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Memorandum submitted by the Association of Electricity Producers (AEP) (FBEN 41)
Executive Summary · Electricity networks exist to enable electricity generators to transport their product to consumers. They must therefore be fit for purpose and able to accommodate evolving patterns of generation and demand. · Gaining access to the network is vital for electricity producers - without it, they cannot deliver their product. · Investment in new and upgraded network infrastructure is required on pressing timescales to accommodate planned new generating capacity. Without this being signalled, generators will not have the confidence to make long-term investments themselves. · Network owners should be encouraged to undertake early strategic investment in network infrastructure ahead of full user commitment by generators, provided that this system is linked to appropriate risk and reward arrangements. · The planning system can act as a significant barrier to
the speedy development of new network infrastructure. · It is essential that there exists a commercial framework for accessing the network which encourages investment in the range of generating technologies required to meet energy policy goals. Generators require rights of access that are clearly defined and predictable over the lifetime of a project. · A variety of access products and exchange and trading services should be available to generators to optimise the use of available access. However, these arrangements must not negatively impact on other users of the network. · We are seriously concerned about proposals to confiscate evergreen transmission access rights from existing generators. · All forms of electricity generation technology should compete on a level playing field and network connection, access and charging arrangements should be non-discriminatory, cost-reflective and transparent. We do not support proposals that renewable generation should have priority access to electricity networks. · Increased penetration of distributed generation will require flows through the distribution networks to be managed more actively, which may require a change in approach by distribution network operators. · Greater levels of interconnection with other countries are likely to be beneficial in ensuring security of supply.
Association of Electricity Producers 1. The Association of Electricity Producers (AEP) represents large, medium and small companies accounting for more than 95 per cent of the UK electricity generating capacity, together with a number of businesses that provide equipment and services to the generating industry. Between them, our members embrace all of the generating technologies used commercially in the UK, from coal, gas and nuclear power, to a wide range of renewable energies. These companies will also provide a substantial part of the investment in new generation capacity necessary to ensure security of electricity supply and help fulfil the UK's carbon reduction and renewable energy ambitions.
Electricity networks must be fit for purpose 2. We welcome the opportunity to submit evidence to the Energy and Climate Change Committee on the future of Britain's electricity networks. Electricity networks exist to enable electricity generators to transport their product to consumers. It is therefore vital that these networks are fit for purpose and able to accommodate evolving patterns of generation and demand.
3. Electricity generation companies are preparing to invest over £100 billion in new generating capacity by 2020 to ensure security of supply and to meet the UK's renewable energy targets. Existing power stations that are scheduled to close as they reach the end of their operational life or to comply with environmental legislation need to be replaced. Furthermore, the UK's ambitious target for 15 per cent of energy to come from renewable sources could require renewables to account for some 35 per cent of electricity supply by 2020, depending on the take-up of renewable energy in other sectors. Beyond this, further investment in nuclear and renewable energy as well as new technologies, such as carbon capture and storage, can be expected to 2050 in order to decarbonise the UK's electricity supply.
4. Gaining access to the network is vital for electricity producers - without it, they cannot deliver their product. In order for companies to have the confidence to make substantial long-term investments in new, low carbon generation capacity, they need to be assured that they can secure network access in a timely fashion and over the lifetime of a project. Existing generators also took investment decisions on this basis.
5. It is therefore essential that there exists a commercial framework for accessing the network which encourages investment in the range of technologies required to meet energy policy goals. Primary access to electricity networks should operate in a transparent, non-discriminatory manner and be cost-based for all connections regardless of generation technology, voltage, location or network asset ownership.
6. However, it is clear that ultimately there is currently insufficient physical capacity in the transmission network to accommodate planned new generating capacity, in particular a large expansion of renewables. Investment in new and upgraded network infrastructure is therefore required. Indeed, without such investment in the network being signalled, generators will not have the confidence to make long-term investments themselves, no matter how attractive the commercial access arrangements are perceived to be.
Future transmission network requirements 7. The transformation in the UK's electricity
supply over the coming decades will have significant impacts on Britain's
electricity networks. From 2020 onwards,
renewable generation could account for at least a third of the UK's electricity
supply.
