Memorandum submitted by the Joint Association
(Association of Electricity Producers (AEP), British Wind Energy
Association (BWEA), Scottish Renewable Forum)
ORAL EVIDENCE SESSION OF 20 MAY 2009: OFGEM
COMMENTS FROM
THE ASSOCIATION
OF ELECTRICITY
PRODUCERS, BRITISH
WIND ENERGY
ASSOCIATION AND
SCOTTISH RENEWABLE
FORUM
1. The Trade Associations have provided
written and oral evidence to the Committee's current inquiry.
They were concerned to hear the evidence on 20 May 2009, by the
Chief Executive of Ofgem, Alistair Buchanan. The Associations
are concerned that Mr Buchanan's evidence may have misled the
Committee about the willingness of the industry to consider change
and also in respect of the governance of the Connection and Use
of System Code (CUSC). In view of that, we should like the Committee
to take note of this letter.
1.1 In his oral evidence on 20 May 2009, Mr Buchanan
made reference to a letter he was about to send to the UK Business
Council for Sustainable Energy (UKBCSE), whose members include
the "big 6" electricity companies. The intention of
that letter was to provide a description of the four models of
transmission access, set out National Grid's preliminary analysis
of the impact of the different models on future transmission charges
and provide an account of the recent CUSC Panel meetings that
resulted in the proposals for a further "auction" option
not being given consideration. A copy of Mr Buchanan's letter[67]
should now be with you for your records.
1.2 Having read that letter we feel it appropriate
to provide a response clarifying the events which led to the decision
not to pursue the two Connection and Use of System Code (CUSC)
amendments proposals, CAP171 and CAP172, which he refers to as
"the fourth model", dispel the myth that CAP171 and
CAP172 are a "Connect and Manage" model as portrayed
by Ofgem but were in fact confirmed by the proposer as an Auction
approach and to reaffirm our support for a "Connect and Manage"
solution to facilitate earlier connection for new entrants to
the energy market.
THE FOURTH
MODEL—AN
AUCTION IN
ALL BUT
NAME
2. The debate around a variety of options
to facilitate the connection of new generation to the transmission
network has been ongoing for years, with consistent and considerable
industry engagement. During April 2008 National Grid presented
a transmission access package comprising six CUSC amendment proposals[68]
which it believed would form a basis to deliver the aspirations
set out in the interim Transmission Access Review (TAR) report
produced by BERR and Ofgem in early 2008. These six CUSC amendment
proposals included CAP166, which dealt with the auctioning of
transmission access rights.[69]
2.1 This CAP166 proposal, along with the rest
of the suite of proposals, was sent to a CUSC Working Group which
included Ofgem, National Grid, AEP, SRF and other industry stakeholders,
for development. After eight months of constructive effort however,
it became clear that due to its central premise being based upon
a zonal approach,[70]
the CUSC Working Group could not develop a viable solution. Alongside
the continuing efforts to develop a workable solution several
alternative approaches were identified for CAP166, as well as
the other CUSC Amendment Proposals. Unfortunately due to the intensity
of effort required to progress the original CAP166 proposal, the
CUSC Working Group was unable properly to consider the alternatives
within the original timescales. The CUSC Working Group therefore
requested that the CUSC Panel[71]
ask Ofgem for an extension of six months, which it considered
to be the appropriate amount of time needed to fully develop the
alternatives. Following discussion of the time extension request
at its meeting on 21 November 2008 the CUSC Panel subsequently
requested of Ofgem[72]
three months additional development time, two weeks of which would
have been lost because of the 2008 Christmas break. Ofgem formally
rejected this request and instead insisted that the work be completed
within only six weeks, including the Christmas holiday. Despite
this hugely challenging and severely limited timetable, the CUSC
Working Group came up with a range of alternative auction approaches
to the original CAP166 original and alternative proposals, one
of which is now being referred to by Ofgem as the "fourth
model" which they claim is a variant of "Connect and
Manage" rather than confirm that this is in fact an auction
approach. The suite of CAP166 proposals was debated at the 27
February 2009 CUSC Panel meeting, with the final report submitted
to the Gas and Electricity Markets Authority for determination
on 12 March 2009. The CUSC Working Group was then stood down.
