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United Kingdom

Transmission - time to wield a big stick

The rapid growth of wind power has turned the business of transmission and distribution on its head. Gone are the guiding principles of the past 50 years. All of a sudden, where transmission is needed most -- in remote windy areas -- there is none. And market incentives work against new transmission for wind. Policy needs a rethink. As a transmission grid role model, global eyes are on Britain and the solution it adopts

A change to the remit of the energy regulator may be the only way to get enough wind energy connected to the British grid to meet the country's renewable targets. So claim wind developers and industry commentators as they continue to await a solution to the lack of spare capacity on the electricity network for wind projects. Regulator Ofgem holds the key to two failings of current transmission management. Large scale wind connection is being stifled by the existing incentives, controlled by Ofgem, that influence decision making by the British system operator, National Grid. At the same time, Ofgem's remit from government appears to encourage the regulator to give far lower priority to protection of the environment than to controlling costs for consumers.

As in all other countries, the crux of the transmission problem for wind lies in the historical development of the power grid, which in planning the supply of electricity to load centres was more concerned with the location of coal mines than windy hills. While the UK may be blessed by the highest wind resource in Europe, the best of the wind is concentrated in the north of Scotland. In a relatively weak Scottish network, some 13 GW of wind projects have applied for connection, not only to utilise strong winds, but because permitting of wind farms in the more densely populated south can be highly problematic. The majority of electricity demand is in the south.

Power in the UK already flows from north to south, with the interconnector between Scotland and England currently running at full capacity and in the process of being upgraded. A further major network reinforcement is planned between Beauly in the Highlands and Denny, west of Falkirk (map), to upgrade the existing line from 132 kV to 400 kV. This will allow around 1000 MW of additional wind capacity to connect in the north of Scotland. But the £320 million project is bogged down at the consenting stage; a public inquiry gets underway this month, with the inspector's report not expected until the end of the year and consent, perhaps, in 2008. According to the latest estimates of transmission owners, Scottish Hydro-Electric Transmission Ltd and ScottishPower Transmission, construction of the line might not be completed until 2013.

Nonsensical queue

Added to the lack of spare capacity on the network is the problem of the queue for connections. Some developers who are waiting for reinforcements to the network have been given connection dates of 2016 and beyond. Meantime, projects which are sitting on allocated capacity higher up in the queue are often not yet consented, some are speculative and some have applied for more network capacity than their size warranted. These are all holding back projects further down the queue that are at a more advanced stage of development; some already have consents in place and would be ready to go as soon as spare network capacity becomes available. With current connection timescales, some of these consents will run out before the projects are connected.

"Management of the queue is an issue we have been grappling with alongside the industry," says Andy Balkwill from the transmission system operator for the whole of Britain, National Grid. But the company is unable to pick and choose winners from those waiting in line, he stresses. "We are constrained by the licence under which we operate not to discriminate."

A couple of proposals have surfaced for changing the rules governing connections to help reduce the queue. With Ofgem's encouragement, National Grid has proposed a replacement for the unpopular financial guarantees stumped up by developers to underwrite any new network investment needed to connect a project. These complex payments -- known as "final sums liabilities" -- are designed to cover the financial exposure during construction of the reinforcement in case the wind developer's project does not go ahead and so leads to stranded assets. The payments ramp up as work begins on the upgrades, requiring a large financial risk at a relatively early stage in the generating project's development. Moreover, the liabilities can rise further if other projects sharing a new connection drop out, leaving the remaining generators footing a heftier bill. Once they build their project, though, the liability falls away.

A way around this onerous burden on developers is outlined by National Grid's proposed new User Commitment arrangements. It suggests that developers make a fixed upfront commitment in case the project does not proceed, based on project size. This avoids burdening small generators with huge liabilities as can happen under the current arrangement. Liabilities would not be shared with other users. The philosophy behind the change is that risks should not sit solely with generators, but should be shared with system users and end consumers on the grounds that all benefit from new generation.

More certainty

As well as providing more certainty for developers, another upside is that the plans could help rationalise the queue. "There are people for whom project construction is a long way off, but there is no incentive on those developers to be realistic," says Balkwill. "This amendment will require them to make an upfront commitment. It will help to flush out the speculative projects which do not have a real prospect of going ahead in the near term." It will also encourage projects that already have a connection date, but which are further down the consents process, to defer their connection, freeing up network capacity for projects that are ready to proceed, he adds.

