Supplementary memorandum by E.ON
1. The Committee asked for supplementary
evidence on the remit of Ofgem and whether this was consistent
with delivering the transmission investment needed to support
delivery of the EU's renewable targets in the UK.
2. The principal objective of the Gas and
Electricity Markets Authority (the formal statutory body which
governs Ofgem), in carrying out its functions under the Electricity
Act 1989, is "to protect the interests of consumers.. , wherever
appropriate by promoting effective competition." Consumers
include both existing and future consumers.
3. The Authority also has to have regard
to guidance from the Secretary of State on the attainment of any
social or environmental policies, in carrying out its functions
under the Act. This guidance has to be laid before both Houses
of Parliament before it can be issued. The last guidance was issued
in February 2004 and refers to the 2003 Energy White Paper and
the policies in existence then.
4. Other obligations are also relevant including
its duty to contribute to sustainable development and to secure
a diverse and viable long-term energy supply.
5. We support this approach which gives
Ofgem a clear focus on the interests of consumers and helps avoid
it having to make judgements about competing energy and environmental
policy objectives, which we believe are more appropriately matters
for political judgement. This also helps create a regulatory framework
where companies operating within it know how the Authority is
going to approach regulation. However, in determining how best
to protect the interests of consumers, the Authority has to have
regard to other social and environmental goals.
6. The key question is whether these duties
permit the Authority to allow transmission companies to recover
through their transmission charges the funding they need to construct
the new transmission assets required to facilitate the delivery
of the UK's renewable energy targets, where some of this expenditure
may be needed before specific projects for connection to the grid
have been identified. We believe they do permit this if the right
conditions can be met.
7. In Great Britain, transmission licensees
operate a very "shallow" connection policy which means
that most revenue is recovered through Transmission Network Use
of System (TNUoS) charges. Only the costs of very local connection
assets are recovered through connection charges with the generator
concerned. The Authority allows transmission companies to recover
revenue through charges if it can be shown that there is a need
and that the investment is efficient. This is a valuable discipline
to ensure that large amounts of capital expenditure are not committed
abortively with customers ultimately carrying the cost.
8. At present the transmission companies
meet this requirement by building their networks in order to meet
the offers for connection that they have made to generators, and
do not build strategically to meet a predicted demand for generating
capacity, as the Authority does not allow them to recover the
relevant revenue on that basis because there is a risk that the
need for that capacity might not materialise.
9. We see no reason why the Authority's
duties would preclude a more strategic approach. The Authority
would need to be persuaded that the proposed expenditure would
in fact be required to connect the renewable generation needed
to meet the EU targets and that the expenditure needed to be committed
before some or all of the required renewable generation asked
for a connection.
10. This should be possible provided there
is a clearer understanding of where and when the expected generation
would be built than exists at present. Transmission companies
should be able to provide this evidence by reference to the Government's
own intentions for example to make available areas offshore for
renewable development under the "Round 3" Crown Estate
leasing process. Although the identity of successful bidders will
not be known until later in the process, the sites designated
for leasing and the level of generation they can accommodate will
be apparent earlier on. The Government's renewable strategy to
meet the proposed EU renewable targets to be published in 2009
could provide a more comprehensive basis for such a strategic
approach and should go further in identifying the required levels
and general locations of renewable investment and the required
transmission reinforcement. Reform of the planning system along
the lines of the Planning Bill would also assist in providing
more predictable timescales for renewable and indeed transmission
development.
11. This approach would be further supported
if the Secretary of State were to issue updated and more specific
Social and Environmental Guidance which would refer specifically
to the Government's policy for delivery of the EU renewable targets,
which the Authority would then have to have regard to in considering
the investment requirements of the transmission companies.
May 2008
| 
