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RESEARCH PAPER 04/36 The Energy Bill [HL] 6 MAY 2004 Bill 93 of 2003-2004
The Energy Bill is in Five Parts. Provisions in Part 2 of the Bill relating to the Civil Nuclear Industry and the Nuclear Decommissioning Agency (NDA) are dealt with in a separate paper (RP 04/37) Part 1 introduces a duty to ensure security and integrity of supply and to make annual reports to Parliament on new energy sources under the Sustainable Energy Act 2003, and on energy efficiency. Part 3 of the Energy Bill relates to the development of offshore renewable energy resources and the establishment of a mutually recognisable system of Renewable Obligation Certificates in Northern Ireland. It also includes a strategy for microgeneration and provision for a Renewable Transport Fuels Obligation. Part 4 of the Bill relates to energy regulation issues, principally the introduction of Great Britain wide electricity trading and transmission arrangements, known as BETTA. Part 5 relates to miscellaneous and supplemental provisions.
Most of the Bill’s content relates to reserved matters, and with exceptions, applies to the whole of the United Kingdom.
Brenda Brevitt
SCIENCE AND ENVIRONMENT SECTION
HOUSE OF COMMONS LIBRARY RESEARCH PAPER 04/36
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Summary of main points
The Energy Bill is in five parts with 23 Schedules. Part Two relating to the Civil Nuclear Industry and the Nuclear Decommissioning Agency is dealt with in a separate paper, RP 04/37.
Part One introduces a statutory requirement to ensure security and integrity of energy supplies, and to make annual reports to Parliament on new energy sources under the Sustainable Energy Act 2003, and on steps to secure carbon savings from domestic energy efficiency.
Part Three - Renewable Energy Sources: There is currently no legal framework to support renewable energy developments beyond UK territorial waters. Part 3 of the Bill will bring in powers to license Renewable Energy Zones (REZs) beyond the current 12 mile limit, based on rights under the United Nations Convention on the Law of the Sea (UNCLOS), which will apply to wind, wave and tidal energy projects. New powers to declare Safety Zones around such installations and prohibit access to unauthorised vessels will be introduced; costed decommissioning plans will also be required. Electricity must be brought ashore in the most environmentally sensitive way.
The Bill also paves the way to a UK-wide system of tradeable Renewable Obligation Certificates once Northern Ireland has introduced a mutually recognised system. The Bill also allows surplus funds arising from the auctioning of output contracted under the Scottish Renewables Obligation and Fossil Fuel Levy to be recycled into the Scottish Consolidated Fund for the purposes of promoting renewables in Scotland. A new strategy for microgeneration is proposed alongside provision for a Renewable Transport Fuel Obligation.
Part Four - Energy Regulation: New Electricity Trading Arrangements (known as NETA) were introduced in England and Wales in March 2001. In Scotland, wholesale electricity prices are subject to an administered price cap. The Government proposes to extend to Scotland trading arrangements based on the NETA model, thus creating the British Electricity Trading and Transmission Arrangements, otherwise known as BETTA, ostensibly to harmonise the two regional markets and allow the Scottish companies to compete in the wider electricity market. It is hoped that the measures brought in under Part 4 of the Bill will protect the interests of consumers by bringing in more competitive prices for domestic and commercial customers.
Shortcomings in the current trading arrangements in Scotland are seen as the prime justification for the introduction of BETTA. The new system would introduce one set of trading rules to allow electricity to be traded across Great Britain, with a single set of arrangements for access to and use of the GB transmission system under a single GB System Operator (National Grid Company), regulated by Ofgem. New codes to balance and settle the system will replace those currently applying to England and Wales, and
3 RESEARCH PAPER 04/36 there will be a new code to govern the relationship between the system operator and transmission system operators in Scotland (SO/TO Code). The widening of access to, and strengthening of, the transmission and distribution networks will also be required to facilitate the introduction of BETTA; this is seen as key to the growth of renewable energy resources, a central part of the Government’s energy policy, particularly those based in more remote areas such as the north of Scotland. However, concerns have been expressed that BETTA may fail to encourage the expansion of renewable energy unless better locational price signals are developed and barriers to small and ‘embedded’1 generators connecting to the Grid are removed. Implementation of BETTA originally planned for October 2004 now looks more likely by the backstop date of April 2005.
Other regulatory provisions are introduced by the Bill. These include; measures to streamline the public inquiry process for power stations and overhead lines; extending the licensing scheme for electricity and gas interconnectors; introducing a special administration scheme for electricity and gas network operators threatened with insolvency to ensure security of supply; a mechanism to allow appeals to the Competition Commission against Gas and Electricity Markets Authority (GEMA) on modifications to the Electricity and Gas Network Codes; and a redefinition of the meaning of electricity supply to ensure that supply taken directly from the transmission network becomes eligible to pay the Renewables Obligation and the Climate Change Levy.
Part Five - Miscellaneous and Supplementary Provisions: Part 5 of the Bill includes a cost recovery mechanism for funding specific regulatory functions in relation to the oil and gas and electricity industries.
Most of the Bill’s content relates to reserved matters, and with exceptions, applies to the whole of the United Kingdom.
The Bill has been amended substantially since it was introduced in the House of Lords on 27 November 2003. Details of the main Amendments is set out in three Library Notes SNSC-2919 Energy Bill [HL] Bill 2 2003-04 Grand Committee Stage2, SNSC-2985 Energy Bill [HL] Bill 34 2003-04 Report Stage3 and SNSC-3014 Energy Bill [HL] Bill 58 2003-04 Third Reading4. The reader is referred to these to pinpoint more detailed discussion on some of the issues that are beyond the scope of this paper.
