Extracts from NATTA's journal
Renew, issue 150 July-Aug 2004

7. Transmission Debate

Should we compensate long distance transmission with some form of subsidy (which would allow remote renewables to compete), or surcharge them, due to the energy losses involved?  OFGEM initially backed the latter position, while the government seems to want to  ‘leave it to market forces’ (‘cost reflective pricing’ as it’s called) which would still of course disadvantage remote generators. However, as noted in Renew 149, on Feb12th  Lord Davies suggested that some form of compensation  might be considered for remote wind projects in Scotland. This produced a critical response from Sir John Moggs, the chairman of Ofgem, in the Times, who said that the proposals were ‘unnecessary and misguided’. 

The debate on this issue was given an airing when the House of Lords looked at amendments to the Energy Bill.  On Feb 24th the Minister was asked for his reactions with, Lord Jenkin of Roding, raising the stakes: ‘I cannot remember an  occasion when there has been quite such an open, blatant disagreement between a regulator and a department of state’. Lord Whitty, the Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs, dodged the question neatly: ‘The row may have been very public, but until I came into the Room I was not aware of it’.

 But it would not go away and resurfaced in various forms during the subsequent debate on amendments concerned with the proposal within BETTA, the new GB-wide Trading and Transmission arrangements, for linking the Scottish system and the English and Welsh system under common trading and management/co-ordination arrangements. For example, on Amendment 116B, which sought to adjust Clause 107 on the organisational aspects of ‘transmission activities requiring license’, Lord Tombs commented: ‘we should recognise that there are real differences in Scotland from England and Wales. They are differences of geography, history and organisation. Those lie at the root of the argument. National Grid Transco is a separate outfit and not at all connected with the generators in England and Wales. It has enjoyed a single transmission operator and owner organisation. The Scottish boards are commercially independent and are jealous, or suspicious, of the notion that their system will be controlled by someone who has a competing, in a sense, system. It does not compete geographically but in terms of arguments on tariffs and similar issues.’

Lord Whitty responded  ‘The DTI and Ofgem are of the view that certain synergies can be gained from having the same person undertake systems operator and systems provider functions. Of course, the National Grid in England has combined the two roles for 10 years and in general it has delivered considerable cost savings from being able to trade off the cost of taking an action on the operator side of its business with the cost of taking an action on the transmission owner or systems provider side of its business. There is no particularly good reason for ending that synergy.’  The amendment had proposed having a separate arrangements for Scotland, since otherwise Scottish interests might be sidelined, but Lord Whitty was not convinced. ‘Both Ofgem and the DTI believe that the systems operator can be prevented from discriminating in favour of its own transmission assets effectively through the conditions of the license’.

Then on Amendment No. 117A concerning the proposal for ‘transitional relief’ while two systems were brought into adjustment, Lord Davis commented:  ‘The GB system operator has been charged with developing a GB charging methodology that is cost-reflective and non-discriminatory. That means that generators whose connection to the system imposes the greatest cost will pay the highest charges. As generators in Scotland and the north of England are located furthest from centres of demand, they will face the highest charges. However, as we discussed previously, the Government intend to take measures to mitigate the impact on renewables. At the same time, it should be recognised that Scottish generators will no longer have to pay any  inter-connector charges or a separate charge for access to the England and Wales market.’

Lord Tombs was still not happy with having the same system for both regions. ‘I keep saying that the geography is different, and that in Scotland a much sparser and simpler transmission system has developed. In many ways it is simpler because the Scottish boards historically did things differently from those in England and Wales. There is a physical case for different charges in Scotland. Quite apart from that, is the question, if we do not have transition, of the impact on the trading arrangements. It would be extremely difficult and, I think, unacceptable to the Scottish boards.’

Lord Davis responded ‘The proposal is that BETTA will operate on the basis that there is no discrimination between the generators. I understand the arguments made on the transitional position; I merely indicate that we do not think  that the case has been made out, in terms of unfairness and so on. The implications of the amendments are clear enough: they would discriminate against generators in England and Wales, which would have to pay increased charges as a result of the transitional relief granted to Scottish generators. That is a straightforward distortion of competition. I understand the motive behind it, but let us not make any bones about the fact that we seek to create a fair, open and transparent market. The amendments would certainly distort that. On that fairly  important point of principle, I hope that the amendment might be withdrawn.’   It was.

In the Lords’ last sessions on the Bill, in March, Lord Whitty returned to the renewables subsidy issue with the following explanation: ‘Ofgem and DTI both agree that, in general, we should have a transmission charging methodology that is cost reflective, non-discriminatory and that promotes competition in generation and supply. This will encourage transmission assets to be built and charged for in the most efficient way. In turn, this will minimise the cost to the consumer. Ofgem believes that this sort of charging methodology should apply to all generators, including renewables. However, the Government must, of course, take its wider energy  objectives into account. While Ofgem plays a part in delivering these objectives as recognised by the breadth of its statutory duties, decisions about trade-offs between environmental and economic objectives are ultimately for government and for Parliament.’

On this basis he said the government ‘raised the question of whether special dispensation was needed for those renewable generators in peripheral areas that have high renewable potential and that would otherwise be impacted by the highest transmission charges in order to ensure that the Government’s renewable targets can be met’  but he noted  ‘Ofgem continues to disagree with any intervention on transmission charges, including any dispensation for renewables. The Government believe that they are entitled to consider a dispensation on transmission charges for  renewables if that safeguards their wider energy objectives.’

* The Bill then moved to the Commons for its second reading, where this issue seemed to be of less concern- see Renew 151