Written evidence submitted by Dr Gareth Davies, Aquatera Ltd (RES0036)

Introduction to Orkney

Orkney is a special and unique place when it comes to energy.  The are some aspects of energy in Orkney that are different and distinctive from other places in the UK and globally.  But what is especially special and unique is the breadth and diversity of energy features that are exhibited within and around Orkney at a scale and in a stage of progression that many other parts of the UK and the wider world can see, experience and learn from.  Orkney is more than an energy island, it is an energy archipelago, it is a hub of imagination, invention and innovation and it is a community of vision, ambition and foresight. 

Some key points are listed below

Record breaking achievements

• World’s largest wind turbine (3MW) 1984-95
• First locally owned 1MW turbine in Scotland (2003)
• World’s largest marine energy test centre (2003 to present)
• First grid connected offshore wave energy (2005)
• First UK grid connected tidal energy (2006)

Major energy infrastructure

• 30 large wind turbines installed
• 700 micro wind turbines installed
• 400 other micro renewables and energy efficiency installations
• Over 70MW installed renewables capacity
• Over 60% of capacity in local and community ownership
• Worlds largest and most successful marine test centre
• Globally leading hydrogen infrastructure
• Over 100% of electricity demand from renewables since 2013
• Also handled 10% of UK oil production since 1970’s

World leading experience and expertise

• Cluster of 10 major marine energy companies
• Operating base for a number of technology and project developers
• 30 marine energy technologies tested
• Over 100 technology deployment and recovery operations
• 3000 vessel days of maritime support operations
• At centre of world largest and most productive offshore wind development zone
• Micro generation hot spot
• Europe’s hydrogen capital
• 500 MSc and PhD graduates
• Knowledge transfer and collaborative relationships with over 50 countries and 100 islands

Orkney is not just the end of a grid spur it is a strategically important location for Scotland, for the UK and for the wider world.  Orkney has been a major energy hub for the last 40 years through the operation of the Flotta Oil Terminal.  Orkney is the gateway to significant renewables generation capacity – there is at least 5GW of generation potential around (within 12 miles) of the islands (possibly as much as 10GW).  Further offshore Orkney shares the potential for over 100 GW of offshore wind potential along with Shetland and the Outer Hebrides.  Orkney has also been the site of numerous technological breakthroughs, the base for introducing many pioneering ways of managing energy supply, an exemplar of how energy awareness within a community can lead to transformational changes in customer behaviour and a leading example of how engaging local investment and involvement can help energy developments progress ay unparalleled rates and scales.

SPOTLIGHT: Orkney and renewable electricity

Some key milestone dates for electricity generation from renewables:

2002                            First calls for new transmission grid connection

2002                            Active network management scheme suggested by OREF in discussions with SSE

2003                            First transmission grid application made by local renewables developer

July 2008              First net export month

2012              SSEN close down grid for new generation above G83 capacity (unilaterally/without consultation)

2013              Grid Action Group established – 28 possible action points identified – only 1 taken forward by SSEN

2013                            First net export year

April 2015              Last net import month

April 2017              New export record of 5,000MWh

April 2019              ReFLEX project kicked off – ground-breaking integrated energy systems projects

Ongoing              Regulatory and network management obstacles placed in the way of rolling out ReFLEX approach             

How has Orkney earned this opportunity?

• Unique blend of natural resources - wind, wave, tide, oil, gas, solar, heat ….

•          Vision - Oil 1970s; wind 1980’s; marine 1990’s, efficiency 2000’s, hydrogen and storage 2010’s, integrated energy solutions 2020s, large scale developments 2020s & 30s

•          Commitment - People, money, sites, demand, ideas

•          Knowledge and expertise - Unrivalled experience, facilities and cluster of experts and specialists

•          Willingness to share know-how and success

Issues with the needs case process

• Presently established so that the network operators are in total control of the process
• Orkney has been seeking a new connection since 2003, 2018 was the first time SSEN had considered it appropriate to submit a needs case
• The Network operators submitted a flawed needs case but as a community and as generators (ultimate users and funders of the needs case) we had very little or no input into it.
• Ofgem reviewed the needs case against a narrow set of cost and risk criteria which failed to take account of the strategic imperative of the grid connection and which also failed to rank such a strategic connection appropriately again other grid investment decisions elsewhere in the UK.

Who pays for works involved

Preparing the needs case

• The work to prepare the needs case was undertaken by SSEN, with support from consultants located in England.  It is clear from the resultant document that both parties have only limited understanding of the local energy situation.  Typically the local generators and wider community are asked to review a late stage draft and comment on it.  To do so probably takes 3-5 days work for each consultee.  In total Orkney may have contributed 20 person days to the process. There is no assurance that any consultee comments are taken onboard.  SSEN probably spent between £50k and £100k on consultant inputs into the Needs Case.  Their own internal commitment may have amounts to 100s of staff days, possibly 1000s.

