First Minister calls current grid charge system ‘indefensible’

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OFGEM’s review of electricity charging must bring a long lasting change to deliver a low carbon society, First Minister Alex Salmond has said.

Mr Salmond was responding to the news that the UK energy regulator is to review the current transmission charging system that sees Scottish electricity generators paying the highest grid charges in the UK.

OFGEM’s review of electricity charging must bring a long lasting change to deliver a low carbon society, First Minister Alex Salmond has said.

Mr Salmond was responding to the news that the UK energy regulator is to review the current transmission charging system that sees Scottish electricity generators paying the highest grid charges in the UK.

The FM said:

“We have long argued that in a rapidly changing energy sector, the current transmission charging approach makes no sense, and have urged change.

“Scotland has some of the greatest low carbon energy resources in Europe, yet the locational approach sees Scottish generators in the areas of highest renewable resource paying the highest charges in the UK. The system impacts on delivery of Scottish, UK and European renewable energy and climate change targets, an indefensible position which must change.

“I welcome that Ofgem is listening to the Scottish Government and to Scotland. This review is a welcome step by the energy regulator towards the more strategic approach that we need if we are to deliver a low carbon economy. We must ensure that the review is independent, objective and delivers fundamental and lasting change that will help to deliver Scotland’s energy future.

“The regulatory role of Ofgem is crucial and I look forward to working with Ofgem to deliver Scotland’s green energy potential. We have had significant consultation and discussion already in Scotland on transmission charging, including the publication of our alternative approach and the options for change. It will be critical that those efforts are factored into the review.”

Mr Salmond also commented on the UK Government’s ongoing review of the powers and functions of Ofgem, saying:

“Scotland needs power over energy regulation and energy markets to match its active role and powers in promoting the low carbon future. Ahead of that pressing and necessary change, in Scotland we need clearer alignment between Ofgem and Government – between Ofgem’s regulatory impact and the policy aims of Government: the outcome of the Review should ensure that.

“I also hope that the UK Government will soon deliver on the Fossil Fuel Levy, and announce that the £185 million levy currently sitting an Ofgem bank account – Scotland’s money – can be used to further develop renewables and related infrastructure in Scotland.”

Renewable Energy body Scottish Renewables said:

“We believe the current transmission charging framework is out of date and ill-suited to the three of the biggest challenges facing the country right now: encouraging investment and economic activity, increasing energy security and cutting carbon emissions.

“The system is purposefully designed to discourage investment in electricity generation in Scotland, and to encourage generation in southern England – with no regard to whether power comes from clean or polluting sources. Renewable energy developments in Scotland are paying millions in charges each year when fossil fuel generation in parts of southern England are being subsidised. This is clearly at odds with the Government’s over-arching objective of moving to a low carbon economy.

“The system needs simplified and made more transparent, and reformed to encourage clean forms of generation where our natural resources are strongest, including the north and west of Scotland – the two areas most heavily penalised by the current framework.

“We are therefore pleased to see Ofgem recognise the lack of flexibility in siting renewable generation and the focus on how the framework can best be aligned with the need to change the way we generate, distribute and use energy as part of our response to the massive economic, environmental and social threat of climate change.”

Background

The existing approach to energy regulation for access and use of the UK electricity grid works against the interests of Scotland’s energy industry. For example, in 2009 Statkraft UK Ltd announced that it would not proceed with a proposed wind project in Orkney due to the locational charging regime.

Locational charging methodology by Ofgem levies higher charges on generators furthest from the main centres of demand for connection and use of the grid. This favours generation in the Southern part of the UK and presents an inbuilt bias in the UK transmission regulatory system against Scottish based generation.

Generators in the North of Scotland face the highest charges in the UK of around £21.58 per Kilowatt Hour, compared to a subsidy of £6.90 per Kilowatt Hour in London. As a result, Scottish generators produce 12 per cent of UK generation, but account for 40 per cent of the transmission costs, or about £100 million per year more than their fair share.

The Scottish Government made a case for an alternative transmission methodology based on a flat rate charge for all generators, irrespective of where on the grid network they connect. National Grid and Ofgem refused the proposal, citing the limitations of their licence obligations.

Following a debate on transmission charging in April the Scottish Parliament unanimously backed calls for an independent views of transmission haring with the full backing of business and civic leaders in Scotland. The Energy and Climate Change Committee at Westminster also made a similar recommendation in February 2010.