The outcome of an Ofgem review currently underway threatens to significantly reduce the incentives for deploying commercial solar PV according to a report by KPMG.
Ofgem was tasked earlier this year by the Department of Energy and Climate Change (DECC) with investigating the “embedded benefits” inherit to distributed generators (DGs) like solar. This refers to the transmission charges avoided by these technologies by using only the distribution network, as well as a series of other benefits to not using the national transmission grid.
DECC believes the rise in decentralised energy is stifling the competitiveness of larger centralised generators in the capacity market which the government believes are key to long term energy security.
Instead of the existing diesel generators that have succeeded in previous capacity market auctions, the government is looking for ways to bring forward new generators, such as Combined Cycle Gas Turbines (CCGTs), by potentially reducing the benefits enjoyed by embedded generators.
In order to address this view, Ofgem is currently considering if these embedded benefits are reflective of the costs being avoided and while DECC has diesel in mind, Ofgem is thought to be taking a technology neutral view in its review. This means any recommendations for changing the current embedded benefits system would affect all embedded generators, including solar.
In response to the review, KPMG were commissioned by gas-fired generator UK Power Reserve to investigate the consequences of changes to embedded benefits, which the consultancy did so in terms of both immediate removal or transitional changes to the current regime.
While the perceived intention of DECC is to limit embedded diesel generators in the capacity market, Andy Pace, senior consultant at Cornwall Energy which recently published a report on the review, believes any changes would impact renewables.
He told Solar Power Portal earlier this week: “It's not specifically looking at the people who have bidden in to the capacity market; it’s just asking if these payments are cost reflective. When you look at them as an end to end then they are but the fact that they have said just see whether they are cost reflective encompasses everyone, so it will catch the renewables sector.”
In both cases, the KPMG report – launched this week in London – found that less renewable energy would be generated as a result of any changes to embedded benefits.
“The embedded benefits regime provides an incentive for the deployment of renewables capacity connected to distribution networks, alongside subsidy mechanisms such as the Renewables Obligation, small-scale Feed in Tariffs and Contracts for Difference. The removal of embedded benefits would reduce the quantity of new renewable generation connecting to distribution networks by adversely affecting plant economics,” the report states.
It adds that reductions in renewable capacity would also make it less likely that the UK would achieve its 2020 target of around 30% of electricity generation coming from renewable sources.
A number of groups within the renewable energy sector are working to influence the Ofgem review to ensure it doesn’t adversely affect the power sector and the trend toward decarbonisation.
Speaking to Solar Power Portal earlier this week, Lee Richards of RegenSW said: “If there is a recommendation that embedded benefits are reduced or removed for all generators because that's what they wanted to do for diesel generators, clearly that's going to have a big impact on a lot of renewable energy projects.
“If you took the worse case scenario and there were no more embedded benefits at all, or they were vastly reduced and it was a very plain argument in that sense – and I do caveat with that – then clearly, the business case won't stack up as well.”
Richards said that for solar panels meeting high levels of energy demand at a property or equipped with a storage device, the business case would still be favourable. However, this is on a case by case basis and he added: “We've had a look at different people and what they're embedded benefits are and it does stack up to a reasonable sum of money over the lifetime of a project if they are reduced or removed.”
Frank Gordon, senior policy analyst at the Renewable Energy Association, claimed that in some cases embedded benefits can save around £20 per kW of installed capacity.
“If you're a solar farm you're receiving these benefits at the moment. They go away and all of a sudden your grid charges go up massively,” he commented.
The true nature of Ofgem’s review remains unclear as there is little published reference to the scope of its investigations. A spokesperson for Ofgem told SPP this week: “We are looking at whether it would be in consumers’ interests to consider changing the charging arrangements for distribution connected generators. We will set out a proposed way forward on this matter in the summer, including whether to consult on making any changes, and what those changes might be.”