8. It is likely that a new generation of nuclear power stations will also need to be connected to the transmission network from 2017 onwards, largely on the sites of former nuclear power stations. Although these will be built in defined locations where there is already existing network infrastructure, they may be of greater capacity than the power stations which they are replacing and some local grid reinforcements may be required.
9. Output from renewable generation is often variable and widespread penetration of renewables, especially if coupled with an increase in relatively inflexible nuclear generation, will make balancing the electricity system more challenging. New more efficient thermal plant will be required to play the crucial role of providing reliable generation capacity to compensate for variations attributable to increasing proportions of renewable output, in addition to the wider benefits such plant brings in terms of security of supply, fuel diversity and lower carbon emissions. This could mean that total generation capacity will grow significantly from today's level by 2020. A larger and more actively managed transmission network will clearly be required to accommodate this increase in capacity. Increased levels of interconnection could assist in coping with variable output, as could investment in and deployment of electricity storage technologies and demand side management.
10. These changes in the generation mix will result in altered power flows across the transmission network. Much of the new generation capacity will be located away from centres of demand and in areas where there has previously been little generating capacity and this, coupled with the closure of existing generating assets, will change the volume of electricity flowing through different parts of the grid. A number of strategic reinforcements will therefore be required to ensure that the transmission network is able effectively to transport electricity from power stations to consumers. There are, for example, currently significant constraints over the Scotland-England border.
11. Transmission system owners and operators are well placed to know, in the context of long-term energy policy and through consultation with electricity producers, what future investment will be required in the network. The Association supports ongoing work to identify the future network upgrades and additions necessary to accommodate the changing generation mix. We welcome the recent report by the Electricity Networks Strategy Group[1]. It is essential that all necessary network improvements are taken forward in a timely fashion given the pressing timescales associated with the UK's carbon reduction and renewable energy targets. This means that Ofgem must authorise investments quickly and, given the lead time for such infrastructure projects, advance work (for example, strategic network design, consenting, and development of cost recovery mechanisms) must start now in order to ensure that the correct infrastructure is in place when it is needed.
Regulatory framework for strategic investment in the transmission system 12. The Association considers that network owners and operators should be adequately incentivised through their licence requirements and security standards to deliver the most appropriate network to enable generators and suppliers to trade their energy. Additional financial incentives should only be required where a clear business case has been identified.
13. We support the concept that network owners should be encouraged to undertake early strategic investment in network infrastructure ahead of full user commitment by generators, provided that this system is linked to appropriate risk and reward arrangements. It is likely that such strategic investments would result in an increase in Transmission Network Use of System (TNUoS) charges. However, for some generators this would be preferable to the uncertainty caused by increases in Balancing Service Use of System charges that would otherwise be incurred to solve system constraints.
14. If such an approach were to be adopted, this should be accompanied by requirements on network owners and operators to publish sufficient network information to assist potential developers of generation assets in understanding key network investments so that they can monitor progress towards provision of additional network infrastructure and take more informed decisions on where to locate their generation projects.
Importance of the planning regime in facilitating network improvements 15. The planning system can act as a significant barrier to the speedy development of new network infrastructure. For example, consent for the North Yorkshire power line took over six years, while the application for the Beauly-Denny upgrade in Scotland was submitted in 2005 and has yet to be determined. It is essential that the planning regime recognises the need for new network infrastructure and ensures that decisions are taken in a timely, efficient and predictable manner.
16. The Association welcomes the current suite of
work on planning reform across Britain, which is intended to address some of
these problems. However, there is still
a disjointed approach between different regimes - varying timescales,
considerations and processes apply to planning for onshore and offshore energy
infrastructure depending on whether the decision is taken centrally or locally,
in Scotland, England or Wales. The
provisions of the
17. We are concerned by the lack of cross-party
political consensus on the principles of planning reform, in particular the
establishment of the Infrastructure
18. Planning regimes must also ensure that there is a joined up approach to consenting network infrastructure and power station developments, recognising the need for new generating capacity of all types. While power stations and networks are planned and built on different timescales, they are clearly dependent on each other. A situation must be avoided in which new power stations are consented without the necessary network connections and improvements gaining planning permission on the same timescale and vice versa.