A consultation on the proposal begins late February or March. Depending on industry views and a favourable decision by Ofgem, the new regime could replace final sums arrangements in the autumn. Meantime, in advance of Ofgem's decision, National Grid is offering its user commitment arrangements on a voluntary basis to new generators. So far, some 10% of projects have taken up the offer. While the industry has generally welcomed the proposals, some developers are not so keen on seeing their place in the queue taken by projects that are more advanced.

National Grid and the industry are also considering a proposal for the short term trading of access rights until enduring capacity through reinforcement can be provided. But Balkwill doubts that such trading would provide enough certainty to enable developers to "bank" their projects.

Fundamental change

The wind industry believes that a more fundamental change is needed to the way that access to the transmission system is managed to get to the heart of the problem of lack of grid capacity and the long wait for reinforcements. Under the current set of rules and incentives governing transmission access, the system operator will not connect new projects unless there is spare capacity on the network. Known as "invest and connect," this approach means that new projects have to wait until lines are reinforced or upgraded, or until existing generators surrender or sell their access rights.

The British Wind Energy Association (BWEA), however, has been pushing for a "connect and manage" approach where new generators could hook up to the grid ahead of reinforcements, with the system operator (SO) managing power flows more actively and constraining off projects for short periods when congestion threatens system stability. Transmission is one of the few industries that operates to such high levels of safety and security, says the BWEA's new head of grid issues, Graeme Cooper. As a result, there is a certain amount of redundancy on existing circuits that could be used while awaiting reinforcements. "Connect and manage allows us to use cleverly any spare capacity that is there," he says.

Indeed, connect and manage principles were largely adopted in the south of Scotland in the move to the current Britain-wide electricity trading rules (BETTA), introduced in April, 2005. Up to that time, generators in Scotland wishing to sell into the English and Welsh market had to book capacity on the Scotland-England interconnector. When the two markets merged, the regulator ruled that all applications to connect to the grid prior to January 2005 should be granted connections even before the interconnector over the border is upgraded -- although they still have to wait for local connections or reinforcements. This ruling led to more wind connecting to the system than the Scotland-England interconnector could deal with in some circumstances, so the SO has had to occasionally curtail some generation or output to accommodate the extra wind power capacity.

Curtailment payments

The current UK connection rules confer a firm right to generate, so the system operator has to pay generators to be curtailed, which can be costly, says National Grid. The level of the compensation depends on the price each generator bids for being constrained. Because of the value of Renewables Obligation Certificates (ROCs), which are awarded to renewables plant in the UK, renewables generation is relatively expensive to constrain off. As a result, the SO usually constrains conventional plant rather than wind. The costs of curtailments is set to rise as more and more wind is connected to the system -- including ScottishPower's 322 MW Whitelee project near Glasgow, which is expected to come online in 2008.

Any extension to the "connect and manage" approach would result in "significant increases in constraint cost," says Balkwill. "It would also represent a major change to the way the industry operates and could raise fundamental questions. For instance, National Grid is required by the Electricity Act to operate the system in an economic and efficient manner. A connect and manage approach does not appear to be consistent with this," he says. Balkwill also asks how the increased costs of running the system should be allocated under this regime? "Should they be recovered from all system users or should they be focused on the parts of the system where the congestion is?"

But granting firm access rights, a key feature of the UK system, is not the only way to contract for connections, argues Guy Nicholson from grid services company Econnect. He points out that countries such as Ireland and Germany are already curtailing generation in areas where there are high penetrations of wind on the system, but not paying generators any compensation. Furthermore, managed constraints are a feature of most British connections of generation at the level of the distribution grid.

So, one way connect and manage to the transmission grid could work in future is for generators to volunteer for unpaid constraints for up to a fixed proportion of their output while waiting for reinforcements to be built. This practice is already adopted in the UK for a few projects feeding into the wires above pinch points in the network. Once the pre-agreed proportion of generation is exceeded, the generators move to paid constraints, which would provide the incentive for National Grid to limit the use of constraints.

Not so costly

Depending on the site, the cost of constraints -- particularly in the north of Scotland -- can be more than compensated by the stronger wind resource, says Nicholson. Typically, a 30% capacity factor for a wind farm in the south could be equivalent to a 33% constraint on a wind farm in the north of Scotland, assuming a capacity factor there of 45%. It compares even more favourably with offshore wind in the south, where a 35% capacity factor and, perhaps, a 50% offshore "cost premium," could be equivalent to a 48% constraint in the far north.

"Renewables need access to the transmission system; not one hundred per cent access," he says. They need a guaranteed minimum level of access for a long period -- not short-term access arrangements. They also need access when they are ready to build, not long delays. He points out that the last transmission line to be built in the UK -- the north Yorkshire line -- took 15 years to develop and complete. "Connect and manage" would address all these issues.

