The future of Britain's electricity networks - Energy and Climate Change Contents


Examination of Witnesses (Question Numbers 160-179)

MR GORDON EDGE, MR TIM RUSSELL AND MR JASON ORMISTON

29 APRIL 2009

  Q160  Chairman: There is a difference of opinion with these figures.

  Mr Ormiston: Everyone now agrees that 40 million is the figure that it may cost, and that is only if everything connects at the same time. These projects, 450 megawatts, will connect over the next three years, so it will be up to 40 million, and this is pending reinforcements of what is known as the Cheviot Boundary, the wires between Scotland and England. Once those reinforcements are finished, that constraint goes away. It is only a temporary measure and it should be an incentive for investment in transmission capacity, and that should be the principle behind a lot of this.

  Q161  Dr Turner: Your organisations are very keen on "connect and manage". Can you tell us more about it? Can you tell us about the benefits of that approach and any risks?

  Mr Russell: Basically "connect and manage", as opposed to what we have at the moment, which is known as "invest and connect", comes in a lot of different flavours, but the basis of it is that anybody who is prepared to commit to paying transmission charges, and where the local connection to connect them to the network can be built, is allowed transmission access and access to the market after a maximum of a fixed period which relates to the proposals. That is currently four years. So it gets access irrespective of whether any wider transmission works that the transmission owners want to build have been completed or not. The advantage of it is that it allows renewables and, indeed, if it is applied, all other generation to be able to get access to the market in the timescale that is reasonably compatible with its own build timescale, which was one of the principal objectives of the outcome of the Transmission Access Review report by government and Ofgem. It does not require you to do anything about the rights of existing generation: they retain those rights. It is up to the energy market whether and when they retire that generation. The only possible down side to it (and we have got to be completely honest about this) is that if there is continued failure to get the planning system to work sufficiently promptly so that what is needed does not take of the order of a decade but the planning can be done in a couple of years and another two or three years build, then there could be some generation that is on the system without what would be considered the right amount of transmission infrastructure to give it access, and that will result in some cost. How much that cost could be (and it should not be anything if planning is sorted out) people can predict and speculate on, and we have heard it is a wide thing. There is an issue, of course, as to who pays that cost. All I would say is that there is a whole range of options, some of which are on the table. At one end (and this is, I guess, probably the first choice of the three people on the panel), you can say it is spread throughout all generators and demand-side users of the transmission system; so it is spread out, as are, of course, the costs of the constraints that exist at the moment. At the other extreme, there is a proposal on the table that says that that cost is borne entirely by the new generators, who are allowed to connect to the system ahead of some of the infrastructure that is considered necessary being built. So it will be those projects themselves that would pay that cost, and that is an option that is on the table at the other extreme. There is certainly a middle way, where you could envisage that if constraint costs do go up because of new generation ahead of the infrastructure in a particular area, then that could be spread amongst, for example, all generation in that area; that is a locational BSUoS charge. I am not suggesting which I would prefer, although I guess our first choice, contradicting myself in one sentence, is probably the first option. That is a debate, as to how the cost, if any, is met and who pays for it, that can be had in the future, but that is the only down side that I can see of "connect and manage", for today's projects to come forward when they are ready to come forward and does not threaten access rights of plant that is already there.

  Chairman: Can we have a look now at the issues of charging. Mike.

  Q162  Mr Weir: Obviously this has been a matter of some contention over a number of years, particularly the locational charging regime from Ofgem. In his evidence to us, Professor Strbac stated that only a small proportion of network charges for generators actually relate to location. Do you agree with that statement?

  Mr Russell: I think we have got to be very careful how it is put. What is true is that only around 15 per cent of the revenue raised by the transmission companies arises from the locational element. That is not the same as only a small proportion of the charges are locational. What actually happens is that generators, broadly in the south of England where the transmission companies are trying to encourage generators, face a negative charge, ie they are paid money by the transmission companies. Generators further north pass through a neutral point and are then charged an increasing amount of moneys. So there is a substantial difference in the charge for connecting generators in Cornwall and in the north of Scotland, but because the generators in Cornwall are actually paid money, the net result of that is, as I am sure Goran meant, only about 15 per cent of the total revenue is raised from the locational element.

