6.Scotland has an abundance of natural resources that can be used for renewable energy. In 2019, 97.4% of electricity generation in Scotland was from renewable energy sources. When we visited Orkney, we heard about the potential of Orkney, Shetland and the Western Isles to provide 50% of UK’s total energy needs. Net zero targets are now law; the UK Government has set a target of net zero by 2050, and the Scottish Government has set a target of net zero by 2045. We heard evidence that targets and commitments by UK Government around renewable energy and net zero were setting the right tone, but that these were not sufficient to ensure delivery. Professor Keith Bell—UK Energy Research Centre Co-Director, University of Strathclyde—told us: “those targets now have to be based up with concrete policies to deliver the outcomes”. We found a consistent theme within written evidence, which emphasised that there must be supportive policy incentives specified in much more detail than the current Energy White Paper provides. The UK Government has said that sectoral strategies and the overarching net zero strategy will be published before COP26 in November 2021.
7.The potential scale of renewable energy in Scotland is huge. The abundance of natural resources can benefit individuals, organisations, and businesses across the UK. We welcome the targets set by the UK Government for net zero and look forward to seeing how the overarching net zero strategy will impact the renewable energy sector in Scotland and look forward to seeing how this will be reflected in the upcoming Spending Review.
8.Scotland has the potential to generate a large amount of energy from renewable sources. However, one of the key challenges highlighted to us is the transmission of energy from generation to consumer via the grid; electricity needs to get to where it can be used. Professor Keith Bell—UK Energy Research Centre Co-Director, University of Strathclyde—told us: “Network capacity is essential, and it has to be in the right places at the right capacity at the right time”. He noted that one of the difficulties of this set-up would be knowing where energy would be generated, sufficiently in advance, to enable grid investment. Without a robust grid, the energy cannot be delivered securely to consumers. Bless Kuri—Head of System Planning, Scottish and Southern Electricity Networks—noted: “until we get a certain level of certainty about projects going ahead, we are not able to make a robust investment case in the grid”. Matthieu Hue—Chief Executive Officer, EDF Renewables—commented that there should be better preparation for investment in the grid: “More can be done to anticipate the investment needed to support renewable projects”.
9.Steven McMahon—Deputy Director, Electricity Distribution and Cross Sector Policy, Ofgem—told us that changes to the grid are needed to hit UK Government targets on offshore wind “particularly around how transmission is planned, developed, and connected”. He also explained that the UK needs a grid that will support the new demands on electricity for example, the increase in electric vehicles and changing the way we heat our homes, and stated: “We need to make sure that any ambitions the Government have around that are not held up by a lack of capacity”.
10.With regard to timescales of grid development, Professor Karen Turner—Director, Centre for Energy Policy, University of Strathclyde—was concerned about the pace of change: “when we are talking about net zero, 2050 sounds a long way off, but it is not, and a lot of action needs to be taken very quickly and rapidly”. Bless Kuri told us how developing the grid at the current pace of change makes the net zero targets very challenging to meet:
We see that the current system is rather congested at the moment. Going at the normal pace, it will be very challenging to hit those targets, so we believe there needs to be some changes around how decisions are made about infrastructure proposals, the planning process itself.
He continued his concerns later in the evidence session:
We also need to see bolder decisions being made by Ofgem in particular, because the current approach looks at certainty of need before investments are progressed. The slight challenge we have here is that there are lots of interdependencies. If we wait for that, if you get to much later in the decade before you make those concrete decisions, there will not be enough time to complete them.
11.The grid is critical for renewable energy to reach consumers. Urgent investment is needed in the grid to ensure that net zero targets are met. The grid needs to be reinforced and expanded to ensure that renewable energy generated in Scotland can connect to the grid and benefit the rest of the UK. We recommend that Ofgem completes a review of the grid in Scotland as a matter of urgency, and at the latest by the end of 2022 to implement changes in good time for the 2045 target. Ofgem should make bold decisions by prioritising reinforcement of the grid in areas where there is potential for a high renewable energy yield. Since net zero targets have already been set in law, Scotland should be enabled to play its part fully in the renewable energy mix of the UK.