1 Embedded generators supply energy for the network at a local (distribution) level 2 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02919.pdf 3 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02985.pdf 4 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-03014.pdf
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CONTENTS
I Context of the Energy Bill 9
II Introduction of the Energy Bill 9
III Part One – Security and integrity of supply and annual reporting 11
IV Part Three – Renewable Energy Sources 13
A. Renewable Energy Generation 14
1. Wind power economics 16 B. Renewable Energy Zones 18
C. Safety Zones and Navigation rights 20
D. Decommissioning programmes 24
E. Generation and Transmission of electricity offshore 24
F. Discharge of Renewables Obligation by Payment 25
G. Northern Ireland - Renewables Obligation Certificates 26
H. CHP exemption from the Renewables Obligation 27
I. Microgeneration Strategy 28
J. Renewable Transport Fuel Obligation 28
V Part Four - Energy Regulation issues 29
A. Electricity generation and supply in England and Wales 32
1. Privatisation and the Pool 33 2. RETA and NETA 33 3. Issues arising under NETA 34 4. National Audit Office report on NETA 36 5. Public Accounts Committee Report on NETA 37 B. Electricity generation and supply in Scotland 39
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1. Current market arrangements in Scotland 40 2. Scottish administered pricing arrangements from 1 April 2002 41 3. The Hydro benefit 42 C. Electricity prices 43
1. Unit prices 43 2. Household bills 44 VI BETTA 45
A. Prelude to the introduction of BETTA 45
1. Interim arrangements 48 2. Towards BETTA 48 B. Pre-legislative scrutiny 50
1. Potential benefits of BETTA 51 2. BETTA issues to be resolved 54 3. BETTA cost recovery 62 C. Responses to draft BETTA proposals 62
VII Other energy regulation matters 67
A. Licensing regime for interconnectors 67
B. Energy supply business failure administration scheme 68
C. Appeals to the CompetitionCommissionagainstOfgem decisions 70
D. Best regulatory practice 72
E. Pre-payment Meters 72
F. Planning for major energy projects 73
G. Scottish Renewables Obligation 74
VIII Part Five – Miscellaneous and Supplemental provisions 75
Glossary 77
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I Context of the Energy Bill
Following on from the Energy Review in 20015 and subsequent consultation exercise the Government set out its energy policy in an Energy White Paper published in 2003.6 The White Paper proposed four main goals for the Government’s energy policy:
• to work towards cutting emissions of carbon dioxide by 60% by 2050;7 • to maintain the reliability of energy supplies; • to promote competitive energy markets in the UK and beyond; and • to ensure that every home is adequately and affordably heated.
While it acknowledges the carbon-free role of nuclear power, there are no proposals in the White Paper to build new stations, but it does not rule this out at some stage in the future. The Energy White Paper signalled that a number of separate energy issues would require primary legislation in the near future; these form the basis of the present Energy Bill.
The Energy Bill is in five parts with 23 Schedules; Part Two relating to the civil nuclear industry and the Nuclear Decommissioning Authority is dealt with in a separate Research Paper 04/37. This paper discusses the main issues in Parts 1, 3, 4 and 5 of the Bill.
II Introduction of the Energy Bill
The Energy Bill [HL] (Bill 2 2003-04) 8 was introduced and received its First Reading in the House of Lords on 27 November 2003.9 The DTI prepared a short Background Note,10 Explanatory Notes11 and a Regulatory Impact Assessment on the Bill.12 The Scottish Parliament Information Centre (SPICe) prepared an assessment of the impact of the UK Energy Bill on Scotland13 and on the operation of the electricity network in Scotland.14
5 See: SNSC-1038 Energy Review http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01038.pdf 6 Our energy future - creating a low carbon economy", Cm 5761, February 2003 http://www.dti.gov.uk/energy/whitepaper/index.shtml 7 CO2 emissions for 2003 are provisionally estimated at about 152.5 million tonnes of carbon, about 7% lower than in 1990. Emissions increased by 1.5% between 2002 and 2003, largely due to the greater use of coal for electricity generation and a decrease in net imports of (nuclear) electricity from the continent. HC Deb 22 April 2004 c427-8 8 http://www.parliament.the-stationery-office.co.uk/pa/ld200304/ldbills/002/04002.i-viii.html 9 HL Deb 27 November 2003 c23 10 http://www.dti.gov.uk/energy/leg_and_reg/acts/backgroundnote.pdf 11 http://www.parliament.the-stationery-office.co.uk/pa/ld200304/ldbills/002/en/04002x--.htm 12 http://www.dti.gov.uk/energy/leg_and_reg/acts/ria.pdf 13 UK Energy Bill SPICe Briefing SB 04/05 22 January http://www.scottish.parliament.uk/research/briefings-04/sb04-05.pdf 14 The Electricity Network in Scotland SPICe Briefing SB 04/07 9 February 2004 http://www.scottish.parliament.uk/research/briefings-04/sb04-07.pdf
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The Second Reading took place on 11 December 2003.15 The ENDS Report summarized the debate as follows:
Many Peers were unimpressed. Lord Ezra had been hoping for “a statutory endorsement of the main courses of action and aspirations set out in the Energy White Paper… Instead we have three disparate pieces of legislation rolled into one.”
Most of the debate was taken up with wider energy policy questions rather than the topics addressed by the Bill. Peers lined up to criticize wind power as intermittent, unreliable and damaging to the landscape-while many invoked the security of supply argument to urge the Government to take more active steps to “keep the nuclear option open”.16
Lord Whitty, introducing the Bill for the Government agreed that “much of the debate concerned what is not in the Bill rather than what is in it…many of which are not by definition legislative matters”.17 He commended the Bill to the House, noting that the purpose of the Bill was to support the Government’s commitment to a sustainable energy policy for the future, and that it would help to safeguard security of supply, and provide a basis on which to move forward on the clean-up of the nuclear industry, the regulation of the gas and electricity industry and on renewables.
