Grid transmission charge reform could save consumers £16 bn
But, they point out, according to new analysis, reform of the transmission charging system could save billpayers £16 billion.
A new report from Aurora Energy Research, commissioned by companies and published ahead of a key decision on changes from the energy regulator, Ofgem, shows that investment in the industry could be protected through reforms to the transmission charging system.
The trio of companies - Ocean Winds, Northland Power,and West of Orkney Windfarm - collectively through their projects generate enough power for a third of the UK's homes.
Adam Morrison, UK Country Manager at Ocean Winds, said: 'The magnitude and volatility of transmission charges are harming existing Scottish projects and undermining investments which will be vital for Clean Power and Net Zero ambitions.
'Amid a rapidly changing energy market, the UK has to reckon with the fact that the charging methodology is broken as it is pulled in directions it was never designed to go.
'Most importantly, the system bares a hidden cost to billpayers of billions of pounds of unnecessary subsidies for projects not burdened by these locational prices.
The report assesses what are called Transmission Network Use of System (TNUoS) charges, a levy on generators which was designed for an era when gas dominated the UK power market, and which incentivised the building of generation projects near major cities in England but penalised generation in remote areas, particularly Northern Scotland.
The three companies are warning that the system undermines UK Government plans to build huge wind projects off Scotland's northern shores, creating a signal not to invest.
Winds of Change on offshore wind and transmission charging (Image: Derek McArthur) Existing projects, they note, are also under threat as the volatile charges can erode as much as half of their value, an impact which is only likely to worsen, as the report warns that Northern Scotland transmission charges are expected to climb by 100% within five years without intervention.
As the Aurora Holdings Research report puts it: "The divergence of... TNUoS charges across regions has increased significantly in recent years and is expected to rise further over the next decades with TNUoS increasing in Scotland and decreasing in the South of Great Britain. This uncertainty disadvantages Scottish wind farms, increasing their cost of capital and opportunities to secure debt financing, increasing their bid prices in contracts for difference auction."
Claire Mack, chief executive of Scottish Renewables, said: "Scotland's abundant natural resources should make it the home of the UK's biggest and most productive renewable energy projects but our outdated transmission charging rules, designed over 30 years ago, are unbalancing how the modern-day electricity network should be paid for which is negatively impacting the development of major sites.
"These charges are both volatile and unpredictable, unfairly penalising Scottish projects by tens of millions of pounds every year."
The analysis by Aurora Energy Research highlights that this transmission charging means a 1 GW Northern Scottish project would cost one billion pounds more through its life to run compared to an equivalent in Southern England.
Ofgem is deciding on a 'cap and floor' model in coming weeks to mitigate the costs and many voices within the renewables sector are calling for change.
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'Quite simply,' said Ms Mack, 'the UK Government will not meet the targets set out in its Clean Power 2030 Action Plan without the abundance of wind power generated around Scotland and it must work with Ofgem to urgently implement a 'cap and floor' model for transmission charging that alleviates these costs and keeps projects on track.'
An Ofgem decision to back a reform proposal - known as CMP444 WACM 1 - would save billpayers £16.2bn between 2028-2050, according to the data, which reduces Scottish Transmission Charges by 59% and mitigates subsidies.
The report sets out that transmission charging is having a bearing on billpayers due to its combination with the 'pay as clear' model of the contracts for difference (CfD) process which grants the same price to all projects on the basis of the highest successful bid.
Transmission charges push up the costs of Scottish projects, and therefore CfD prices - southern projects unaffected by transmission charges do not need the same level of CfD, but still receive it.
Emanuele Dentis, Commercial Manager at Northland Power commented: 'The investment signals are just inconsistent at the moment. Ofgem has greenlit billions of pounds of transmission investment works in Northern Scotland, without recognising that – without reform – these works are too expensive for generators to pay back. It's like building brand new motorways that too few users are going to use because the toll is too expensive.
'In the meantime, projects in the Southern England are paid (rather than pay) transmission credits. This was historically justified as an investment signal to minimise transmission costs, but this system is simply incompatible with renewable energy deployment, whereby generation is most efficiently produced where natural resources are strongest.
'We are in support of a regime that redistributes transmission charges costs more fairly, is better aligned with other locational incentives such as option lease fees and the contracts for difference (CfD), and delivers on the government's Clean Power 2030 targets and beyond. CMP444 WACM 1 and CMP432 are the best tools in the short term to kickstart this reform.'
A Department for Energy Security and Net Zero spokesperson said: 'Our priority is to expand Britain's energy infrastructure to get more clean, homegrown, electricity onto the grid and protect billpayers from volatile fossil fuel markets.
"We continue to work with Ofgem to ensure an update on transmission is provided as quickly as possible and ensure that any proposed changes to transmission network charges continue to support investment in clean energy projects across the country, while delivering value for money for consumers.'
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