Scottish Wind May Gain in ‘Overdue’ Cost Review: Energy Markets

Scotland, source of almost half the U.K.’s renewable energy, may benefit from a proposal to scrap the 20-year-old rule blamed for impeding wind and sea power.

Ofgem, the nation’s electricity regulator, plans to take comments until Nov. 17 on a plan that would abolish the system that charges the highest carriage rates to generators furthest from consumer centers, leaving Scotland with Britain’s highest transmission prices. Ofgem is due to make a decision next year.

“The review of transmission charging is long overdue,” said Martin McAdam, chief executive officer of Edinburgh-based Aquamarine Power Ltd., which joined with Scottish & Southern Energy Plc to develop 1,000 megawatts, starting with a wave project off the coast of Orkney, Scotland. “The high transmission charges are preventing potential developers from committing to underwrite the construction of new capacity.”

Scotland, with 7,300 miles (11,800 kilometers) of coastline and turbines poised to supply 1.7 million homes, has the potential to produce 10 percent of the wave power and 25 percent of the offshore wind energy in Europe. The U.K., which gets a lower proportion of its power from renewable sources than other nations in the 27-member European Union except for Malta and Luxembourg, is under pressure to reduce disincentives.

Britain’s power industry pays 2.5 billion pounds a year to ship electricity from generators to customers, according to Ofgem. The charges, equivalent to about 5 percent of wholesale prices, are passed through to end users. U.K. baseload power for summer closed today at 43.90 pounds ($69.38) a megawatt hour.

200 Billion Pounds

The current transmission charges reflect costs of building cables, the distance to consumption centers and congestion on grid. A windfarm in the Scottish Highlands pays 22.79 pounds to move every kilowatt of electricity on the grid. The same plan means Centrica Plc, Britain’s biggest energy supplier, is eligible for a subsidy of 1.36 pounds for every kilowatt produced at its new 885-megawatt gas-fed power station near Plymouth, southern England, an area where little power is made.

“The logic behind the charging system is that it attempts to reflect long-run costs of investing in the network to transport power longer distances from areas of generation to areas of high demand,” said Adrian Palmer, the London-based senior manager at Redpoint Energy, an energy research firm. “The regulator is looking at how better to distribute these costs to power generators and power suppliers.”

Further Subsidy

Britain subsidizes renewable energy by awarding certificates whose value increase as the government boost requirement for renewable generation. One megawatt of power generated from green sources receives one certificate, which fetched an average price of 45.49 pounds each in a Sept. 28 auction.

Removing the distance factor in U.K. transmission charges “is not good economics,” Lakis Athanasiou, an analyst at London-based Evolution Securities, said by e-mail today.

“What is now being proposed is a further subsidy,” he said. “I can’t see why Scottish wind generation should get preferential treatment versus wind or other renewable generation elsewhere in the U.K.”

Changing the system would benefit Perth-based Scottish & Southern Energy Plc and Scottish Power Ltd., a unit of Bilbao, Spain-based Iberdrola SA. Scottish Power’s generation includes 500 wind turbines with capacity of 400 megawatts, hydro plants in Scotland and three gas-fueled plants in southeast England.

“We have been concerned for some time that the current rules on charging for transmission are hindering the U.K.’s ability to make cost-effective progress toward key environmental and energy policy goals,” Nick Horler, CEO of Scottish Power.

‘Cheapest System Wins’

Revised transmission pricing would likely shift costs to companies such as Dusseldorf-based E.ON AG, whose U.K. fossil- fuel plants generate about 10 percent of the nation’s power.

“You have to be sensible about this to ensure that the most efficient and cheapest system wins,” said Peter Bolitho, a trading manager at E.ON U.K.. “If it’s more efficient to build a power station in the south where the demand is, then it’s better to do that rather than to extend transmission lines at a higher cost from more remote areas.”

Under EU targets, Britain must source 15 percent of its energy from renewables by 2020, up from the 2.2 percent share in 2008. Sweden gets about 44 percent from renewable, and Finland gets 31 percent.

Scotland has connection agreements in place for 12,000 megawatts of wind power, Stewart Larque, a London-based spokesman at National Grid, said in a Sept. 24 interview.

Thatcher’s Legacy

“This huge amount of proposed wind generation suggests the current regime isn’t discouraging” investment, Larque said. “We don’t think the current system is unfair, but there’s so much change going on and new challenges that now probably is a good time to take a step back and review the whole system.”

Britain’s power network was built in the 20th century to move coal-fired power from Northern England to power consumers in the south and Midlands, according to Robert Gross, director at Imperial College London’s Centre for Energy Policy and Technology. Existing transmission prices were set in 1990 under Prime Minister Margaret Thatcher to cut power costs by promoting generation as close as possible to consumers.

Aquamarine Power’s Oyster wave-power machine, in development since 2003, would be subject to the U.K.’s highest transmission charges. The company plans to develop 200 megawatt of wave capacity off the coast of Orkney, the first step in a deal with Scottish & Southern Energy Plc to develop 1,000 megawatts of wave-power capacity.

To contact the reporter on this story: Catherine Airlie at cairlie@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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