  Q163  Mr Weir: Does that locational charge impact adversely on renewables, given that many of the areas where renewables are situated are far from centres of population? I notice that Scottish Renewables Forum, for example, have joined the Scottish Government and Scottish Power in pressing for a more postal system of charging, as, I think, exists in Germany. How would that affect renewables?

  Mr Ormiston: The impact of transmission charges on generators in the north of Scotland and the islands is significant. If you are a smaller generator, a distributor/generator in the north of Scotland requiring access to both distribution and transmission networks, you pay the full charge on both, and that can amount to something like 25 per cent of your expected turnover in a year. Not only are you faced with a high charge, you are faced with a charge that is volatile, that swings quite wildly from year to year and is unpredictable as well. So it is very difficult to plan your investment going forward. If you are looking for a hand with the two new ones, the transmission charge is an attempt at encouraging investment where it is closer to demand. That principle in itself is fine a world where you can actually make a choice, but if you are a community or a land owner and you want to build a wind farm on your site, you do not have that choice, you have to locate your project where you are. Similarly, the renewables potential in the UK, certainly onshore, tends to be in the north of Britain. It is stronger the further north that you go. Again, you do not have much of an opportunity to respond to that locational signal. What National Grid and Ofgem have failed to do is to respond to the three problems: high charges, unpredictability and volatility, and whilst the debate tends to focus on the charge and whether or not it is discouraging projects from coming forward, the other two issues are almost ignored in the debate, which is very unfortunate. I think also a point worthwhile bringing into this perspective, the European point of view and the European Directive, which says that you shall not discriminate against renewables generators in what are known as peripheral or low-density areas, and what we have is a transmission charge that does not recognise that issue. I think there is a European argument to be made and one that could go potentially into a legal situation. We have demonstrably now cases where projects have not gone ahead because of high transmission costs. In Orkney the Fairwind Project, over 100 megawatt scale, I think, probably, to be kind to them, has mothballed their project because of high transmission charges and because the Secretary of State has decided or, rather, is minded not to use his powers to cap the transmission charges in the north of Scotland and in the islands. In having those powers, there was recognition that there was a threshold and if you cross that threshold you will dissuade investment in renewables, and in the islands it was recognised a few years ago that transmission charges were likely to cross that threshold and, therefore, be in contravention of things like the European Directive on Renewables and Transmission Charges, and we believe that in the north of Scotland, where the charge is also very high, there is an impact on investment decisions. Of course, investment decisions are very complex: how windy is a site, how complicated it is environmentally, how can you get access to the grid and how big is the charge? So often, in the round, you will find that an investment decision means that it is still in a positive and you can move ahead. That does not mean that because you are lucky enough to be in a windy site you should necessarily be punished for your location, and that is the way that generators in the north of Scotland feel. They feel that it is a punitive and discriminatory charge that needs to be tackled and that has not been tacked properly. Hence our partnership with Scottish Power, SSE and the Scottish Government to bring forward the alternative charging model to open up this debate and try and get it on the table. We recognise that the losers are going to be in the south, those who benefit from the subsidies in the transmission charge, but they tend to be also conventional generators. What you are actually doing is you are taking investment away, or, rather, the revenue that is earned through the Renewables Obligation in the north of Scotland, and transferring it to conventional generators in the south of the UK, and that is an imbalance that needs to be addressed as well and I think it is one that should be addressed through Europe.

  Q164  Mr Weir: But given that both the UK and Scotland are very ambitious targets for generating electricity from renewables, in the current charging arrangement are these targets taken into account in any way as far as you can see? It would seem from what you are saying that they discriminate against renewables in many areas of the UK?

  Mr Ormiston: I do not think they discriminate against renewables necessarily, but they discriminate against areas that are further from the centre of all things, which tends to be Birmingham or the West Midlands.

