Memorandum submitted by Scottish Council
for Development and Industry (SCOI)
SCDI is an independent and inclusive economic
development network which seeks to influence and inspire government
and key stakeholders with our ambitious vision to create shared
sustainable economic prosperity for Scotland.
1. SCDI welcomes the opportunity to comment on
the inquiry by the Energy and Climate Change Committee into The
Future of Britain's Electricity Networks.
2. SCDI is an independent membership network
that strengthens Scotland's competitiveness by influencing Government
policies to encourage sustainable economic prosperity. Its membership
includes business, trades unions, local authorities, educational
institutions, the voluntary sector and faith groups.
WHAT SHOULD
THE GOVERNMENT'S
VISION BE
FOR BRITAIN'S
ELECTRICITY NETWORKS,
IF IT
IS TO
MEET THE
EU 2020 RENEWABLES TARGET,
AND LONGER-TERM
SECURITY OF
ENERGY SUPPLY
AND CLIMATE
CHANGE GOALS?
2020 Targets and The Future of Electricity Generation
in Scotland
3. In December last year, SCDI published
The Future of Electricity Generation in Scotland the first
major independent study of the Scottish Government's renewable
energy targets which it had commissioned from the independent
international energy research consultancy Wood Mackenzie. This
concluded that Scotland can hit its target of 50% from renewable
sources by 2020 and maintain exporting electricity to England
and Northern Ireland. Scotland's electricity sector will, consequentially,
produce a third less carbon dioxide. Reaching this Scottish target
is essential for the UK's renewable energy and climate change
obligations.
4. In Wood Mackenzie's view, onshore wind will
provide more than 80% of the increase in Scotland's renewable
electricity by 2020, with marine, biomass and hydro expanding
at a tenth of the rate of new wind. This is likely to mean a 500%
increase in the numbers of wind farms, with Scotland needing around
450 MW of new wind power—more than twice the size of the
country's biggest operational wind farm—every year until
2020. Expansion at this rate will mean £10 billion of investment
in new electricity generation between now and 2020.
5. Wood Mackenzie also provided a forecast of
renewable generation capacity growth and compared it with the
views put forward in the Scottish Government's draft Renewable
Energy Framework. A comparison is set out in the table below:
| Technology | Current (GW)
| Scottish Renewable Energy
Framework 2020 Estimate (GW)
| Wood Mackenzie
2020 Forecast (GW)
|
| Hydro | 1.4 | 2.1 to 2.4
| 1.7 |
| Onshore Wind | 1.3 | 5 to 7
| 6.6 |
| Offshore Wind | 0 | 1 to 4
| 0.5 |
| Wave & Tidal | 0 | 0.5 to 1
| 0.2 |
| Biomass | 0.04 | 0.2 to 0.4
| 0.4 |
| Total | 2.8 | 8.8 to 14.8
| 9.3 |
| | |
|
6. While the report concentrates on the future of electricity
generation in Scotland, this is within the context of Scotland's
high voltage power transmission network being connected to systems
in England and Northern Ireland and, following the introduction
of BETTA in 2005, Scotland's integration into the wider GB electricity
trading market. Wood Mackenzie also forecasts renewable generation
capacity growth in the rest of the UK. These underline the fundamental
importance of the growth of the UK's electricity transmission
networks to the mix of future supply.
7. The recently published report by the Electricity Networks
Strategy Group (ENSG) sets out three scenarios for the growth
of renewable electricity capacity in Scotland by 2020: from a
minimum scenario of a 6.6GW of wind generation, a second scenario
of 8 GW of wind generation and a third scenario of 11.4 GW.
8. In Scotland, Wood Mackenzie forecast that onshore
wind will increase by 5.5GW, from 1.3GW today to 6.6GW in 2020,
towards the upper end of the estimate in the Scottish Government's
draft Renewable Energy Framework. By way of comparisons, it forecasts
that only 2.3GW will be added in England and Wales and around
1GW added in Northern Ireland. Wood Mackenzie's view is that:
"The growth of onshore wind capacity, as perhaps the
cheapest and most accessible form of renewable power, is likely
to represent a large majority of the Scottish generation sector's
response to current renewable energy targets. Some slowing of
this rate at the very end of the period is assumed as desirable
sites become more difficult to acquire and the sector finds itself
competing for equipment and investment in an increasingly active
international market."
9. The Crown Estate has announced that it will be offering
exclusivity arrangements to companies and consortia for 10 sites
for development of offshore windfarms within Scottish territorial
waters. In total, the sites have the potential to generate more
than 6GW of offshore wind power. The Crown Estate Round 3 Offshore
Wind Farm identifies a further two potential development zones
around Scotland.
10. However, Wood Mackenzie forecast that Scotland's
offshore wind generation will only increase from 0GW today to
0.5GW in 2020—5% of the total capacity for renewable energy—a
much slower growth than has been estimated in the draft Renewable
Energy Framework. This contrasts with its forecast that there
will be offshore wind development in England and Wales of 6.8GW.
Its view is that:
"...there will be a noticeable shift from onshore
to offshore wind development in the UK during the period, as developers
circumvent the planning issues associated with onshore wind projects
by going offshore and take advantage of the greater flexibility
this also provides to locate generation close to demand centres
in the southern part of England. Unfortunately, without the introduction
of significant offshore transmission networks, offshore wind in
Scotland will rely upon much of the infrastructure being used
by onshore projects, and seems set to remain less attractive than
developments further south as a result."
11. The Crown Estate has invited initial proposals from
developers for the UK's first commercial marine power sites in
the Pentland Firth and surrounding waters. The aim is to deliver
700MW of new offshore wave and tidal power by 2020.
