APPENDIX 36
Memorandum submitted by the National Grid
Company plc
I. INTRODUCTION
1. National Grid owns and operates the high
voltage transmission system comprising the 400kV and 275kV transmission
lines in England and Wales. Our network delivers electricity from
power stations connected to it to distribution companies and a
small number of large industrial customers. The distribution companies
then deliver it to the majority of customers through their 132kV
and lower voltage networks.
2. We welcome this opportunity to provide
information to the Science and Technology Committee on:
(i) how wave and tidal stream energy projects
are likely to interact with the high voltage transmission network;
(ii) our approach to developers of these
technologies, and renewables in general; and
(iii) how our role may help to achieve the
Government's targets and accommodate further developments of renewable
energy in the longer term.
3. Our statutory duties are to develop and
maintain an efficient, co-ordinated and economical transmission
system and facilitate competition in the generation and supply
of electricity. Our licence prohibits us from discriminating between
parties who make use of the transmission network. To help meet
our responsibilities we provide transparent information on the
charges for using our network, its capability and characteristics,
including opportunities for future use, and guidance to anyone
who wishes to connect to our system.
4. National Grid has contracts for use of
our network with all generators over 1,000MW, whether they are
directly connected to our network or embedded in distribution
networks. Currently, there is approximately 67,000MW of such plant
in England and Wales, about 94 per cent of which is directly connected
to the high voltage transmission network. All existing renewables
in England and Wales are "embedded", that is they are
connected to the lower voltage distribution networks. We expect
the majority of renewable energy developments needed to meet the
Government's targets will also be connected to distribution networks.
It is important to note, however, that consumers in England and
Wales can access renewable energy sources in Scotland and in Europe
through the interconnections between the high voltage transmission
systems.
5. The New Electricity Trading Arrangements
(NETA) introduced on 27 March 2001 represented a significant change
for generators and electricity suppliers as well as for National
Grid as system operator. Generators and suppliers of electricity
now enter bilateral contracts for energy and largely "self-despatch"
to meet the terms of these contracts. National Grid, in our system
operator role, is responsible for balancing the system, ensuring
secure supplies and achieving the required quality of supply.
We will do this by purchasing "ancillary services"[6]
and by accepting bids and offers for electricity from generators
and suppliers (ie on behalf of demand) in NETA Balancing Mechanism.
II. OVERVIEW
OF TRANSMISSION
CHARGES
6. In order to explain how National Grid
could interact with new wave and tidal stream generation it may
be helpful to set out in brief how we provide market participants
non-discriminatory access to the national electricity market through
our network. We provide services to customers who connect and/or
use our system. For these services National Grid makes three types
of transmission charge to cover the investment, maintenance and
operational costs of our network as follows:
7. Connection charges—these reflect
the cost of installing and maintaining the assets required for
the connection of a generator or demand customer directly to our
network. Transmission connection charges are "shallow",
that is, they cover only those assets at or very near the connection
site. Customers may vary the design of their connections (subject
to safeguards), they can choose whether they incur National Grid's
regulated rate of return or some other form of financing, and
can choose whether to arrange for the construction of these assets
themselves or whether National Grid makes these arrangements.
Generators who connect to the distribution networks do not incur
transmission connection charges but pay distribution connection
charges to their host distribution company. In so far as the host
distribution company considers such generators help reduce the
demand on the transmission system, they help avoid the need to
reinforce grid supply points and hence may reduce the charges
levied on distribution companies.
8. Transmission Network Use of System (TNUoS)
charges—these charges cover the regulated cost of the transmission
network infrastructure assets and their maintenance. As such assets
cannot in general be allocated to specific customers, the TNUoS
charge shares the costs between all transmission customers who
use the system in that year. The charges to individual customers
reflect the marginal cost of reinforcement to meet increasing
imports or exports from each area of the country. For generators
larger than 100MW, these charges are positive (ie a payment from
the generator to National Grid) in areas where reinforcements
will be required to accommodate increased exports. The charges
are negative (ie a payment to the generator by National Grid)
in those areas of the country where generation offsets the need
for transmission investment. Smaller generators are not subject
to these charges (unless they choose to be). However, smaller
generators reduce the liability of electricity suppliers to pay
the TNUoS demand charge. By this means, embedded generators may
receive an "embedded benefit" in all areas of the country,
but the benefit tends to be significantly larger in those areas
where generation or demand reduction offsets the need for transmission
investment.