2.2 Soon afterwards, rumours about a new
auction amendment began to emerge, which the industry was led
to believe would be based on one of the CAP166 auction alternatives[73]
discussed by the CUSC Working Group and on 30 March 2009 National
Grid formally presented this to the CUSC Panel as CAP171. In National
Grid's presentation several references were made to the fact that
this CAP171 amendment proposal was virtually the same as one of
the CAP166 alternative auction options currently with the Authority
for determination.[74]
This is where the central governance issue arose for the CUSC
Panel in that the Code is clear that, where there is an amendment
proposal currently with the Authority for determination, the industry
is prevented from raising a new amendment proposal which, in the
opinion of the CUSC Panel, has substantially the same effect.[75]
Following the decision of the CUSC Panel[76]
that this was indeed the case in respect of CAP171, Ofgem issued
an open letter[77]
which urged the CUSC Panel to reconsider its position. However
when the CAP171 amendment proposal was subsequently resurrected,
as CAP172, at the urgently convened meeting of the CUSC Panel
on 3 April 2009,[78]
the majority view regarding interpretation of the provisions within
the Code remained unchanged.
2.3 It should be noted that at no time was
there any legal argument made or implied by National Grid as proposer
of both CAPs 171 and 172, or Ofgem at either of the two CUSC Panel
meetings, or in Ofgem's open letter of 2 April 2009 that the interpretation
and process followed by the CUSC Panel members was incorrect.
Indeed, had the provisions of the Code been "overlooked"
in order to enable either CAP171 or CAP172 to be formally accepted
potentially this could have been construed as a misuse of process,
bringing the proceedings within the scrutiny of a Judicial Review.
In addition it is important that the Committee understands that
National Grid as the proposer of both CAPs 171 and 172 has confirmed[79]
that the two proposals are auctions. For Ofgem not to refer to
them as such but rather as a variant of CAP164 "Connect and
Manage" as Mr Buchanan states in his letter[80]
is misleading.
CONNECT AND
MANAGE
3. One of the suite of six Transmission
Access related CUSC amendment proposals raised by National Grid
in April 2008 was CAP164 which specifically addressed the options
for "Connect and Manage". This CAP164 amendment proposal,
like CAP166 Auctions, was debated extensively over six months
by the CUSC Working Group as well as, before and throughout the
TAR process. There is general support within the industry for
a solution based upon the high level principles embodied in "Connect
and Manage". CAP164 alternative amendment proposal is supported
by existing and new entrant generators alike. It is not, as Ofgem
have suggested, only supported by incumbents with vested interests.
The CAP164 alternative amendment proposal received unanimous support
when debated by the CUSC Panel having received widespread industry
and Working Group support prior to this. In fact the industry
has continued in their constructive efforts by initiating debate
designed to investigate appropriate and proportionate charging
methodologies to support CAP 164 "Connect and Manage"
going forward.
3.1 Having subjected the amendment proposals
to a comprehensive Working Group, CUSC Panel and industry evaluation
as part of the TAR process, the Associations believe that it is
now the time to work together to align a true "Connect and
Manage" solution with:[81]
— an appropriate constraint management
framework;
— an enhanced "Queue management process";
— an escalated strategic investment program
for both Transmission and Distribution Networks;
— a pragmatic cost allocation/charging
methodology; and
— arrangements that align with a European
Transmission Model.
This should provide a robust and effective solution.
