Memorandum by Scottish Power Limited and
Scottish Power Renewable Energy Limited
INTRODUCTION
1. This memorandum is on behalf of Scottish
Power Limited and ScottishPower Renewable Energy Limited (together
"ScottishPower"). Scottish Power Limited is a subsidiary
of Iberdrola SA. It is an energy business that provides electricity
transmission and distribution services, supplies more than five
million electricity and gas services to homes and businesses across
Great Britain (GB), and operates electricity generation, gas storage
facilities and associated energy management activities in the
UK.
2. ScottishPower Renewable Energy Limited
(the UK's largest wind developer) is part of Iberdrola Renovables,
which is 80% owned by Iberdrola SA. Iberdrola Renovables is the
largest developer of renewables globally.
3. The Iberdrola Group operates in 40 countries
worldwide and has interests in renewable electricity generation
(wind, hydro, solar thermal, tidal), thermal electricity generation
(coal, gas, nuclear), transmission and distribution, gas storage
and energy services. The overall Group has over 42,000MW of installed
electricity generation capacity and supplies energy to over 25
million points of supply.
GENERAL QUESTIONS
(i) How achievable are both the EU's
general 20% and the UK's national 15% renewable energies target?
4. The targets set out in the Directive
will be extremely challenging at both an EU and UK level. In particular,
the UK has to increase the proportion of energy it derives from
renewable sources from current levels of around 2% to 15% by 2020.
5. It is imperative that all sectors involved
(electricity, heating and cooling and transport) play a part in
reaching the UK's renewable energy target. Although Government
have not yet advised how this target will be shared between the
sectors, it is anticipated that the target for renewable electricity
could be in the region of 40% by 2020, almost a threefold increase
on the current target of 15% renewable electricity by 2015.
6. Furthermore, the 10% mandatory target
for bio-fuels will be extremely challenging, due to the needs
of agriculture and the intense competition for such fuels from
other industries, as will the targets for heating and cooling
(anticipated to be in the region of 10%) as large scale development
in these sectors is not so advanced. Ultimately, this means that
the targets for the electrical renewable technologies will be
even more challenging in the short to medium term.
7. Delivery in the UK is already constrained
by planning and grid access issues. The new target will increase
the urgency of addressing these issues and will also make it necessary
to strengthen the supply chain. Solutions to these problems must
therefore be prioritised to ensure that progress continues to
be made towards the target.
(ii) How coherent are these proposals
in the context of the EU's energy policies in general and in the
Third Energy Package in particular?
8. These proposals will contribute significantly
to the development of a lower carbon electricity supply and are
consistent with the development of a liberalised EU energy market.
9. We are aware of the UK Government's initial
concerns that the 20% renewable energy target combined with a
20% energy efficiency target (as proposed by the Third Energy
Package) would result in a low carbon price, based on a 20% CO2
reduction. However, we understand that the latest assessment of
the figures suggests that this is no longer thought to be a significant
risk.
(iii) To what extent are these targets
capable of improving the EU's security of energy supplies?
10. It is important that there is an appropriate
mix of energy generation in the system and no over dependence
on any single generation technology. From a UK perspective, an
increased component of renewable energy will reduce dependency
on imported fossil fuels. However, it will be necessary to maintain
sufficient back-up in the form of thermal plant. This must remain
a fundamental part of the generation mix, in order to balance
out the variability of renewables.
GRID ACCESS
(iv) How effective has the existing
legislation (2001/77/EC) been in encouraging grid access for renewable
energy generators?
11. The Great Britain system for electricity
is self despatched, so the priority despatch provisions of 2001/77/EC
are not relevant; connected renewable generators have generally
been able to run whenever they are available. The main issue has
been the provision of sufficient infrastructure to connect the
new renewable generation. ScottishPower has been at the forefront
of this work, to which Directive 2001/77/EC is not relevant.
12. The Directive also has optional provisions
concerning priority access for renewables. While helpful in principle,
these provisions need to be approached with some caution, since
it is necessary that thermal plant also has sufficient grid access
and connections.
(v) To what extent does grid access
remain a significant barrier to increased consumption of renewable
energies? Is it consistently a problem across all Member States?
