Funding for small energy plants to plummet under Ofgem plans 

Small power plant owners who benefit from generous Government subsidies to help keep the lights on at peak times face losing a big chunk of their funding under fresh proposals unveiled in a consultation paper today.

Ofgem, the energy watchdog, wants to cut payments that small energy generators receive for producing electricity at peak times from £45 per kilowatt to £2 per kilowatt.

Under the current network charging system, small generators enjoy certain benefits that are not offered to bigger power plants.

This has led to a boom in small power plants, including polluting diesel generators, which have been able to undercut big new gas plants to secure subsidies through the Government’s “capacity market” scheme to help keep the lights on.

But Ofgem has said that the current payments framework distorts the market and gives small generators an unfair advantage. Reducing the payment should reduce costs for consumers and prevent this market distortion, the regulator said.

“If action isn't taken now, this distortion will only escalate,” said Ofgem.

Ofgem reckons the proposals could save consumers up to £7bn by 2034, equivalent to £20 per household per year.

“This is because consumers are funding these payments as part of the network charges they pay on bills. Reducing the payments should also make the energy system more efficient overall," the energy regulator said.

The reforms, if passed, will be phased in over three years from 2018 to 2020. Ofgem will reach a final decision in May, following a consultation period. The Government has previously backed the proposals as it wants big new gas plants established.

While the wider energy industry has supported the plans, the proposals have not been without criticism.

Smaller suppliers (who benefit from the subsidies) have warned it could lead to a shortfall at peak times. Sir Ed Davey, the former energy secretary, also warned last year that the closure of many small power plants could lead to blackouts and hit more environmentally friendly generators, such as biomass and energy-from-waste generators.