By Peter Hobson and Susanna Twidale
LONDON (Reuters) - Changes to Britain's local power generation rules could drive up energy bills and curb growth in new small plants just when the government is seeking to boost the country's electricity supply.
Smaller power generators with less than 100 megawatt capacity embedded into local power grids have grown rapidly thanks to rules that let them avoid the costs of using and maintaining the national transmission network.
But encouraged by Britain's "big six" energy suppliers, the Department for Business, Energy and Industrial Strategy (BEIS) and energy sector watchdog Ofgem plan to remove some of these advantages.
Most affected are small gas, diesel and bioenergy generation plants with combined capacity of around 7-8 gigawatts (GW) - around a tenth of Britain's electricity supply - some of which could be driven out of business by the changes, said Andy Pace, senior consultant at analysts Cornwall Energy.
"If existing plant goes out of business in the next couple of years, and all those who won capacity market contracts found that the playing field has changed and decide to pull out, in aggregate that could have quite a few gigawatt impact," he said.
Without major new infrastructure, power output will fall sharply as Britain's ageing coal and nuclear plants begin to close in the 2020s.
In a bid to shore up supplies the government has launched a capacity market which pays plants to make available back-up electricity at short notice.
Around 1.7 GW of small-scale generation projects, not yet built, have won capacity auction contracts for future years and could be at risk, Pace said.
Britain is forecast to have a surplus power margin of 6.6 percent this winter, which would be just 1.1 percent without its back-up measures,, meaning the loss of just a few gigawatts could tip the balance.
Industry body, the Association for Decentralised Energy, estimates the removal of embedded benefits would cost industrial manufacturers with on-site generation up to 170 million pounds, and add up to 282 million pounds to consumers' bills from this year's capacity auction.
But the big six – SSE (L:SSE), Iberdrola (MC:IBE) unit Scottish Power, Centrica's (L:CNA) British Gas, RWE npower (DE:RWEG), E.ON (DE:EONGn) and EDF Energy (PA:EDF) -- which produce the bulk of their power at large, transmission-connected facilities -- say some of the current rules are unfair.
Changes are needed "to ensure that the costs of the system are allocated fairly," said a spokesman for EDF Energy.
Smaller generators say such changes would suppress more flexible and cheaper generation, driving up costs.
"It's going to throw us back into the hands of utility generation, which is slow and expensive ... We're all going to see that on our bills," said Tim Emrich, chief executive of embedded generator UK Power Reserve.