[A much better solution would have been for SSEN to commission the local community and local generators to develop an initial needs case which they could then add their own network understanding to, perhaps a £50k funded local process would have been appropriate]

Meeting needs case conditions

• To meet the conditions of the needs case (consented project with a grid connection and route to market) any developer will have to commit hundreds of thousands to millions of pounds in development costs at total risk. Typical costs for a 20 MW project in Orkney might be:

There are 7 to 10 developments underpinning the needs case, this means that the Orkney community, the supply chain and local project developers have been required to invest, at total risk, some £10 million against the Needs Case process.

What advantages would the grid connection provide?

• A new transmission connection:
• would allow a greater amount of Orkney’s renewable resources to be contributed to the UK grid
• would future proof Orkney in terms of back-up connectivity for future increases in electrical demand
• would enable an islands based a MITS point to be established, moving the socialised cost point onto Orkney instead of being in Caithness
• Could if sized properly provide added capacity for offshore wind, tidal and wave generation and provide greater incentive for hydrogen system balancing capacity
• Drive the ongoing vibrant renewables sector as a local employers and wealth creator and distributor
• Provide a stimulus of major upgrade of the distribution network to remove constraints and that level of system management
•   

Transmission charging regime

The transmission cash cow

The present transmission charging regime places excessive and uncertain costs on development activity.  The basis for the locational premise of the charging regime has changed.  In the old model generation capacity based upon coal and hydrocarbons was encouraged to be built close to urban and industrial demand centres.  Given the co-location of coal and urban development in the UK and the southern abundance of gas resources the established north/south and west/east high/low charging gradients may have held some logic.  In today’s and tomorrow’s worlds with an imperative for decarbonisation the availability and suitability of resources is reversed with northern and western areas holding critical and over time absolutely critical resources upon which the UK will be reliant to achieve Net Zero and wider decarbonisation.

The present zoning structure is therefore likely to need to be changed and the charging philosophy needs a total overhaul.

Development needs to be encouraged in areas where there are sufficient resources, that can be delivered acceptably at an affordable cost.

To show the effect that transmission charges can have, the following calculation, based upon information currently available, estimates the TENUoS costs for the cluster of wind farms currently being developed in Orkney.

Key assumptions:

• Capacity of 70 MW by 2023; 135 MW by 2028; 220 MW by 2033. 
• Revenue 5 p/kWh. 
• TNUoS £100/kW. 
• Cable life 40 yrs. 
• Windfarm CAPEX: £1.2M/MW;
• Wind farm OPEX @ 3%CAPEX/yr;
• Capacity factors per wind  farm, average 40% to 45% CP.

Total revenue = £487M+£395M+£443M = £1325M - £1490M over 40 years

CAPEX – £264M x 2 = £484M

OPEX - £7.9/yr = £317M over 40 years

TENUoS @ £100/kW - £280M+£227M+£255M  = £762M

Total project cost = £1,563

Compared to the estimated revenue this estimated TENUoS would make the development not profitable given the £73 million estimated deficit

Applying actual total connection cost of say £500M makes the scheme profitable with a surplus of around £189M over 40 years.

Obviously the actual TENUoS charge level is not known to any developer and under the present system are not known until the works are completed by the network operator.  There is a history of cost overruns for such works particularly in the Isles.

People closer to generation pay less – apparently an Ofgem proposition – is that true?

There are many factors linked to what we pay for energy which affect customers in different parts of the country to different extents.

• The weather and lighting conditions are different across the country so the heating and lighting demand is different
• The extent of travel is different and with a heavy reliance on ferries and planes Orcadians are affected by transport costs to a high level
• The type, size, setting and thermal quality of buildings varies across the country
• The choice of energy supply is different in different places – in Orkney we have no mains gas so customers are trapped into using either oil, electricity or imported biomass for heating
• For decades the price of electricity was 2p higher per unit in the North of Scotland and the Isles due to the stated ‘excessive’ cost of connectivity (perhaps £2-4 million per year)
• There are other locational charges made with bills which disadvantage northern UK customers (the zoning system is based upon the old power generation model – not the new)
• This is why Orkney has one of the highest levels of fuel poverty in the UK!

Part of the bills we pay for energy are directed into system investment – each customer in Orkney pays 12.5% of their bill for socialised network upgrades – because Orkney pays more for its energy Orkney customers pay more towards the grid – but Orkney never gets its turn at socialised grid investment, instead local developers and shouldered with the bill and the associated reduced profitability.