12. Wood Mackenzie forecast that wave and tidal energy
generation in Scotland will increase from 0GW to 0.2GW in 2020,
again a much slower growth than was estimated in the draft Renewable
Energy Framework. This is incorporated in the "Other Renewables"
category of its forecasts. In this period, its view is that:
"...the nascent nature of wave and tidal technologies,
challenges associated with connecting offshore generating capacity
to the grid, and expectations of high capital costs (roughly double
those of onshore wind) suggest it is unlikely that a significant
volume of marine generation will be connected to the system."
13. The majority of Scotland's potential is located around
the Highlands and Islands. For example, the Western Isles has
the potential for at least 16GW of wind, 1GW of wave and 150MW
of tidal. The proposed Viking Energy wind farm on Shetland would
alone meet 12% of Scotland's renewable energy target and 5% of
Scotland's CO2 reduction target. The potential of the Pentland
Firth has already been noted. Three of the 10 potential sites
for offshore wind farms sites announced by the Crown Estate in
Scottish territorial waters are in Argyll and Bute, including
the largest, the Argyll Array, at 1500MW. Off the east coast,
the Beatrice site situated in the Outer Moray Firth has a potential
capacity of 920MW.
14. At over 40% of installed capacity, the load factor
for wind energy is generally much higher in these areas than in
other areas of the UK. A wind farm on Shetland has recently achieved
a world record of 58% of capacity over the course of a year. Viking's
wind farm is working on a conservatively calculated load factor
of 46%. It has been estimated that to attain as much output on
the Scottish mainland, the proposed scheme would have to be twice
as big in size. The areas are a very reliable power source for
the UK and—along with the local socio-economic benefits—the
projects should be viewed as nationally significant.
15. Wood Mackenzie also presented an Alternative Case
which assumes a lower rate of wind capacity expansion and the
extensive development of more efficient, low carbon, fossil-fuelled
power sources. Such technologies are yet to be proven at a commercial
scale in the power sector and the feasibility of such additions
will rely much upon the research and development activities of
those companies currently active in the field. However, this Alternative
Case would emit less CO2 and put Scottish generation on a more
competitive footing in the wider GB power market. By 2020, output
from gas and Carbon Capture and Storage coal plants would account
for nearly 55% of total generation. Due to the assumption of lower
build rates, renewable energy supply would fall to 40% of Scottish
demand.
Beyond 2020
16. The report also highlights the potential loss of
base load generation, specifically nuclear and coal-fired plant
closures that may occur in the period between 2020 and 2030, and
the possibility that this could give rise to a generation shortfall.
Wood Mackenzie states that if Scottish demand is to continue to
be served by Scottish generation, it is highly likely that new
base load capacity will be needed and that new nuclear generation
could represent a viable option at this time.
17. In total, Scotland has an estimated potential of 36.5
GW of wind and 7.5 GW of tidal power, 25% of the estimated total
capacity for the European Union and up to 14 GW of wave power
potential, 10% of EU capacity. In the long-term, the renewable
electricity generating capacity in Scotland may be 60 GW or more.
Britain's Existing Electricity Networks
18. Britain's electricity networks were designed for
a different age in which electricity has been mainly generated
from a relatively small number of large scale plants. The network
is already under severe strain in Scotland as this pattern changes.
After the development of hydroelectricity in the 1950s, the North
has generally exported electricity to the Central Belt. However,
the main North-South transmission lines are now at capacity. There
are extra power flows in the South, and, in recent years, Scotland
has typically maintained power transfers to neighbouring networks
of around 10TWh per annum, which has been limited by the maximum
operating capacity of the circuits between Scotland and England.
However, all the generation scenarios for renewables assume significantly
increased power transfers from North to South and from Scotland
to England.
19. The current grid connection system was established to
allow for the connection of a relatively small number of very
large generation projects, often with long lead times available.
The recent trend towards renewable generation has seen a much
larger number of small projects seek access to the grid, which
has contributed to the current backlog (the so called GB queue).
As access is allocated on a "first come, first served"
basis, projects with planning consent can be stuck in the queue
behind projects that are less well developed. Renewables projects
can currently wait for 10 years for access to the grid and the
Transmission Access Review 2008 by the UK Government and Ofgem
found that "fundamental changes to the codes that govern
access to the grid" are required.
20. The worst affected areas are often the ones with
the biggest renewable resource. For instance, as Argyll and Bute's
grid infrastructure is considered effectively "saturated"
even very small projects are being refused connections before
2018.
Vision for Britain's Electricity Networks
21. SCDI has set the following objectives for UK and
Scottish energy policy:
— Security of Supply.
— Decarbonising Supply.
— Affordability of Supply.
— Optimising Economic Benefit.
— Security of Supply
22. There has been significant underinvestment in the
UK energy industry over many decades. A substantial percentage
of the UK's generating capacity is scheduled to close over the
next 15 years. Production of North Sea oil and gas is declining
at a rate of 5% per year and the UK will soon, once again, become
an importer of both. There is a real danger that a business-as-usual
approach will fail to attract enough investment in generating
capacity to meet peak UK demand. The UK has a relatively short
time to shape its electricity networks for the decades to come.
23. The European Commission's Energy Security and Solidarity
Action Plan: 2nd Strategic Energy Review which was published
in November 2008 stated that "the development of a blueprint
for a North Sea offshore grid, interconnecting national electricity
grids and plugging in planned offshore wind projects" should
be recognised as an energy security priority of the entire European
Community.
24. The future of Britain's electricity networks is within
international cooperation on an entirely new scale. Scotland is
leading the way in the development of a North Sea Grid, which
should ultimately form part of a Europe-wide electricity system.