The Bill was substantially amended in Grand Committee, over eleven days between 15 January and 2 March 2004. The Energy Bill [HL] (Bill 34 2003-04),18 as amended, was published on 2 March 2004. The Bill was further considered and amended during six days of the Report Stage. The Energy Bill [HL] (Bill 58 2003-04),19 as amended on Report, was published on 1 April 2004. Detailed scrutiny of the main Amendments tabled and discussed during the Grand Committee and Report stages is set out in two Library Notes, SNSC-2919 Grand Committee Stage20 and SNSC-2985 Report Stage.21
Opposition Peers criticised the Government for the number of Amendments tabled before Second Reading, and during its passage through the Lords. Baroness Miller of Hendon commented:
A long time has passed between the publication of the White Paper and the production of the Bill. What is the matter with the Government that they need to
15 HL Deb 11 December 2003 c829-865 & 893-924 16 ENDS Report December 2003 p40-41 17 HL Deb 11 December 2004 c915 18 http://www.publications.parliament.uk/pa/ld200304/ldbills/034/2004034.htm 19 http://www.publications.parliament.uk/pa/ld200304/ldbills/058/2004058.htm 20 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02919.pdf 21 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02985.pdf
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bring forward Amendments to their own legislation? They do not wait for us to do it; they bring forward Amendments themselves.22
Lord Jenkin of Roding wrote to the Times to express his frustration at the Government’s approach to voting down Opposition Amendments to the Energy Bill “when many of those Amendments could perfectly well be accepted by the Government.”23
Third Reading of the Bill took place on 20th April 200424 when the Bill, on Question, was passed to the Commons. Library Note SNSC-3014 Third Reading25 summarises the main issues dealt with at Third Reading.
The Energy Bill [HL] (Bill 93 2003-04)26 was published and received its First Reading on 22 April 2004;27 detailed notes on the Clauses are contained in the accompanying Explanatory Notes.28
III Part One – Security and integrity of supply and annual reporting
A new Part One with three new duties on the Secretary of States was added to the Energy Bill as originally tabled during its stages through the House of Lords. During the Report stage of the Bill in the House of Lords Baroness Miller of Hendon successfully moved an Amendment to require the Secretary of State to have a duty to ensure the integrity and security of electricity and gas supply.29 The measure was proposed, in part, to address fears raised by recent power failures, energy company insolvencies, concerns over the failure of the energy market to send timely investment signals for new infrastructure, and the fact that the UK will become a net importer of most of its primary energy needs over the next twenty years, some sourced from, or transiting, politically unstable regions.
Lord Whitty for the Government argued that the Amendment was superfluous because such a requirement was already enshrined in the Gas Act 1986 and the Electricity Act 1989, and that the Secretary of State and Ofgem already share responsibility for ensuring security of supply. Nonetheless, the Amendment was agreed to on Division (Content 119; Not Content 84).
22 HL Deb 11 December 2003 c835 23 Letters to the Editor, Times, 14 April 2004 24 HL Deb 21 April 2004 c182-218, 235-80 25 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-03014.pdf 26 http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmbills/093/04093.i-viii.html 27 Votes and Proceedings 22 April 2004 http://www.parliament.the-stationery-office.co.uk/pa/cm/cmvote/40422v01.htm 28 Bill 93-EN http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmbills/093/en/04093x--.htm 29 HL Deb 18 March 2004 c382GC
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The press reported that the Energy Bill itself could be at risk if the Government failed to overturn the Amendment when it reaches the Commons. Commentators suggested that the proposed change would “seek to impose an unworkable rigidity in the system that runs counter to the market based system.”30 It would require the Government to interfere in the relationship between Ofgem and the market by taking powers to direct investment and effectively signalling an end to independent regulation and a return to central planning.
The Government has firmly signalled its intention not to interfere in the market “except in extreme circumstances, such as to avert, as last resort, a potentially serious risk to safety.”31
Baroness Miller successfully introduced a further Amendment to the Bill, that in addition to the matters specified to be included in the annual reports required under section 1 of the Sustainable Energy Act 2003 (c. 30),32 a further report should be made containing information on the development of new energy sources, including biomass, biofuels and other renewable resources.33
The debate noted that the new Clause also relates to the Government’s responsibility for security of supply by requiring it to make specific annual reports on the development of new supplies. Although not mentioned in the list of sources to be reported on in sub- section 1 of the Clause, the potential to keep nuclear power under review as part of the energy balance is mentioned under sub-section 3 of the Clause.
Lord Whitty saw the Amendment as unnecessarily prescriptive, as there was already a requirement under the Sustainable Energy Act 2003 to report on the issues set out in the Clause; he commented that sub-section 3 was a ‘Trojan Horse’ measure designed to bring about a shift on nuclear policy.34
Although the long term future of nuclear power in the UK is uncertain at this stage, and the White Paper made clear that the Government have no plans for new nuclear build for economic reasons, the possibility is not ruled out at some stage in the future, pending the outcome of policy consultations on the future of the disposal of radioactive waste.35 A full public consultation would take place in this case.36
30 “Lords place energy gains in jeopardy, say analysts” Financial Times 1 April 2004 p4 31 Our energy future - creating a low carbon economy", Cm 5761, February 2003 Chapter Six para 6.7 32 See: Library Research paper 03/29 The Sustainable Energy Bill[ Bill 20 2002-03] http://www.parliament.uk/commons/lib/research/rp2003/rp03-029.pdf 33 HL Deb 18 March 2003 c397GC 34 HL Deb 18 March 2003 c408GC 35 Further information on the Government’s strategy for dealing with radioactive waste is set out in Library Note SNSC-1248 Radioactive Waste Management 36 Our energy future - creating a low carbon economy", Cm 5761, February 2003 Chapter Four para 4.68
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On Third Reading, Lord Ezra successfully moved an Amendment37 requiring the Secretary of State to make an annual report to Parliament setting out the steps he has taken and proposes to take to secure carbon savings from domestic energy efficiency of 5 million tonnes of carbon (MtC) each year by 2010 and a further 4 MtC each year by 2020.
The Amendment anticipates the publication of the Government’s first annual report on progress on achieving its White Paper goals,38 a requirement under the Sustainable Energy Act 2003, and its Energy Efficiency Action Plan39 and is intended to highlight the key part that energy efficiency is intended to make in securing the Government’s commitments on reducing carbon emissions under the Kyoto protocol. It also re-visits a commitment to report on such matters in terms of firm targets rather than policies that was removed from the Sustainable Energy Bill 2002-03 during its passage through the Commons.40
Two Library Research Papers, 03/29 on the Sustainable Energy Bill (Bill 20 2002-03)41 and 04/10 The Sustainable and Secure Buildings Bill (Bill 15 2003-04)42 contain background information on Government initiatives with regard to domestic and commercial energy efficiency.
Although Lord Whitty for the Government saw no need for the duplication of the requirement to report on the energy efficiency goals of the Energy White Paper, the Amendment was agreed to on Division.
