Transmission Charging

Background

Transmission Network Use of System (TNUoS), or transmission charging, is the charge levied on generators for using the electricity transmission network (the grid).

National Grid, the company appointed by Ofgem to manage the GB grid, implements a charging regime that levies higher charges for use of the grid on generators furthest from the main centre of demands to encourage generation closest to where it is needed the most. This regime has several aims: to send signals to generators on where to locate, to minimise the energy lost from transmission, and ensure that the network does not become constrained at pinch points; to apply a charging system that is cost reflective - i.e. reflects the costs that system users cause to be incurred for building, developing and maintaining the grid system; to ensure that the consumer is protected from unnecessary costs; and to ensure that the development of the grid is efficient and economic.

The locational charging system was developed against a backdrop of predominantly thermal generation in the GB system and is not designed to encourage a more mixed and geographically spread energy supply, including a significant renewable energy element (as the best sources of renewable energy to be in parts of the UK distant from main demand centres - and Scotland has some of the best onshore and offshore renewable resources in Europe).

We need to develop renewable energy capacity and low carbon economies to offset the challenge of climate change and ensure security of future energy supply. Opponents of the locational charging approach argue it is not fit for purpose to deliver a more sustainable, low carbon energy mix and ensure security of energy supply.

The Scottish Government view

The Scottish Government fully supports the need for an efficient and economic grid system that ensures security of energy supplies and protects the interests of all consumers.

The grid network in Scotland needs to be able to deliver the connections that will transport and export the remarkable renewable energy potential in Scotland and its islands - with an estimated quarter of EU tidal and wind power and 10% of its wave power.

The Scottish Government believes that the existing approach to energy regulation for access and use of the UK electricity grid works against the interests of growing Scotland's renewable energy industry and impacts on delivery of Scottish, UK and European renewable energy and climate change policies and targets.

Imposing high transmission access and use of system charges acts as a disincentive to investment in renewable energy generation in Scotland, which has some of the highest yields from renewable energy than anywhere else in Europe.

As a result of the strong locational pricing element in the charging methodology, generators in the North of Scotland are facing the highest charges in the UK which is £20.17 per Kilowatt in the North of Scotland, compared to subsidies of £5.87 per Kilowatt received by generators in Cornwall.

Locational charging means Scottish generators produce about 12% of UK generation but account for 40% of the transmission costs, or about £100 million per year more than generators in the South.

As part of our ongoing efforts to address this issue, Scottish Ministers and Scottish Government officials are in ongoing discussions with Ofgem, National Grid and Scottish generators to develop options for change that will deliver a more equitable regime. We are also engaged in active discussions on this with UK Ministers and at EU level.

The way forward

We have been arguing the case for change for a long time, and Ofgem announced on 22 September 2010 in Glasgow the launch of a review of transmission charging. This review, Project Transmit, will report in summer 2011. We want a review that results in a more equitable, enduring, transparent and simple charging regime - and one that encourages the transition to a low carbon energy mix.

Academic reports were commissioned as part of Transmit, with one from a Strathclyde University team led by Jim McDonald, one from David Newbery at Cambridge University and another from a team of American academics. All three recommend that a locational element be retained in the charging methodology. A further report from the University of Exeter recommended that any future charging methodology should take sustainability and government low carbon and climate change objectives into account.

Ofgem is preparing to consult on the options identified in light of the evidence gathered and the academic reports and will then submit a final report with recommendations to the GEMA (Gas and Electricity Markets Authority) board. The Scottish Government will continue to collect evidence from industry and academia to support a clear case for change, and we will be contributing this evidence to the next stage of Project Transmit.