It will then be possible to balance variation in the energy generated
from solar in southern Spain, with wind, wave, and tidal resources
from the north of Scotland.
25. Technology choice will proliferate and the system
will become customer driven rather than supply driven. The Energy
Savings Trust has estimated that microrenewables could potentially
supply as much as 30-40% of the UK's total electricity demand
by 2050. Power will flow to users and surplus from distributed
generation will flow back to the grid, supporting intermittency
management.
— Decarbonising Supply
26. The electricity networks must support the complete
decarbonisation of electricity generation which is essential if
the 2050 climate change target is to be achieved. Scottish Ministers
believes that Scottish supply could be decarbonised by 2030.
27. CO2 emission reduction and wider energy services will
drive energy utility company revenue. It has been estimated by
National Grid that the introduction of smart metering could meet
6% of the UK's 2020 target for CO2 emission cuts.
— Affordability of Supply
28. The cost of grid infrastructure improvements could
add about £15 per year to the average UK household electricity
bill. Therefore, when decisions are made on investment, it is
important that the costs to consumers now and in the future, including
the estimate by the Stern Review that climate change could lead
to a loss of between 5% and 20% of annual global GDP, are taken
into account.
29. The roll-out of smart meters would enable customers focus
on economic value, using a wider range of products and services.
Initial analysis by National Grid of the levels of benefits suggests
£8 billion in 10 years, mostly from reduced demand.
— Optimising Economic Benefit
30. As a result of the credit crunch, economic downturn
and lower price of hydrocarbons, the global growth in renewables
is slowing from the 30 to 40% seen in recent years. However, the
sector is still enjoying comparatively high investment. The European
Investment Bank has increased its lending this year to about a
fifth of its total lending for energy projects. This amounts to
3 billion euros compared to 2.3 billion in 2008. The Bank is considering
lending to a large number of big offshore wind projects in the
North Sea worth more than 1 billion euros. This lending could
eventually amount to 7 or 8 billion euros. Investment in Britain's
electricity network is not only an economic stimulus in itself,
it is essential if the UK is to attract projects and take advantage
of this so-called "Green New Deal".
31. Island authorities and offshore developers support "bootlaces"
around the coasts of Scotland to take the power they generate
to the population centres. These sub-sea grid developments would
offer a springboard for developing the North and Irish Sea Grids.
It will be important that Government supports sufficient generation
capacity in order that investors have confidence in these proposals.
This is a once-in-a-generation socio-economic opportunity for
the communities.
32. The exploitation of Scotland's and the UK's renewable
electricity potential and its transmission through an offshore
grid will, eventually, create the opportunity to export power
to Europe. This would benefit the UK's balance of payments.
33. The offshore wind and marine energy markets offers
great promise in terms of developing a wider indigenous supply
chain. The aim for the UK should be not simply to exploit the
resource, but to create the world's leading technological hub.
This will only happen with early projects in Scotland and the
rest of the UK. The sustainable development of offshore wind and
new marine and tidal renewable developments will only be taken
forward in the Highlands and Islands if the necessary capacity
is first built into the grid. Early progress in the marine renewable
field is critical because the global competition is quickly catching
up.
34. Smart grid technologies will not only improve electricity
networks, but stimulate economic development through competition
which automatically encourages innovation. Several studies done
in US and Europe show that these cross cutting technologies have
the potential to open new markets, new revenue streams and create
several high end jobs to serve the new markets. The smart grid
is likely to serve as the foundation for the growth of many new
industries just as broadband is creating new markets in e-commerce,
telehealth, and online banking etc.
Electricity Networks Strategy Group
35. With the Britain's electricity transmission networks
recognised as a key determinant of the pace of expansion and mix
of renewable energy technologies, SCDI welcomes the ENSG report.
This proposed the largest single expansion of the gird in the
UK since the 1960s, utilising 1,000 km of new cables, at a total
cost of £4.7 billion. The resulting network could accommodate
a further 45 GW of which 34 GW could be a combination of onshore
and offshore wind generation by 2020.
36. SCDI supports ENSG's view that the upgrade of the Beauly-Denny
line is simply essential on any potential pathway towards the
targets. It is the only practical and affordable way to proceed,
and its completion will also unlock the upgradeable potential
of the rest of the northern Scotland transmission network through
relatively uncontroversial reconductoring on existing routes and
towers, without the need for new overhead transmission routes,
at a total cost of £780 million. These are required to make
maximum use of the existing infrastructure and overhead lines
routes to connect renewable generation on the mainland and the
islands. Offshore connections will only proceed if the Beauly-Denny
upgrade is approved.
37. The ENSG propose the provision of connection capacity
to the Western Isles, Orkney and Shetland via subsea links to
the main interconnected system, together with a subsea link between
the Kintyre peninsula and Hunterston, allowing the contribution
of 1.5-2 GW of renewable generation from these areas.
38. Further proposals by the ENSG would increase the
transfer of power between Scotland and England. One would further
boost the Scottish/English inter-connectors. The Western subsea
1.8GW High Voltage Direct Current Link (HVDC) would link Hunterston
and Deeside on Merseyside at a total cost estimated at £760
million. The Eastern subsea 1.8GW HVDC Link, would link Peterhead
and Hawthorne Pit, Country Durham at a total cost of around £700
million.
39. The need for these reinforcements depends on which
scenario for the growth of renewable electricity capacity in Scotland
proves to be correct. However, as the report from Wood Mackenzie
highlighted, the availability of significant offshore transmission
networks in Scotland will itself be a determinant of the growth
of offshore renewables. The ENSG propose to proceed with the Western
HVDC Link and the incremental upgrade immediately, with a target
completion date of 2015, and then with the Eastern HVDC link with
a target completion date of 2018.