IV Part Three – Renewable Energy Sources
Many forms of energy capture can be termed renewable, described by the Department of Trade and Industry (DTI) as “those continuously available sources which do not rely on exhaustible fossil fuels.”43 Renewable energy is likely to make a considerable contribution to the Government’s medium and long term energy and sustainable environmental aims. It has already set a target to generate 10% of UK electricity from renewable energy sources by 2010; the yearly targets were extended to reach 15% by 2015 in December 2003.44 The White Paper set out the Government's aspiration to double
37 HL Deb 20th April 2004 c182 38 Creating a Low Carbon Economy - First Annual Report on the Implementation of the Energy White Paper, DTI 26 April 2004 http://www.dti.gov.uk/energy/sepn/firstannualreport.shtml 39 Energy Efficiency – The Government’s Plan for Action, DEFRA 26 April 2004 http://www.official-documents.co.uk/document/cm61/6168/6168.htm 40 Further information on the passage of the Sustainable Energy Bill 2002-03 can be found in three Library Notes SNSC-2063, 2593 and 2848 41 http://www.parliament.uk/commons/lib/research/rp2003/rp03-029.pdf 42 http://www.parliament.uk/commons/lib/research/rp2004/rp04-010.pdf 43 DTI Energy Renewables homepage http://www.dti.gov.uk/energy/renewables/index.shtml 44 DTI News Release P/2003/585 Government gives green light to renewable future 1 December 2003
13 RESEARCH PAPER 04/36 that figure to 20% by 2020, and suggests that still more renewable energy will be needed beyond that date. 45
The main provisions of Part Three of the Energy Bill concentrate on the development of offshore Renewable Energy Zones (REZs), initially to harness the energy of the wind passing through turbines, but with the potential in the longer term to harness energy from the motion of waves and tides. 46
A. Renewable Energy Generation
Chart 1 details the proportion of total energy consumption (for the purposes of heat and power generation) in the UK met by renewable energy sources. While there is some year- on-year volatility, owing largely to variances in environmental factors (such as rainfall, which impacts on hydro energy generation), the contribution of renewables to total energy consumption has generally increased since 1990. Renewable sources, excluding passive uses of solar energy, provided 1.39 per cent of the UK’s total primary energy requirements in 2002, more than 2.5 times the 1990 level of 0.52 per cent.
More than four-fifths of renewable energy production (measured in thousand tonnes of oil equivalent mtoe) in 2002 was made up of biofuels and wastes, with older, large-scale hydro electricity production contributing the majority of the remainder. All other renewable sources, such as wind & wave, small-scale hydro, and geothermal aquifers, accounted for just 4.5 per cent of renewable energy production.
Seventy eight per cent of the renewable energy produced in 2002 was transformed into electricity. Total electricity generation from all renewable sources in 2002 amounted to 11,444GWh. As described above, biofuels and wastes dominate the picture when fuel inputs are being measured. In terms of the output of electricity, however, large-scale hydro-generation dominates, with 40 per cent of total generation in 2002 being derived from this source. This is because, on an energy supplied basis, hydro (and also wind and wave) inputs are assumed to be equal to the electricity produced. For landfill gas, sewage, sludge, municipal solid waste and other renewables a substantial proportion of the energy content of the input is lost in the process of conversion to electricity
Overall, renewables and wastes provided 2.96 per cent of the electricity generated in the United Kingdom in 2002. There was a 3½ per cent increase in the installed generating capacity of renewable sources in 2002, mainly as a result of a 25 per cent increase in wind capacity and a 5 per increase in the capacity fuelled by biofuels and wastes. The percentage of UK electricity sales that were of electricity generated from sources eligible
45 Further information on renewable energy policy can be found in Library Note SNSC-1162 Renewable Energy policy and support 46 Library Note SNSC-1389 Wave and tidal Power outlines some of the technologies in this area. http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01839.pdf
14 RESEARCH PAPER 04/36 for the Renewables Obligation (RO) rose from 1.32 per cent in 2000 to 1.52 per cent in 2001 and 1.74 per cent in 2002.
Almost all energy production classified as “wind & wave” is currently generated at onshore wind farms. Potential energy production from offshore sources is great, however, as UK offshore wind speeds are higher than those onshore and also less turbulent, while the direction of prevailing winds and size of the Atlantic Ocean mean that wave power levels in the UK are among the highest in the world.
Contribution of renewables to total energy consumption increased by factor of 2.5 since 1990
1990 0.52% 1991 0.50% 1992 0.60% 1993 0.71% 1994 0.95% 1995 0.99% 1996 0.92% 1997 1.03% 1998 1.12% 1999 1.20% 2000 1.21% 2001 1.26% 2002 1.39%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% Proportion of all energy consumption Chart 1: Renewable energy production as a proportion of total energy consumption: UK 1990-2002 Sources: Digest of United Kingdom Energy Statistics 2003, DTI, Tables 1.1.2 & 7.1.1.
Chart 2 shows that, while wind & wave energy production accounted for less than one fiftieth of a percentage of all energy consumption in 2002, the rate of growth since 1990 has been faster than that for renewables generally.
The growth in production shown in Chart 2 has occurred primarily because of increases in capacity: all of the 80-plus wind energy schemes identified as being in operation at the start of 2004 by the British Wind Energy Association (BEWA) have come on line since 1990.47 In addition, wind power productivity has grown over the period, due to improvements in technologies and the better siting of farms.
47 British Wind Energy Association (BEWA) figures http://www.bwea.com/map/list.html
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Contribution of wind & wave energy to total energy consumption increased by factor of 125 since 1990
1990 0.0004%
1991 0.0003%
1992 0.0013%
1993 0.0085%
1994 0.0136%
1995 0.0154%
1996 0.0182%
1997 0.0253%
1998 0.0327%
1999 0.0318%
2000 0.0348%
2001 0.0351%
2002 0.0470%
0.000% 0.005% 0.010% 0.015% 0.020% 0.025% 0.030% 0.035% 0.040% 0.045% 0.050% Proportion of all energy consumption Chart 2: Wind energy production as a proportion of total energy consumption: UK 1990-2002 Sources: Digest of United Kingdom Energy Statistics 2003, DTI, Tables 1.1.2 & 7.1.1. of United Kingdom Energy Statistics 2003, DTI, Tables 1.1.2 & 7.1.1.