13. In GB, the biggest constraint on renewable
development is currently the planning process. However, gaining
a grid connection is also an important constraint. The most important
way to resolve this, as noted above, is to improve the electricity
network infrastructure. This requires both regulatory approval
and planning consent for new lines. The latter procedure can lead
to long delays.
14. As an interim measure, it is also important
to utilise existing infrastructure more efficiently and ScottishPower
is supporting a number of initiatives in the Transmission Access
Review to this end.
(vi) How does Use of System charging
affect grid access for renewable energy generators? How far can
the different levels of renewable energies take-up in different
Member States be attributed to Use of System charging and cost
sharing rules?
15. The locational Use of System charging
methodology introduced in England & Wales in 2004 and extended
to Scotland in 2005 results in very high charges for renewable
generators remote from the GB load centre in the south east of
England. The charge is largely based on a generator's location
and is designed to reflect the long term investment cost of supporting
additional generation at that location. Since there is a significant
north-to-south flow on National Grid's system reflecting the location
of power stations near primary fuel sources in the north and the
large load centre in the south east, then the locational charges
reflecting this imbalance are high in the north of England and
in Scotland and low in the south. However, there are real questions
as to whether the current system achieves the desired outcome
in an equitable manner.
16. Under the current system, a 100MW wind
farm in the north of Scotland will pay £2.2 million per annum
in transmission Use of System charges whereas a 100MW power station
near London would be paid £0.6 million per annum for connecting
to the system. As, by their nature, renewable resources are often
distant from the load centre then this locational charging methodology
significantly increases costs for the GB renewables industry and
is in our view disproportionate.
17. In terms of transmission charging, GB
renewable generators are significantly disadvantaged when compared
with those in other Member States. Half the Member States do not
charge generators of any type for use of the transmission system
on the basis that it is more appropriate to levy all of these
charges directly on suppliers. Of the Member States that levy
charges on generators, half employ a usage or postage stamp approach
and recover a substantially smaller proportion of system costs
from generators than the GB locational methodology. This group
includes the renewable energy market leaders of Denmark, Germany
and Spain, with Denmark further exempting renewable generators
from the transmission charges.
18. The GB charging methodology is one of
only six locational methodologies in Europe and the sharpness
of the GB locational signals does not bear comparison with other
locational signals in Europe. The European Transmission System
Operators (ETSO) concluded in their June 2006 "Overview of
transmission tariffs in Europe" that average GB charges were
only comparable to Greece, which also operates a locational charging
system. Greece, however, exempts renewable generation from transmission
charges. The report also concluded that charges in Scotland are
significantly above the EU average, are at least five times above
the Greek average and in Northern Scotland are in the order of
30 times greater than the Danish average.
(vii) What impact do the various systems
of reinforcement planning and work have on encouraging renewable
generation? How important is the issue of constraint in increasing
Member States' renewable generation?
19. Reinforcement and connection in the
UK is provided under an "invest then connect" policy.
This requires the need for the capacity to be agreed in a binding
agreement and financial commitment provided by the generator prior
to the connection works being started. Thus, the generator needs
to have a high level of confidence in their project before they
will enter into the agreement. This policy results in delays in
generation being connected as well risk that often discourages
developers from proceeding until their project is consented.
20. The current connection and reinforcement
policy also requires the transmission and distribution system
operators to provide terms for connection on a non-discriminatory
basis, regardless of how advanced or robust their project is.
No allowance can be made for the likelihood of a project's success
and therefore the system requirements are often over designed,
triggering excessive time and cost.
21. In the UK, Ofgem have allowed funding
for grid infrastructure but the planning process is not facilitating
the development and investment in power networks required to meet
the 2020 targets. Integrated planning is essential to reconcile
town and country planning issues and grid reinforcement programming.
22. This constraint has a significant impact
as renewables growth is tempered by the need to accommodate traditional
thermal generation within a system of rules that were created
for a significantly different generation mix. For example, National
Grid is cautious about modifications to the charging system that
would adversely affect traditional thermal generation. While this
is generally appropriate, such caution should not go as far as
ruling out significant improvements in facilitating the participation
of renewables where this can be achieved at a proportionate and
modest cost elsewhere.
(viii) To what extent is further co-ordination
of National Regulatory Authorities needed?
23. In general, the problem does not involve
additional co-ordination between National Regulatory Authorities
as the development constraints on renewables are mainly at the
national level. It is at that level that there is a role for the
regulators.
