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Regulating for least cost electricity

The government's favouritism of Scottish generation is running at odds with Ofgem's remit to regulate for least cost generation. It wants to see all generation, wind plant included, located at least cost to the network, while the government is bowing to the demands of Scottish companies lobbying for access to the lucrative southern markets

Regulating for least cost electricity

Locational price signals are one of the few mechanisms for encouraging generators to site plant where it can help reduce power flows and lessen the need for new transmission investment. But the British government is concerned that charges for use of the system could impede progress towards achieving the country's renewables targets.

Current plans to introduce Britain-wide transmission charging rules will result in charges that are highest for generators in Scotland, says the Department of Trade and Industry (DTI). In a consultation with market players launched in August, the DTI proposes a rebate on transmission charges for large renewable generators located in "peripheral" areas where charges are high. The DTI's preferred option would mean that while charges would be reduced, they would still be higher than in other areas, "thereby dampening the locational signal rather than removing it entirely," says the consultation paper.

Meantime, the government is trying to block plans by electricity market regulator Ofgem to allocate the cost of transmission losses. The regulator has agreed to a modification to the Balancing and Settlement Code (BSC) -- the rules governing electricity trading, balancing and settlements -- to bring in cost reflective zonal charging for transmission losses in England and Wales.

Ofgem says: "The adoption of more cost reflective charging for losses will encourage the more effective location of [renewable and combined heat and power] plants, including encouraging the development of otherwise marginally uneconomic plant located in more southern regions, which might have not otherwise been developed."

Charging for losses will help in meeting Britain's CO2 targets, adds Ofgem. Losing electricity as heat as it travels along the wires is neither economic nor good for the environment, it says. In pushing through the modification, however, Ofgem overruled the recommendation of the BSC panel, made up of industry representatives and independents, which rejected the plans.

Tony Bramley of Tanaris Energy, who speaks for renewables and combined heat and power on the panel, explains: "There is a need to have some form of transmission charging methodology that recognises losses, but this proposal is too draconian. It is going to be very detrimental to renewable generators, particularly in Scotland."

INDUSTRY SURPRISE

In a move that surprised some industry commentators, the Renewable Power Association (RPA) supported Ofgem's plans. According to the RPA's Gaynor Hartnell, its members are unanimously in favour of zonal charging for losses, arguing that they encourage least cost electricity and pointing out that there are plenty of renewable resources, onshore wind included, in the zones with generation deficits.

The DTI, however, has further soured its relations with Ofgem by saying it "is not minded" to include zonal loss charging in the nationwide balance and settlements code under new British electricity trading and transmission arrangements (BETTA), now being formulated. Its decision follows strong lobbying -- particularly by Scottish companies.

Legislation to introduce BETTA has been delayed through lack of parliamentary time, but Bramley warns that as a consequence the transmission charging regime will have time to become even more firmly embedded in the present England and Wales arrangements and could be more difficult to remove from under the new BETTA charging regime.

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