12.Transmission Network Use of System (TNUoS) charges are set by Ofgem. These charges are paid by developers to transmit their electricity to customers, and the cost is passed on to consumers as a “network” cost in their energy bills. Transmission charges are described by National Grid as recovering “the cost of installing and maintaining the transmission system in England, Wales, Scotland and Offshore”. Ofgem publishes transmission charges each year on 31 January, and updates take effect from 1 April. Professor Keith Bell—UK Energy Research Centre Co-Director, University of Strathclyde—outlined what transmission charges were set up to do: “The TNUoS regime is an attempt—imperfect as it may be—to reflect the costs of the network as part of that overall cost minimisation”.
13.Transmission charges vary and are subject to annual review, this affects how much developers must pay to transmit the electricity they produce. Claire Mack—Chief Executive, Scottish Renewables—told us that Members of Scottish Renewables say the volatility of transmissions charges make it “almost impossible […] to be able to get those costs in a meaningful way into their projects”. Lucy Whitford—Managing Director for UK & Ireland, RES—followed from this stating “it is hard to make investment decisions, because you don’t ultimately know what those charges will be in the future”. Bless Kuri—Head of System Planning, Scottish and Southern Electricity Networks—stated that “the poor predictability of this cost”, affects the business cases for these projects. Neil Douglas—Director, BVG Associates—commented on renewable energy generators: “If they don’t know what the TNUoS charge will be in five, 10, 15 or 20 years’ time, that is an uncertainty. The only way that they can finance that project is to price that risk, therefore they may be pricing themselves out”. During our visit to Orkney, Dr Gareth Davies—Managing Director, Aquatera—told us how the volatility is specifically affecting investment in Orkney:
Ranges have gone from £150 down to £50 in Orkney [per KWh]. […] To go to the investment proposition, if you are going to investors and saying, “Your access to market could vary from here to here,” it is an incredibly difficult economic proposition to make.
14.The evidence we have heard has highlighted issues around the volatility of transmission charges. The short-term volatility of transmission charges is a barrier to the development of renewable energy as it affects confidence in investment and the future cost of a project.
15.Scotland is a net exporter of electricity, and in 2020 31.8TWh of renewable electricity was generated in Scotland. This is the equivalent of powering all households in Scotland for almost three and a half years. The most recent statistics from 2019 show the net exports of electricity from Scotland were 19.3TWh. Professor Keith Bell—UK Energy Research Centre Co-Director, University of Strathclyde—pointed out that “renewable generation in Scotland to a large extent depends on the GB market and consumers within England to earn its revenues. That requires transmission network capacity, not just within Scotland but also down through England”.
16.The Transmission Network Use of Service (TNUoS) charges methodology is designed to have locational differences in the tariff, this has been the case since privatisation in the 1990s. Steven McMahon—Deputy Director, Electricity Distribution and Cross Sector Policy, Ofgem—summed up why locational transmission charges exist: “The further the electricity has to travel, the more expensive it will be”. Claire Mack—Chief Executive, Scottish Renewables—told us that the system we have is not built for renewable energy:
It was devised about 30 years ago in a very different era, when we did not have the renewables-led system that we are aiming for now. The incentive within it to place generation closest to demand does not fit with what we need now, which is probably to harness the best of resources as quickly as possible in order to achieve our net zero ambitions.
17.We received evidence about the different locational charges across the UK and how there is a higher impact on Scottish developers. In Scotland developers must pay to connect to the grid, whereas in Wales developers are paid to connect to the grid. Scottish Renewables stated that: “TNUoS charges for a wind farm in Scotland will increase £4.50–£5.50 per MWh while an equivalent wind farm in Wales will get paid £2.80 per MWh”. This evidence pointed at transmission charges being a barrier to renewable energy development. When asked about this, Matthieu Hue—Chief Executive Officer EDF Renewables—stated: “overall, it can impact the competitiveness of projects”. Bless Kuri—Head of System Planning, Scottish and Southern Electricity Networks—reported that he had been told transmission charges do affect Scottish renewable energy development: “Our stakeholders, our customers, tell us that this is an issue for them in terms of achieving commercial viability for their projects”. The SSEN transmission charging stakeholder feedback report shows that out of the stakeholders they contacted for their survey, 84% said that TNUoS presents a barrier to the delivery of future projects.