HOW DO
WE ENSURE
THE REGULATORY
FRAMEWORK IS
FLEXIBLE ENOUGH
TO COPE
WITH UNCERTAINTY
OVER THE
FUTURE GENERATION
MIX?
40. Ofgem has highlighted the significant challenges
in forecasting. It has suggested that future electricity networks
may have to be larger to transmit more renewable energy and conventional
power. In evidence to the Environmental Audit Committee, E.ON
UK stated that if the UK needs around 40000MW renewable electricity
to meet the EU renewable energy target, 36400MW of conventional
supply will also be needed to ensure that winter peak demand can
be met. But Ofgem has also said that with smart grid technology,
energy efficiency and more decentralized generation activities,
the national energy networks could shrink.
41. In The Future of Electricity Generation in Scotland,
Wood Mackenzie forecast that demand for electricity will rise
by 10% between now and 2020 despite continued attempts to encourage
greater energy efficiency. This projection is probably applicable
to the rest of the UK. SCDI believes that much more could be done
to promote energy efficiency. But the use of electric powered
vehicles is likely to increase sharply, the Scottish and UK Government
are expected to support major phased programmes of rail electrification
over the next decades and the anticipated new high-speed rail
lines would increase energy consumption by 90% at top speeds.
So overall demand for electricity may increase further.
42. The regulatory framework must be flexible enough
to cope with the following:
— closures of existing generating plants due to various
legislation and age profile;
— contracted new connections for all types of generating
plant;
— the potential for, and location of onshore and offshore
wind generation; and
— the potential build rates for wind and new nuclear
generating plant.
43. The ENSG report stated that there is a "high
probability that at least 8GW of wind generation will connect
in Scotland", and that this could potentially be 11.4GW.
The critical point for Scotland, especially the Highlands and
Islands, is that planning begins now for grid upgrades which will
transport and export up to 11.4GW. Large hydro power schemes in
north of Scotland offer a prime example of the benefits of an
initial, ambitious investment in infrastructure to access renewable
energy. These areas now boast some of the cheapest, if not the
cheapest, generation in the UK free from the effects of fluctuating
fuel prices.
44. The uncertainty can be reduced through planning.
The Scottish Government has announced that it will complete a
Strategic Environmental Assessment for offshore wind. It is intended
that this assessment will ensure that Scotland's offshore resource
is developed in a strategic and coordinated manner. Ministers
have stated that they will prioritise the completion of the process
within one year.
WHAT ARE
THE TECHNICAL,
COMMERCIAL AND
REGULATORY BARRIERS
THAT NEED
TO BE
OVERCOME TO
ENSURE SUFFICIENT
NETWORK CAPACITY
IS IN
PLACE TO
CONNECT A
LARGE INCREASE
IN ONSHORE
RENEWABLES, PARTICULARLY
WIND POWER,
AS WELL
AS NEW
NUCLEAR BUILD
IN THE
FUTURE? FOR
EXAMPLE ISSUES
MAY INCLUDE
THE USE
OF LOCATIONAL
PRICING, OR
THE AVAILABILITY
OF SKILLS
Planning
45. The average time between planning application and
completion of the construction of major infrastructure seems to
be over 10 years. The UK will not be able to meet its energy objectives
if such projects are not fast-tracked. SCDI welcomes the inclusion
of electricity grid reinforcements as a national priority within
the Scottish Government's National Planning Framework (NPF2) and
the proposals for a National Policy Statement in the UK Government's
Planning Bill.
46. The upgrade of the Beauly-Denny line is simply essential on
any potential pathway towards the renewables targets. It is the
only practical and affordable way to proceed, and its completion
will also unlock the upgradeable potential of the rest of the
northern Scotland transmission network through relatively uncontroversial
reconductoring on existing routes and towers, without the need
for new overhead transmission routes. Any further delay would
be likely to halt development in large areas of the country with
the best renewable resource.
47. The report from the ENSG builds on NPF2, but the documents
are not entirely consistent. The ENSG refer to a subsea link between
the Kintyre peninsula and Hunterston, and the need for a new sub-sea
cable link between Hunterston and Carradale to allow future capacity
to be built into the grid for Argyll and Bute is mentioned in
the text of the NPF2. However, it is not actually shown on the
network map (map 8) in the document nor is it detailed in the
annex (unlike other proposed links to Shetland, Orkney and the
Western Isles). This may lead to challenges in the planning. It
is important that all these links receive sufficient priority
if the major renewable electricity potential in these areas is
to be realised.
Regulation
48. The regulatory regime has served its purpose. The
Social and Environmental Guidance recently given to Ofgem by the
Secretary of State for Energy and Climate Change is a step forward.
But Ofgem's remit now needs to be more strategic, supporting transmission
reinforcements, and considering the total costs to consumers now
and in the future, including the costs of climate change.
49. One of the most significant barriers to renewable energy
development in Scotland is access to the electricity transmission
system. The additional capacity is needed both for larger scale
renewable projects and for smaller scale, community driven projects.
Renewables projects can currently wait for 10 years for access
to the grid. A more flexible and responsive network connection
regime needs to be put in place. SCDI is encouraged by the on-going
work on the Transmission Access Review and GB Security and Quality
of Supply Standard, including the consideration by the UK Government
and Ofgem of interim arrangements to allow for the immediate connection
of new capacity. SCDI welcomes moves by National Grid to reduce
delays and more speedily connect projects before major transmission
reinforcements are made. These short-term measures are possible
as the rapid growth of variable wind on the system increases the
potential for greater sharing of existing capacity. It is a concern
to SCDI that Ofgem has recently threatened to block the initiative
by National Grid.
