Supplementary memorandum by Centrica
INTRODUCTION
The Committee has asked for further information
on Ofgem's[7]
remit with regards to transmission investment necessary to meet
the EU's 2020 renewable target. The question is whether Ofgem's
remit would require changes to allow transmission owners ("TOs")
to take a more strategic approach to network investment.
TRANSMISSION INVESTMENT
TOs have a statutory duty to build, develop
and maintain efficient, co-ordinated and economic networks and
to facilitate competition in the generation and supply of electricity.
The process of setting the TO allowed revenue means that TOs can
only recover cost deemed efficient and economic by Ofgem. Therefore
TOs will generally only undertake transmission investment when
generators have signed a connection agreement and have made a
financial commitment to underwrite the network investments.
Strategic investment carries the risk of stranded
assets because generation projects that were anticipated may not
materialise. Stranded assets result in additional costs to TOs
or consumers (the former if the investment is not considered efficient
and economic).
Although user commitment is an important principle
for avoiding creation of stranded assets, because the network
is reactive, it can result in a piecemeal and delayed approach
to network reinforcement. This may appear cheaper in the short-term,
but may be more costly in the long-term. Because of the long lead
time of infrastructure projects, timing of investment is key,
in particular when there are only 12 years left to meet the EU's
2020 renewable target.
OFGEM'S
REMIT
Ofgem's primary duty is to protect the interests
of consumers, by promoting competition where appropriate and regulating
monopolies. In addition to its primary—overriding—duty,
Ofgem also has a number of secondary duties, relating to sustainable
development, the environment, security of supply and vulnerable
customers.
Part of Ofgem's secondary duty is to have regard
to Social and Environmental Guidance ("Guidance") as
issued by the Secretary of State.[8]
In short this means than when carrying out its duties Ofgem should
take into account the social and environmental targets set out
in the 2003 Energy White Paper. However, the Guidance is not prescriptive—as
the market is said to be best placed to deliver cost effectively
the outcomes sought—and does not cover implementation of
specific social or environmental measures that would have significant
financial implications—as these will be implemented by Ministers.
A CASE FOR
CHANGE?
Centrica is not convinced that a change in Ofgem's
remit is required to allow TOs to take a more strategic approach
to transmission investment, although a different interpretation
of the existing criteria regarding "economic and efficient
investment" and "interest of consumers" may be
necessary to take account of short-term as well as long-term costs.
Firstly, the existing framework (TO licences
and Ofgem's duties) allows for better co-ordination between TOs
and developers. A good example is National Grid's recent initiative
to introduce a co-ordinated connection application window for
Mid-Wales. This has meant that a group of developers could come
forward within a specific timeframe to underwrite the transmission
investment which probably would not have happened if individual
developers had applied for a connection within different timescales.
Secondly, we believe that under the existing
framework a more strategic approach is already possible by allowing
TOs to apply for planning consents and pay for public inquiries
before receiving firm commitments from generators. The cost of
this preparatory work is small compared to the actual cost of
the infrastructure project and is far outweighed by the potential
time savings. It should therefore—under certain conditions—be
considered economic and efficient and in the interest of consumers.
Finally, we are not convinced that the existing
framework prevents Ofgem from agreeing to actual strategic investments
as well as associated preparatory work where there are clear indications
that projects will come forward in due course, even if connection
agreements have yet to be signed. For example, offshore wind is
allocated to specific coastal zones. The Crown Estate has recently
released its round three leasing programme which details the size
and the location of the next round of offshore wind projects.
Potential parties still have to bid for development zones, but
as these projects are key to meeting the government's renewable
targets they are likely to go ahead and additional network capacity
will be required. Clearly under these circumstances strategic
network investment will be economic and efficient and in the interest
of consumers from both an environmental and a long-term cost perspective
though the challenge of minimising costs remains.
We recognise, however, that Ofgem may be restricted
with regards to certain strategic network investment. As mentioned
above, under the current Guidance, environmental measures which
would have significant implications for consumers or regulated
companies will be implemented by Ministers. It is our understanding
that the Guidance will be reviewed as part of the Renewable Energy
Strategy ("RES") consultation, expected later this month.
A final RES document setting out how the EU's 2020 renewable targets
will be delivered, is expected to be published in spring 2009.
This document could be the basis of strategic network investment
to be sanctioned by the government and/or Ofgem.
June 2008
7 Formally the Gas and Electricity Markets Authority,
the body that governs Ofgem. Back
8
Social and Environmental Guidance to the Gas and Electricity Markets
Authority, DTI, 23 February 2004. Back
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