18.It can be difficult to prove that transmission charges are a barrier to renewable energy development. Professor Karen Turner—Director, Centre for Energy Policy, University of Strathclyde—highlighted: “we don’t know the counterfactual, we don’t know how many projects could have been attracted”. Steven McMahon from Ofgem was asked if transmission charges being a barrier to renewable energy development was difficult to quantify, he replied: “It is, just in terms of establishing that counterfactual, but whether it has been a barrier to our renewable targets, I don’t think it has”. However, a number of our witnesses have made it clear that locational transmission charges are a barrier to renewable energy development.
19.Ofgem is considering transmission charges in an internal review, which has been ongoing since 2018. When we asked Ofgem about conducting the review of transmission charges, Steven McMahon stated: “It is something we are pursuing. […] we constantly need to check that our regulation is fit for purpose, and we are looking at whether these arrangements remain fit for purpose for a net zero world, but there is a lot happening”. The UK Government told us it has discussed transmission charges with Ofgem and were confident Ofgem was looking at the issue. Anne-Marie Trevelyan MP—Minister, Department for Business, Energy & Industrial Strategy—said:
I am comfortable that Ofgem has definitely noted this as a potential issue now and also does recognise the critical importance of renewables in achieving net zero. It is at the moment considering whether the current transmission arrangements are right for the future and it is looking at the volatility of those transmission charges as it thinks about how this goes forward.
20.Locational transmission charges weigh more heavily on developers in Scotland when projects in other areas of the UK, like Wales, are paid to connect to the grid. The financial burden of transmission charges and grid investment needs to be justly shared across the UK and not fall heavily, and unjustly, on the developers of renewable energy projects in Scotland. The current review by Ofgem about locational transmission charges is not happening at a fast-enough pace.
21.We recommend that the UK Government specifies that, as part of its internal review, Ofgem must consider the financial burden of transmission charges in Scotland. Ofgem should consider the long-term impacts on net zero targets and aim for a way to ensure renewable energy projects have the chance to flourish over the next 30 years, rather than pushing for a short-term, lowest cost view. Ofgem should publish the result of their internal transmission charges review as soon as practicable, and certainly within six months.
22.Ofgem (the Office of Gas and Electricity Markets) is the independent regulator of the gas and electricity market. Its role is to protect consumers now and in the future by working to deliver a greener, fairer energy system. Ofgem considers that this role implicitly includes net zero within its aims: “We already have a duty to protect future consumers, which we interpret as a full commitment to achieving net zero at lowest cost”. Neil Kermode—Managing Director, European Marine Energy Centre (EMEC) Ltd—responded to this in a later evidence session:
Ofgem kept saying in evidence that it was all about doing things for the lowest possible cost. […] The point is this: if we go for the lowest cost, we will fail to achieve the maximum market. We will end up with something cheap that barely works, as opposed to something that is excellent.
23.Throughout written and oral evidence there was an acknowledgement that net zero was considered by Ofgem, but that it is not prioritised to a sufficient degree. Bless Kuri—Head of System Planning, Scottish and Southern Electricity Networks—summed up those concerns:
We still feel there is a case for the Ofgem remit to be widened to properly cover net zero. At the moment, we think there is probably more focus on the shorter term, and maybe on the costs borne by the specific consumers of electricity; whereas when you open the agenda to truly net zero it is not just electricity consumers, it is everyone affected.
The UK Government’s view is that net zero “is sufficiently defined in that primary objective to protect both current and future consumers as it stands”.
24.Ofgem is considering net zero targets in their planning. However, we are convinced by significant evidence to suggest that more emphasis should be put on net zero and this should be made explicit and formalised within Ofgem’s remit. We recommend that the UK Government amend Ofgem’s statutory duties to consider net zero targets in all its decision making, alongside the duty to protect the interests of existing and future consumers.
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15 The initial target set out in 2008 was an 80% reduction of 1990 levels by 2050. This was amended by to net zero by 2050
16 Scottish Government, , December 2020
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