50. TEC-Sharing (called CAP163) allows generators to
share transmission capacity as long as they ensure that the combined
total of their projects does not exceed a pre-agreed maximum.
This works where co-incidence of peak output is rare.
51. Regional Power Zone (Active Load Management) allows
the distribution operator to control small generators in a given
area so that they can restrict output when necessary for grid
control. This is currently being applied on Orkney and its introduction
is allowing a further 15MW of generation to connect. The distribution
operator, SHEPD, have the right to request Ofgem approval for
another scheme in Argyll and there is an intention to implement
another one in the Western Isles.
52. A "Connect and Manage" system would oblige
National Grid to provide (where a physical link to the transmission
system can be put in place) grid access within four years of generators
making a commercially committed application. The generator has
to accept flexible operation. Such an arrangement would significantly
reduce uncertainties for generators and send strong signals for
investment in grid infrastructure and generation projects. SCDI
hopes that a finalised `Connect and Manage' system can be introduced
as soon as possible.
Locational Pricing
53. Grid capacity and transmission charging mechanisms
which disadvantage those looking to develop in rural locations
away from the central grid network, are proving to be a serious
barrier to ensuring sufficient future network capacity. The current
regime of locational pricing is designed for high load factor,
baseload generators, but it is also being levied on low load factor,
intermittent generators. SCDI members have questioned whether
the model and inputs reflect the network and power flows, and
whether the short term year-on-year approach to charging properly
reflect economic decisions in an industry with long-life assets.
54. The UK's system of transmission charging results in higher
and less predictable charges for Scottish based generators and
is a particular disadvantage to those developing renewable energy
projects in those areas with the best resource.
55. A report for ScottishPower has shown that under the
pricing regime energy producers in Devon and Cornwall receive
almost £9 per kW, those in London receive £5 and those
in south Wales and Gloucester receive £3. In Scotland, they
are charged almost £14 and those in the north of Scotland
pay £22. The operator of a 50MW wind farm would pay a locational
charge of about £1.1 million per year, while one in southern
England would receive subsidies of about £450,000. The additional
locational costs for generators in the north amount to 15% of
their total costs and appear to run contrary to Government energy
and climate change policy, by making it harder to finance projects
in optimal, but peripheral locations. This too is a barrier to
the geographical dispersal of projects to counter variability.
56. Charging is also volatile. Some generators have experienced
year-on-year increases of over 100%. It does not appear credible
that a generator can impose twice as much cost on the network
from one year to the next. Stability and predictability are necessary
for a healthy climate for new generation investment.
57. SCDI accepts the view that there are other important
barriers to new generation, renewable or otherwise, especially
the present planning regime. However, it believes that the current
transmission charging regime is a significant disincentive and
that a more appropriate approach is needed to achieve the stretching
renewable energy and climate change targets which the UK Government
has agreed for the European Union. Early renewable projects have
been sited in areas of best resource. The UK and Scottish renewable
energy targets will now require an unprecedented and rapid expansion
in areas which are increasingly marginal. SCDI would suggest that
the current economic climate is also important. Renewable energy
companies are experiencing serious difficulties in financing projects.
When growth takes off again, this will also pose problems. Global
demand for turbines will drive up the cost of projects and squeeze
the margin of financial return which will mean that locational
pricing will increasingly become a barrier to renewable development
in peripheral areas. It will also disincentivise investment in
extending the life of and constructing new thermal plants to back
up the variable power supply from renewable sources.
58. SCDI has called for a fundamental review of locational
charging. It is supportive of the proposals by the Scottish Government,
ScottishPower, Scottish and Southern Energy, and the Scottish
Renewables Forum for a new methodology in which there is a level-playing
field with generators using the UK transmission network being
levied at a uniform rate for each unit of energy that enters the
system, irrespective of its location. This would appear a simpler,
more predictable and fairer system, which is more aligned with
Government policy objectives and would not impose extra costs
on National Grid or the consumer. Locational signals could be
provided in other ways under consideration by the industry, such
as charging for network losses associated with generators' output.
The new approach would support integration of the European energy
market.
59. Transmission costs currently make up 3% of customer
bills. Therefore, if these changes to the charging methodology
are implemented, consumers would not be affected. The total revenue
recovered from the generators would not be altered either. The
charging would, rather, be more evenly and fairly distributed.
60. The lack of a formal charging method and the resultant
uncertainty/potential volatility is the biggest barrier to renewable
energy projects being developed on Scotland's islands. The Viking
wind farm project will create a new industry on Shetland which
will compensate for the rundown of the oil and gas industry. An
average of 230 local jobs will be created during each year of
the construction phase and more than 50 local jobs created during
the anticipated 25-year life of the wind farm. Through a unique
community-private sector partnership, it will return an estimated
£25 to £30 million to the Shetland economy every year,
including £18 million profits on average to Shetland Charitable
Trust. Electricity demand on the island peaks at 60MW and a large
project (540MW) is needed to justify the estimated £250 million
capital cost of the cable connection. The indications are that
transmission charging could be over 100 times greater than in
London and even 20 times higher than in Aberdeen. This would be
a greater cost on an annual basis than all the other costs put
together and could make it commercially unviable. But Viking Energy
is still awaiting finalised figures and the project is proceeding
into planning blind of its single biggest cost after project finance.
61. The European Commission's Renewables Directive of
2001 stated that: "Member states shall ensure that the charging
of transmission and distribution fees does not discriminate against
electricity from renewable energy sources, including in particular
electricity from renewable energy sources produced in peripheral
regions, such as island regions and regions of low population
density."