3.2 The trade associations have the distinct
impression that, in Ofgem's eyes, this is "the wrong answer"
and are disappointed that both the CAP164 "Connect and Manage"
approach and the work that the Industry has undertaken across
the whole suite of TAR proposals is now being discredited by the
public pronouncements of Ofgem. This is despite Ofgem's detailed
and continuous involvement in the TAR process since its inception
and Lord Mogg's statement of confidence in the ability of the
proposals under consideration to deliver an effective and appropriate
outcome. In his letter of 30 March 2009 to the Secretary of State
Lord Mogg declared that "We are currently assessing the
merits of the proposals and we plan to publish an initial Impact
Assessment consultation before the end of April. Based on current
information these options appear to provide an appropriate range
of alternative approaches on which to base our decisions".[82]
This is in stark contrast to the tone of the letter of 20 May
2009 to the UKBCSE in which Ofgem states that "We struggle
to see how the benefits (in terms of lower wholesale prices and
carbon emissions) would be sufficient to justify the additional
costs to customers". In addition we are alarmed by the sweeping
prejudgement that has led Ofgem and National Grid to develop CAP171
and CAP172 to attempt to deal with concerns that had been expressed
about elements of the other three models. Industry still awaits
the opportunity to respond to the Regulatory Impact Assessments
on the proposals current with the Authority for determination.
3.3 The industry will continue to work constructively
and with full engagement to deliver an effective outcome from
the TAR process. We believe that the work already undertaken can
form the basis of an enduring solution. The challenge now is to
complete that work and integrate it with enhanced constraint and
queue management processes to form a comprehensive reform package.
The industry continues to move forward in these areas, we look
forward to Ofgem playing its part in the process.
Should you or the committee require further
clarification regarding the complexities of the transmission access
proposals we would be more than happy to meet with you to discuss
this and clarify the strength of industry support to date. Please
let us know if you would like to do that.
June 2009
APPENDIX 1
GRID SLIDE CONFIRMING CAP171 BASED UPON CAP166
WGAA3
This is Slide 3 National Grid presentation to
the 30 March 2009 CUSC Panel Meeting
CAP171—OVERVIEW
Broadly based upon the work of TAR Working Group
2:
— Capacity Price[83]
set through a combination of long-run and short-run costs.
Key Differences:
— Access Right defined by reference to
Load Duration Curve (LDC).
— Users may influence prices through submitted
data including LDC and also Buy-Back Price.
67 We have limited our comments to Mr Buchanan's letter
of 20 May 2009. However we have noticed other aspects of his evidence
to the committee which are, potentially, misleading. We would
hope to provide in the near further comments on this to assist
the Committee in its deliberations. Back
68
Known as CAPs 161 to 166. Back
69
Access to the electricity network, such as the Transmission for
large power stations, is a pre-requisite for a power station.
Without it they cannot operate in the GB Market. Back
70
A zonal approach is unworkable. Access Rights would be untradeable
within zone because of the physical structure of the network.
For example two neighbouring power stations may be unable to trade
their access rights. Back
71
The body which is elected by industry to oversee this element
of industry code change. Back
72
As required by Section 8 of the CUSC. Back
73
Known variously as CAP166 WGAP1 and/or CAP166 WGAA4. Back
74
Working Group Alternative Amendment 3(WGAA3). This proposal has
been with Ofgem for determination since 12 March 2009. Back
75
Section 8.15.4(a) of Connection and Use of System Code. Back
76
At its meeting on 30 March 2009. Back
77
Dated 2 April 2009. Back
78
That was Friday 3 April following on from the previous (CAP171)
CUSC Panel of Monday 30 March 2009. Back
79
See for example the paper presented by National Grid to the CUSC
Panel on 2rd April 2009 entitles CAP172 Capacity Allocation Mechanism
2 differences between CAP172 and CAP166 WGAA3 which clearly states
in the second paragraph that CAP172 and CAP166 are both capacity-duration
auctions. Back
80
See the misleading first sentence page two of Alistair Buchanan's
20 May 2009 letter under the "Fourth Model" heading
that the "Fourth Model" is a variant of "Connect
and Manage". Back
81
For the avoidance of doubt and despite Mr Buchanan's protestations
to the contrary, the Associations do not accept that either CAP171
or CAP172 is a variant of CAP164 "Connect and Manage",
rather they are, as confirmed by National Grid the proposer, auctions. Back
82
Note the industry await the publication of the Regulatory Impact
Assessments which were expected in April 2009. Back
83
Pricing methodology will be consulted upon separately through
Charging Governance]. Back
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