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Electricity Transmission Charges

4 pm

Mr. Mike Weir (Angus) (SNP): I welcome the Minister to what is probably his first debate on electricity transmission charges. He will probably think his new position as byzantine as his previous one. Electricity transmission charges have been a hotly debated issue throughout the implementation of the British electricity trading and transmission arrangements—BETTA for short. The charges were raised during the passage of the Energy Act 2004 during the last Parliament and managed the unlikely feat of uniting my party with the former Member for Cunninghame, North, Brian Wilson, in opposition to them.

The charges proposed by Ofgem would be a disaster for Scotland. It is ironic that when the Prime Minister is jetting around Europe in an attempt to get agreement on tackling climate change at the G8 summit, which is to be held in Scotland, the Government at Westminster are making decisions that could strangle the prospect of renewable energy development in Scotland. On the one hand, the Government say that climate change is the biggest issue facing us, but on the other they sabotage efforts to tackle it. The more cynical among us might think that that is not unconnected with recent attempts to talk up the prospects of nuclear power.

When the matter was first raised during the passage of the Energy Act 2004 in the House of Lords, the Government reacted by inserting a clause that would give exemption from those charges to an area especially favourable for renewable energy. It had been widely assumed that that area was the north of Scotland and the island areas. However, there are serious deficiencies in the proposals. For one thing, the derogation is for only five years, with the power to extend for a further single period of five years. The mathematicians among us will readily work out that that gives a total period of only 10 years. However, it is important to remember that the exemption—as I understand it—is for an area and not for specific projects, so only projects up and running at the time the exemption is introduced will get the full benefit of 10 years' reduction; any project coming later will get a tapering relief, if any at all. It should also be borne in mind that the payback period for many such projects will be far longer than 10 years, and that anyone investing in them will face the prospect of massive increases in transmission charges midway through their project.

If the Minister takes nothing else from this debate, I urge him to give serious consideration to this matter, and if the ridiculous transmission charges are to remain, I urge him to address the problem and consider making the exemption project-based within a specified area to allow for the continuing development of renewable energy. Each project set up and running within that area would then get the full benefit of a 10-year exemption, which would go some way at least to tackle the problems that the transmission charges will impose on those renewable projects.

The situation has been made much worse by the attitude taken by Ofgem, which has recommended the charges. It seems to be governed not by the real world, but by some mad economic model of its own. During the passage of the 2004 Act, my hon. Friend the Member for
 
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Banff and Buchan (Mr. Salmond) and I met representatives of Ofgem to discuss their attitude to the charging regime. It was a very unfulfilling experience. Ofgem seemed to be totally dominated by a fixation that charges should be used to send economic signals and that generating capacity should be sited near centres of population, which, in its view, seemed to be mainly in the southern part of England. The representatives were asked three times whether they supported the Government's aim on renewable generation; three times they refused to reply to that question.

The whole idea of locational charging is based on a misconception. The desire to locate energy generation near population centres can have a superficial attraction, but cannot be done under the present centralised generation and transmission system. Greenpeace has done work on local systems, and I understand that it is to produce a report later this summer that will argue that addressing the distribution system must be at the heart of the climate change agenda. Under the current system, the charging regime completely fails to take into account the fact that remote areas are the most efficient places for energy generation, and in particular for renewable energy generation. Instead of letting comparative advantage dictate where energy is produced in a manner that would be beneficial to all, locational pricing attempts, in effect, to second-guess the marketplace by using effective subsidies or taxation to force energy production into less resource-efficient areas.

I understand that losses through transmission are only between 2 and 4 per cent., depending on distance, but locating power stations in places with greater resources delivers between 25 and 33 per cent. more power. That implies that a 1 GW wind farm with 50 per cent. capacity will lose 10 MW, but as a result of increased efficiency will generate between 100 and 150 MW extra energy. Therefore, it does not make sense to insist on locational pricing.