62. SCDI has long supported the capping of transmission
charges from the islands, would be a step towards integration
with the wider European market, and is very disappointed that,
based on what is a strongly disputed report, the UK Government
appears to have rejected such a positive step. The effect on UK
consumers of any special measures to adjust transmission charges
for the islands would be virtually nothing. On the other hand,
the socio-economic value of renewable energy developments to the
islands would be transformational.
Skills
63. There is a need for greater clarity on the ability
of the Scottish supply chain to take advantage of natural resources
and deliver the UK and Scottish Government targets. Meeting the
targets will require a change in the skills base across Scotland
as at present it would seem that there are gap in skills across
most sectors in relation to renewables projects. However, this
provides an opportunity particularly in the current economic climate
as opposed to necessarily representing a barrier. For example,
in science and engineering (for research and development), and
in trades (for deployment and installation). Planning for training
facilities for offshore energy services should be commenced.
WHAT ARE
THE ISSUES
THE GOVERNMENT
AND REGULATOR
MUST ADDRESS
TO ESTABLISH
A COST-EFFECTIVE
OFFSHORE TRANSMISSION
REGIME?
64. The Crown Estate announced the third leasing round
for offshore wind energy is intended to deliver up to 25 GW of
new offshore wind generation by 2020. In addition the leasing
application process for offshore wind in Scottish Territorial
Waters has granted 6.4GW of exclusivity agreements pending the
outcome of a Strategic Environmental Assessment. The Energy and
Climate Change Department estimate that 5,000 to 7,000 wind turbines,
which would generally have to be more than 22 miles from the coast,
could be in the water by 2020. The Crown Estate is also holding
a tender for marine renewable energy installations in the Pentland
Firth. It anticipates that up to 700MW will be achieved by 2020.
65. Further significant infrastructure upgrades will also
have to be made if the full potential of offshore generation in
Scotland is to be realised in this period. A report prepared by
the Dutch marine energy firm Tocardo found that "the current
policy associated with obtaining grid connection agreements will
not permit any tidal energy developments over 5 MW in the Pentland
Firth before 2016."
66. In December 2008, The Crown Estate published a connection
study in support of Round 3. This work considered a scenario for
connecting 25GW of offshore wind. The study identified that approximately
£10 billion of network reinforcements would be needed. Of
these, approximately 7% related to onshore works.
67. Developing a grid will be a major challenge which
calls for regular review. The offshore regime must work together
in a co-ordinated way around the UK and there is some concern
about a lack of clarity on decision-making. The decisions and
actions of the Crown Estate will clearly have a pivotal role in
the development of marine energy. In Scotland, SCDI welcomes the
integration of the proposed National Marine Plan into the NPF2.
But details are needed on how the Scottish and UK marine legislation
will be co-ordinated. There is a risk that this uncertainty will
make Scotland less attractive for international investment.
68. A report by the Crown Estate made the following
recommendations for Round 3:
(1) That environmental and planning constraints may affect
connection solutions for each zone.
(2) That the extent of constraints on supply chain may impact
delivery of the Round 3 connections.
(3) The power transfer capacity of the HVAC and HVDC technologies
should be raised to improve economies of scale.
(4) A process to effectively manage the Round 3 grid connection
applications should be put in place.
(5) That "no regret" onshore reinforcement options
should be progressed immediately to provide the necessary transmission
capacity in a timely manner.
69. Improved access to the National Grid system for offshore
wind, wave and tidal developers must be implemented within a reasonably
tight timeframe if the UK is to attract investment, and a major
opportunity for UK manufacturing and economic development, for
example on the Scottish islands, is not to be missed. This will
be, ultimately, offer access to the wider UK and European markets.
70. A strategic approach needs to be taken to planning,
design, licensing and investment. The Crown Estate believes that
the offshore licensing regime can accommodate development of the
required offshore transmission infrastructure.
71. This co-ordinated approach should also extend to
associated onshore reinforcements and there is case for commencing
these ahead of connection applications. This will lead to the
most cost effective solutions. The ENSG found that timely investment
in associated onshore networks could save £850m overall.
72. This strategic approach would also give the supply
chain the confidence it needs to invest in infrastructure to support
transmission development. The establishment of offshore networks
offers the opportunity to establish testing, manufacturing and
monitoring facilities in island and remote communities.
WHAT ARE
THE BENEFITS
AND RISKS
ASSOCIATED WITH
GREATER INTERCONNECTION
WITH OTHER
COUNTRIES, AND
THE PROPOSED
"SUPERGRID"?
73. The future of Britain's electricity networks is within
international cooperation on an entirely new scale.The European
Commission published a new energy plan in November which identified
as a strategic priority the ultimate aim of combining a North
Sea grid with ones in the Baltic and Mediterranean to create a
pan-European super-grid. A Europe-wide electricity system would
be able to balance variation in the renewable energy generated
from solar in southern Spain, with wind, wave, and tidal resources
from the north of Scotland. This would improve security of supply,
decarbonise supply, provide protection from fossil fuel prices,
and, given UK renewable energy export potential, optimise economic
benefit.
74. The full super-grid which would be developed incrementally
over 30 years. Scotland is leading the way in the development
of a super-grid through a study by the Scottish and Irish Governments
into a connection between Ireland and the west coast of Scotland
which should ultimately form part of a super-grid.
75. If a Europe-wide electricity system is to be realised
then work needs to start now. This will involve surveying the
seabed, planning, overcoming technical challenges and resolving
how they would be funded and regulated, who would be licensed
to build them in the UK, and how European projects will be co-ordinated.
76. Finance is a major potential stumbling block. It
has been estimated that upgrading the EU's power infrastructure
will cost upwards of £500 billion. Ultimately, billions of
pounds of investment will need to be attracted from the private
sector. The European Commission has revealed that it could plough
£30 million into research. This could be attracted to a proposed
test centre which is planned for Aberdeen. The Scottish and UK
Governments should work together to secure funding.