9. Balancing Services Use of System (BSUoS)
charges—these charges are levied on generators and electricity
suppliers participating in the national electricity market, and
cover the costs of system operator actions to balance the system
including the costs of ancillary services. Generators larger than
100MW are required to participate in the national electricity
market, while smaller generators may choose to do so if they wish.
Smaller generators also have available to them a number of options
that permit them to participate in the national market without
incurring transmission charges. Normally small generators will
help an electricity supplier avoid BSUoS charges and so may be
able to negotiate an embedded benefit.
10. National Grid's charges are published
in a statement of charges which is available from our website.
This statement includes indicative charges calculated for common
connection arrangements. For example, to connect a generator directly
to the 400kV transmission system with a new substation near an
existing line may cost approximately £2,000,000 of connection
charges for the first year (reducing in subsequent years due to
depreciation). Typically, such a connection could accommodate
up to 1,000MW of generation and so could represent a connection
cost of approximately £2/kW per annum. The connection at
400kV for a smaller generator, however, would require similar
assets in terms of a substation and line works, and so would cost
more per kW of generation capacity. For this reason, we would
expect generators smaller than around 300MW to find it more economic
to connect at a lower voltage (on networks owned by distribution
companies).
11. In terms of transmission network use
of system charges, generators locating in the upper north of the
country can expect to pay £8.34/kW per annum. In Greater
London, we pay generators £0.13/kW. Our payment increases
to £10.15/kW in Central London or £9.71/kW in the South
West Peninsula as these areas would most benefit from new generation
to avoid network reinforcements that would otherwise be needed.
12. As explained in paragraph 8, smaller
generators help suppliers avoid the TNUoS demand charge. In the
North East area, such a contribution is worth £1.00/kW but
in London it is worth £13.17/kW and in the South West it
is worth £15.05/kW. How such benefits are shared between
the supplier and the embedded generator depends on the commercial
agreement between them.
13. Through our participation in the DTI/Ofgem
Embedded Generation Working Group we are aware that the connection
and use of system charges levied by distribution companies on
embedded generators differ significantly in form from those described
here for transmission. In particular, we understand that distribution
connnection charges for generators are "deep" and so
cover all reinforcements throughout the distribution network needed
to accommodate the new generator. This may be a significant cost
for a generator who precipitates a major reinforcement. Such costs
may then be difficult to recoup from subsequent generators who
can take advantage of the completed reinforcement. An Embedded
Generation Working Group recommendation is to review distribution
charging methodology to see if an approach more akin to that used
on the transmission system could remove the barriers that can
be imposed by the deep connection methodology.
III. CONNECTION
AND NETWORK
ACCESS PROCEDURES
14. Under the terms of our licence we are
required to provide any customer who seeks to connect to our network
with a non-discriminatory offer of terms within three months.
This offer will describe the connection works necessary to connect
to the transmission system, set a date when the connection will
be completed, calculate charges in accordance with our charging
methodologies, and provide a draft contract.
15. For embedded power stations larger than
100MW we are also required to offer terms for the use of our network
within 28 days. If works to reinforce our network are necessary
to accommodate such a generator (for example, due to fault level
considerations) the use of system offer will state when our network
will be ready. The use of system offer will also set out the appropriate
zonal TNUoS charge.
16. For embedded generators smaller than
100MW, as described above, National Grid does not generally levy
charges and so agreements for connection and use of system are
not required. However, National Grid is keen to receive information
on any such embedded generators that may have a material impact
on our system as soon as possible so that we can co-ordinate the
developments to our network to best meet the needs of our customers
and ensure it remains safe and secure at all times. It has been
our practice to seek agreements with such generation to ensure
they do not energise before any reinforcements needed on our network
are complete and safe. As a result of discussions with embedded
generator representatives at the Embedded Generation Working Group,
however, we will be modifying our contractual arrangements so
that embedded generators can choose to have a single point of
contact with their host distribution network. In this way we will
help reduce the red-tape on embedded generators.
