Memorandum submitted by the Association
of Electricity Producers
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.
Planning regimes must recognise the need for new power stations
and network infrastructure and ensure that decisions are taken
in a timely, efficient and predictable manner.
— 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% 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% of energy to come from renewable
sources could require renewables to account for some 35% 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.
Renewable energy projects, such as wind farms, need to be sited
where they can best exploit naturally occurring energy sources.
This will often mean that they are built in areas of Britain (including
offshore) where there is currently insufficient or no existing
network capacity to accommodate them. This can already be seen
in Scotland where there is a substantial queue of wind farms waiting
to connect to the transmission network. Some of these projects
have been offered connection dates of a decade from now—well
outside the timeframe which most project developers could accept.
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
Planning Act 2008, for example, do not apply in Scotland. It is
important that there is a consistency of approach and well-considered
interaction between systems and that the planning regime encourages
the most sensible deployment of energy infrastructure to meet
the UK's security of supply and carbon reduction needs.
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 Planning Commission. If
the new Planning Act system were to be abolished, the result would
be further uncertainty and delay for developers.
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 Britain and would therefore
make the UK a less attractive place for them to invest compared
to other countries.
ALL GENERATING
TECHNOLOGIES MUST
BE TREATED
EQUALLY
24. The security of supply and carbon reduction
challenges facing the UK require a range of electricity generation
technologies to be used. All forms of generation technology should
therefore compete on a level playing field and network connection,
access and charging arrangements should be non-discriminatory,
cost-reflective and transparent. We therefore do not support proposals
that renewable generation should have priority access to electricity
networks. Priority access rules which apply irrespective of cost
are clearly not conducive to the cost-effective and efficient
operation of networks and "special deals" for any forms
of generation are inequitable and distort the market. Support
levels for renewable generation should take full account of the
costs which renewables will incur.
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 UK waters. We
note proposals for an offshore supergrid, but consider that further
investigation of the costs and benefits as well as the practicalities
of these proposals is needed. The costs of an offshore supergrid
could be very high and it is not clear how these would be met.
Furthermore, there would be significant cross-border technical
and regulatory challenges to overcome.
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. Britain
is well insulated from the risks of increased interconnection
as the UK is an island system and its interconnectors will be
DC links, which are readily controllable. It is important that
European regulators and EU governments work closely together to
facilitate interconnection, but new interconnection should be
justified primarily through cost-benefit analysis undertaken by
Transmission System Operators (TSOs) or other developers.
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. Back
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