to generators’ income with TRIADs being reduced considerably and the Capacity Market (CM) embedded benefit being removed entirely.

However, more change is on its way with one of the most significant announcements from Ofgem - the Targeted Charging Review consultation on 28/10/2018, which among other areas proposes substantial changes to the Balancing Services Use of System (BSUoS) embedded benefit.

These changes will not only remove the embedded benefit, but it will become a cost to embedded/ distribution connected generators. Ofgem propose that these changes are to be implemented in 2020 or 2021.

How will the BSUOS proposals impact generator income?

Indicatively, for a wind asset owner in England and Wales, we would forecast a potential reduction of c£5.50/MWh after such a change, significantly impacting financial performance.

For gas assets, this benefit during the Super peak periods of Block 5b and 6a has reached £13.87/MWh in the last few months and consistently averages £2.10/MWh.

For assets in Northern Scotland (distribution area HYDE) BSUoS charges have been an issue for some time due to ‘flipping’ in this geographical area. This occurs as embedded generation in this area is consistently exceeding demand, resulting in the distribution system being a net exporter to the transmission network. With the proposed changes all areas will be treated in the same way.

Future for embedded generators

This announcement, coupled with the suspension of the CM and the continued reduction in the Triad embedded benefit, does not support investor confidence.

Although it’s not all bad news. We are seeing more volatility in the power markets, creating opportunities for generators enabled by our product suite.

The volatility this year has seen prices for Winter 2018 spike at £76 per MWh for baseload. External analysis has also suggested that if CM payments are not reinstated, we could see the further price spikes next Winter with pressure on the generation stack.

Our product suite allows for trading up to gate closure and access to a 24/7 trading desk, which supports SmartestEnergy’s focus on customer asset optimisation.

The importance of a structured power selling strategy on the right product, optimising when and where to sell your power, has never been more important and will be essential for future-proofing your generation income.

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About the author

Chris joined SmartestEnergy’s Renewables team in 2017 from Danish energy trading company Neas Energy. He works with generators to develop solutions to help them maximise returns in a changing environment for renewable projects. Chris began his career in the energy sector in 1996 with Eastern Natural Gas. He went on to work as a Generation Services Senior Business Development Manager at RWE npower, developing PPA solutions for customers. He has also worked on the supply side with industrial and commercial users. His role as Business Development Manager at Neas saw him build its UK PPA and CHP portfolio from market entry. Chris has a BA in Business Studies from De Montfort University, Leicester.

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