17. For all sizes of generation, we interpret
our duty to facilitate competition by seeking to connect market
participants in accordance with their desired time scales as far
as possible. To assist market participants in choosing advantageous
sites we operate an open information policy under which all our
network information, including the options for future network
developments, are set out in our Seven Year Statement. This is
available at nominal cost in paper and cd-rom form, and is available
free of charge on our website. We were pleased that our approach
to generation connections was considered by the Embedded Generation
Working Group as worth of emulation in the distribution context,
albeit with adaptations for the particular circumstances there.
IV. NATIONAL
GRID'S
ROLE CONCERING
EMBEDDED GENERATORS
18. As noted above, most of the renewable
energy developments and much of the new CHP needed to meet the
Government's targets are likely to have small generating unit
sizes and so will find it most cost-effective to connect to low
voltage distribution networks. We expect that most individual
tidal stream and wave power installations are likely to be smaller
than the 300MW approximate break-even threshold for direct connection
to our network. The trend towards having a larger proportion of
"embedded" generation will interact with the high voltage
transmission network as follows:
(i) Flows at the transmission to distribution
network interfaces
19. Generally, we expect an increasing proportion
of embedded generation to reduce the flow across the interfaces
between the transmission and distribution networks. This will
tend to delay the need for us to reinforce this part of our network
but it is unlikely to remove the need for the substations at these
interfaces. These will continue to be needed to balance the fluctuation
in generation and demand in specific parts of the distribution
network from minute to minute.
20. In a few areas it is possible that embedded
generation may increase to a level where there could be electricity
exports from distribution networks to the transmission system.
However, reinforcements would only be needed at these interfaces
if the level of exports to the transmission system were to rise
to a level that exceeded the existing capability.
(ii) Bulk power transfers on the transmission
network
21. The general reduction in the flow from
the transmission to distribution networks as a result of embedded
generation development does not necessarily lead to a similar
reduction in the bulk transfers across the transmission network.
This is because these transfers depend on the geographical location
of generation with respect to demand.
22. At present there is a substantial north
to south power transfer across our network of up to 10,000MW.
This arises because generation capacity located in the north near
coal and gas fuel supplies substantially exceeds demand in that
area, and it exports to meet demand in the south. These transfers
occur throughout the year because, as demand reduces from the
annual peak, the output of the generally more expensive generation
in the south reduces first.
23. Against this background, embedded generation
that connects in the north, and displaces the higher cost generation
which is predominantly in the south, will tend to increase system
transfers in just the same way as any other new generator connecting
directly to the transmission system in the north. Embedded generation
locating in the south, also displacing the older southern generation,
would tend to leave north to south power flows unchanged.
24. For these reasons, bulk transfers on
the transmission system can be expected to continue unless there
is a significant overall shift towards an improved regional balance
between demand and generation, whether embedded or directly connected
to the transmission network. From the present situation, improved
regional balance will require a very significant increase in generation
in the south.
25. Looking to the longer-term future, there
are some technology trends that may tend to bring generation and
demand more into regional balance. Fuel cells, micro-CHP and CHP
district heating systems would be expected to bring electricity
generation very much closer to where it is consumed in all areas
of the country by transmitting energy by gas pipeline.
26. However, there are other trends that
may be expected to maintain or perhaps increase bulk transfers.
For example, due to the distribution of wind resources, on-shore
and off-shore wind power would be expected to increase north to
south transfers. Given the areas of highest wave concentrations,
wave technology can be expected generally to contribute to the
North to South bulk power transfer pattern. Tidal stream may have
a different distribution but would not be expected to reduce the
North South flow.
27. Given this and other future trends we
expect reinforcements at pinch points in our network will be likely
to be required, depending on the location of new generation and
the closure of existing plant. Through the technology at our disposal,
we will always exploit the scope for improving the capability
of our network before seeking to construct new transmission lines.