A major barrier, though, is the incentives regime governing the system operator. This encourages National Grid to reduce constraint payments and to avoid connecting new generation where there is any chance it may lead to constraints. There are additional environmental incentives to reduce network losses and leakage of sulphur hexafluoride (SF6), an insulating agent used on switchgear which is one of the most harmful of the greenhouse gases. The more new lines and the more switchgear, the higher the rate of losses and SF6 leakage, comments Nicholson, so the incentives work directly against construction of new transmission and are indirectly anti-renewables, because they take no account of the environmental benefit from increased renewable generation. "The networks do not exist in isolation; they are there to move power around and moving renewables around produces a lot less CO2 emissions than conventional generation," says Nicholson.

He believes the wind community has not yet fully woken up to the effect on wind of the SO incentives. But now would be a good time for the industry to urge the regulator to take a good hard look at the incentives the system operator is working under to take account of CO2 emissions over the whole network. With the review on the economics of climate change by Sir Nicholas Stern recently pointing out that failure to act in the short term to deal with climate change will cost more later, Ofgem may be open to persuasion that connecting renewables now could save consumers money in the long run, he says.

What Ofgem says

Ofgem, meantime, maintains it is already playing an active part in encouraging renewables. In its recent final proposals for the next round of transmission price controls it sanctioned some £500 million of investment by transmission network owners to connect renewable generation. "We are allowing the [transmission] companies the money to build all the connections they need," says Ofgem's director of transmission, Bob Hull. And the controls are as flexible as possible so that they will be able to invest on top of this to respond to further demand, he says.

The regulator sees its role as a facilitator: to bring all sides together to resolve issues. Last year it set up the Access Reform Options Development Group (ARODG) comprising the industry, transmission companies and the Department of Trade and Industry (DTI) to look at options for changes that could help connect more new generating capacity. National Grid's user commitment modification was one of the proposals to emerge from a series of meetings. This month Ofgem is to reconvene ARODG to review progress so far. "It's an opportunity for us to look at ways in which short term measures can be introduced to help connections," says Hull. These will be effected through proposals for modifications to industry codes.

But Ofgem has so far resisted the more fundamental change to the way in which connections are managed that the wind industry would like to see. And it has refused to act upon the government's promptings in its July 2006 energy review report. In an annex to the report on grid issues, the DTI commends the "connect and manage" approach, saying it could increase competition and advance some 2 GW of renewables by between two to three years. The BWEA had hoped this encouragement would prompt the regulator to modify SO incentives in its 2007 price control review. But in its final price control proposals, Ofgem claimed to be unable to mandate access reforms; it is for the industry to bring forward proposals for Ofgem's approval, it said.

Amending the code

One such proposal has been tabled by generator SSE, with support from Richard Ford of Renewable Energy Systems. SSE's proposed amendment to the code covering connections could be seen as a first step towards a "connect and manage" system. It seeks firm connection dates for projects to be given as soon as the necessary grid reinforcements receive planning consent instead of waiting until they are fully built.

This interim connection entitlement would bring forward up to 1 GW of projects which are awaiting the planned Beauly-Denny upgrade -- provided the new line gains consent. The connection rights would come with the proviso that they can be constrained for a pre-determined amount of time. A working group looking into the proposal had its first meeting last month. "The SSE proposal is a small step in the right direction for some participants," says Ford, who was previously head of grid issues at the BWEA and, before that, managed electricity transmission policy at Ofgem.

As it stands, "connect and manage" may be a bigger part of the answer to the industry's grid access problems, but the entire issue of forcing the pace of transmission for wind appears currently to be in limbo. "Neither Ofgem or National Grid have any legal obligation to meet the government's renewables targets," says Ford. "Our responses to the price control review consultations were repeatedly frustrated -- and Ofgem failed to follow up the government's very clear steer in its Energy Review. They have had the carrot; where is the stick?"

A big stick

The stick, believes Ford, should be a change to Ofgem's remit conferring an obligation to promote renewables, although this would require primary legislation. The BWEA agrees. Ofgem's priorities were set in the 1980s but the world has moved on since then, says Cooper. "They do not seem to be looking at the bigger picture. But change the way that Ofgem reviews renewables and how they fit into the current market structure, and connect-and-manage will soon filter to the top as a way of stimulating connections more quickly," he says.

The government, keen to meet its renewable targets, is also believed to be frustrated by Ofgem's refusal to intervene over transmission access rules. It is understood that a government appointed body is already on the case and is currently reviewing the regulator's role in promoting renewables.

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