  Q165  Mr Weir: But at the same time renewables—

  Mr Ormiston: That happens to be renewables, but also, if you speak to Scottish Power and SSC, they will say that actually their investment case for conventional generation in Scotland is also hit through high transmission charges. They have to make cases, for example, for new gas turbines perhaps in Peterhead, whereas you might find that they would more likely locate their station in the south of Britain than they would in the north of Britain because of the high transmission charges. That is a problem for not just the local economy but actually in terms of balancing demand and supply in Scotland alone. So there is a conventional renewables case to be made through this.

  Mr Edge: From BWEA's point of view, we do not think that cost reflectivity and the locational aspects of charging are bad principles. What we do not think is right is that 100 per cent of the cost is reflected onto projects. Certainly it is the case that renewables, and wind in particular, are going to be the first technologies which pay for the extension of the grid to them in the UK. Previously, up to the point of privatisation, those costs were spread amongst all users. We are the first technologies coming along to really change the structure of the network, and we do not think it is hugely fair that we should be therefore expected, for the first time, to be the ones who pay for that entire grid, which is currently where we are at. We think the principles are right but how they are applied may not be correct. It is also fair to say that the grid codes, particularly the security and quality of supply standards, impose certain costs. They assume that generators are base-load thermal generators using those wires to the maximum extent. When you are variable in using the wires to the maximum extent, you impose a lower cost on the system but you are charged as if you were using it in a certain way. So we think that needs to be reflected through the SQSS Review and that may, indeed, feed down to lower charges for any more generators that are on the periphery.

  Mr Ormiston: Can I say that Steve Smith, Director of Networks at Ofgem, in giving evidence to the Scottish Parliament in a similar inquiry to this one, has said that the Scottish generators were paying 40 per cent of the total UK transmission charge but only represented 12 per cent of generation. That suggests to me that we are over paying and it needs to be addressed.

  Q166  Dr Whitehead: To put what can be seen as a sort of initial uninformed commonsense view, you might say, it could be said that renewable generators on the one hand are saying they should not pay transmissions charges because they are developing capacity in what you might describe as rather far-flung locations, and yet, on the other hand, as far as the distribution end is concerned, are saying we ought to recoup the savings from actually a very short transmission distance using different elements of the grid and, therefore, gain as far as local generation is concerned. One might say that it appears that renewables want to have it all ways. How would you react to that?

  Mr Russell: Can I come back on that, but I will also go back to the first question. The Renewable Energy Association supports cost reflective charging for transmission. Whether cost reflective charging is discriminatory we will leave to lawyers to pontificate about, but if it costs more to connect and transmit power from generators in some areas than other areas, we think the generators who are further from the demand should pay more. There are some very good reasons about delivering the amount of renewable energy that this country wants and needs and is committed to at minimum overall cost, why it is important to have cost reflective transmission charging, that I can illustrate, if you want, in a minute very quickly and simply, but as to whether cost reflective charging stops some projects getting ahead in areas like Scotland, which is an extremely important resource for renewable energy in the United Kingdom, it is not, however, the only show in town. The answer is the majority of projects are either going to go ahead or will fail economic criteria to progress irrespective of what the transmission charges are. It is the projects at the margin, and the margin may be only a few per cent or it may be 30 per cent of all projects whether they go ahead or not, that will be affected by what the transmission charges are. So, absolutely right, yes, there will be some projects a long way from demand that, if transmission charges are cost reflective, will not go ahead that would go ahead if they were uniform. Equally and as importantly, there will be some, as indeed applies to any form of generation but renewable projects at the moment, who are near to demand that will not go ahead unless the transmission and, indeed, distribution charges are cost reflective. So in order to get the overall best balance of where all the generation decides to locate, and in particular for this session the renewable generation cost reflective transmission charges are important, to sum it up, I think there are only three possible worlds for how you decide where power stations, renewable or any other, locate. Either you have central planning, as we had prior to 1990, and it is one body who is responsible for the wires and also decides where to locate power stations, or you have cost reflective transmission charges that generation project developers can take into account as one of the many costings as to where they develop projects, or you have chaos and waste money.

