Ofgem recommends change to Transmission charging methodology
Press release
Publication date
Industry sector
Transmission Network
Ofgem has today announced it is minded to approve a change to the methodology for calculating what generators pay to use the electricity transmission network across Britain. It is proposed that the new charges would come into effect on 1 April, 2014.
The aim of this change is to facilitate the timely move to a low carbon energy sector, while maintaining a robust and efficient supply of electricity across Britain’s high voltage network. The main update to the methodology is that it would better take into account the type of generator and how it uses the network to transmit power to parts of the network where the demand for that power is situated. In doing this, Ofgem considers that the proposed methodology change would better reflect the costs placed on the high voltage system by all forms of generation, including new kinds of generators, located at different points on the network.
The locational element from the existing methodology, whereby generators are charged more the further they are located from demand is retained under the proposals. This is to reflect the cost of running and upgrading the transmission network. Charges that provide users with efficient signals that reflect these costs will help to promote sustainable development goals and support long term decisions on the efficient location of generation.
Industry looked in detail at the effect of the changes for the development of prospective island links (e.g. transmission links to the Scottish Islands). These tend to be far from demand and will impose higher investment costs and transmission charges for generators using these links to transmit power to where demand is located. The proposed methodology change would factor in recovery of costs of the proposed sub-sea links, which once built, would enable the transmission of electricity from the islands to the mainland.
Overall, the changes would mean that transmission charges would be lower for the Scottish Islands than may have been expected if the methodology was not changed, but still remain higher than the mainland due to the cost of building and running the sub-sea links. This proposal will narrow the difference in generation tariffs between the north and south of Britain.
Tariffs in the north will decrease whilst tariffs in the south will increase relative to the status quo. For example, indicative industry modelling suggests that in 2014 wind generators in the north of Scotland may pay on average £13/kW less than under the current methodology for access to the main transmission network and those in south west of England may pay £5/kW more.
We consider that implementing this new approach will be in the interests of existing and future consumers. This is primarily because we consider it to be the most cost reflective of the options presented to us and therefore drives more efficient decisions by companies which create value for consumers.
Our view is supported by the modelling analysis submitted to us by industry which suggests that between 2020 and 2030 consumer bills could be up to £8.30 per annum lower than under the current methodology. This outweighs a much lower impact in the period up to 2020 where consumer bills could on average be up to £1.60 per annum higher than under the current methodology.
This reflects the difference between short term impacts on generators’ decision making and longer term impacts where we would expect the new methodology to result in more efficient decisions on the location of generation.
Notes to Editors:
1. Process and next steps The new approach is one of the 27 options drawn up by industry. These options, along with the status quo, have been presented to Ofgem for decision. Today’s consultation considers the impact of all options and requests stakeholders’ views on our minded-to position. Following the consultation and our consideration of responses, we plan to publish a final decision at the end of the year. The full document can be read on our website at http://www.ofgem.gov.uk/Networks/Trans/PT/Pages/ProjectTransmiT.aspx
2. Transmission charges Transmission charges are paid by generators and suppliers for using the high voltage electricity network across Great Britain. Generators pay charges to flow power across the network while suppliers pay charges to take power from the network and transport it to their customers (i.e. businesses and homes). They account for four per cent of a household power bill. Generators face higher charges to transmit power the further they are located away from areas of high electricity demand as it costs more to transport their energy to consumers. Generators in the south of England pay lower charges, and in some cases receive payments. This is because they help National Grid avoid investment in reinforcing the high voltage grid. Under the proposed methodology, this gap between north and south charges will reduce.
3. How transmission charges are set Transmission charges for generators and suppliers are set by National Grid using a formula approved by Ofgem. The charges pay for building and running the high voltage networks. Charges are paid to National Grid in its role as the System Operator for Great Britain and National Grid recovers these costs from all users of the grid, both generators and electricity suppliers. This means generators pay charges to transmit power while businesses and homes pay for electricity to be transported to them as part of their bills. Location based charges have been in place in England & Wales since 1990 and were introduced GB wide in 2005 to better reflect the costs the transmission companies, National Grid, SHE Transmission and Scottish Power, face for running the high voltage grid.
4. Ofgem is the Office of the Gas and Electricity Markets, which supports the Gas and Electricity Markets Authority, the regulator of the gas and electricity industries in Great Britain. The Authority's functions are set out mainly in the Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000. In this note, the functions of the Authority under all the relevant Acts are, for simplicity, described as the functions of Ofgem.
For further press information contact:
Lisa O’Brien: 020 7901 7426
Chris Lock: 0207 901 7225
Out of hours contact: 07766 511470