When questions were asked of Ofgem at a meeting, its rationale seemed to be that there are many applications for generation in northern Scotland so there is no need for encouragement there, but there is a need for encouragement in other areas. I pointed out that there were so many applications in northern Scotland because that was the obvious place to site renewable energy developments. The odd thing is that Ofgem accepted that most of the applications were for renewable generation, but that did not seem in any way to impinge on its views on locational charging. Reality seemed to impinge little on its closed world. It still felt that there needed to be some encouragement for generation in the south of England.

Ofgem's stance is bizarre. I think that we all now agree that climate change is a major danger. Even at today's Prime Minister's questions, the Prime Minister cited a report by the G8 nations' academies of science that advances that view. There is a suggestion that even President Bush is beginning to get the message. That being the case, we need to move towards renewable energy, and the regulator should not put barriers in the way of renewable generation in Scotland in favour of new generation in southern England. Perhaps it is the case that the regulator would prefer there to be new
 
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nuclear power plants in Surrey than renewables generation in Scotland, although it is doubtful whether the people of Surrey would agree.

There is an argument that the Minister should take on board. The role of Ofgem in this entire matter must be looked into, and in particular whether its remit is sufficient to cover the new renewable energy sector—although, in my view, it should be got rid of altogether and something new should be put in its place. However, perhaps the need to meet carbon emission targets should be taken into account.

I was a member of the Scottish Affairs Committee in the last Parliament. We undertook an investigation into Scotland's energy needs, during the course of which we looked into the whole question of transmission charges. That subject was brought up by Scottish and Southern Energy, which is the main energy producer in the north of Scotland. Its chief executive commented on the effect that the charges will have on renewables, and he referred in particular to a hydroelectric project that his company was undertaking. He said:

"We are currently trying to consent a new hydro station at Glendoe on the banks of Loch Ness and the economics of that are being directly affected by transmission charges, and that makes a marginal project probably uneconomic. I am not saying I will not be doing it here, but there is clearly a marginal project that is being affected."

From recent discussions with him, I understand that there has been a substantial increase in the costs of that project, partly because of the transmission charges.

Similarly, those behind the Beatrice project in the Moray firth have suggested that transmission charges could have an effect on that project, costing it up to £20 million per year. That is important because that offshore wind project will generate as much electricity as a new nuclear power station, and I am sure that most people in Scotland would very much prefer there to be a wind farm in the Moray firth than a nuclear power station in the north of Scotland.

It is worth remembering that these charges do not only affect renewables. They will affect conventional generation in the north of Scotland, in particular the Peterhead station, which is the most efficient combined gas station in Europe. What will be the impact of the charges? I refer the Minister to the report of the Scottish Affairs Committee entitled, "Meeting Scotland's Future Energy Needs". The Committee was not stuffed full of nationalist members. I was the only nationalist member. In fact, it had a substantial Labour majority. The report contained trenchant criticism of the transmission charging regime proposed by Ofgem. It states:

"The effect of this is that it costs between £23 and £26 million more to operate a gas-fired power station in Aberdeenshire than one in South West England."

Scottish and Southern Energy commented that

"our Peterhead power station will pay £18 a kilowatt for every kilowatt it has connected. A power station in the central belt of Scotland will pay around £12 a kilowatt. A power station in the north of England will pay around £5. A power station in the Somerset area will receive £5, so you have a very pronounced tilt."

Under the scheme, there is in effect a subsidy for power generation in the south of England, as opposed to the north of Scotland. However, as I said earlier, the north of Scotland is the best area for most renewable energy.
 
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Scottish and Southern Energy told the Select Committee that, under the proposals, Scotland would be the first place that a power station would be shut and the last place where one would be built. That has immense implications for the security of energy supply in Scotland and the future of power generation in Scotland. I am sure that the Minister will tell me that, under the British electricity trading and transmission arrangements, the interconnector charge is going and that will balance the cost to Scottish generators. The matter was put specifically to Scottish and Southern Energy when it was giving evidence to the Committee. It said that, for a big generator, that might be the case and that matters will balance themselves to some extent. However, it will not allow new generation and new renewables to come on line. Such projects are likely to be seriously hit by the charges.

