Written evidence submitted by SSEN Transmission (RES0030)

Scottish Affairs Committee: Renewable Energy in Scotland Inquiry

SSEN Transmission’s additional written evidence submission: June 2021

About us

SSEN Transmission is responsible for the electricity transmission network in the north of Scotland and the Scottish Islands. As part of the SSE plc group, we’re proud to be a Principal Partner of COP26.

Delivering a network for net zero

Scotland’s transmission network has a key arterial role to play in supporting delivery of the UK’s net zero target. We are already a mass exporter of renewable energy, with around two thirds of power generated in our patch exported south.

22GW of renewable energy will be required in the north of Scotland by 2030 to support a net zero pathway. For context, we currently have just over 6GW of renewable generation connected to our network.

Our strategic grid investments will:

Support the UK Government’s 40GW by 2030 offshore wind target - by connecting our share of up to 10GW of ScotWind offshore wind projects to the GB transmission network by 2030.

Contribute to green recovery - We’re planning to invest at least £2.8bn between now and 2026, potentially increasing to over £4bn, to deliver a network for net zero. Increasing capacity, improving resilience, supporting greater electrification, and working to connect Scotland’s remote islands.

Support a just transition - We’re creating hundreds of sustainable and highly skilled careers with plans to effectively double our 2019 workforce in the coming years to around 1,000 direct employees, as well as supporting thousands of supply chain opportunities. These jobs include trainees, apprentices, graduates and STEM returners, often in remote locations, supporting Government’s ‘levelling up’ agenda and a just transition.

Power change - We’re the world’s first electricity networks company to be accredited for a science-based emissions reduction target, aligned to most ambitious goal of Paris Agreement. We’re also investing in innovative “greener grid technology” and we’re industry leaders in our approach to Biodiversity Net Gain on our sites.

To help deliver the above, SSEN Transmission is investing in a Network for Net Zero, as outlined in our stakeholder-led RIIO-T2 business plan for the current price control from March 2021 – March 2026. This next price control period for transmission will be a critical period in supporting a cost-effective, just transition and enabling infrastructure investment to accommodate the net zero ambitions of the customers, communities and stakeholders we serve. 

1)      High level summary of our key points

• The north of Scotland’s vast renewable resources are key to meeting UK and Scottish net zero targets and the Prime Minister’s 40GW by 2030 offshore wind target.
• Our generation customers and wider stakeholders have been consistently telling us that charges for transmission access in the north of Scotland, as well as uncertainty about future charges, are acting as a barrier to the commercial viability of renewable energy projects – this creates risk to net zero delivery.
• We undertook our own analysis and evidence-based approach which concluded there is a strong and compelling case to urgently review the transmission charging regime. This needs to focus on net zero delivery.
• We also need to progress with the strategic investment required in our electricity networks to deliver net zero, particularly to support 40GW of offshore wind by 2030.
• And we believe Ofgem’s statutory duties need to be updated to reflect net zero delivery, providing the regulator the strategic direction required to ensure its policies and decision making is in step with the ambition of government and society.

2)      Timescales for Scotwind leasing

During our session, the committee requested further information from us on timescales for Scotwind. As a stakeholder-led business, we’re keen to work closely with all parties that are involved in the delivery of future Scotwind projects, which will be fundamental in supporting the UK Government’s 40GW by 2030 target. As such we have established a Scotwind Roundtable group with Crown Estate Scotland, Marine Scotland, Scottish Power Energy Networks and others, which meets regularly to discuss and understand potential delivery barriers and explore potential solutions in a timely manner.

From our engagement through this group, we understand that the closing date for Scotwind leasing round applications is 16th July 2021. We expect that an update on outcomes from this will follow late this year.

3)      Our TNUoS analysis

As a stakeholder-led business, driven by a stakeholder-led strategy, we’re motivated to act on the feedback we receive from customers and others with an interest in the north of Scotland transmission network, especially when that feedback could have wider implications for industry investment and the realisation of the UK’s legally binding climate goals.

We published a TNUoS discussion paper in February this year to explore the case for TNUoS reform in greater detail, along with evidence of impact. Although TNUoS is set to recover the allowed revenue of TOs throughout GB, it is the responsibility of the Electricity System Operator (ESO) to recover the revenue on behalf of the TOs. The ESO do this by implementing the methodology set out in section 14 of the Connections and Use of System Code (CUSC) which is governed by Ofgem.

Using publicly available data, our analysis was independently assured by consultants Baringa and supported by Scottish Renewables. Using the paper as a tool to encourage further debate, we sought feedback on our paper via a range of methods including written responses, calls with stakeholders, feedback forms and through an interactive stakeholder webinar session, which was joined by over 100 participants from developers to local authorities.

We have now published a summary report of all feedback received through this engagement which overwhelmingly supports the need for change. In summary:

• 93% of all stakeholders agreed that some form of TNUoS reform is required.
• 70% agreed with the findings outlined in our TNUoS paper.
• 84% told us that TNUoS acts as a barrier to the delivery of their renewable projects in Scotland.

