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Small power plants clobbered by Ofgem subsidy change

June 21, 2017

By Paul Homewood

h/t Patsy Lacey

As expected, OFGEM has acted to close a loophole, which pays unjustifiably large subsidies to small peak loader power plants, such as diesel generators:


Energy watchdog Ofgem has decided to slash generous subsidies paid to small power plant owners in a move it says will cut consumers’ energy bills.

Ofgem has cut subsidy payments for small plants producing electricity at peak times from £47 per kilowatt to between just £3 and £7 per kilowatt. The change will be phased in from next year, to be fully implemented by 2021.

The regulator believes the changes will prevent market distortion and reduce consumers’ energy bills by up to £370m a year.

But small power plant owners immediately criticised the decision, saying it would threaten the UK’s ability to keep the lights on and deter smaller players from entering the market.

Mark Draper, chairman of the Flexible Generation Group, said: "This decision poses a significant challenge to our growing industry and makes it even more difficult for new entrants into the energy market to compete with established players.

"Its impact will inevitably push up prices for consumers, stifle innovation and investment in the energy sector and put existing Capacity Market agreements at risk, threatening security of supply."


OFGEM explain their decision:

Ofgem has decided to reduce a specific payment that some small electricity generators receive for producing electricity at peak times. This payment cost customers around £370 million last year.

Embedded generators are power plants connected to the lower voltage distribution networks. Smaller embedded generators (with less than 100 MW capacity) can receive specific payments from suppliers for helping them to reduce their charges to use the transmission network. These payments are in addition to the price these generators get for selling their electricity.

The current level of this payment is around £47/kW (double the clearing price for the 2016 Capacity Market auction). It is forecast to increase over the next four years to £70/kW. Ofgem’s view is that the level of the payment is distorting the wholesale and capacity markets and if no action is taken the distortion will increase.

Ofgem has decided to accept an industry proposal to phase in a reduction in the payment to between £3/kW and £7/kW* over three years from 2018-21. Ofgem believes the reforms will make the energy system more efficient overall.



There is around 30 GW 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 plant, and biomass generators, which together account for roughly one third of embedded generation. Around two thirds of the total embedded generation capacity, mainly renewable generation (solar and wind farms), will not be affected to the same extent because generally they do not receive this payment.

  1. John Ellyssen permalink
    June 21, 2017 3:53 pm

    While a reduction is a start, I just do not see any usefulness in subsidies. It falsely sets levels of actual costs to the consumers. Just remove all subsidies and let market drive the costs and incidentally remove some of the more bizarre government regulation that makes relatively clean energy more expensive. My apologies if my remarks offend anyone. They are not meant in such a manner.

    • June 21, 2017 4:15 pm

      Without the subsidies, John, how are we to pay Mark Draper, chairman of the Flexible Generation Group, his salary?

      I think we need to start educating people about the number of “Mark Drapers” there are around the place simply acting as mouthpieces for various energy suppliers and paid (how lavishly I wouldn’t know) with our money without our knowledge.

      • McNeil permalink
        June 21, 2017 8:25 pm

        Paying Mark Draper his salary is an outcome from investment in jobs. There are now many such employment opportunities that just did not exist before.

      • Ian permalink
        June 21, 2017 9:05 pm

        And don’t forget politicians-turned entrepreneurs like Ed Davey. He recently appeared on a politics programme piece on green energy, introduced as a past energy minister, ie he’s qualified and we should listen. When I complained to the BBC (who else?) about their failure to also note his vested interests (see Wiki), the best they could do by way of justification was to say: “… at no point did we claim his contribution should be considered impartial.” You couldn’t make it up.

  2. June 21, 2017 4:08 pm

    About time too.

  3. Reasonable Skeptic permalink
    June 21, 2017 4:14 pm

    For each action there is an equal an opposite reaction.

    This principle ignores people political view points, so while people want to lower emission while keeping prices low and grid stability high it simply can’t be done no matter which incentive they use.

    This policy will impact stability which can’t be sacrificed, so it will increase prices, which is exactly the opposite of the intention.

    • John Ellyssen permalink
      June 21, 2017 4:33 pm

      Query? How will it increase prices as part of the unseen prices are the subsidies themselves? Seems like it would rather be a one to one tradeoff or near so.

      • Bloke down the pub permalink
        June 21, 2017 6:34 pm

        If there is insufficient generation at times of peak demand, someone will end up paying through the nose to keep the lights on, and that will be the consumer.

  4. Gamecock permalink
    June 21, 2017 4:45 pm

    ‘But small power plant owners immediately criticised the decision, saying it would threaten the UK’s ability to keep the lights on and deter smaller players from entering the market.’

    Not providing electricity will keep costs down.

    • Gerry, England permalink
      June 22, 2017 1:17 pm

      If you build a business based on taxpayers cash being chucked about there is always a good chance it will be stopped at some point.

  5. June 21, 2017 7:31 pm

    About time too. Ofgem should bring the changes in immediately and stop all development of these STOR facilities, which are unaffordable and environmentally damaging. A single CCGT would obviate the need for all of the STOR facilities built so far.

    • Gerry, England permalink
      June 22, 2017 1:18 pm

      The presence of the diesels in the STOR is to allow instant generation for when the wind drops suddenly and thermal plant needs time to warm up. Yes, the reason is still due to the retarded use of renewables.

  6. velcro permalink
    June 21, 2017 9:29 pm

    I dont think there should be any subsidies on any form of generation. And I would throw out the priority right of despatch of the intermittent solar and wind producers. This would force them to enter into agreements with backup power generators so that they could bid and guarantee despatch, just as other generators do. Then we would see what the real cost of renewables is. And if this means no new wind farms or solar power plants, then so be it. But I would also give coal fired generators a notice period, say 12 years, in which to convert their plants to state of art ultra supercritical plants else risk being shut down. That would ensure efficient use of established sites and transmission systems

  7. Vernon E permalink
    June 22, 2017 9:29 am

    Yes to all of the above but there remains the problem that peak demand is exactly that – occasional and sometimes never demand. Nobody is going to invest in, say, a CCGT plant that may run rarely, especially when the system is geared to always give priority to renewable generators. Reality is that peak shave demand has to be subsidised directly or indirectly and the most cost effective way to achieve that is the old way of building some reserve “flexibility” into the main generators – but that’s all gone now. So what do we do?

  8. June 22, 2017 1:17 pm

    The real problem is that it is all left to a ‘Market’ in GB. Let’s get back to a National planned approach. Most countries do this.
    Our electricity supply industry is now unbelievably complex, with no single Body actually politically appointed to be responsible for keeping the lights on.
    A lot of people are making a lot of money out of this arrangement.

  9. Jack Broughton permalink
    June 22, 2017 2:59 pm

    Saw in the press that Drax are considering converting some of their remaining coal fired boilers to gas and installing a few Open Cycle Gas turbines. Given their ability to sniff-out the subsidies / profits, that tells me that the small generators are going to suffer (unless they have guaranteed £/kWh contracts).

    Ultimate madness to convert coal to gas, in terms of efficiency, national security and true generating costs; but these are no longer part of the energy planning.

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