  Mr Ormiston: No, you do not. There is a fourth, which is generation equals zero, which is a model that is applied in many zones in Europe.

  Mr Russell: Generation is zero, which is what happens currently in Germany—I have connected some plant in Germany—is, of course, the uniform thing and that will lead overall to some projects going ahead when they should not and some not going ahead when they should and more transmission being demanded than would be the optimum and, therefore, a higher cost than you would otherwise have.

  Q167  Chairman: There is the issue, of course, of their consumers.

  Mr Russell: Yes.

  Q168  Sir Robert Smith: If you have a postage stamp approach instead of a cost reflective, what is the cost to the consumer?

  Mr Edge: The cost to the consumer would be neutral.

  Q169  Sir Robert Smith: Why would it be neutral?

  Mr Edge: Because National Grid recovers the cost of running the networks in whichever model they have applied. In this model, you just spread the cost of the generation side equally across—

  Q170  Sir Robert Smith: What if everyone then located at the periphery?

  Mr Edge: Do not forget, I did not say that we were necessarily against the principle of a proportional cost for location, and you can apply that. It may have an impact in terms of transmission losses because you are further away from demand, and we have no problem with the principle of charging for transmission losses. There is actually another transmission charging methodology around losses which is discrete to NUoS, which is applied at the moment, and they are seeking change over that as well.

  Chairman: That is very interesting. I think we will have to look very carefully at the points that you have made on this, because they are quite crucial. Unfortunately, we have a second session, so we have to move on. I know that we want to have a look at the issue of connecting offshore wind, which is A very topical issue. David, I think you wanted to start off on this.

  Q171  Mr Anderson: I will start off on a negative. I am not actually very positive, particularly about offshore wind and how you are going to start building in the north-east, but I want to ask some practical things about when they are in place how they will be run, particularly in relation to security of supply. How much work is being done about maintaining, repairing and replacing equipment in what is one of the most hostile environments in the world, the North Sea?

  Mr Edge: Clearly operating offshore wind farms is a new and challenging area. I think the real challenge is to develop turbines that do not go wrong in the first place.

  Q172  Mr Anderson: That will never happen.

  Mr Edge: You can design a lot of reliability into it, particularly if you take a very different approach to that for onshore turbines. Essentially, each onshore wind turbine is a mini power station. It has got all the things in one place and then you just module them up into wind farms. You can centralise a lot the electronics and some of the supporting stuff into stuff that you can do onshore, and therefore you are generating dirty power in a big offshore wind power station, taking it ashore and cleaning it up and putting it onto the network. So there are different concepts that you can apply which will make it a lot simpler, make the things that are actually out at sea a lot simpler and more robust. That is a process that we are only embarking on: because actually what people have done is take those onshore turbines because they work and take them offshore. It is clearly the case that, unlike onshore, where you can just drive up to the bottom of the tower with a white van and get out and fix it, you have to go out on a boat or a helicopter and fix stuff. There is quite a way to go, but given that we operate oil and gas platforms at high reliability, in fact in some places they are completely inaccessible, we have incredibly reliable machinery down at the bottom of the sea, which you simply forget. I fail to see why we cannot apply that kind of innovation. The trick is to do it in a cost-effective way, with large numbers of turbines, but I have got a belief in UK engineering capability. We have shown it in the offshore oil and gas field; we can show it in the offshore wind field.

  Q173  Mr Anderson: I am glad you feel like that. I used to work in the energy supply industry as a mechanic. Things do go wrong. The fact that you say that they will not go wrong is just not true.

  Mr Edge: I am saying you can minimise it. Certainly we are also working on ways to improve on it—it is already quite safe, but improve further the safety of the transfer from turbines—so that when you do have to go, it is really safe.

  Q174  Mr Anderson: Another issue which has been raised is about the impact on bird life. The RSPB have asked us, in discussions we have had up in Aberdeen, about surveys on the impact of the oil industry on bird life. Have you as an industry looked at the impact, not just in terms of bird kill but also on habitats and feeding grounds?

