‘Volatility and unpredictability’ of transmission charges inflating renewable costs

The “volatility and unpredictability” of Transmission Network Use of System (TNUoS) charges are inflating renewable costs and undermining the viability of some projects.

Andrew Urquhart, head of whole system at Scottish and Southern Electricity Networks (SSEN) Transmission, said some developers in the north of Scotland have reported having to factor a risk premium of as much as £10/MWh into their business case to reflect the uncertainty.

Urquhart was speaking to Utility Week after SSEN Transmission released a report last week outlining its concerns over the charges and urging interested parties to give their thoughts on the matter.

He said the volatility faced by developers comes from a variety of sources, a lot of them “completely outside their control,” including modifications to the Connections and Use of System Code (CUSC), bits of legislation and peculiarities of the charging methodology.

For example, the €2.50/MWh cap on average charges for transmission-connected generators that was imposed by EU regulations and transposed into UK law, means they are currently affected by “currency fluctuations”. Meanwhile, there is “a lot of weird stuff that happens around the methodology” when it comes to generators on remote islands.

He said this volatility and unpredictability is not a reflection of the overall amounts being recovered: “We’re just coming out of the end of an eight-year price control, so we’ve had a long period of stability. We’re going into a new price control now but again you’ll get another five years of stability.

“So, although that is nice and stable and well understood ahead of time, the tracking of those costs goes up and down and all over the place.”

“When you’re a developer and you’re trying to make your case and get your business funding you’ve got to put in that risk margin,” Urquhart added. He said these costs will ultimately be passed on to consumers through things like higher strike prices in Contracts for Difference auctions.

He said the only ways generators can reduce their exposure is to lower their Transmission Entry Capacity so they are charged for less, or increase their load factors so the costs are spread across more output: “Now to do that they’re going to have to put a lot of storage on site… That isn’t a thing that can be done super quickly…

“When you’re looking at smaller – community generators, smaller businesses – they’re not going to have the resources or the ability or the technical know-how to be able to do that sort of stuff, so it seems to me you’re driving a wedge between the large developers who potentially do have the time and the resources and the inclination to look at that and the community groups that just don’t.”

Urquhart said Ofgem’s significant code reviews (SCRs) – the first looking at residual charges and the second at forward-looking charges and access arrangements – have not addressed these issues as they have “very much been focused on distribution charges”.

He said the proposals as part of the latter, which is still ongoing, to expose smaller embedded generators to forward-looking transmission charges will instead mean “the issues we see with TNUoS are going to spread”.

“The volatility and unpredictability are going to go down all the way to 1MW with embedded generation so that’s going to make these problems far worse in our eyes,” he remarked.

The report published by SSEN Transmission also raised concerns over the regional disparities created by the forward-looking charges, which are intended to provide price signals to encourage generators to connect where it is cheapest for the network.

“In theory it has its place because obviously the closer you have generation and demand together, the less losses you have and the more energy gets from generator to the consumer so you get more bang for your buck, plus you spend less on network development,” said Urquhart, speaking from his home in Dunfermline.

“The challenge is that renewable resources are not spread evenly across the country. It’s not sunny up here but conversely, we do have higher wind speeds.”

He said reaching net zero emissions will require both solar in the south and wind in the north but the transmission charges are discouraging the latter.  He said SSEN is still trying to establish what kind of effect they are having on the buildout: “What we’re trying to do now is get real evidence because it is very difficult to quantify what might have happened if the costs or the charging had been different.”

Whether these issues should be resolved through minor adjustments or a major overhaul “depends how appetite there is from BEIS and Ofgem to engage on this,” he added.

“Obviously, Ofgem are super committed to what they’ve been doing through the SCR at the moment and to go back and say that’s all very good what you’ve said but there’s all these other problems as well is not going to be a quick fix.”

But he said developers can’t wait for “five, six, seven years” for change: “I think it’s going to require a bit of a hybrid approach. Do a few things in the short term possibly through industry wide CUSC mods and then follow it up with an overarching review of actually what the hell is the point of the TNUoS. What behaviours are we trying to get people to display?”