Transmission charges are critical to selling electricity generated in
Scotland into the UK market. Until now, they have worked strongly in
Scotland’s favour by not being fully reflective of actual costs – the exact
opposite of the claims made by the current Scottish Government.
I have never believed that it was transmission charges that closed
Longannet prematurely, as opposed to a commercial decision by its owners.
Certainly, the existing system of transmission charges has done absolutely
nothing to inhibit the growth of renewable energy in Scotland – quite the
reverse.
But now this is the classic case of the boy who cried wolf. Whatever
problem currently exists, real or imagined, it is as nothing to a change in
the system which is proposed – and which, astonishingly in my view, has
gone unnoticed by Scottish Ministers who last month welcomed a report by
the Competition and Markets Authority, presumably because they did not
understand it.
One of many unsung achievements of the early Labour/LibDem Governments at
Holyrood was to convince the then Labour Government in Westminster to share
the costs of transmission losses across the UK network thereby avoiding
increasing charges to Scotland’s generators beyond the level at which they
would able to compete with other generators closer to the major consumer
markets elsewhere in the UK.
Transmission losses occur when electricity is transported long distances
and the greater the distance, the bigger the losses. While that simple fact
points to generation being located closer to major centres of population,
it is equally true that certain forms of generation, particularly wind,
require more distant locations. That creates the transmission loss
conundrum for politicians and industry regulators – and it is ridiculous to
pretend that the issue does not exist.
The political fix which we reached in my day as Energy Minister involved
the costs of this local variation in losses being allocated to generators
and customers in a way that takes only limited account of their location.
However, this has always stuck in the craw of some who would prefer a full
system of ‘locational pricing’ and claim that anything else discriminates
against them.
Now the Competition and Markets Authority (CMA) have found that the absence
of full locational pricing for transmission losses gives rise to an
‘adverse effect on competition’ (AEC) likely to ‘distort competition
between generators ‘. Their proposed remedy is to require that variable
transmission losses are priced on the basis of location and to assign 100%
of losses to generators, rather than 45% as under the current charging regime.
This long running argument, therefore, has now taken a new and – from a
Scottish perspective – dangerous turn. In the past, the Department of
Energy and Climate Change (DECC) and its predecessors in Whitehall have
responded to political pressure by instructing National Grid to adopt the
compromise. Now the CMA is seeking to marginalise this political process
and enforce rules that it regards as necessary to ensure a competitive market.
This represents a fundamental shift in responsibility from the department
to a quite separate regulatory authority – the CMA – and while DECC may not
be entirely happy with the outcome, the danger is that future debate is
likely to revolve around competition rules rather than political lobbying.
Circumventing this would require primary legislation, which I believe the
current UK Government would be loathe to introduce.
Having woken up to what is gong on, the current Scottish Government or its
successor will be extremely unhappy. However, competition policy is not a
devolved matter – nor has it featured in any debate on devolved powers to
date. Neither, from my personal experience of dealing with the CMA’s
predecessors, the Competition Commission, at the time of the Iberadola
takeover of ScottishPower, is it something that ministers can directly
influence.
The prospect which now exists is that generators in Scotland will have to
compete in rest of the UK market on the delivered price of power covering
the full cost of interconnector charges. If that happens, Scotland will
never have a new baseload station and existing ones will find it difficult
to compete with stations closer to the major consumer markets, thus
prospectively burdening Scotland with uneconomic and uncompetitive
electricity prices and energy costs more generally
While there is clearly a healthy future in more localised energy generation
and localised systems of transmission and distribution in Scotland and the
rest of the UK, the CMA report would spell the death knell for conventional
baseload generation here while future renewable generation would face a
significantly different financial environment.
It is a matter of great urgency that the CMA recommendations become the
subject of scrutiny and debate. The Scottish Nationalists have put a great
deal of effort into creating the false impression that the existing system
is discriminatory against Scotland. It remains to be seen if they are
capable of anything more than empty rhetoric now that an actual threat has
been forced to their attention.
Otherwise, it will be a case of Longannet, ‘when will we see your likes
again’? Not anytime soon and not because it was coal fired either.
Allan Wilson is a former Labour MSP and Deputy Minister for Enterprise and
Lifelong Learning
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