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Embedded Process Flaws- A brake on energy innovation?

Ofgem today announced their minded to position for the much anticipated slashing of TRIAD benefits to embedded generators, phased over the next three years.

In itself, no great surprise, as the direction of travel has been clear since being highlighted as an issue in the CMAs final report published in June 2016 and the success of diesel generation in the capacity market auction was linked to embedded benefits.

There has been much written on the technical rights and wrongs of proposed changes. What has been talked about less is a big underlying issue with the current governance process, which has been illustrated clearly by the embedded benefit fracas. Whilst largely invisible to most, this process is hard to argue remains effective and fit for purpose in a market that has fundamentally changed.

The Governance

The current governance process for managing industry change has been in place since the market opened- a time when ‘the market’ largely consisted of the ‘big 6’ plus the regulated industry players. Rightly, the process was designed to be transparent and consultative. Change is governed by industry panels, membership of which is open to industry participants who are voted onto the panel through an open process. So far, so good.

It is the ‘CUSC’ panel (connection and use of system) that governs changes to transmission charging methodologies responsible for the changes announced today. This panel is chaired by National Grid, attended by OFGEM and the remainder consists of a member from Energy UK, a member from the National Consumer Council and representatives from Scottish Power, EDF, Eon, SSE, DRAX and FirstHydro. Not a small or medium sized business, investor or other stakeholder in sight.

The Process

Those who have been following closely will know that the two modification proposals submitted relating to TRIAD benefits, came from EDF and Scottish Power- both of whom sit on the panel, and both of whom have little business interest in embedded generation. There have been many informed cynics who have noticed this coincidence and the timing of the modification proposals.

There has been a lot written about the proposed changes. Few people argue against the need to review charging methodologies in light of the transforming energy market, however nearly all informed industry commentators have been calling for this to be a holistic rather than piecemeal review- a call that has been overtaken by events triggered by the modification proposals.

The remainder of the industry, once the gun had been fired, piled into the process in the only way possible- through raising ‘WACMs’ (workgroup alternative CUSC modification) as alternative proposals to the original, for damage limitation purposes. It is no surprise that, given the potential impact of the original two proposals, 41 well considered and written WACMs were raised by different industry participants.

With the complexities involved, a full 16 meetings of the panel took place between July and October 2016, a huge commitment of time and resource for all those participating.

The amount of paper and reading cannot be underestimated- there are many detailed documents involved in the process with the final drafted legal text (vol 1b) for CMP264 alone running to 1,526 pages and CMP265 (vol1c) a mere 1,206 pages. Documents which were then were passed to Ofgem for further review, final decision, and publication of their consultation- a mere 118 pages to read and digest.

The Challenge

No one should question that the process is following the proper governance procedure, nor have anything other than high regard for the thought, work and technical analysis put into getting to the current position.

However there are bigger questions for OFGEM to answer:

- How does the rest of the market (other than Big 6) have its views fairly represented and considered in the governance process, recognising that the majority of smaller businesses do not have the resource or time to dedicate to the process as it currently operates?

- Given the composition of the Panel membership, and their associated traditional business models, how are new innovative and disruptive business models effectively considered when making decisions?

- How can technical industry changes and investor signals be considered in the round, so that unintended consequences don’t result from industry change? In reality since the prospect of TRIAD changes was raised, the market has effectively discounted TRIAD benefits in investment cases and is looking for the next opportunity- which rationally is heading towards the safe harbour of behind the meter generation. A response that will not help manage the system in the longer term.

- How can the time from the starting gun to final resolution be shortened, so that the period of market uncertainty can be minimised? These changes will have taken over a year when implemented- a period of uncertainty that is too long in a fast changing world.

The market, and the number of participants and innovative business models involved, is undergoing unprecedented change. The pace of change is accelerating and the market will not wait for governance processes to catch up. It is time that the industry governance and engagement processes, which no longer serve the market well, change too.

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