Where do energy customers come from?  It is obvious within Orkney, and important to remember, that energy makes our society.  Energy investors, energy employees and energy service users are also energy customers/consumers.  Without investment, jobs and services there is no society and there are no customers or consumers for Ofgem to ‘safeguard’.  Unsustainable consumer safeguarding will lead to unsustainable communities and society!!

Targets – are they useful?

• Targets are almost always useful they give scale, direction and purpose
• They should be ambitious, owned, shared, monitored and reported on
• Commitment to them should be rewarded and recognised, working against them should be called out and sanctions taken
• Just missing targets is not a problem if the trend, direction and purpose is strong; divergence away from an achievement pathway is serious, even in the early stages of a target pathway
• The metrics chosen need to be appropriate – NET ZERO – is unlikely to be the best metric
• Too much uncertainty and it means something different in every place and every sector with to much choice about who owns the hard bits!

Local perspectives

• Electricity makes up only 15% of Orkney’s overall energy demand
• Over the next 20 years (half of the lifetime of the proposed cable) Orkney has to decarbonise the other 90% of its energy
• This is because Orkney is an R&D and demonstration hub for such transitions
• Some where needs to be first so that others can follow and the UK government, based upon the R&D funds pouring into Orkney clearly feels that Orkney should be this pioneering community
• The UK’s grid connection strategy needs to ensure that it is aligned with the UK’s future electricity demand, energy security strategy, industrial strategy, health strategy, regional development strategy, international development strategy
• The connection of Orkney at transmission  scale is an essential requirement for delivering against these many strategic objectives 

How do targets affect jobs?

The works to prepare for and meet targets have been very helpful to a place like Orkney that has committed itself to making a contribution to this endeavour

• Orkney has a unique cluster of expertise and experience
• Numbers currently around 270 in 2018/19 (previously 400)
• Orkney needs to earn £8-10M per year just to keep these people employed, plus need to sustain facilities, vessels and equipment and also repay investment
• A sustainable target income at present is around £25-30M per year

Monetary value of works connected to renewables in Orkney undertaken between 2000 and 2019:

• Total value of renewables related activity associated with Orkney £700 million
• Total onshore activity costs £300M
• Local investment in onshore energy ~£85M
• Total marine energy programme cost in and around Orkney  ~£400M
• Local investment in marine energy ~£90M
• Total local investment ~£175M  (25%)

What is local opinion about targets?

Why Orkney supports renewable energy – for Orkney renewables means money and jobs

Orkney understands energy as generators, as distributors and as consumers

Grid connection to major parts of Orkney was only achieved in the late 1970’s, we appreciate the benefits of connectivity in a very tangible way

Orcadian’s use more energy than any other part of the UK due to strong winds, cool temperatures, drafty housing, big sea and air journeys

Orcadian’s pay more for energy due to the amounts of energy used and due also to the excessive locational tariffs added to fuel and electricity delivery

The quality of supply can be poor with many winter wind induced faults

Over 270 people currently employed in renewables sector and a further 150-200 in the oil sector, so 420 to 470 people are currently employed in the energy sector across Orkney

A huge part of Orkney’s success has been/is willingness to invest collectively and individually in its own energy future

That local investment of over £170M, is at risk of becoming a stranded investment due to the ongoing delay in delivering a new grid connection to Orkney

Exportability of experience, technology and knowhow – how does that work?

Orkney energy hub and prioritising internal UK connection

Looking forward and taking into account Orkney’s unique geographical position, its unique and rich energy resources and its unique strategic industrial and energy role will likely lead to many other follow-on connections to Orkney.  These connections may be through other cables, pipelines, shipping etc.  The key point is that in every other respect that the grid, Orkney is a strategic hub not a marginal spur.  Grid connectivity is now limiting the wider role that Orkney can play and therefore limiting the development potential of the UK at a time when the country needs every opportunity it can find

Benefits of UK intra-connectors

•          The image previously graphically shows the large number of continental interconnectors that have been considered and their length – which is roughly equivalent to their cost

•          None of these interconnectors exploit UK resources, none create UK jobs, none support UK technology, none will pay UK tax on generation and none provide national energy security – especially at a time when we are reducing reliance on European systems

•          The Orkney “interconnector” is a fraction of the length and despite its relatively low capacity a fraction of the costs of these other interconnectors.

•          The Orkney connection will use UK resources and will create UK jobs, technology, taxes and security

•          Far better to invest in the UK as a priority

•          Also noteworthy that however these wider connections are initially funded their costs will eventually be borne by the UK consumer

July 2021