1. Wind power economics
According to the BWEA, there are currently 86 wind energy schemes, comprising 1,066 turbines currently generating electricity for the grid in the UK. These include single turbine installations, small clusters of turbines, and larger wind farms with 10 or more machines.48
Critics argue that wind farms are less efficient than other renewable resources, and that the costs of wind power should take into account the additional generating capacity needed to cover periods of intermittency. A similar argument can be applied equally to solar powered arrays. The average capacity (or load) factor49 for all UK onshore wind farms has been calculated as 29.9 per cent in 2002.50 Separate figures are not yet available for offshore wind farms, but they would be expected to demonstrate higher average load factors due to the greater resource potential offshore.
On the costs of wind farms, Lord Sainsbury of Turville, in response to a LPQ noted:
48 British Wind Energy Association website: http://www.britishwindenergy.co.uk/map/index.html 49 The capacity factor is the energy generated during a given period divided by the energy that would have been generated had the wind farm been operating at maximum capacity. HC Deb 19 April 2004 c65W 50 Digest of United Kingdom Energy Statistics 2003: www.dti.gov.uk/energy/inform/energy_stats/renewables/index.shtml
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It is difficult to make generalisations about the costs of wind turbines, as this technology is advancing rapidly, with different makes and models being bought to suit the particular site. Costs will vary, for example, according to whether the project is onshore or offshore, and according to wind-speeds at the site.
There will thus be differences between projects, but I understand that a rule of thumb in the wind energy industry is that new projects may currently cost an average of some £650,000 per megawatt of capacity installed, including the cost of the turbine, transport to the site, and erection and commissioning.
Making use of this rule of thumb, rough approximations can be made of the replacement cost of currently operational wind farm projects: some £150 million for Wales; some £130 million for Scotland; some £100 million for England and some £45 million for Northern Ireland.51
It is also difficult to generalise about the relative costs of electricity generated by wind power compared to other renewable sources as the companies concerned are reluctant to publish detailed figures for reasons of commercial confidentiality.
The relative costs of energy technologies are sometimes expressed in pence / kWh. Current best estimates suggest the cost of offshore wind generation is in the region of 5- 6p/kWh, although this is expected to fall to approximately 2-3p/kWh by 2020. The Government target is for operational and maintenance costs to be approximately 1p/kWh by 2010, with capital and installation costs in the region of £750/kW installed. These figures can be compared with the unit retail prices for domestic and commercial electricity, which in 2002 were 6.246p/kWh and 3.096p/kWh, respectively.52
DTI Wind Energy Factsheet One notes:53
offshore wind farms will initially cost more than onshore wind farms. It has been estimated that offshore machines installed quite close to the shore (in the range of 5-10 km) and in shallow water (5-10 metres deep) might cost around £1000 / kW installed, roughly 30% more than onshor
Given the relatively recent introduction of offshore wind generation technology, several commentators have suggested that its cost will fall more rapidly than conventional fuels.
51 HL Deb 5 January 2004 c23WA 52 Quarterly Energy Prices March 2004, DTI, Tables 2.1.2 & 3.3.2; Digest of United Kingdom Energy Statistics 2003,DTI,Table1.7 By applying data for the fuel components of the RPI to these figures the prices for 2003are 6.128p/kWh and 2.898p/kWh respectively (M Whittaker Social and General Statistics Section) 53 DTI Wind Energy Factsheet One, Offshore Wind Energy http://www2.dti.gov.uk/energy/renewables/publications/pdfs/windfs1.pdf
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The February 2002 Energy Review54 of the Performance and Innovation Unit (PIU) suggested that the offshore wind generation costs of 2-3p/kWh would be comparable to gas-fired and new nuclear plant generation of 2-2.3p/kWh and 2.5-4p/kWh, and lower than coal generation costs of 3-3.5p/kWh, by 2020.
A report in 2004 by Oxera55 calculated the cost of onshore wind power in 2004 at 3.1p/kWh and offshore wind at 5.5p/kWh; these figures are expected to fall to 2.5p/kWh and 3.7/kWh respectively by 2020.
According to these estimates, then, offshore wind generation is expected to be more expensive than existing conventional energy sources by somewhere in the region of 2.5- 4.5p/kWh, but costs are expected to come closer together over time.
In terms of the number of wind farms needed to help the UK meet its renewable targets, Energy Minister Stephen Timms said:
Mr. Timms: To meet the Government's target of 10 per cent. of electricity generated from renewable sources by 2010 we expect that approximately 3,500 to 5,000 wind turbines will be required. This includes both onshore and offshore turbines, and assumes that around 7 per cent. to 8 per cent. of electricity is generatedfromwindwiththeremaining2percent.to3percent.fromother renewable sources.56
B. Renewable Energy Zones
For the Government to meet its renewable energy targets and achieve its aim for a reduction in carbon emissions, a rapid expansion of offshore wind power, not only within territorial waters but beyond, is deemed necessary. Government policy in this area was set out in the Energy White Paper:
4.47 (…) We published in November 2002 a consultation document, Future Offshore, which proposes a strategic planning framework to harness the significant potential of offshore wind. The Future Offshore consultation document includes proposals for the provision and regulation of offshore infrastructure for transmitting electricity.57
54 The Energy Review, Cabinet Office Performance and Innovation Unit February 2002 http://www.number10.gov.uk/output/Page3703.asp 55 Oxford Economic Research Associates, Results of Renewables Marked Modelling” February 2004. http://www.dti.gov.uk/energy/renewables/policy/oxeraresults.pdf 56 HC Deb 23 February 2004 c73W 57 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003, para 4.47 http://www.dti.gov.uk/energy/whitepaper/index.shtml#wp
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The Future Offshore58 consultation document proposed three strategic zones for the immediate future of offshore wind farm development – The Greater Wash, the Solway Firth down to North Wales, and the Thames Estuary. Of the twelve applications made so far made for Round One offshore licence consents, six59 have been granted under the Electricity Act 1989; a further four60 have been granted Orders under the Transport and Works Act 1992 (TWA); two61 further consents are under consideration. No planning applications have yet been made under Round Two of the consents scheme.62 Further details are contained in Library Note, SNSC-1933 Offshore wind farms – Licensing.63
Currently, there is no legislative basis for granting consents to develop any form of renewable generation, including wind farms, beyond 12 nautical miles offshore (the territorial waters limit). New legislation is thus required to allow developments beyond this limit. The Government gave a commitment in the Energy White Paper to enact this:
4.48 (…) to extend the opportunity for developers to exploit areas beyond the UK 12-mile zone we will also bring forward legislation as soon as possible to enable the granting of licences for offshore wind farm developments beyond territorial waters. We will identify and assess the difficulties that might be posed for aviation and other military and civil interests before we offer areas of the sea to the wind industry for development.64
Part Three of the Energy Bill will create this framework of Renewable Energy Zones (REZ) based on the rights available to the UK to waters beyond the territorial limit as a contracting party to the United Nations Convention on the Law of the Sea, known as UNLCOS.65
The Explanatory Notes explain that Article 2 of UNCLOS recognises that each coastal state has jurisdiction and sovereignty over territorial waters; Part V1 also gives coastal States certain rights in relation to the seabed of its continental shelf; in the UK there rights are given effect under the Continental Shelf Act 1964 (c.29).