It’s therefore clear, that urgent action is required to find solutions in the context of the climate emergency.

4)      Why we support the case for reform

We support TNUoS reform because the current TNUoS charging methodology was established nearly 30 years ago and is not designed for an electricity system that will enable a net zero world. With the aim of transporting electricity generated by thermal plants from source to demand underpinning the purpose of the charges, we know that in today’s society in order for us to achieve the necessary low carbon transition, that all areas of industry should be enabling not hindering its progress. The outdated methodology of TNUoS results in charges for transmission access in the north of Scotland being many, many times higher than the rest of GB. Alongside this, the volatility and unpredictability of future charges across the whole of GB, are acting as a blocker to the commercial viability of renewable energy projects, particularly in Scotland.

This creates huge uncertainty for us, as a Transmission Owner (TO), in terms of efficient system planning as we work to connect the renewable energy needed to support greater electrification in society and deliver a network for net zero. From our analysis and engagement on the issue, our key reasons as to why reform is required are outlined below:

• Evidence supports the fact that Transmission charges are significantly higher in Scotland: Particularly the north of Scotland. For example, while a wind farm in the north of Scotland pays £5.50 per unit of energy, an equivalent wind farm in Wales will get paid £2.80 per unit.

• The north of Scotland experiences not just the highest charges in GB, but in Europe: RUK and RIDG’s recent paper demonstrates that Transmission charges in Scotland are not just the highest in GB, they are the highest in Europe. We need to level the playing field to support home grown, green economic growth. According to ENTSOE the average transmission charge for generators across Europe at £0.46/MWh per year. The average annual charge paid by generators in GB is now sitting at £4.37/MWh. However, excluding GB connection costs brings the average for GB generators to £2.53/MWh. This coming year, generators in England and Wales will pay an average of £0.49/MWh. But generators in Scotland will pay an average of £6.42/MWh. The average for the most northern region is £7.36/MWh, which represents over 20% of the total levelised cost of electricity (LCOE) for new offshore wind farm sites.

• Potential impact on net zero / renewables targets: Over 80% of our engaged stakeholders told us that TNUoS acts as a barrier to the delivery of their renewable projects in Scotland. Analysis from the ESO tells us that 22GW of renewable energy will be needed in the north of Scotland by 2030 to put us on the correct pathway to net zero. We currently have just over 6GW connected in our network area and there is a clear need to have regulatory policy in place that enables the required development. The current TNUoS charging regime does not send the appropriate signal to enable the capacity required in fact does the contrary.

• Impact to consumers: This is not an area our analysis explores however we feel it is an area that needs greater exploration in terms of impact. Recent analysis carried out by NERA Economics commissioned by Ocean Winds shows that by 2030 the volatility of TNUoS alone could increase consumers bills by up to £390m per year[1]. We are yet to see throughout our analysis how the current methodology for generation TNUoS benefits consumers. We expect that the high cost, volatility, and unpredictability is likely to be increasing costs for consumers. It is key to note that although TNUoS is split into generation and demand, there is a common misconception that the revenue recovered stops there. Generation TNUoS has to be built into the cost margins of each project, these costs flow through the market to the supplier and eventually are paid by consumers, resulting in consumers paying both generation and demand TNUoS at one point or another. The volatility and unpredictability of generation TNUoS significantly increases the risk for generators, subsidies as well as other pass through costs etc we expect that this is increasing consumers bills in the long run.

• User pays principle is fundamentally flawed: The currently methodology results in the further the electricity has to travel the more expensive it will be. We support the theory of a user pays approach for use of the Transmission system, however this is not what happens in practice, the majority of generators down south get paid to use the same cables and wires to deliver electricity, the current charging regime doesn’t stack up – the same investment is needed in the network despite location. This is very different from ‘user-pays’. It is hard to argue that any generator can have a negative use of the transmission system. A fairer, modernised approach is required to support net zero delivery.

• This is not just a “Scottish” problem: While TNUoS particularly disadvantages Scottish projects, this is not a Scottish problem. We are already a mass exporter of renewable energy in the north of Scotland, with around two thirds of power generated in our patch exported south. Scottish renewable projects (particularly Scotwind) will be fundamental in helping to meet the UK’s net zero and offshore wind targets – 40GW by 2030, 10-11GW expected to be delivered through Scotwind.

• And it’s not just an issue for Scottish developers: while the high costs of locational charging is mostly a Scottish issue, the impact of volatility and unpredictability of future charges are impacting developers across GB. Some generators in England and Wales see wider TNUoS fluctuate by over 700% from one year to the next. Although the National Grid ESO provide sensitivities to combat the unpredictability of TNUoS, with hindsight these in themselves are flawed.

• Current system is out of date: the current charging mechanism was devised for a different time and a different electricity system. The dated regulations which govern how our electricity system works don’t support delivery of the UK and Scotland’s collective net zero ambitions. It is making development of the renewable energy projects which Scotland needs to supply its energy and drive economic growth less likely, at a time when those projects are more urgently needed than ever.