Commercial arrangements to make best use of available capacity 19. The Association considers that a variety of access products and exchange and trading services should be available to generators to optimise the use of available access to the transmission system. However, these arrangements must not negatively impact upon other users of the network or risk compromising their access standards. Generators must continue to have rights of access that are clearly defined, ensuring delivery of a predictable volume and duration that does not compromise the commercial viability of a project.
20. The Association has been actively involved in the work of the Transmission Access Review (TAR), which has been reviewing the transmission access and charging arrangements to ensure that they will facilitate the connection of large amounts of renewable generation by 2020. The Association considers that there is merit in some of the short-term measures for access to the transmission network which have been proposed, such as capacity sharing, short-term release of entry capacity, and a commercial mechanism for overrunning access rights. The industry awaits the Ofgem Impact Assessments for the full suite of transmission access proposals.
21. We are seriously concerned, however, about some of the longer term proposals for network access which are currently under consideration. In particular, the proposals for finite access rights and long-term capacity auctions would require the relinquishing of existing access rights by generators.
22. Existing generators believe that they have secured evergreen transmission access rights, which are enshrined in the Bilateral Agreements between National Grid and individual power stations. Generators invest significant sums well in advance of connection in order to secure the necessary level of connection and system reinforcement, after which they pay years of TNUoS charges. This level of financial commitment is evidence that the rights secured are ongoing until such time as the generator decides that transmission access is no longer required. Investments in power stations have taken place on the basis that these plants have secured transmission rights to give them access to the market to sell their power. We therefore do not consider that National Grid has any ability to remove access rights without legislation and without providing significant compensation. These fundamental issues have not been adequately addressed by Ofgem in discussions to date.
23. We also have concerns about the potential
introduction of any form of auctioning process.
The Association considers that capacity auctions are not an appropriate
means of allocating network capacity on a long-term basis. This approach does not deliver improved
long-term investment signals, inappropriately introduces under- and over-recovery
into a regulated income stream, and carries with it an onerous and unnecessary
administrative burden. In the gas
regime, long-term auctions to allocate gas entry capacity have proved
inefficient and have failed to provide the fundamental benefits that were
originally envisaged. The introduction
of electricity capacity auctions would increase the uncertainty faced by
electricity producers in
All generating technologies must be treated equally 24. The security of supply and carbon reduction
challenges facing the
Offshore transmission networks 25. The Association considers that wherever possible there should be competition in the provision of connections, with connecting parties having the option to organise the provision of connection assets. We recognise the benefits in terms of cost and innovation that a competitive approach should bring to designing, building, financing and maintaining offshore transmission networks. However, we wish to see further clarity on the extent to which new European Union rules on the separation of ownership of generation and transmission assets will restrict the number of parties that are able to act as Offshore Transmission Owners (OFTOs). Reduced ability to act as an OFTO could potentially undermine the benefits which the new offshore transmission regime seeks to deliver.
26. There also remain questions about the extent to
which the proposed offshore transmission regime will encourage a holistic and
strategic approach to the development of offshore connections for up to 33 GW
of offshore wind in
Impacts of higher levels of distributed generation 27. Many renewable energy projects connect to the distribution networks rather than the transmission network and an expansion in levels of distributed generation can be expected, especially as householders, businesses and communities are encouraged to install renewable generating technologies. The resulting increased flows through the distribution networks will have to be managed more actively, which may require a change in approach by distribution network operators. The Association first called for active management of distribution grids as long ago as 1998. Increased penetration of distributed generation will alter the interactions between the transmission and distribution networks. Distributed generation that seeks to use the transmission network should do so, as far as possible, under the same commercial and physical conditions and with the same commercial rights and responsibilities as transmission-connected generation.
Benefits of increased interconnection 28. Given the difficulties that could be incurred
in balancing the system as a result of a widespread penetration of renewables,
greater levels of interconnection with other countries are likely to be
beneficial in ensuring security of supply.
29. As DC interconnectors involve substantial investments and high levels of risk, it is important that the option of building merchant lines is maintained as an alternative to financing them on a regulated basis. Merchant approaches can enhance competition and security of supply by promoting investments which would not otherwise be made or bringing forward new infrastructure earlier than through the regulated route. TSOs, generators and other market players should all be allowed to build and own merchant interconnectors, which should not be subject to unnecessary regulation.
April 2009 [1] Electricity Networks Strategy Group, Our Electricity Transmission Network: A Vision for 2020, March 2009 |