28. The Transmission Network Use of System
charging arrangements that we currently have in place provide
locational signals as to the most economic areas for development
from a transmission system point of view. Small embedded generators,
as described in paragraph 12, can also receive the benefit of
the avoided demand charges when meeting demand of local suppliers.
Such benefits exist at all locations but are greatest in the south
of the country.
29. The potential for improving the economic
efficiency of locational signals to users of the transmission
system that are provided by transmission charges is currently
being considered as part of a wider review of transmission access
arrangements, currently led by Ofgem.
(iii) Security of supply issues
30. As well as ensuring efficiency in bulk
electricity flows, the transmission system also provides security
by ensuring that demand in a specific part of the country is not
solely dependent on the availability of generating plant located
in that area. It means that any available generation wherever
it is located can be utilised to meet demand, control frequency
and provide reserves to meet fluctuations in demand or generation
output.
31. The development of generation technologies
that may fluctuate more, or are to some extent less predictable
than existing generation, could bring some challenges to balancing
generation and demand and hence maintaining security. However,
this issue can be easily overstated. The transmission system is
operated with reserves to cope with fluctuations in existing generation
and demand and, together with the ability of the network to diversify
variations across the country, there is a large capability to
accommodate new generation sources. On the basis of our assessments
we do not foresee any difficulties in accommodating the renewables
required to meet the Government's targets for 2010, even if the
majority of the target was met with wind power.
32. Beyond 2010, with further major tranches
of renewable and CHP generation entering the market, it is probable
that the large coal-fired units which currently provide a major
proportion of the balancing services may close. This together
with a potential need for additional balancing capability may
pose an issue.
33. To address longer-term technical issues
that may arise from a larger proportion of wind and other intermittent
renewables, we are actively facilitating and encouraging the further
development of open ancillary service markets. We have already
established arrangements through which we can use small and decentralised
providers for reserve and frequency response through the use of
aggregating agents. Further developments to the market arrangements
for frequency control are planned once NETA has been introduced.
We see benefits in the DTI/Ofgem Embedded Generation Working Group
suggestions that distribution network operators should facilitate
local markets in ancillary services and we look forward to working
with them in this area.
34. These market developments should encourage
the most cost-effective provision of frequency control and reserves
that are needed nationally. They should ensure that any additional
requirements can be provided in respect of reserve and response
that may be needed to accommodate large amounts of wind generation.
They will also ensure that the displacement of some of the large
grid-connected power stations that currently provide these services
can take place without any effect on system security. Such markets
would also enable embedded generation with the capability to provide
such services with an additional income stream.
V. CONCLUSIONS
35. For the reasons described above, we
would expect most wave and tidal stream energy developments to
be connected to distribution systems rather than directly to the
transmission system. As such, the issues associated with the cost
of such connections and recovery of such costs through charges
to the generators are primarily issues for distribution companies.
36. Nevertheless the transmission system
will continue to play an important role in the future electricity
market even with higher penetration of renewables, CHP and embedded
generation. Accordingly, to the extent that such developments
impinge on us, we see it as a priority to achieve solutions to
the technical and market issues that we foresee, thereby ensuring
that we play our part as effectively as possible in facilitating
the change to these technologies.
37. We hope that this information helps
to explain the issues relating to the high voltage transmission
system with respect to the development of renewable generation
and the approaches which we at National Grid are taking to ensure
we play our part in facilitating the development of this and other
embedded generation. In so doing, we do not wish to downplay the
challenges that will be faced by distribution networks in addressing
the issues that form the major part of the report from the DTI/Ofgem
Embedded Generation Working Group.
38. However, for transmission, we do not
foresee any specific issues that would impose a barrier to meeting
the Government's 2010 targets for renewable generation. We also
believe the actions we are taking now will ensure that there are
no barriers for much larger renewable developments in the longer
term.
April 2001
6 Frequency response and reserve, which are needed
to balance demand and supply for electricity second by second
and reactive power for voltage control. Back
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