UK: Electricity Generators And Embedded Benefits - Cause For Concern?

Last Updated: 21 September 2016
Article by Derek Goodban and Gus Wood

Embedded benefits are savings or payments available to generating stations that are directly connected to distribution networks (commonly referred to as embedded generation or distributed generation). They come in a variety of forms, and, in part, are intended to reflect the fact that the generation is located closer to the demand, thereby reducing the required levels of network investment (transmission and distribution) and electrical line losses.

Embedded generators typically realise, and share the financial value of, embedded benefits under the power purchase agreement under which they sell the electrical output from their generating station. Embedded benefits can therefore be a valuable income stream for those generators.

First gaining widespread attention due to Government concerns in respect of the Capacity Mechanism, and also the subject of an ongoing Ofgem review, there are now a number of industry code modification proposals that seek to limit and exclude the availability of certain embedded benefits. The outcome of these proposals will be of real concern to those developing and operating embedded generation projects, as well as their funders.

The Context

Embedded benefits have been reviewed on numerous occasions over the years, but have nevertheless remained an integral part of the industry charging arrangements.

However, in Ofgem's 2016/17 Forward Work Programme, it noted that it would be reviewing the transmission network charging arrangements for embedded generation again, in light of concerns that those arrangements could be over-rewarding embedded generation, thereby distorting investment decisions.

These concerns were then expressed again by the (then) Department for Energy and Climate Change (DECC), in the context of the potential distorting effect of embedded benefits on the Capacity Market - DECC noting in its March 2016 response on reforms to the Capacity Market that "Ofgem is ... reviewing whether it would be in consumers' interest to change the charging arrangements for distribution- connected generators".

On 29 July 2016, Ofgem issued an open letter on its review of the charging arrangements setting out its thoughts on the key issues. Ofgem stated that its main concerns related to the regime for transmission network use of system (TNUoS) charges, the mechanism for which is contained in the Connection and Use of System Code (CUSC).

In the period between the DECC statement and the Ofgem open letter, two CUSC modification proposals (CMPs) were raised - CMP264 and CMP265 - by Scottish Power and EDF Energy, respectively. These proposals seek to change the TNUoS charging mechanism. The content of these proposals is outlined in more detail below.

In light of the CUSC modification proposals, Ofgem intends to deal with any changes to TNUoS via the industry code modification process, rather than launching a separate Significant Code Review process - its view being that the delay incumbent in going down the Significant Code Review route is likely to be to the detriment of consumers.

Ofgem intends to consider embedded benefits other than in respect of TNUoS separately and notes the need for a co-ordinated approach in relation to a number of issues, including electricity storage (which we highlighted in our note on electricity storage earlier this year). It plans to set out its further thinking in the Autumn.

TNUoS charges and their application to embedded generation

TNUoS charges are the charges levied by National Grid to recover the costs of providing and maintaining the transmission network. They are levied partly on generation and partly on demand. They include a locational element - a locational signal that should broadly reflect the transmission system-related costs in different locations - and a residual element to recover the remaining costs of the transmission network.

Demand-side TNUoS charges are currently charged to licensed suppliers by reference to their average net demand over the three so-called "triad periods" - the three half-hour periods of highest system net demand in the period November to February separated by at least 10 days.

Currently, the output from licence exemptible embedded generation can be registered by suppliers under the industry codes as negative demand. Generation by licence exemptible embedded generators therefore reduces the TNUoS demand charges for which suppliers are liable. This is known colloquially as the "Triad Benefit". Ofgem's open letter suggests that the current value of the "avoided" charges is circa £45/kW (estimated to rise to £72/kW over the next four years). Suppliers will typically share a proportion (often a large proportion) of that financial benefit with the embedded generator.

