Energy companies split over reforms to support renewable energy generation
Energy market regulator Ofgem wants to reform how the UK’s electrical grid operates as more renewable energy gets added to the system. But energy companies disagree over the best way to do it.
The UK plans to get 15 per cent of its energy from renewable sources by 2020. That means encouraging energy companies to build a lot more renewable energy capacity, such as solar and windfarms.
All electricity generators have to pay to get plants connected to the grid. Under the current system, power companies pay less for grid access if they generate electricity where demand is highest.
Historically this helped keep the costs of building and maintaining the electrical grid down. But because wind turbines and solar panels often need to be built in remote locations to be effective, it currently costs renewable energy generators a lot more to get them connected to the grid.
Ofgem says this isn’t fair on renewable energy providers, so has devised a new system of charging companies to use the UK’s transmission lines. But not all energy companies are happy with the changes.
The problem
Large power stations are often built close to where electricity gets used – in areas like the Midlands, the south-east, and near other population centres.
Renewable energy projects, on the other hand, are often built a long way from where power demand is. That’s because they often need to be away from large urban developments to get access to the wind, sunshine, and water supplies they rely on.
At the moment, Ofgem charges power plants more to use power lines if they produce power far away from areas of high demand.
This map shows how much it costs companies to use the transmission lines, based on where the power stations are located:
Image - Electrical transmission charges zones map (note)
Source: NERA report using National Grid data.
As you can see, power plants in the north of Scotland pay much more (around £20 – £30 per kilowatt) than plants near big demand centres, such as London.
That drives up the cost of building renewable energy projects in locations where they’re most efficient – such as offshore windfarms in the North Sea.
As such, the current system could discourage the sort of investment the government needs to hit its renewable energy and emissions reduction goals, and Ofgem has decided it is no longer fit for purpose.
New system
Instead, Ofgem is proposing a new scheme which doesn’t base charges on where power plants are located, but does make renewable energy providers pay a bit more to use the electrical grid.
Ofgem says this is fairer, because it’s not renewable energy providers’ fault that they need to build away from where demand is concentrated.
At the same time, the new system acknowledges that renewables strain the grid more than fossil fuels as sometimes they are pushing large amounts of electricity onto the grid – when it is particularly windy and sunny, for instance – and so makes them pay a bit more for the privilege.
Ofgem says the new system should reduce costs for consumers as it will encourage renewable energy projects to be built in the most effective locations – such as where it’s windiest or sunniest – rather than just near to where the demand is.
That should mean renewable energy projects generate more electricity more of the time, making them more profitable and driving electricity prices down.
Because of this, Ofgem estimates that the change will add £1.60 a year to bills between now and 2020 as more renewables are connected to the grid, but that between 2020 and 2030 it could save households £8.30 a year.
Profit concerns
The plans have revealed some tensions between energy companies, however.
SSE’s chief executive, Paul Smith, wrote his support for the scheme in industry magazine, Utility Week, last Wednesday. He argued that the new system was “much fairer” than the old scheme as it didn’t disadvantage renewable projects which needed to be sited in remote locations.
But yesterday, a report commissioned by energy company Npower disputed Ofgem’s figures, saying the scheme could cost UK consumers an extra £3.4 billion per year – about £9 per household, and concluded that there was no economic basis for changing the system. It said the new system could squeeze profit margins of existing power stations, with the additional costs being passed on to consumers. npower is against Ofgem’s proposal.
That might be because npower stands to gain less than some of its competitors if the system is changed, because of where the companies’ power generating infrastructure is.
As you can see from this map, npower’s renewable energy projects are fairly evenly spread across the country. In contrast, SSE’s power stations are more concentrated in Scotland.
Image - SSE vs npower renewable projects map (note)
Source: Maps from SSE and npower. Image by Carbon Brief.
SSE currently has 3,237 megawatts of wind, solar, and hydro power projects in the UK, a considerably larger renewable energy fleet than npower, which only has 814 megawatts installed. As such, any regulatory change which has an impact on the profitability of renewable energy will affect the companies in different ways.
Since Ofgem’s plans are likely to make it cheaper to build and run northern renewable energy projects, SSE stands to benefit much more than npower does. That might be why SSE is more keen on the plans than npower.
Decision time
Since the changes are expected to make renewable energy generation cheaper, it’s likely to be companies with large wind, solar, and hydro portfolios that most vocally support Ofgem’s plans. In contrast, companies without many renewable energy projects are likely to push Ofgem to preserve the status quo, as they are concerned their competitors could get a commercial advantage from the change.
Ofgem was originally due to make a decision on how it would change transmission charges last December, but it’s delayed the decision until March after the energy companies raised their concerns at the last minute.
As the decision date approaches, energy companies will be increasingly keen to get their voices heard. Amid the noise, it’s worth noting who stands to win and lose from the change – and that means keeping in mind where in the UK companies’ assets lie.