Reading the Runes on Embedded Benefits

https://www.linkedin.com/feed/update/urn:li:activity:6210580344584826880

Ofgem today published an update on the arcane but highly controversial issue of embedded benefits. The aim was to provide some clarity for those generators considering bidding in the capacity auction. But inevitably Ofgem couldn't actually give much clarity as it cannot risk creating "legitimate expectations" ahead of actually taking the decision and the decision is a difficult one.

There's clearly a lot of support for a wider review of charging which makes sense given the number of other distortions across transmission and distribution (eg on connections) and the vital importance of sending the right signals to encourage the efficient development of a more flexible and smart energy system. Ofgem is clearly worried that the distortions in embedded benefits could escalate if you waited for a full review - but there are mods on the table aimed at stopping that - and a general consensus that further increases in embedded benefits would be wrong.

But in case you try reading the tea leaves and conclude that this would be a sensible solution, Ofgem feels obliged to point out to investors that they should consider the risks of the worst possible mod being approved. ie the guidance actually takes nothing off the table - it just tries to make sure that investors are aware of everything that's on it.

The update also makes a number of references to the recommendations of the CUSC panel. Under statute Ofgem has to have regard to these recommendations. However, in another part of the forest, Ofgem has been raising concerns, which were then picked up by the CMA, about the code modification arrangements and the fact that they are dominated by incumbents who may not have the right incentives to drive forward changes to the energy system. The CUSC panel comprises essentially the big players - although supposedly acting independently. Participation in the working groups has been wider and Ofgem has received 145 responses to its original open letter but there is a real onus on Ofgem here to ensure that it is listening to the voices of the little people in this debate.

This is a big decision with, as Ofgem notes, implications for investor confidence, competition and security of supply. Not to mention the future direction of the energy system. Ofgem is promising a draft IA early next year with a minded to decision. This one could run and run.