  Mr Edge: There is a huge amount of work going on on this one. I think it is fair to say that my members in the offshore wind sector have spent more money on researching the offshore environment than any other sector in the history of the UK. We have been forced to do that amount of environmental impact work and, in addition, the Government has been doing a lot of survey and research work. The Crown Estate is taking money from the auction fees that are put down for around one or two projects to set up this fund called COWRIE (Collaborative Offshore Wind Research into the Environment), and that has put several million pounds into these studies. So I think it is fair to say that we have been looking at this very, very closely and to a huge extent offshore wind in the marine environment is massively benign, it has a very, very low impact, and in some cases you can argue with the artificial reefer bed we put something there and, bang, there are barnacles, or whatever, and it becomes a fish sanctuary: you are actually helping to promote biodiversity.

  Q175  Mr Anderson: Lastly, the impact on military radar. We understand that will not happen offshore.

  Mr Edge: No. There is definitely an issue, particularly in the southern Wash, with the air defence radar trimming in Staxton Wold. We have been working very closely with all parties and the wind industry on site—the Department for Transport, the Ministry of Defence—and we signed this Memorandum of Understanding bringing forward the technical solutions, of which there are a number. There are patches to the radar software, potentially, somewhere down the line. QinetiQ are trying to develop a stealth blade so it does not show up on radar screens. There are technical solutions being done. We believe that the Government needs to put more effort into this. Our members have brought forward three million pounds of funds to do this work.

  Q176  Mr Anderson: You mean more money or more effort?

  Mr Edge: I do mean more money.

  Q177  Chairman: It is the R&D as well.

  Mr Edge: This is all R&D.

  Chairman: I can certainly confirm there is work on a stealth blade going on because I have seen some of the work in my own area.

  Q178  Charles Hendry: Can I look at some of the supply chain issues as well? We have had some interesting evidence given to us about the benefits of a point-to-point connection for offshore facilities or for having large DC cables which would connect quite a number of them together. I think it is broadly agreed that we might use seven and a half thousand kilometres of cabling, and the global capacity is about 700 to 1,000 kilometres a year. That means the UK alone would use most of the global output, as currently available, if it was trying to meet its 2020 offshore target. What is the solution to that? The companies appear to be reluctant to invest in new plant if that plant is only going to be operational until 2020 and then the development is not going to have a clear future beyond that. At the moment there is not a programme in place for the further development of offshore wind beyond that.

  Mr Edge: This is why my point earlier about a vision to 2030 is really important. You had a Round 1, plus Round 2, plus Round 3, plus the Scottish territorial waters project. That is nearly 40 gigawatts of offshore wind projects that will be in process in the UK. There is lots of work going on in Europe as well. There is a clear threat and opportunity for the cable supply chain situation. The threat obviously is, if we do not get the signals right, the cable will not be there and you cannot do it. The opportunity is, if we do get the signals right, those factories come here, and we are not just supplying 7,500 kilometres of cable for the UK but the similar amount they want in Germany, and it becomes an export opportunity. Our view is that the licensing regime for offshore could be evolved to give those kind of signals. As it stands it is very piecemeal, but if in the future, for the Round 3 zones off-shore, transmission is appointed for each zone very early, they can work with the likes of APB and Areva, who supply the cables, to build up a solid view of the demand and, therefore, the factories can be built to meet it.

  Q179  Charles Hendry: Would there be a case for saying that the 2020 targets should be allowed to slip back a bit in order for that demand to be managed in a more constructive way when one looks as well at what is going to happen in other countries? Ireland are looking to develop their off-shore, and a whole range of other countries, which will be putting pressure on that global supply chain.

  Mr Edge: You set a reasonable 2020 target and you set an objective further out as well.

  Mr Russell: I think the important thing to bear in mind is that 2020 is most definitely not the end point; it is purely a way mark. Yes, a way mark with legally binding commitments that the Government has entered into, but it is purely a way point on the way to complete decarbonisation of electricity production by 2050, or a bit later. So it is not that at 2020 that is it, by any means.


 
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