Part V of UNCLOS also enables the coastal states to establish an exclusive economic zone within which they have sovereign rights for the purpose of exploring and exploiting, conserving and managing natural resources (whether living or non-living), and the exploitation of energy from the water, both currents and tides, and winds, including the
58 Future Offshore: a strategic framework for the Offshore Wind Industry, DTI November 2002 www.dti.gov.uk/energy/leg_and_reg/consents/future_offshore 59 Scroby Sands, North Hoyle, Rhyl Flats, Barrow, Kentish Flats and Burbo Bank. 60 Lynn; Inner Dowsing; Cromer; Gunfleet Sands 61 Teesside; Shell Flats 62 HC Deb 26 April 2004 c740W 63 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01933.pdf 64 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003, para 4.48. 65 United Nations Convention on the Law of the Sea Cmnd 8941 http://www.un.org/Depts/los/index.htm
19 RESEARCH PAPER 04/36 construction of artificial islands, installations and structures for these purposes. However, UNCLOS does not currently confer rights for the exploitation of renewable energy through solar capture.66 The Bill contains powers to designate the extent of a Renewable Energy Zone around the UK by Order in Council,67 within the rules laid down in UNCLOS, on which Scottish Ministers will be consulted.
C. Safety Zones and Navigation rights
The Bill provides that, where there is a proposal to construct, operate, extend or decommission installations in the territorial sea or a Renewable Energy Zone, the Secretary of State be given a discretionary power to issue notices declaring one or more safety zones around the installations.
In a letter to Baroness Miller of Hendon, Lord Whitty explained the nature and purpose of safety zones.68 He noted that UNCLOS gives the UK the right to establish safety zones around renewable energy installations in the REZ, with the purpose of ensuring the safety of both navigation and the installation by keeping them at a safe distance apart to minimize the risk of collisions. UNCLOS specifies that the safety zone is not to exceed a distance of 500 metres from the installation unless the International Maritime Organisation agrees that it can be larger.
He went on to explain that the applicant will need to make the case for a zone based on safety grounds, which will be assessed by the DTI in conjunction with the Maritime and Coastguard Agency. Where a zone is considered necessary, it may be tailored to the particular circumstances, in full consultation with interested parties such as Trinity House, the Chamber of Shipping and the Royal Yachting Association, local ports and the fishing industry. Provision is made to hold a public inquiry if the issues it raises are deemed to be of particular importance.
A notice would be issued declaring the extent of any zone; the extent may be sufficiently restricted to enable some vessels to enter a turbine array without entering into the safety zone, or specify that some vessels may be permitted to enter the zone in some circumstances. For example, certain fishing vessels below a certain size or undertaking a particular type of activity may be given access; likewise vessels providing aid to ships in distress. A permit itself will not be required if the permissions are already set out by the safety zone notice.
66 HL Deb 3 February 2004 c315GC 67 Orders in Council are a form of secondary legislation, issued by the Privy Council and relate to the regulation of professional bodies, or the transfer of responsibilities between Government departments. They serve the purpose of amending legislation when a Statutory Instrument would not be appropriate. 68 Letter from Lord Whitty to Baroness Miller of Hendon on Safety Zones, 18 March 2004 Deposited Paper 04/781
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The Bill also introduces a new section into the Electricity Act 1989, giving the Secretary of State power to extinguish public rights of navigation in the vicinity of installations located in GB territorial waters. It also places various obligations on the Secretary of State to ensure that those with interests are made aware of the declaration.
The Bill seeks to ensure, by means of Orders in Council, that there is a common criminal and civil legal regime for all offshore developments, whether located in internal waters, territorial waters of an REZ or safety zone surrounding it, and gives powers to the police to investigate alleged offences on, above or under an installation. Application to restrict public rights of navigation may also be made once consent has been granted to develop an REZ.
Fines may be incurred where a person is convicted of unlawfully entering a safety zone unless they are able to show in their defence that they took all reasonable steps to prevent the contravention, for example, they lost of control of a vessel in the event of high winds or mechanical failure.
Lord Whitty addressed the issue of compensation to fishermen whose activities may be restricted in proximity to an REZ by stating that this would be a matter for the commercial judgement of the developer; the Government sees its role as facilitating discussion between industries and developers on this matter.
Ministers in Scotland would be consulted prior to an Order in Council applying criminal or civil law in an REZ. During Grand Committee Stage, Lord Whitty explained:
An Order in Council could potentially cover civil or criminal law matters that are wholly reserved under the Scotland Act 1998, wholly devolved or a mix of both. In the case of wholly reserved matters the Order in Council would be subject to the negative resolution procedure in the Westminster Parliament, as we discussed earlier. Where the Order in Council deals with wholly devolved matters it would be subject to annulment of a resolution of the Scottish Parliament. Where the content of the Order in Council includes both reserved and devolved matters it would need to be subject to the procedures of both the Scottish and Westminster Parliaments.69
The issues of safety zones and the extinguishment of navigational rights were hotly discussed during the passage of the Bill through the Lords. Industry representatives lobbied Peers over their concerns that the Government had failed to consult in timely fashion about safety in already busy shipping lanes and the practicalities of the measures proposed in the Bill. They pressed for a memorandum of understanding on consultation before any further sites are offered for tender, particularly with the lighthouse authorities and asked for details to be published of the heaviest shipping routes for the assistance of
69 HL Deb 3 February 2004 c334GC
21 RESEARCH PAPER 04/36 would be developers. It is thought that some of the developments already approved will cause significant disruption to existing shipping lanes and run the risk of collisions.
