The embedded benefit saga: why GB needs a progressive energy vision

Catherine Mitchell, IGov Team, 8th August 2016 

Over the last few weeks, new possibilities have been injected into the energy policy debate, and now is the time to forge a progressive UK energy vision. Theresa May, our Prime Minister, said in her inaugural speech: ‘’We will do everything we can to give you more control over your lives. When we take the big calls, we’ll think not of the powerful, but you.’’ A few days later, she set out the principles of her economic policy, one dimension of which included industrial policy:  ‘“We need to reform the economy to allow more people to share in the country’s prosperity. We need to put people back in control of their lives’’. Two (Clark and Hurd) of the new ministers have energy and climate experience and both are thought to be bright, interested and progressive – a welcome occurrence. More recently, the decision to review Hinkley Point C (HPC) means that energy policy in GB has suddenly opened up.

At the same time, we have the National Infrastructure Commission consulting on the merits of a National Infrastructure Assessment (NIA), which would presumably lead to a national infrastructure plan, to include energy infrastructure – and will somehow link to an industrial strategy? We have also had a CMA inquiry which has largely sunk without trace, but which will require certain changes to be implemented.

This is not to say that suddenly GB energy policy is great. Business Green recently had a great blog about the political and technical realities that the incoming Ministers (Baker, Hurd and Neville – Rolfe) will have to deal with – pointing out (and this is my wording / interpretation) that many of the dimensions of a sensible, cost-effective energy policy have recently been dumped by the Government; that those issues which have been championed by Government are either unlikely to help decarbonisation goals (fracking), or will not work in time, if at all (nuclear); or have not worked / not worked as well as they should have (energy efficiency policy).

Nevertheless, the UK has space to create a progressive energy policy Vision.

One very beneficial side effect of this would be the reduction in wasted time and effort involved when a bad policy mechanism gets put in place to solve a perceived problem in the ‘old’ system we are trying to get away from (for example, the capacity mechanism); which then tends to lead to other short-term, siloed policy-decisions,  which are further likely to work against the overall energy policy direction (for example, if it gets through, changes to embedded benefits (see below)), and so on.  Had there been a powerful Vision or narrative for EP in GB, neither of these mechanisms would be in place.

This one step forward (more support for D3 (i.e. demand reduction, demand response and distributed generation) and then two steps back (a capacity market (which has chosen to benefit supply over demand; and largely existing, fossil fuel supply over new, sustainable options) and then potentially altering embedded benefits to remove the diesel) happens regularly in GB energy policy – and we cannot afford to continue like this.

Government energy policy goals are for a sustainable, secure and affordable energy system. Whilst there are differences around the edges, we broadly know what that means for direction of travel – more renewables, more energy efficiency, more flexibility, more demand side response, less fossil fuels. It is extraordinary, even though we know where we need to be heading, just how hard we make it for that ‘new’ system to develop, never mind prosper.

The UK needs a strategic energy policy framework, and it needs a clear Vision or Narrative – achieved through meaningful engagement and consensus building – that the majority can get behind.

As the Business Green blog illuminated, this is complex political territory which requires hard decisions by the new Ministers. But it also gives them and stakeholders (hopefully including civil society) the opportunity to come together to forge a progressive Vision.

The Government should widen the review of HPC to include a process for developing a consensus energy Vision.

One Step Forward, Two Steps Back

With respect to the potential re-jigging of embedded benefits: very very briefly:  Ofgem acted on Embedded Benefits (EB) because diesel generators in the 2015 Capacity Market (CM) were awarded contracts because they were able to bid in sufficiently low because of the EB, and players without EB could not. This was judged to be uncompetitive. Ofgem is now discussing the removal of EB, which hits all DG actors. Although the embedded benefits policy is flawed in some ways (see the CE report below), it is the only mechanism that gives any recognition of value of DG, avoiding transmission use etc . Diesel would not have received contracts were there a ‘working’ carbon price; if diesel had been ruled ineligible within the CM etc. And, as IGov argues, this would not have happened were there a fit-for-purpose GB energy governance system which actually provides value to where it is wanted in support of the broad goals of energy policy – i.e. sustainable, secure and affordable – rather than value given out via a poorly designed, and unnecessary, CM which de facto maintains the ‘old’ system.

For more information: Ofgem had a very technical letter published in the FT about their worries that some embedded generators might be being paid more than they ought, according to a number of criteria. Cornwall Energy analysed the costs and benefits of this for ADE; and ADE produced an excellent summary of the CE report; and Business Green wrote a blog about it.

My interpretation of these various letters and papers is that under the current governance and institutional structure, Ofgem’s concerns are correct in certain situations. But, in general and in a whole system sense, far greater costs would accrue to customers if the embedded benefits were removed, and the vast majority of embedded generators (which in general Government is trying to support), which broadly receive ‘fair’ embedded benefits at the moment, would lose out.  Much better that Ofgem takes a breath and passes this question back to BEIS.  Ofgem should not be moving into de facto policy areas.

Posted by: Iain Soutar

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