The Select Committee recommended an urgent review of the charges. I urge the Minister to take that on board. I understand that Scottish Power has launched a court case against Ofgem because of the charges and that matters have still to be determined. There is a prospect of a review of the charges taking place when they have been up and running for a time but, by then, generation in Scotland might have been damaged irrevocably. Such matters are important because Scotland has the potential to be the renewables powerhouse of Europe and to contribute greatly to the reduction of carbon emissions, both within the United Kingdom and throughout the European Union.

Scotland has 25 per cent. of Europe's wind resources, 10 per cent. of Europe's wave capacity and 25 per cent. of the total tidal capacity. Indeed, the Pentland firth has been described as the Saudi Arabia of tidal power—an interesting thought. Scotland has the world's first commercial wave power station, but recently there has been talk about much of that being moved to Portugal, which would be seriously detrimental to Scotland. One of the major players in the wave generation market has recently been bought by a German company, so we are already seeing some of the innovation in Scotland going to other nations, partly because of the lack of take-up of some of the technology. As I said earlier, that take-up will be hit by the fact that transmission charges are being imposed. It has an area exemption for a specified period rather than a project exemption.

Scotland has the infrastructure and the professional expertise garnered from the oil and gas industry to create an important renewables industry. Denmark has a £4 billion a year export industry, employing more than 15,000 people. Scotland could replicate that success in renewable energy only if it had a system in place with which to set up and operate renewable stations. The charges will undermine that potential and may force us to consider building new nuclear power stations—a move that would be fiercely resisted by the people of Scotland.

I urge the Minister to reconsider the charges and to ensure that Government targets for carbon emissions are met by taking control of the charging regimes from the ideologues at Ofgem.

4.15 pm

The Minister for Energy (Malcolm Wicks) : I thank the hon. Member for Angus (Mr. Weir) for securing the debate on this important issue. The debate is entitled,
 
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"Electricity transmission charges", but the new transmission charging structure is a small part only of a much greater project—the BETTA project, as it is known. BETTA stands for the British electricity trading and transmissions arrangements; I hope that the hon. Gentleman and others in the Chamber do not mind if I refer to it as the BETTA project, although whether it is for better or worse may be the subject of this debate.

The BETTA project has had a profound effect on the Scottish electricity market. We cannot look at transmission charges in isolation. I stress to hon. Members that BETTA brings great benefits to Scottish consumers, who, for too long, had less choice and paid higher prices than their counterparts in England and Wales. As a Government who believe in competition and choice, we believed that to be unacceptable.

The hon. Gentleman expressed concern about the impact of transmission charges on the Scottish electricity industry. Those charges were set by the national grid and approved by Ofgem after extensive consultation with the industry over 18 months, during which there were many opportunities for industry representatives to feed in views. Any such views have been taken into account.

Let us remember what cost-reflective charging is intended to achieve. A cost-reflective system promotes the efficient use of the electricity transmission network, and hence the lowest-cost solutions for consumers, who ultimately have to pay. I emphasise that if charges did not reflect costs, the network would not develop efficiently and consumers would face higher electricity prices, which would harm industrial competitiveness and the fuel-poor.

I reiterate that BETTA is a package of measures, which must be looked at in the round. We have heard a lot about how transmission charges in Scotland have increased with BETTA, but BETTA is more than a new transmission charging structure. To consider transmission charges only would be to ignore the bigger picture.

Before BETTA, any Scottish generator that exported electricity to England and Wales had to pay separate charges to use the interconnector. Those charges disappeared under the BETTA arrangements and the merger of the Scottish electricity market with that of England and Wales. Indeed, connection charges are lower in Scotland as a result of BETTA, and Ofgem estimates that its overall effect on Scottish generation has been broadly neutral.