Interested parties also felt that more research and technical studies need to be done to assess the impact of wind farms on shore and ship radar. One suggestion is to have traffic management tools to enable the offshore zones and shipping to coexist safely. The Government has said that the costs of providing any navigational aids to prevent collisions will be met by developers.70 They must conform to international navigation specifications as monitored by the General Lighthouse Authorities.
At Third Reading the issue was raised once again. It was reported that the Maritime and Coastguard Agency will begin an initial study on the effects of radar as a matter of prority, using the North Hoyle wind farm off North Wales as a test facility.71
The Chamber of Shipping and the Corporation of Trinity House, in consultation with the British Ports Association and the UK Major Ports Group, in a joint submission to Peers, recommended that, when planning the location of offshore renewable energy sources, the Government should where appropriate consider the value of designating routeing measures conforming to internationally agreed standards to provide the necessary interface between installations and shipping, in order to:
• enhance safety and the protection of the marine environment; and, • ensure that the progressive development of offshore installations is both structured and compatible with other marine activities.72
The Chamber of Shipping believes that offshore wind farms could endanger the safety of seafarers and the marine environment if the Government allows them to be placed near major shipping lanes. In addition, it says that the costs of diverting shipping may negate the environmental benefits of the turbines, 73 a view supported by the Earl of Caithness when he mentioned the EU initiative on short-sea shipping, called Motorways of the Sea, whereby freight that would normally be transported by road would be shipped by sea. He noted that although it would be feasible for shipping to by-pass any wind farms situated in fast track shipping lanes, it might not necessarily be practical.74
70 HC Deb 26 April 2004 cc741-2W 71 HC Deb 26 April 2004 c741W 72 Energy Bill Part 2: Renewable Energy Sources Submission by the Chamber of Shipping and the Corporation of Trinity House 7 January 2004 73 Chamber of Shipping Position Statement on offshore wind http://www.britishshipping.org/news/index.htm 74 HL Deb 23 March 2004 c618GC
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In the light of these submissions, Lord Greenway sought to add a proviso to the Bill that would ensure that such installations or their safety zones cannot be established where they would interfere with designated sea lanes or prescribed traffic separation schemes.75
Lord Greenway also highlighted the fact that consent for offshore structures under the Transport and Works Act 1992 (TWA) does not require a statutory assessment of navigational safety whereas an application for consent under the Coast Protection Act 1949 (CPA) does, and asked that this be remedied. Lord Davies of Oldham acknowledged that factually this was the case, but that even under the TWA, which disapplies CPA, control is stringently applied to ensure maritime safety is not compromised. He restated the case at Third Reading, noting that the DTI seeks the views of the Maritime and Coastguard Agency on all TWA order applications; where applications are approved, subject to conditions, these conditions become legally binding on the developer.76 Nonetheless, the area appears to be legally complex, with Lord Higgins contending that MCA approval was not a statutory obligation. Moves to disapply TWA orders for offshore wind farms would also present difficulties for approvals of such developments in Wales, where the Assembly does not have powers under Section 36 of the Electricity Act but is responsible for TWA orders for offshore wind farms in Welsh territorial waters.
Although Lord Greenway’s Amendment was withdrawn, Lord Davies for the Government conceded that the Government had learnt lessons on the consultation process and were seeking to put right any oversight in the process to date. He stressed that the Government were aware of concerns of the shipping industry about the navigational safety around renewable zones and was committed to addressing these, within the framework of existing legislation.
Similar assurances were put forward at Third Reading stage when Lord Higgins sought to move that consent under Section 36(1) of the Electricity Act should only be given in relation to offshore wind farms after full consultation with representatives bodies of marine users.77 Lord Davies of Oldham reminded the House that the Secretary of State cannot grant a Section 36 consent unless a full environmental statement is provided that complies with the statutory requirements, including an assessment of the likely direct and indirect risks and impacts on the environment. Carryer and Deeming present a useful overview of such risks in their article, Environmental risk for offshore wind farm developers: lessons from other industries,78 where they specifically highlight “Shipping and aviation risks, including collision”.
75 HL Deb 4 February 2004 c360GC 76 HL Deb 20 April 2004 c246 77 HL Deb 20 April 2004 c241 78 R Carryer and K Deeming, Environmental risk for offshore wind farm developers: lessons from other industries, Proceedings of the 20th BWEA Annual Conference 1998. http://www.owen.eru.rl.ac.uk/documents/bwea20_40.pdf
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Peers also raised the potential problems posed to recreational shipping in REZs. The Royal Yachting Association’s (RYA) position statement notes that the RYA has objected to the development of offshore wind farms around UK waters because of the real risk of rotor blade collision with recreational craft. The RYA believes that the threat to recreational yachts can be minimised by specifying a minimum rotor height clearance above flat level (mean high water springs) of 22 metres.79
D. Decommissioning programmes
UNCLOS also places an obligation on contracting parties to ensure that renewable energy installations in a Renewable Energy Zone are decommissioned. Chapter Two sets out a requirement of the preparation of a decommissioning programme for all such installations, with the onus on the developer to ensure the programme is complied with, including the provision of final security for the decommissioning programme. Greater clarity on the security that would be needed before planning permission could be granted was set out in two letters to Baroness Byford.80
E. Generation and Transmission of electricity offshore
Generation, transmission, distribution and supply of electricity are prohibited activities under the Electricity Act 1989; this means that they must not be undertaken by anyone without being granted a licence to do so. The Bill applies these prohibitions to REZs unless a licence is granted from the licensing authority, Ofgem. The Bill also confers powers to modify the standard licence conditions of offshore transmission and distribution licences to make allowance for the differing offshore environmental conditions that may prevail, subject to formal consultation.
