New research published today shows that Britain’s energy regulators are putting billions of pounds of green infrastructure investment at risk by overseeing an energy market which favours EU energy imports at the expense of home-grown schemes. By Marc Smeed, Associate Director of RIDG.
Scottish generators pay 16x more to use the transmission system than the European average. This fact probably doesn’t come as a surprise to those familiar with the TNUoS regime. However, this market distortion is taking on new relevance as we look to accelerate towards Net Zero.
ENTSOE has calculated that the average transmission charge for generators across Europe is 0.46£/MWh per year[1]. Excluding the costs of connecting to the network, the average charge for GB generators this year will be 2.53£/MWh[2]. However, transmission charges are not spread evenly throughout GB – the charges vary depending on region. This coming year, generators in England and Wales will pay an average of 0.49£/MWh – pretty close to the European average. But generators in Scotland will pay an average of 6.42£/MWh for using the same transmission system. This only gets more extreme the further north you go - the average for SSE’s patch (the northern half of Scotland) is 7.36£/MWh, which is over 20% of the total LCOE for new offshore wind farm sites[3].
Not only do these high charges put Scottish projects at a severe competitive disadvantage, but the uncertainty due to charge volatility compounds the matter and can make projects unbuildable. Charges are demonstrably more volatile in the north, both in absolute terms and (even more markedly) when considered relative to revenues[4], so uncertainty affects Scottish projects to a far greater degree. By 2025, NGESO has forecast that the average transmission charge for projects in Scotland will increase by between 2% and 58%. The base case forecast shows an 11% rise to 7.12£/MWh, and close to £10/MWh in the far north, whilst tariffs in England and Wales are due to decrease by over 80% to 0.08£/MWh. Ultimately, the financing cost of this uncertainty is paid by consumers through higher bills.
As the renewables sector continues to evolve beyond subsidy mechanisms and rely more heavily on market forces (across Europe), this distortion will likely play a significant role in determining where renewable energy projects get built.
In December, the then Secretary of State Alok Sharma, set out in the Energy White Paper an 18GW target of interconnector capacity between GB and Europe by the end of 2030[5] and National Grid ESO is projecting up to 27.7GW of capacity by 2040[6]. National Grid estimates that 30-36% of all power consumed in GB annual will be traded over interconnectors by the end of the decade. And interconnectors have no liability to contribute toward the cost of the transmission system in GB.
Whilst Scottish generators pay the highest transmission charges in Europe to move power south, interconnectors from Europe do not pay for using the GB transmission system at all[7]. Further, the interconnector subsidy mechanism administered by Ofgem (known as ‘Cap and Floor’) appears to take little account of the movement of economic value from GB to Europe that results from further interconnection[8].
The current TNUoS regime isn’t the only way to ensure an efficient network is built and operated. In fact, it is quite unusual. Of the 36 European countries covered by ENTSOE, 20 do not charge generators at all and only 5 charge based on location (three of which are GB, Northern Ireland and Ireland). This means that investors looking across Europe have far less network charging risk to consider in foreign markets compared to northern sites in GB.
[1] ENTSO-E Overview of Transmission Tariffs in Europe: Synthesis 2019. For the purposes of comparison throughout this paper, the same EUR/GBP exchange rate has been used as the ENTSOE paper, which used a rate of 1.175. [2] The difference between the average charges including local assets is almost entirely due to the charges levied on offshore wind projects for getting the power shore. This year, offshore wind farms will be charged £422.6m for their OFTO assets, which is more that the entire remainder of the industry will pay in TNUoS altogether. [3] https://ore.catapult.org.uk/blog/miriam-noonans-thoughts-seabed-leasing-4/ [4] https://www.ssen-transmission.co.uk/media/5261/ssen-transmission-tnuos-paper-february-2021.pdf [5] https://www.gov.uk/government/publications/energy-white-paper-powering-our-net-zero-future [6] https://www.nationalgrideso.com/future-energy/future-energy-scenarios/fes-2020-documents [7] The Connection and Use of System Code (CUSC) Section 14 [8] https://www.ofgem.gov.uk/publications-and-updates/cap-and-floor-regime-initial-project-assessment-gridlink-neuconnect-and-northconnect-interconnectors