An announcement appeared which was part of
the wider Energy review, and could have very
significant implications for costs of generation
projects as you will see below. The bulk of the
report was to do with supplying electricity to
the consumer, and that is what has been all over
the news. However it was the small section below
which looked worthy of further investigation. Below that
are some comments from Professor
Gordon Hughes which attempt to cast some light on it.
Basically the further away the generator is from
the location where the power is used, the more
it is going to have to pay. We have heard a lot
about economic viability , especially from RES
recently . We may well be about to hear quite a bit more.
The section itself is only six paragraphs …. but they are worth reading
Locational adjustments for transmission losses
19. Energy is lost when electricity is
transported from one part of the country to
another, and the greater the distance travelled,
the higher the losses. The costs of these
transmission losses therefore vary considerably
by geographical location – in an area with
relatively low levels of demand and high levels
of generation, for example, consuming
electricity will be associated with low losses
and generating electricity will be associated
with high losses. However, despite this
locational variation in the costs of losses,
under the current regulatory regime, these costs
are allocated to generators and customers in a
way that takes no account of their geographical location.
20. We have provisionally found that the absence
of locational pricing for transmission losses is
a feature of the wholesale electricity market in
Great Britain that gives rise to an AEC, as it
is likely to distort competition between
generators, raise bills to customers and to have
both short- and long-run effects on generation and demand:
(a) In the short run, costs will be higher than
would otherwise be the case, because
cross-subsidisation will lead to some plants
generating when it would be less costly for them
not to generate, and other plants, which it
would be more efficient to use, not generating.
(b) In the long run, the absence of locational
pricing may lead to inefficient investment in
generation, including inefficient decisions over
the extension or closure of plant. There could
also be inefficiency in the location of demand.
21. Our proposed remedy is to require that
variable transmission losses are priced on the
asis of location, and to assign 100% of losses
to generators, rather than 45% as under current charging arrangements.
22. We have conducted a modelling exercise to
assess the benefits that might be expected to
arise from the introduction of locational
charges for losses. The model results suggest
that the total cost of meeting the electricity
demand of customers in Great Britain will fall
by between £158 million and £190 million over
the period 2017 to 2026 due to the proposed
remedy, depending on the future level of fossil
fuel prices. The additional efficiency gain of
requiring generators to bear 100% of
transmission losses is estimated to be worth
between £14 million and £31 million. The model
also estimates that there will be a moderate
additional environmental benefit from the
reduction in SO2 and NOX emissions from the
proposed remedy, valued at between £0.4 million
and £14.4 million over the period.
23. The results of our modelling are similar,
overall, to those from previous modelling
exercises conducted in support of previous
proposals to introduce locational charging for
transmission costs We have not attempted to
model the dynamic benefits from the proposed
remedy, in terms of more efficient investment,
due to the complications and uncertainties of
such modelling. All in all, expected benefits
from the remedy – considering both benefits we
have modelled and those we have not – exceed by
far expected implementation costs, which are less than £10 million.
24. In summary, based on the modelling work we
have conducted and other analysis, our
provisional conclusion is that introducing
locational charging for transmission losses will
reduce costs and be in the long-term interests
of customers. We propose to implement the remedy
by means of an order imposed on National Grid,
as system operator, to calculate imbalance
charges taking into account transmission losses
calculated on a locational basis and according
to which 100% of losses would be borne by generators.
And a few thoughts from Gordon Hughes
“The implications of these findings and remedies
are fascinating, even though their immediate
scope is limited. In this respect, the
principle of what the CMA has done on
transmission charging is particularly important.
There has been a long running argument about
whether and how to take account of location in
the design of transmission charges. The
Scottish Government has lobbied
against the whole idea and has complained
frequently about the locational elements that
are built into the current structure of
charges. In the past, DECC has given way to
this political pressure and has instructed
National Grid to adopt a rather unsatisfactory compromise.
Now, the CMA has, in effect, decided to overrule
this political process and enforce rules that it
regards as necessary to ensure a competitive
market. This is a fundamental shift in
responsibility from the department to a quite
separate regulatory authority. DECC may not be
entirely unhappy in this case but the principle
is really important and suggests that future
debate is likely to revolve around competition
rules rather than political lobbying. To get
round this DECC would have to pass primary
legislation and would be very reluctant to go down that path.
The Scottish Government will be extremely
unhappy, though they may be unwilling to express
it as competition policy is not a devolved
matter – either now or in the future. The
reason is that the principle will entirely
scupper any notion of the continuation of
unified GB market with minimal differentials in
transmission charges in the event of
independence. In that case, generators in Scotland
will have to compete in the England and
Wales market on the delivered price of power,
covering the full cost of interconnector charges.
I wonder how long it will take investors in
Scottish wind farms to realise that cost-based
transmission charges would be a disaster for them.
No ROCs or CfDs plus the requirement to pay full
transmission charges means that the financial
prospects of even the best unbuilt schemes will
look awful. SSE & Moray Offshore would be daft
to go ahead with the Moray Firth projects with
such uncertainty. Repsol have enough other
problems so they have sold out of Inch
Cape. The new Chinese owner may feel that they
have been conned but it is very unlikely that
anything will happen for several years. As for
onshore wind farms under development, how many
of them are financially viable at a net power
price of < £40 per MWh? Very few, I suspect. “
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