Embedded benefit: what it is and why it matters

Embedded benefit is one of the most complex issues facing the energy industry. With changes on the horizon, we've tried to set out what is is - and why it matters...

What is an embedded benefit?

Our electricity system is made up of transmission and distribution networks.
Transmission networks carry power across large distances at high voltages, often using large pylons.

Distribution networks carry power from the transmission network to homes and businesses, more often on wooden poles.

Embedded generation is the production of electricity from power stations that are directly connected to a distribution network: it is ‘embedded’ more deeply in the electricity system.

The distribution network is connected to the transmission network at ‘grid supply points’.

National Grid, the organisation which runs the electricity system, can ‘see’ what transmission-connected generators are producing at any given moment on its computer screens.

It can only see distribution-connected generators, however, by the way they affect what electricity is used by consumers on the other side of the grid supply point from the transmission network. In other words, where demand for electricity from the transmission network is lower as a result of distribution-connected generation.

An embedded benefit accrues because embedded generation offsets the need for generation (and associated charges) coming from the transmission network.

A VERY SIMPLE EXAMPLE:

A factory requires 20 MegaWatts (MWh) of electricity. It gets some of that power from a distribution-connected hydro generator (A) which produces 5 MWh of electricity.
Suppose then that hydro generator B, this time connected to the transmission system, produces the extra 15MWh of electricity which is sent straight into the distribution system and can be used by the factory.

Although we know that two different generators are providing the 20MWh of power which is used by the factory, as far as National Grid is concerned, hydro generator A doesn’t exist – they only see the 15MWh of demand.

This means that generators A and B both face very different charges (and in some cases receive payments) for the way that they use the grid. 

Who benefits?

The name would suggest that the embedded generator benefits.
However it could be argued that ‘embedded benefit’ isn’t actually a benefit at all, and that there is a good reason for not subjecting embedded generators to the same costs as transmission connected generators.

That’s not only because they don’t use the transmission network, but because if embedded generation had to be replaced with transmission-connected generation (to meet demand) much more money would have to be invested in that network.
In that scenario, the transmission network ‘benefits’ from avoiding additional cost, and the consumer (or bill-payer) benefits in the long term. 

What’s the problem?

Some fairly significant changes to the market have left the Government and regulator questioning whether the things they are doing to drive investment in transmission and distribution generation are driving the right sort of behaviour.

That applies most pointedly in the Capacity Market.

Former energy minister Amber Rudd set out in November that the UK needed to build a new fleet of gas power stations.

The Capacity Market – which pays generators to be ready to respond to National Grid’s calls for power – was designed to encourage that, but hasn’t.

Many fear that this is due to the fact that small ‘diesel gen sets’ are able to bid in with extremely low prices as a result of being able to connect to the distribution network rather than the transmission network. That means they avoid a significant number of charges, and actually getting paid to offset demand at peak times.

Added to that, National Grid (which has the job of making sure that everyone pays their fair share for the maintenance, operation and investment in the transmission system) is becoming concerned that power from embedded generators is increasingly finding its way onto the transmission network and driving up costs. 

What about Triads?

This is the other big issue – Triad avoidance.

Embedded benefit isn’t one thing – it’s a range of charges which can be avoided or payments which can be accrued as a result of connecting to the embedded network.
And the value of one payment in particular has risen sharply.

Triads are the three hours out of the whole year where the UK has its highest electricity demand.

In order to encourage large, transmission-connected demand customers (factories, cold stores etc) to use less electricity during these times, National Grid developed a system called Triad.

Simply put, this means that large demand customers which don’t use power in these periods pay nothing for using the transmission system across the whole year; and as a generator, if you provide power during the triad period you can get paid for offsetting the demand.

FOR EXAMPLE:

Hydro generator C sells the power it produces to a ‘supplier’.

The supplier acts as a trader, sitting between generators and customers and selling units of power in the market.

Suppose then that the supplier has 10 demand customers, which we’ll call units.
One of those units is able to turn off during the Triad period, so the supplier should only be billed by National Grid for nine units

However, the supplier also has embedded generation, which provides one unit of generation during the Triad period – so when the supplier gets its bill through the door it is only charged for eight.

The supplier then charges all nine units for their Triad bill, pays National Grid for eight units and pays the generator one unit for offsetting the bill.

This is all well and good as long as the costs and payments are ‘cost reflective’ i.e. the cost incurred by demand customers, reflects the impact that they have on the network. That way the payment to the generator is equal to avoiding that impact on the network.

However, triad payments are increasingly out of kilter with this concept of cost reflectivity for a number of reasons.

The question, therefore, is what value is cost reflective, and there are a lot of answers being given – from £1.62/kW to over £32.30/kW.

Does this impact wind generation?

This is an important question. Triad avoidance payments are best suited to generators which can choose when they provide power. Wind, however, only generates when there is resource available.

However, on average, over the lifetime of the project there is a good chance that wind generators will be providing some output during Triad periods, which may equate to a relatively small but meaningful proportion of revenue. 

What’s changing?

National Grid has said it intends to undertake a holistic review of charging arrangements over the coming years.

Ofgem recently set out in an open letter that it will be looking at pretty much every aspect of embedded benefit, but has suggested that industry is best placed to resolve the specific issue of Triad through existing governance arrangements. 

Why Scottish Renewables is concerned

First of all, there is a huge amount going on in the area of grid charging, and all these reviews could have real impacts on the renewables industry.

We think it’s important that there is a holistic review with independent oversight to ensure that any potential changes are made to work well together.

A number of changes have been proposed to amend the Triad system which could fundamentally change the way that the system operates – some drastically, and some with little impact on renewables generators.

However, while they all address the symptom of Triad payments being too high, we would question whether any address the root causes.

With this in mind, Scottish Renewables has written to Ofgem to encourage that it takes a lead in tackling the fundamental issues that sit at the centre of this problem.

Blog by Michael Rieley, Senior Policy Manager