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.
|
