Ofgem condemned for slashing subsidies for small-scale energy generation

Energy regulator Ofgem has faced accusations of "hammering" the financial viability of low-carbon projects, after it confirmed subsidies made to small-scale electricity generators will fall by up to 93%.

The ’embedded benefits’ payments for small generators to produce electricity at peak times will be slashed from £47/kW to between £3/kW and £7/kW over a three year period. Ofgem claims that the current level of payment distorts the wholesale and capacity markets and costs customers around £370m a year.

But green organisations have criticised the decision for “directly undermining” the Government’s Industrial Strategy. Renewable Energy Association’s (REA) chief executive Nina Skorupska has warned that manufacturing energy costs will rise and energy storage projects could suffer delays. 

“This ruthless cut will be damaging to the development of next-generation flexibility and energy storage technologies,” Skorupska said. “Additionally, several gigawatts of already installed renewable generation capacity will be negatively impacted. This comes on top of 18 months of damaging and sudden policy changes to the sector which are not only hammering the financial viability of new low-carbon projects, but now the viability of existing ones now too.

“This move will clearly benefit larger, incumbent companies compared to the innovative renewable energy players that have burst onto the market in the past decade.

“Despite Government rhetoric about supporting manufacturing through the Industrial Strategy, these sites too will be impacted by increased costs, potentially in the millions of pounds for larger installations.”

‘Making a mockery’

Local generators receive an embedded benefit, as they do not use the transmission networks, and help lower consumer energy bills by reducing the need for new network infrastructure investments.

It is anticipated that energy costs could rise by 20% for some industrial energy users that meet their energy needs with efficient on-site generation. The outcome is slightly more generous than the original consultation which proposed reducing the benefit to around £2/kW.

The decision “makes a mockery” of circular economy ambitions, according to the Environmental Services Association (ESA), which has raised concerns about the impact on resource-efficient renewables such as waste-fueled electricity generated by energy-from-waste (EfW), anaerobic digestion and landfill gas.

“Ofgem has ignored our concerns about the scale of the proposed cuts to small, decentralised, low-carbon generators,” the ESA’s executive director Jacob Hayler said.

“Not only does this decision endanger the UK’s renewable energy commitments, it also makes a mockery of our circular economy ambitions by disincentivising resource efficient use of waste as a fuel. The removal of these payments will raise costs of waste management for local authorities at a time when services are already under threat.”

Market distortions

There is around 30GW of embedded generation capacity on Britain’s electricity distribution networks. Those most impacted by the reforms are generators that can control when they produce electricity including diesel and small gas, combined heat and power (CHP) plants, and biomass generators, which together account for roughly one third of embedded generation.

Ofgem believes the reforms will make the energy system more efficient overall. “We are concerned that the current level of the payment is distorting the market and is set to increase further,” Ofgem chief executive Dermot Nolan said.

“Our role is to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.” 

George ogleby

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