Developers have warned that potential reforms to the electricity system risk derailing offshore wind deployment.
Representatives of Ocean Winds, a 50/50 venture between EDP Renewables and Engie, warned that the current model – Transmission Network Use of System (TNUoS) – and the possibility of introducing locational charging could erode the economic cases for upcoming projects.
Mark Baxter, project director for Ocean Winds’ upcoming Caledonia offshore wind farm, says: “These unfair locational charges create a lot of jeopardy for me as a project director.”
He warns that the changes will make it more difficult to prove that “Scotland is a place to invest”.
© Supplied by Ocean Winds“What we have coming in the summer is what I term an energy market gamble, which I’m not sure we should be taking at the moment given the criticality of what we’re trying to achieve,” he says.
Ocean Winds UK country manager Adam Morrison also tells Energy Voice: “The UK government is sending a strategic message that it wants to build more electricity networks in the north of Scotland, so we can use our renewable resources to get more clean power onto the system and provide opportunities for skills transition in the North East.”
However, government proposals that could change the electricity market are at odds with this message, and the mixed signals are eroding investor confidence.
Running costs
Under TNUoS, electricity users and generators are charged to use the UK’s transmission network, sharing the cost of its creation and upkeep.
The charges are determined by several factors, with location a major contributor. This typically means generators located near centres of demand, such as in the South of England, pay less, while those in more remote areas, such as the North of Scotland, pay more.
Developers have warned that this pushes up the cost of renewable projects in Scotland, eroding their financial case and making them less competitive than southern projects.
In addition, northern projects are effectively subsidising southern projects when determining power prices.
Under the current contract for difference (CfD) mechanism, projects bid in an auction to receive a contract for their electricity. More expensive projects are the ones to determine the price level that the bidding projects receive.
This means that Scottish developments, which need to factor in TNUoS charges to be economical, set the price, with cheaper projects receiving the same price – despite being cheaper to build.
Morrison explains: “They get paid as if they’ve got the most expensive tariff possible, but they are effectively getting a negative tariff.
“The cumulative impact is terrible for the electricity customer.”
© Supplied by Ocean WindsCharges under TNUoS are not just calculated at the start of a project, but are constantly reevaluated. And in recent years, they’ve been increasing – in some cases, up to four times compared to five years ago.
This makes “Scottish power generation of any sort that’s connected to the transmission system less and less profitable, even though they can do nothing about it,” Morrison notes. “You can’t move and you can’t increase your price because they’re all under CfD.
“It’s taking money out of the Scottish generation fleet and zonal pricing could double down on that.”
Reforms
As part of plans to transform the way the UK prices power, the government has introduced the Review of Electricity Market Arrangements (REMA) process, which is exploring reform options that could potentially split the UK into regional electricity markets.
On the cards is a system of locational pricing, where the UK is divided into different zones with different energy prices. This could see consumers in areas with low demand and high supply charged less than in areas with high demand and low supply.
The government has said it expects to make a decision on the introduction of locational pricing by mid-2025. However, it has yet to provide details on what a new system could look like, such as how finely the UK could be divided up and where the different segments are based.
What the Department of Energy Security and Net Zero has said, however, is that the current status quo is “not an option”.
The changes have proven divisive in the energy industry, with proponents like Octopus Energy saying it will save consumers billions.
Lowering energy prices in Scotland will encourage energy-intensive businesses, such as in cutting-edge green technology like hydrogen, to locate to the north east.
© Supplied by Ocean WindsThe other side, which along with developers such as Ocean Winds includes RenewableUK, Offshore Energies UK and Scottish Renewables, has warned that locational pricing will cause increased volatility and higher capital costs, jeopardising the renewable energy boom that could lower prices in the first place.
“We need to focus on delivering what’s required to enable these projects and be ready by 2030. We need delivery of grid, on time,” Morrison says.
“It depends on how it’s designed though. The impact it will have on our projects is a complete guessing game, but that’s the particular problem that they have around investor confidence.”
Ripping up the rulebook
This makes issues facing developers not just the potential changes but the prospect of reforms alone eroding investor confidence.
“The reality is, if they make a decision this summer it won’t be fully designed,” Morrison says. “They will then probably spend years fully designing it, so we’ll have to wait for a long time to work out what this would actually mean.
“Hence our industry’s argument is: if you want us investing in building new assets right now, it’s not a smart time to rip up the rulebook when there’s no new rulebook available.”
Instead of location-based pricing, Morrison argues, a reformed national market would help deliver new network investment and renewable generation.
“Don’t expose us to locational signals that oppose what they actually want us to do,” he says. “If you want more offshore wind in the Northeast, don’t design the market to prevent it.
“If you want it, design the market so that we can build it with low risk. Don’t expose us to market uncertainty and amplified signals that then prevent us from delivering cheap power.”
In turn, this would help displace gas from the system, which as the most expensive source of electricity, has been the driving force behind recent price spikes.
“That means being brave just now and saying we need to spend money to save money. If you deliver all of that, you reduce the amount of gas that’s being bought significantly.”
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