Transmission failure a real threat to Scotland's renewable energy mill

Published on Friday 6 July 2007 00:08

RENEWABLE energy, virtually all the political parties say, is one of the bright hopes for the future health of the Scottish economy.

Much of the immediate prospects for developing on- and offshore wind, and wave power, however, depends on planning permission being given to upgrade the Beauly-Denny power transmission line, now embroiled in a hotly contested public inquiry. Without that go-ahead, the renewable power industry fears, there will be little to no room to develop any more renewable power generation in northern Scotland.

That, of course, is the hope of the many protestors, who worry that the unspoiled hills and mountains are about to be covered with grey windmills. Might, however, the economics of the industry turn out to be just as much of a problem and dash political hopes of Scotland being the "renewable powerhouse" of Britain?

There are signs that costs are beginning to rise quite sharply. A large part of the costs of building a wind farm are in the steel towers and turbine blades. The recent government energy white paper noted that mainly thanks to recent rises in the cost of steel, the cost of these towers have risen by 25 per cent in the last two years and further increases are expected.

That, however, may not be the biggest problem. Last week, I wrote about the transmission charges applied to all electricity generators by National Grid, which are regulated by Ofgem. These have caused big complaints in Scotland where the charges are much higher than in the rest of Britain. I noted that since wind farms continue to be built, there is a case for thinking that these charges, high though they may be, are not creating an economic disincentive for wind farmers.

This conclusion created as big a volume of comment as I have had on any subject, for which I am grateful. The gist of these comments was that when the transmission charge regime, called BETTA, came into being in 2005, it was not expected to be penalising, but the way it is now changing is causing unexpected burdens.

One of the points of BETTA was to dissolve the trading barrier between Scotland and England, allowing Scottish power companies to sell into the English market without having to pay interconnector charges. This also allowed Scottish consumers to shop across the border for their electricity, increasing competition in Scotland and reducing prices.

There is no complaint about this. But there is complaint about the way BETTA divides Britain into some 20 zones, each with different charges levied on generators for getting their electricity onto the transmission grid. The idea behind this was to provide an incentive for generators to produce more electricity closer to where the demand for it is located. More electricity is produced than consumed north of the Midlands, and south of the Midlands more is consumed than is produced. BETTA is supposed to not just incentivise producers to shift generation southwards, but also to encourage better matching of supply and demand in each of the BETTA zones.

The net effect on the charges levied is that they are high in northern Scotland (22.59 per kilowatt (kW)), low in the Midlands (1.97/kW), and turn into a subsidy given to generators in Cornwall (-8.56/kW). So you can see what people are complaining about.

Maf Smith, Scottish director of the Sustainable Development Commission, which is now looking at how this system works, says that these incentives don't actually work. He says that if Scottish & Southern Energy (SSE) were to pack up Peterhead power station and transport it to Cornwall, the move would transfer so much supply that the Cornish subsidy would disappear and SSE would soon find itself paying as much in transmission charges as it now does at Peterhead (19.23/kW). Meantime, Peterhead's high charges would turn into a subsidy signalling to SSE that they should ship the power station back northwards.

It is an interesting point, but I am not sure it is all that relevant - Ofgem would argue that all Cornwall needs is half of Peterhead and then the transmission charges would be close to zero in both places. More cogent is his argument that the charges seem to conflict with the government's objectives of increasing renewable electricity generation and reducing carbon output because the biggest renewable potential is furthest away from the demand for it.

More serious still are the objections that have been raised by SSE. It has raised complaints with Ofgem and lodged a formal complaint with the European Commission about the transmission charging methodology. Malcolm Burns, SSE's regulation manager, says that the charges have turned out to be subject to unpredictable year-to-year change. He says that between 2006-7 and 2007-8, SSE's power station on the Medway in south-east England has seen its transmission charges reduce from 1/kW to 0.54/kW while charges for SSE's wind farm at Hadyard Hill, south Ayrshire, have gone up from 5.61/kW to 12.90/kW. These big changes, of -56 per cent and +130 per cent he says, make it very difficult to draw up a reliable business plan to access finance for new developments.

This would not matter if these costs were a small part of a wind farm's operating costs. But they are a big part. Jason Ormiston, chief executive of Scottish Renewables, calculates that the transmission charges of a 50MW wind farm operating at 35 per cent efficiency in the north of Scotland would pay 1.1m a year in transmission charges. Depending on the price the operator was getting for the electricity, he estimates likely revenues at between 7-11m a year, which makes the transmission charges a minimum 10 per cent of revenues, a hefty impost.

Thus, while some initially thought, and some still believe, that wind farms are so profitable as to be the Highland equivalent of a gold rush, the real economics are proving a lot more uncertain.

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