• The volatility and unpredictability of TNUoS is in stark contrast to the stability and predictability of the underlying costs of the transmission system (TO revenues) - the cumulative allowed revenue of NGET, SPEN and SSEN Transmission has been stable: within 5% of £2.5 billion over the past five years. Ofgem’s assessment for the next five years is for allowed revenue to fall by around 0.6%.

• Security of supply: As we move towards a zero-emission electricity system in Scotland, charging signals should support the essential diversity in the location of electricity generation, in the places that have the very best renewable resource, to ensure we continue to have efficient, resilient and robust security of supply for GB consumers.

• The objectives and principles of the charging methodology set out in the CUSC do not refer to or consider environmental impacts, decarbonisation or policy objectives in particular net zero. In practice there are elements of the methodology which are counterfactual with such vital areas. This also effects the modification process as when a principle led assessment is undertaken on potential modifications they do not consider these areas.

• Significant Code Reviews – Access SCR: We are expecting a minded to decision to be published by Ofgem this month. At this time there is nothing within the Access SCR which is being discussed that will go towards resolving the high costs, volatility, and unpredictability of TNUoS. In fact we expect Ofgem to introduce wider locational TNUoS for small distribution generation (SDG), we expect SDG paying TNUoS will not only negatively affect the deployment and sustainability of SDG but will extrapolate the issues (outlined above) further for transmission connected generation also. It is key to mention that the majority of SDG is renewable, with SDG paying TNUoS on top of existing DUoS network charges we expect this will great a huge barrier for SDG and in turn hinder the progress in achieving net zero.

• Significant Code Reviews – Targeted Charging Review: The decision by Ofgem was felt by all developers. With the removal of the Transmission Generation Residual (TGR), to reduce the credit that the residual cost brought, increased the costs for all generators significantly. Alongside this, the TCR saw the removal of the Small Generators Discount also – resulting in further increased costs for generation.

• CUSC modifications – CMP353 - Stabilising the expansion constant: This is further evidence as to why the current methodology is not fit for purpose. Using the current expansion constant methodology for RIIO T2 price control increased the expansion constant C costs by approximately 83%, Ofgem recognised this and decided that the RIIO T1 EC should be used for T2 (including inflation) to avoid this increase and instructed the ESO to look into this further, we are yet to get an update on this. This is another example as to why TNUoS is impossible to predict as there are many everchanging factors that developers do not have control over.

5)      Is TNUoS the barrier it is made out to be?

Yes, we think the current TNUoS methodology presents the biggest barrier to net zero delivery, and that an urgent formal review is required.

Although the renewables pipeline is strong in Scotland, it doesn’t mean that all those projects will actually proceed / be delivered due to a chicken and egg situation - developers don’t find out about what their charges will be until they go through the process with their projects and even then, future forecasting is uncertain and can make projects commercially unviable.

Projects also still need to compete for CfD – TNUoS currently makes Scottish projects less competitive in this process, with successful projects raising prices for consumers to account for additional cost, and lower priced bidders elsewhere in GB benefiting by being brought up to the cleared strike price. Anecdotal evidence suggests that Scottish developers are adding on roughly £10 per MWh in their bids to combat this increased cost, alongside the volatility and unpredictability of TNUoS – this ultimately ends up on consumers bills.

6)      Views on options for TNUoS reform

Following engagement, stakeholders’ views on potential reform options vary, however we have listed five potential options that were suggested, as listed in our paper:

1. Removing the locational element (postage stamp methodology)
2. Capping TNUoS floor price at zero – removal of negative charge
3. Improving certainty of charges
4. A full review of the current objectives and methodology (long term goal)
5. Reforming the overarching principals of the CUSC methodology to recognise net zero (short term goal)

As a stakeholder-led business we aim to advocate on behalf of our customers and wider stakeholders when they raise concerns with us. We recognise the concern caused by the uncertainty of the current TNUoS methodology, this also impacts our ability to efficiently plan for required network investments to support net zero. We therefore believe that an urgent review of the current regime is required in the context of net zero.

7)      Conclusion

We would like to thank the committee for inviting SSEN Transmission to participate in the evidence session on Thursday 17th June and welcome the opportunity to share our views as part of the inquiry process. A summary of our key points can be found below for consideration:

• We believe that an urgent formal review of the current TNUoS regime is required to support the UK’s ambitious net zero targets and green recovery goals.
• To support the deployment of further renewable generation in Scotland, we need to progress the strategic investment required in our electricity networks to deliver net zero, particularly to support 40GW of offshore wind by 2030.
• To deliver this investment at the pace and scale that will be required, we believe that Ofgem’s statutory duties need to be updated to reflect net zero delivery, providing the regulator the strategic direction required to ensure its policies and decision making is in step with the ambition of government and society.
• We’re currently carrying out some further analysis on the impact of TNUoS charges on offshore wind specifically and we plan to publish an addendum to our TNUoS paper on this topic in the coming weeks – we would be happy to share this with members of the committee once published in case of interest.
• In the meantime, we are grateful for the opportunity to take part in the Committee’s evidence gathering and look forward to hearing the committee’s recommendations, following the conclusion of the inquiry, in due course.

June 2021