Let us not forget that a postage-stamp system of transmission charging, with which the rate does not vary geographically, would mean that Scottish electricity consumers would have to pay around £46 million more in 2005–06 then they do now. Is that really what the hon. Gentleman wants? Surely it might lead to more fuel poverty in Scotland.

In short, the apparent increase in cost to Scottish generators has been misinterpreted or misunderstood due to a failure to look at the whole picture and, perhaps, a failure to consider the interests of the consumer, who is surely the person about whom we should be most concerned.

Mr. Weir : The Minister talks about the interconnector, but what about renewable energy? The
 
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Government say that we must have more renewable energy to meet our carbon emission targets, yet the transmission charges specifically hit new renewables. Taking away the interconnector charge will not help those developments.

Malcolm Wicks : I shall answer that question by moving on swiftly, as I shall cover that a page or so on in my speech.

We need to recognise that Scottish generators are getting a different product in return for the transmission charge that they now pay. They have equal access to the entire British electricity market, which was not the case before. That is particularly good news for renewable generators, given that Scotland is already a net exporter of electricity. Instead of generators having to navigate different sets of rules and pay additional charges to access the market in England and Wales, there is a single British market with a single set of rules. Generators have easy access to a wider range of customers and can negotiate the best prices for their output.

The Government regard the development of a range of renewable energy sources as a vital element in reducing carbon emissions and addressing climate change, and the role that Scotland will play is crucial. The energy White Paper set the goal of putting ourselves on a path to cut the UK's carbon dioxide emissions by some 60 per cent. by about 2050 or, with real progress, by 2020. The Government have a clear target that 10 per cent. of electricity should come from renewable sources by 2010. We also have an aspiration to double that figure to 20 per cent. by 2020 or thereabouts.

In Scotland, the Executive have set a target of securing 40 per cent. of generation from renewable sources by 2020. We recognise Scotland's great potential for a range of renewable technologies: onshore and offshore wind and, in time, wave and tidal power. The fact that Scotland is a centre of excellence in this respect was apparent to me on a recent visit to Aberdeen.

The renewables obligation encourages electricity suppliers to source an increasing proportion of power from renewables. It is already securing effective
 
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exploitation of wind resources and should, in time, assist development of other technologies on a commercial scale. We do not believe that transmission charges will impede the growth of renewables nationally. BETTA is essential to the growth of renewables in Scotland, as the hon. Gentleman will agree—at least I hope he will.

I am well aware of the exceptional potential that the Scottish highlands and islands offer as a location for wind farms and, possibly, wave and tidal generation. I had discussions about that a while ago, when I was in the Western Isles. That is why the Government recently announced our intention to exercise the section 185 power in the Energy Act 2004 to adjust transmission charges for renewable generators on the Scottish islands. We shall consult on that in the summer. Not only will it help the Government to meet our renewables targets and so fulfil environmental objectives; local communities will also benefit. That is particularly important given that disposable household incomes on the islands are some 20 per cent. below the national average.

Underlying all this is the need to do what is best for consumers. BETTA has already delivered more choice and better value for Scottish consumers. On a related matter, which will be of particular interest to the hon. Gentleman, as his constituents are benefiting, we introduced a new scheme to replace the now defunct hydro-benefit scheme in the north of Scotland. That is of huge benefit for anyone who lives or works there. It will bring in £40 million a year to offset the high cost of distributing electricity in the sparsely populated areas. We also put the common tariff obligation on a firm legal footing, which will protect consumers in remote parts of Scotland from the threat of discriminatory electricity pricing.

Those examples show how the Government are responding to the particular needs of communities in the north of Scotland. We have ensured that the relatively remote location of some Scottish communities is no barrier to an affordable electricity supply. I again emphasise the Government's strong commitment to renewables as a major source of energy, not least in Scotland, in the foreseeable future.
 
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