77. Looking ahead to the 2020 to 2030 period, it is critical
especially critical for generation on the Scottish islands to
be linked into an offshore electricity grid network which would
interconnect with the Irish and Atlantic sea developments to the
south, and Norway and Iceland in the North. Furthermore, the creation
of an offshore HVDC power station and onshore control capability
to harness the future offshore wind and marine energy sources,
whilst also controlling power flows to and from northern Europe,
could maximise economic and social benefits for the islands by
claiming a portion of the transmitted energy value for their economies.
WHAT CHALLENGES
WILL HIGHER
LEVELS OF
EMBEDDED AND
DISTRIBUTED GENERATION
CREATE FOR
BRITAIN'S
ELECTRICITY NETWORKS?
78. The Energy Savings Trust has estimated that microrenewables
could potentially supply as much as 30-40% of the UK's total electricity
demand by 2050. Short-term progress depends on Government support
for the industry in the current economic downturn by helping to
maintain orders and removing the planning barriers so that it
can contribute towards the 2020 target and build towards 2050.
79. SCDI favours feed-in tariffs with an upper capacity limit
at a level which is complementary to the ROCs system and does
not undermine investor confidence in it. SCDI believes that feed-in
tariffs could better support an expansion of smaller scale and
decentralised renewable electricity schemes including domestic
microgeneration, onsite and community owned renewables. It recognises
the strong case for front-loading this support to stimulate demand.
80. The Scottish Renewables Forum has highlighted that
small generators are charged as if they are using both the transmission
and distribution networks all of the time, but the power that
they generate often does not reach the transmission system. It
is promoting the concept of a "gross-net" model in which
the small generators would pay for the amount of transmission
which they actually use.
81. One model for the new electricity networks would
include more large-scale renewables, local self-sufficient networks
and some commercial micro-generation. This would mean that suppliers
need to look at new business models to maintain their revenues
and there would be different regulatory pressures. The system
would change from a supply driven to a customer driven model.
Customers would focus on both economic and environmental value,
using a wider range of products and services. Electricity would
both flows to users and back from distributed generation, supporting
intermittency management. CO2 emission reduction and wider services
would drive energy company revenue.
82. While offshore grids are being planned and constructed,
a temporary solution would be possible if smart-grids are piloted
for decentralised energy in north of Scotland and on the islands.
This would involve the electricity generated from these variable
power sources supplying local consumers and industries when it
is available and the national grid supplying the electricity when
it is not. This would enable the Government and National Grid
to test the impact of more unpredictable power on the network
and help to develop larger smart-grids. Hydrogen transport and
storage are also potentially future options in these areas.
83. Higher numbers of electric vehicles would increase
demand, provide distributed storage capacity and smooth levels
of electricity demand on the grid. Battery manufacturer Axeon
Holdings has calculated that 5,000 electric light good vans would
result in carbon emissions reductions of 43,585 tons per year
and increase electricity demand by 29,190 mWh (or 54,987mWh for
heavier box vans). More electric vehicles will probably not cause
problems in electricity supply in the short term. Early adopters
are likely to be light good vehicles and they can be charged overnight.
This would result in no significant extra demand on the grid and
smooth demand. Smart metering and new tariffs could be needed
to make efficient use of electricity and avoid overloading the
grid, especially if Plug-In Hybrid Electric Vehicles prove popular
following their introduction in 3-5 years. Fast charging would
place significant demands on the grid: overnight is better.
84. There are a number of associated challenges for Britain's
electricity networks. At present, there is a serious lack of public
charging infrastructure in most parts of the country—there
are only two locations in Scotland, both in Glasgow— and
insufficient progress has been made by Government in sorting out
the regulatory issues. Clarity is needed on how the electricity
supply infrastructure will be developed and charged for (public
ownership/public good or competitive market) and on smart metering
to get the best value from current electricity generation.
WHAT ARE
THE ESTIMATED
COSTS OF
UPGRADING OUR
ELECTRICITY NETWORKS,
AND HOW
WILL THESE
BE MET?
85. Achieving the renewable electricity targets will
depend on investment in the expansion transmission capacity on
a scale which has not been delivered for many years. But any delay
could temporarily sterilise the development potential of large
areas of the country, which might otherwise provide suitable sites
for new generation, and severely restrict Scotland's renewable
energy potential.
86. According to a recently published report by Ernst &
Young report for Centrica an investment of £234 billion will
be needed by 2025. Last June it estimated that £165 billion
was needed by 2020. Since then the cost of renewables has increased
significantly, especially for offshore wind, due to component
inflation and the weak pound. Investment rates will have to be
double what they are at present.
87. The costs broken down in the Ernst & Young report
include: £12 billion for an offshore transmission grid; £12bn
for onshore grid reinforcement; £4.2 billion for enhancement
to the distribution network; and £13.4 billion for smart
metering.
88. Electricity consumers will help meet the costs of
upgrading UK electricity networks. The cost of grid infrastructure
improvements could add about £15 per year to the average
UK household electricity bill. Therefore, when decisions are made
on investment, it is important that the costs to consumers now
and in the future, including the estimate by the Stern Review
that climate change could lead to a loss of between 5% and 20%
of annual global GDP, are taken into account.
89. There may also be a role for more direct Government
support, especially at this time. Other governments, such as the
US, appear to be intervening more directly. The Climate for
Recovery study for HSBC found that the UK is investing $2.1
billion in green stimulus (6%), less than a third of France's
$7.2 billion (21%), less than a sixth of Germany's $13.8 billion
(13%) and 110 times smaller than China's $221.3 billion (38%).