Ofgem suggests that the level of this income to embedded generators could be distorting the market in a number of ways, including leading to an inefficient mix of generation by encouraging smaller embedded generation over more efficient larger embedded generation or transmission-connected generation. This could lead to transmission-connected generation exiting the market as it is unable to compete, and distorting the outcome of the Capacity Market by depressing prices (as smaller embedded generation can bid in at lower prices than transmission connected/large embedded generation).

CUSC modification proposals

The Ofgem open letter identifies that any changes to the charging arrangements will require changes to the CUSC. There are already two modification proposals going through the CUSC modification process.

CMP264 - Embedded benefit triad avoidance standstill

This modification proposal (raised by Scottish Power) would change the rules for new licence exemptible embedded generation (being generation commissioned after 30 June 2017).

The generation output from these new embedded generators would no longer be treated as negative demand for the purpose of establishing a licensed supplier's TNUoS charges. Suppliers would therefore not have a financial saving that could be shared with new embedded generators. The proposal does not envisage changing the position for generators commissioning before 30 June 2017.

The proposal is described as a short-term mitigation to the distorting effect described above until Ofgem's consideration of the charging arrangements has been completed and any changes fully implemented.

CMP 265 - Gross charging of TNUoS for HH demand where embedded generation is in the Capacity Market

CMP265 has been raised by EDF Energy. It is aimed at what EDF Energy describes as the "pressing issue" in relation to the next Capacity Market auction (in December 2016). The intent is that the proposal can be considered and determined in advance of the auction - acknowledging that further important changes may be needed to the TNUoS arrangements going forward.

The proposal would affect only the output from embedded generation that has a capacity agreement under the Capacity Market. It would apply to both existing and new generation, but would only apply from April 2020. The proposal would prevent the output from such embedded generation being counted as negative demand.

CUSC Modification Process

Having completed their consultation with industry, the CUSC working group established to consider CMPs 264 and 265 (and any alternatives developed during the process) is currently expected to submit its proposals to the CUSC Modifications Panel by the end of September (although a further extension to the timetable may be sought).

The Modification panel would then vote on the proposals in October, with an Ofgem determination on them expected in November.

As is the case for all industry codes, there is a merits-based appeals mechanism, which allows interested persons to appeal certain Ofgem modification proposal decisions to the Competition and Markets Authority. However, if both the CUSC Modification Panel and Ofgem approve the proposed modification, there will no right to bring such an appeal.


The embedded benefit matrix in the electricity industry is complex, but is a very important component of an embedded generator's revenues. Any change could have significant (and potentially unintended) consequences for embedded generators, funders, the wider industry and consumers including in terms of current revenue streams and appetite for further investment in embedded generation.

It is clear that the regime, and in particular the Triad Benefit, is under scrutiny. It will be essential that Ofgem undertakes a thorough analysis both when considering the current CUSC modification proposals and when looking at the embedded benefit regime generally. That analysis should include a consideration of the significant value that embedded generation provides to the electricity system in Great Britain.

Generators should ensure that their voices are heard, and that the impact on them is taken into account as part of the analysis. Generators have an opportunity to do that, by responding to Ofgem's open letter. They will need to do so swiftly - responses are required by Friday 23 September 2016. They should also continue to engage in Ofgem's wider process as it develops.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
22 Nov 2017, Seminar, Montreal, Canada

Please join us on Wednesday, Nov. 22 for a breakfast seminar featuring a panel of experts who are abreast of the most recent developments in the field. Also featured will be Paul Allard, president of Impak Finance, who launched the first cryptocurrency offering under the traditional financial regulatory framework.

29 Nov 2017, Seminar, London, UK

Join us at 4 More London for this breakfast seminar on Wednesday, 29 November 2017 to gain a greater understanding on this debate. Coffee and breakfast will be from 08:30 with the discussion commencing at 09:00. We will finish and have you on your way by 10:00.

7 Dec 2017, Seminar, London, UK

Would you like the opportunity to hear more about the potential disruptive effect that blockchain is going to have in the energy sector? If so, please join us on 7 December where Jo-Jo Hubbard, a leading light in this area, will explain all.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.