24. In the UK, Ofgem have traditionally
been cautious about allowing networks expenditure relating to
climate change policy. However, some change in this approach is
now evident; for example, the RETs programme was approved, leading
to significant infrastructure improvements to support renewables
in Scotland. But these developments were more appropriate to the
UK's previous target of 15% of electricity; to make significant
progress toward the EU 2020 targets will require more strategic
thinking to facilitate a new regulatory regime especially for
early (or advance) renewable investments that may be viewed as
"at risk". To this end, larger financial commitments
are required from Ofgem. At the moment financial investment is
only being made if projects are coming to fruition. In some parts
of Wales, for example, the renewable resource exists, but development
is slow coming forward as there is currently no grid sufficient
to exploit renewables on a large scale.
(ix) How far do current regulations
inhibit access to the grid?
25. Current regulations do not encourage
existing generators to release or sell transmission capacity in
the short term nor do they take account of the intermittent nature
of wind generation and the resultant requirement for less infrastructure
per MW of installed capacity than for conventional generation.
26. Medium to long-term capacity trading
products need to be identified to encourage capacity sharing to
enable more generation to be connected to the grid. Such products
should provide sufficient access firmness to enable developers
to finance their generation projects and allow the owners of existing
and new generation to negotiate their own capacity sharing arrangements.
Non-firm access products should be developed which could offer
potential investors a reasonable degree of certainty of returns
perhaps in conjunction with a firm product for part of the required
capacity. This would facilitate the introduction of a limited
connect-and-manage approach to connection to the transmission
system. Non-firm access products have a key role to play in launching
the marine renewables industry and ensuring that development of
marine generation technologies is not lost to other countries.
27. Network planning standards should be
amended to allow renewable generators to accept a lower security
of connection than the current GB Security and Quality of Supply
Standards require. This could both release additional capacity
using existing assets and reduce the cost of upgrades.
SUPPORT SCHEMES
(x) At what level should the EU be
involved in harmonising or regulating support schemes offered
by Member States to encourage renewable energy generation?
28. It is crucial that existing support
schemes in each Member State are protected and that investor confidence
in renewables is maintained through long-term support frameworks.
29. Each Member State should therefore have
the freedom to choose a scheme to meet the specific needs of their
domestic situation and in a manner consistent with the liberalisation
objectives of the EC ie existing regulatory markets, industry
commitment and cost/risk to the consumer.
30. However, there is merit in considering
the potential of regional renewable markets ie for Member States
that form a closely interconnected market, or have similar support
systems. This could provide additional flexibility to ensure that
the targets are achieved in the most cost-effective way.
(xi) What impact have the various schemes
in operation across the Member States had on encouraging renewable
energy? How have these schemes affected take-up both by producers
and commercial and domestic consumers?
31. When assessing the impact on support
schemes on encouraging levels of renewable generation, each Member
State must be considered in isolation. For example, the Renewables
Obligation (RO) in the UK has been highly successful in attracting
high levels of investment in renewable electricity generating
technologies, but issues beyond the RO, such as planning, grid
and availability of wind turbines, have prevented their potential
being maximised to the full.
(xii) Will cross-border renewables
markets be genuinely affected by the existence of a variety of
support schemes? Is necessary investment hampered by lack of market
harmonisation?
32. It is crucial that support schemes in
each Member State are protected, otherwise confidence in investing
in any EU renewables market will be eroded and targets will not
be met. However, there is merit in the flexibility that cross
border trading can bring in meeting overall EU 2020 targets in
a cost effective manner. If this is done on a voluntary basis,
investments should not be hindered by the lack of full harmonisation,
as investors will be free to choose the market that is most beneficial
to them (ie market will decide rather than regulation).
33. Nevertheless, each country needs to
reach their baseline target before advancing to a "free trade"
system. This would ensure that Member States participate in achieving
their targets and not simply purchase "credits" in an
effort to avoid implementing renewable development.
(xiii) To what extent would the enhanced
use of Guarantees of Origin certificates require the harmonisation
of support schemes?
34. We think that any gains from the enhanced
use of Guarantees of Origin (GoO) certificates are small compared
to the damage that would occur to the level of renewables development
as a result of disturbing current support schemes. Any enhancement
of the use of GoO certificates should be considered against this
backdrop.
21 April 2008
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