What transmission loss fee changes mean for Scotland

The cost of electricity lost during its transmission has always been borne equally across the UK – until now. Generators now face a rule change – which could tilt the balance against some of the most remote Scots power projects.

Scotland is the windiest country in Europe.

It rains (a lot).

And our longer daylight hours mean even cloudy skies can deliver the sun’s rays for more of the time than you would think.

All that means one thing: our renewable energy resource is among the best in the world.

Much of the green energy we generate is produced far from customers, where that resource – the weather – is strongest.

The issue

Connecting that renewable energy to the customers who need it requires miles of cabling – and that’s where the issue of transmission losses must be faced.
When we generate and transmit power across the electricity network, some electrons will escape.

This can happen for a number of reasons: some are simple, like through heat that is generated as electrons pass through wires, while others are far more technical, like magnetising the iron core within transformers.

Overall, however, only a very small proportion of electricity will be lost.

To date, industry and customers have shared the burden of recovering the cost of transmission losses on an aggregate basis.

Generators cover 45% of the cost, customers 55% – no matter where the electricity in question was generated.

In practice this means that all generators agree to take a cut of 1% off of their actual generation figure and demand customers agree to add on just over 1% of their total demand.

That 1% figure can be seen as a ‘postage stamp’ payment – i.e. everyone pays the same, no matter where you are in the country. A wind farm producing 1,000MWh of electricity, for example, will only receive payment for 99% of the electricity it generates regardless of whether it was sited in Inverness or Oxford.

So what’s changed?

In June 2016, the Competition and Markets Authority identified that the current ‘postage stamp’ system is effectively distorting the market.

Acknowledging that a greater proportion of power will be lost between Inverness and London than if the same amount of power was generated in Ipswich, the CMA has instructed National Grid to change the current rules to ensure generators furthest from demand see a greater reduction in their total output than those closer to our big cities.
This CMA also required that this change is implemented by April 2018.

The numbers

The changes will have a very direct impact on Scottish electricity generators.
Under existing arrangements for those connected to the transmission network 1% equates to around 90GWh of electricity.

Under the new arrangements, that loss will increase to 251GWh (2.7%) of wind and hydropower generation – a significant increase.

The picture is even more complicated than that, however.

Under the new rules (unlike previously) there will be differences in ‘losses’ depending on the time of year, as well as the generator’s location.

Hydro generators may be hit the hardest by this change, given that higher rainfall in winter means a greater proportion of their output is delivered in the colder months.

Available data shows that transmission connected hydro in the North of Scotland would have lost 3.2% of output last year – a 2.2% increase on the current regime.

With profit margins in the industry tight (and tightening), there is now a real fear that these changes, introduced very rapidly and with little consultation, could render certain projects unbankable.

Who will benefit?

The Competition and Markets Authority (CMA) has been quite clear that it is consumers who stand to benefit from this change. However, there are some points that the renewables industry would seek further clarity on:

1. Locational signals are already in place: Electricity generators in Scotland are already subject to a significant locational signal through the Transmission Network Use of System Charge, which ranges from around £5/kW/year in zone 11 (Lothian and Borders) to £12/kW/year in zone 1 (North Scotland).
2. Existing generators can’t respond to new signals: The CMA’s conclusion in respect to transmission losses is centred on creating a signal to encourage siting decisions for generation and demand. If a locational signal is introduced it is vital that it only apply to projects able to respond to it.
3. This decision appears at odds with the transition to a more decentralised system: Renewables by their nature tend to be located in the more remote parts of our country where the resource is strongest, and the Committee on Climate Change estimate that we need to double the capacity of renewable power if we are to keep on track to meet our 2050 climate targets.

Other issues?

There are further issues that arise from the operational impacts of this change – particularly for projects that currently hold or will be seeking to secure a Contract for Difference in the future.

The current CfD contract contains some protection against changes in transmission losses.

The transmission loss adjustment within that contract allows for a modification of strike prices to hold generators neutral against changes to transmission losses.

However since the introduction of BSC modification P350, the Low Carbon Contracts Company and BEIS have stated that this is not the policy intent of the CfD adjustment.

Given that the proposed changes do not alter the overall amount of losses attributed to generators (i.e. generators cover 45% of losses and customers 55%), there will be no change to the average and therefore no strike price adjustment.

What is Scottish Renewables doing?

Scottish Renewables has a number of concerns with the proposed changes.

We set out those concerns to the CMA in April, highlighting the risk of “undermining investor confidence” and encouraging the authority to ensure that any changes were afforded the appropriate level of scrutiny through two measures - the relevant rules, and governance of the BSC panel.

That panel, which makes recommendations to Ofgem on changes to the rules that govern the balancing and settlement procedures for the electricity market, consulted on the introduction of the new rules at the end of last year, our response reinforced our concerns and strongly encouraged the BSC group to ensure that transitional arrangements (including exemptions) be put in place.

This should ensure that operational projects and projects which have already made significant investments are not affected by the introduction of the change and provide industry with reasonable and sufficient certainty to make investment business cases.

The Panel’s report recommends that changes are introduced an implemented on the 1 April 2018 and we will continue to monitor this process.

Blog by Michael Riley, Senior Policy Manager - Markets & Systems.