Transmission investment and renewables generation

Publication date
27th October 2003
Policy area

Many of the sites currently being considered for developing renewable generation (particularly wind), and in light of problems with planning permission, are geographically remote and often some distance from the existing electricity transmission system and the majority of customers. The expected growth in renewable generation may, therefore, require significant additional investment to extend the existing network and increase capacity. It is important that any investment is efficient as customers ultimately pay these costs.In Great Britain, there are three electricity transmission network operators (TOs): The National Grid Company (NGC) in England and Wales and Scottish Hydro Electric Transmission Limited (SHETL) and SP Transmission Limited (SPTL) in Scotland. Ofgem regulates these companies transmission revenues and charges because transmission is a natural monopoly. Every five years Ofgem sets a price control that fixes their allowed revenue based on forecasts of efficient costs, their investment requirements and an allowed rate of return on their assets. Ofgem also regulates the structure of their charges. The structure of charges determines how the companies recover their allowed revenue from different customers. The price control provides the companies with strong efficiency incentives. The companies can earn additional profits by delivering the outputs agreed at lower levels of costs than the level assumed by Ofgem when setting the control. This benefits customers as these efficiency savings are passed through to customers at subsequent price controls when revenues are reset. The price control also protects customers from price increases. If costs are higher than forecast in setting the control, the companies cannot simply raise charges.At the time that the last price controls were set, neither the companies nor Ofgem anticipated significant new investment to accommodate renewable generation. If the companies undertake significant infrastructure investment to accommodate new renewable capacity during the present price control period there would, at present, be no adequate mechanism by which they could recover the funding of this investment before the start of the next price control period. The companies are, however, obliged to offer terms to all generators including renewables, wishing to connect to and use their systems.NGCs current price control expires in March 2006 whilst SHETLs and SPTLs current price controls end in March 2005. The estimated infrastructure expenditure to accommodate renewables for the three TOs in 2004/05 is 21m compared to the estimated capital expenditure over the same period of 277m. In 2005/06 NGCs estimated capital expenditure is 222m compared with the estimated additional expenditure of 60m to accommodate renewables. Ofgem has proposed that the Scottish price controls should be rolled over for another year so that they end at the same time as NGCs price control. This is in recognition of the intention to implement GB wide trading arrangements from April 2005 and the consequent interactions between the positions of the Scottish TOs and NGC, as prospective GB System Operator. If the price controls for the Scottish TOs are rolled forward a year, the total estimated capital expenditure for all three TOs in 2005/06 is likely to be about 265m compared with an estimated 164m of additional expenditure in infrastructure investment for renewables, resulting in a significant funding gap.Additional transmission investment and renewable generation could have an impact on the level and distribution of transmission charges for existing and new transmission users. This is because NGCs transmission charges are set annually to reflect the costs of providing the transmission system at different locations. These costs vary depending on the balance of generation and demand at different points on the system. With the planned implementation of British Electricity Trading and Transmission Arrangements (BETTA) from 1 April 2005, these arrangements are being consulted upon to be extended to cover all GB transmission charges.Ofgem therefore believes that it is appropriate to consult on whether the existing price controls should be adjusted to provide funding for any additional investment required to accommodate new renewable generation sources. If no adjustment is made, delays may occur in new renewable generation gaining access to the transmission system. Such delays and associated uncertainty would raise costs, harm customers and risk frustrating Government policy.Price controls are not intended to shield regulated companies from the normal range of business uncertainties. Ofgem therefore does not normally consider making significant adjustments to price controls once they have been set. If companies believe that Ofgem will re-open price controls once they have been set then this could significantly reduce the incentives to outperform during the existing control and future controls. If, for example, Ofgem agreed to re-set a price control where capital expenditure was greater than forecast due to cost overruns then companies would have less incentive to manage costs effectively. Customers would, over time, face higher bills as a result. However, when circumstances change in a way that was unforeseen when the price control was set, Ofgem will carefully consider whether there is an argument for reflecting such changes by reopening the price control or via an Income Adjusting Event. Such changes could in principle be positive or negative. If Ofgem decides that it is necessary to make adjustments to the current price controls we will seek to ensure that any adjustment mechanism maintains strong incentives on the companies to invest efficiently. Ofgem has identified three possible approaches to the issues raised by the prospect of significant additional transmission investment to meet the demands of renewable generators and has highlighted some of the potential advantages and disadvantages of each:- rely on existing mechanisms i.e. do nothing until the next price control review;- re-open all three price controls; or- add an adjustment mechanism to the existing controls to deal with renewable expenditure.Ofgem would welcome views on the merits of the three different approaches outlined in this document. If respondents believe that it is appropriate to adjust the existing price controls, Ofgem would welcome views on how we could continue to ensure that the companies have strong incentives to invest efficiently. Given the potential impact of additional investment on charges for existing users, Ofgem would encourage both generators and customers of the transmission network to respond to this consultation.Ofgem will publish a more detailed consultation in November 2003 having carefully considered the responses to this consultation. The November 2003 consultation will include a regulatory impact assessment. If appropriate, this will be followed in early 2004 by a statutory licence modification consultation under Section 11(2) of the Electricity Act 1989. Assuming the TOs agree to the proposed licence modifications, they will take effect from April 2004.