The recent Canadian Government Budget included a $1 billion green
infrastructure fund for transmission lines to connect renewable
energy projects.
90. Lord Stern has said that the world should spend $400
billion, 20% of the planned global fiscal stimulus, to support
low-carbon technologies such as home insulation and renewable
energy. He believes that public investments being made now must
not lock in carbon emissions. This investment would have long-term
benefits. A report for World Resources Institute found that every
$1 billion spent now in the US on technology such as energy efficiency
and renewable energy would generate 30,100 jobs and save the economy
$450 million a year.
91. The UK should explore international sources of funding.
The Scottish and UK Governments have independently been speaking
to sovereign wealth funds in the Middle East. This year the European
Investment Bank is increasing its lending to renewables sector
to about a fifth of its lending for energy projects—a total
of 3 billion euros in 2009, up from 2.3 billion in 2008 and 2
billion in 2007.
HOW CAN
THE REGULATORY
FRAMEWORK ENSURE
ADEQUATE NETWORK
INVESTMENT IN
LIGHT OF
THE CURRENT
CREDIT CRUNCH
AND RECESSION?
92. The carbon price has fallen from rates of between
30 (£28) and 40 (£38) per tonne a year ago to well under
10 per tonne today. This is reducing the value of carbon credit
which renewable electricity generators receive in the carbon trading
scheme and reducing the incentive for investment in the in low
carbon technologies. Decisions are being postponed though not
yet cancelled outright.
93. National Grid has said that the Government needs to introduce
fresh incentives to guarantee that over £100 billion of investment
is made over the next decade to ensure the stability of the power
grid. This could include placing a floor on the price of carbon
to boost investment in new nuclear and offshore windfarms.
94. The credit crunch and recession has made it more
difficult for network owners to fund investment. Charges are capped
at a level which does not at present create a high enough return
on investment to enable them to borrow money from banks. A recent
report by Ernst & Young that said that rates of return on
electricity projects would have to rise by a couple of percentage
points to satisfy investors. In response to similar pressures,
the new US Administration has increased the rate of return on
investment in order to fund a programme to build new networks.
The UK Government and Ofgem need to consider the UK's competitive
position.
HOW CAN
THE REGULATORY
FRAMEWORK ENCOURAGE
NETWORK OPERATORS
TO INNOVATE,
AND WHAT
IS THE
POTENTIAL OF
SMART GRID
TECHNOLOGIES?
95. Greater variability of the power supply to the grid
network will mean that the system needs constant balancing. Pump
storage technologies can help address this variability, providing
significant quantities of power at very short notice. However,
one barrier to the development of pump storage is that it is currently
treated and charged as electricity generation. In SCDI's view,
pump storage should be regarded in the regulatory framework as
storage and not generation.
96. The grid's character will have to change. A smart grid
is needed to go with smart metering. As generation becomes less
controllable, it will have to be more controllable. Customer load
will have to adapt to supply capability, for example demand from
electrical appliances could be remotely turned down at times of
lower supply. There is also the potential for more decentralised
networks. Network operators should be encouraged to accept newer
technologies like power electronics which will act as key enablers
for the smart grids of the future.
97. Smart grid technologies will not only enhance electricity
networks but also stimulate economic growth through competition
which automatically encourages innovation. They have the potential
to open new markets and revenue streams, and create several high
end jobs to serve them. The regulatory framework can encourage
network innovation to go hand in hand with market innovation.
IS THERE
SUFFICIENT INVESTMENT
IN R&D AND
INNOVATION FOR
TRANSMISSION AND
DISTRIBUTION TECHNOLOGIES?
98. SCDI has been told that it is not the scale of the
investment in R&D and innovation which is inadequate, but
rather that insufficient progress is being made from feasibility
studies to testing and proving these technologies. It may be that
stricter guidelines should be attached to public funding for R&D
and innovation to incentivise demonstration projects above fundamental
research.
99. The innovations which produce the next generation of networks
are likely to be made by the manufacturers such as Siemens. Utility
companies should be encouraged to approach them collectively with
clear indications of requirements. Industry consultations should
include a wider representation from the industry and not just
network operators. It is very important to understand the future
energy mix and the role of innovation to address these changing
requirements.
100. Particular attention needs to be given to innovations
in response to global warming. At present, increasing temperatures
would make transmission wires less efficient, which would mean
that even more electricity has to be generated.
101. There are a number of exciting and innovative projects
and developments in Scotland which aim to enhance the quality
of renewables projects and increase their rate of deployment.
If grid capacity is increased, there would be the potential to
undertake more testing here and to create centres of excellence.
WHAT CAN
THE UK LEARN
FROM THE
EXPERIENCE OF
OTHER COUNTRIES'
MANAGEMENT OF
THEIR ELECTRICITY
NETWORKS?
102. SCDI understands that no country in Europe or North
America has made much progress on restructuring their physical
electricity networks. Progress has been focussed on managing the
existing resources better by reducing costs.
103. A recent European study by Capgemini concluded that UK
electricity Distribution Network Operators lead the field on controlling
costs and reaching operational efficiency targets by employing
good outsourcing and performance management techniques. It suggested
that Europe can learn from the UK.
104. It is important to remember most of the countries
within Europe have different operational structures. The only
example of multi-national trading system to date is Nord-Pool
operating between Norway, Sweden and Finland. This could potentially
help aspects of managing integrated networks in the UK.
105. The experience in Germany offers an alternative
model for developing subsea infrastructure for offshore wind and
marine energy generation. It has passed legislation to "accelerate"
infrastructure via planning and finance by one Transmission System
Operator on behalf of groups of offshore projects.
March 2009
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