OFGEM LAUNCHES REVIEW OF UNFAIR GRID CHARGES

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Energy watchdog Ofgem has announced that it is to launch a review of the heavily criticised electricity grid charging system after the SNP Government and energy producers in Scotland described it as “discriminatory”.

The current system sees Scottish generators produce 12 per cent of UK generation, but account for 40 per cent of the transmission costs and has been accused of hampering Scotland’s fledgling renewable industry.

 

Energy watchdog Ofgem has announced that it is to launch a review of the heavily criticised electricity grid charging system after the SNP Government and energy producers in Scotland described it as “discriminatory”.

The current system sees Scottish generators produce 12 per cent of UK generation, but account for 40 per cent of the transmission costs and has been accused of hampering Scotland’s fledgling renewable industry.

The current charging methodology 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. 

The charging regime means that, for example, an energy provider in Peterhead, Aberdeenshire would have to pay £20 per kw for a grid connection while London-based energy provider would be subsidised by £3 per kw. It is estimated that Scottish based companies currently pay £100 million more than they should as a result.

At its annual board meeting in Scotland, energy regulator Ofgem announced a comprehensive and open review of the charging regime and associated connection arrangements for using Britain’s high voltage electricity network and high pressure gas grid.  The regulator has recognised that the issue of grid charging is critical for Scotland whose renewable energy potential makes it attractive to companies wishing to invest in low-carbon generation.  It intends to publish new proposals by Spring 2011.

Ofgem has launched Project TransmiT to ensure the regimes promote security of supply and a low carbon future, while keeping the cost of transmission to customers under control.  The project will focus on the charging regime for the electricity grid and other practical and commercial difficulties experienced by new generators.  Project TransmiT will consider if the current regime for network charges can continue to support the move to a low-carbon energy sector.  The review will seek wide-ranging stakeholder input, including independent academic reports.

However the regulator defended the current charging system claiming it has “served customers well” by locating generators close to major cities.

The news will be seen as a positive step by Scotland’s renewable sector and validation for the SNP’s campaign to end the system described by many as ‘biased’.

Speaking in August this year, SNP Westminster Energy spokesperson Mike Weir MP said:
“…what is really crucial is ending the discriminatory connection charging regime which works against the development of clean, renewable energy in Scotland by forcing generators to pay millions of pounds more to use the grid.

“Scotland has overwhelming energy potential but our future wealth is being sabotaged by these unfair charges which discriminate against Scotland. For example, Peterhead Power Station has been forced to pay £29 million a year for the right to produce power while an identical generator in London would be paid £3million to set up shop. This ridiculous position must be brought to a halt.”

Responding to today’s announcement Mr Weir said:

“The SNP have for years been pressing OFGEM to move away from their current charging model. We would strongly dispute the assertion that it has served the energy industry well as there have been serious concerns over its impact on renewable generation.

“I am, however, pleased that OFGEM are finally accepting that the present regime is not suitable for the encouragement of low carbon renewable generation given that such generators have little option as to where they can site developments. The present encouragement to site near centres of population is clearly unsuitable.

“Any new system must recognise the need to give a fair deal to developers in Scotland and end the current ludicrous situation where generators in the north pay a £16 per megawatt to get access to the system, whilst generators in the south of England effectively receive a subsidy.

“Scotland has huge renewable potential but must have a fair access system to allow linkage to the national grid. The announcement from OFGEM is a long overdue recognition of the point we have been making and hopefully we will shortly have a system that recognises the needs of the low carbon electricity generation of the twenty first century rather than the old system based on large centralised generation.”

Alistair Buchanan, Ofgem’s Chief Executive, said: “Project Discovery identified the need to invest up to £200bn to secure low-carbon energy supplies for Britain. The electricity and gas grids play a fundamental role in meeting this huge challenge. Project TransmiT will consider whether the way in which grid costs are shared between users needs reforming.”

The review is in line with the clarified sustainability duties that the Energy Act 2010 has given Ofgem in April, and the terms of the Third EU Energy Package passed in September 2009. Also, from the New Year, industry parties and Ofgem will have the ability to instigate changes to the charging regime following reform of the industry governance arrangements.

Stuart Cook, Senior Partner, Smarter Grids and Governance, said: “As a first step Ofgem has published a call for evidence seeking views on the scope and priorities for the review and any objective analysis from all parties with an interest in the charging regime. Initial proposals will be published in spring 2011 with a decision on taking these proposals forward to follow in the summer.”

The project will be set in the context of the Government’s review of wholesale electricity market arrangements as well as cross-Europe issues, such as increased electricity interconnection between Member States, and other market and regulatory developments.

Ofgem is the regulator of the gas and electricity industries in Great Britain.

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