The Bill also extends the requirement under Section 36 of the Electricity Act to gain consent to construct, extend or operate a generating station to include REZs.
The proposals in this Bill to introduce BETTA (see Part VI of this paper) make no provision to extend current transmission licences offshore; this provision was made by Amendment to enable the Secretary of State to extend the system operator licence to apply offshore. 81
79 Royal Yachting Association Position Statement on offshore wind farms, April 2004 http://www.rya.org.uk/images/uploaded/1d037d09-4569-468c-a26c- 1aa483773911/RYA_position_on_wind_farms_april_04.pdf 80 Letter from Lord Triesman to Baroness Byford 1 March 2004 Deposited Paper 04/529 and Letter from Lord Whitty to Baroness Byford 6 April 2004 Deposited Paper 04/841 81 HL Deb 4 February 2004 c358GC
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F. Discharge of Renewables Obligation by Payment
The Renewables Obligation (RO) is a market based mechanism that obliges licensed electricity suppliers in England and Wales, and separately in Scotland, to supply a specified and growing proportion of their supplies from ‘eligible’ renewable energy82 or face a financial penalty subject to the price to customers being acceptable. Some energy companies positively market premium price electricity to meet the demand from their customers who wish to receive their supply from “green resources.” For England and Wales in 2004-05 the RO target level is 4.9%. The aim of these measures is to create a demand for electricity from renewable sources and provide market incentives for developers to invest in new technologies in order to meet the targets.
The supplier has a choice; they can buy renewable electricity from a renewable generator at a cost-effective price and present the necessary Renewable Obligation Certificates (ROCs) to Ofgem to the value of their target. If they fall short of their target, they can purchase ROCs from other suppliers through an auction, or pay Ofgem £30/MWh, linked to RPI, to ‘buy-out’ the unmet obligation. The value of ROCs is established in Power Purchase Agreements (PPAs) or contracts between generators, suppliers and third party traders. The floor price is set by the ‘buy out’ fee; the ceiling price depends on the excess of demand for ROCs over supply of renewable energy. The “buy out” has been increased to £30.51/MWh for the second year of the RO. There are restrictions on the number of ROCs a supplier can carry forward from one annual compliance period to another, which is assessed each year in October.
Receipts of the buy-out fund are redistributed to suppliers in proportion to the number of ROCs they hold. There are no provisions in the Bill for a single buy out fund for Britain; currently there is a fund for England and Wales, and for Scotland, with one due to be established in Northern Ireland. However, the manipulation of the buy-out fund was raised during Third Reading of the Bill in the Lords, when Baroness Miller of Hendon sought to introduce a Clause to merge the funds and help to overcome the practices she outlined:
Figures recently published by Ofgem have shown that the current system is open to manipulation through the creation and subsequent gaming of material differences in the value of renewable obligation certificates—or ROCs—between the different buy-out funds. For example, a supplier with a large market share in Scotland has been able to under-present ROCs in Scotland, thus inflating the value of the remaining ROCs presented there, and then to use the ROCs that he did not present in Scotland to secure extra revenue by presenting them in England and Wales.83
82 3% of total supply in the first compliance period (April 2002 to March 31st 2003) rising to 10.4% from 2010. 83 HL Deb 20 April 2004 c249
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Lord Davies of Oldham assured Peers that this was a serious matter that would be kept under scrutiny, but a move to merge the fund would be premature; a detailed assessment of the RO is due to take place in 2005-6; there would also be impacts on the buy-out fund in the 2003-4 year, and implications for powers previously devolved to Scotland in terms of its own Renewables Obligation and buy-out fund.
In November 2002 the energy suppliers TXU (UK) Ltd and Maverick Energy Ltd were placed into administration with liabilities owed to the Renewables Obligation buy-out fund totalling £23.6 million, 84 which fell due on 1 October 2003. Non-payment into the fund places an unfair disadvantage on those that have made their payments on time because the sum that will be available to those who wish to cash in their Renewable Obligation Certificates is reduced.
In a reply to a question in the House of Lords the Government noted that it would be consulting industry on proposals to minimise the adverse impact of any future shortfalls in the renewables market, but that its approach would be on the basis that the industry itself will bear the risk of suppliers going into administration; the Government will not seek to interfere in the market. If necessary, legislative action would be taken to tackle theissueoflatepayments.85
The Energy Bill contains a provision that aims to reduce the likelihood of a future shortfall in the buy-out fund, mostly from late payments, essentially by reducing the length of the obligation period, which currently stands at one year. Any late payments beyond the normal obligation period would incur daily surcharges, dispersed into a late payments fund. No penalties will be imposed on suppliers while the late payment scheme is in place, but there will be provision for an end date, from when normal penalties for breach under the Act would be applied by Ofgem.
During the Report stage, Lord Whitty explained why there would be no transfer of suppliers liabilities with the obligation; essentially such a measure would give one set of creditors preference over others, breaching the fundamental principles of insolvency. Moves at Third Reading to introduce additional powers to reduce default risks to the buy- out fund by making extra charges on consumers and / or staged payments to reduce outstanding debts, were disagreed on Division.86
G. Northern Ireland - Renewables Obligation Certificates
The electricity industry in Northern Ireland differs from the rest of the UK in that there is a smaller number of customers spread over a relatively small area, served by only three main power stations that have until the mid-1990’s supplied all of the Province’s
84 Over £23 million HL Deb 29 March 2004 c1033 85 HLDeb8October2003c291 86 HL Deb 20 April 2004 c258
26 RESEARCH PAPER 04/36 electricity needs. Now there are three electricity interconnectors linking the Northern Ireland grid; two to the Republic of Ireland grid operated by the Electricity Supply Board, and The Moyle Interconnector, operated by Northern Ireland Electricity plc.87
In 1993 the Department of Economic Development in Northern Ireland announced its intention to encourage the development of commercially viable renewable energy sources. A scheme was developed that involved placing a non-fossil fuel obligation on Northern Ireland Electricity (NIE) plc to initially secure 16 MW DNC (declared net capacity), rising through successive Non Fossil Fuel Obligations (NFFOs) to 45 megawatts (MW) target of electricity from such sources by 2005.
Renewable Energy in the Millennium - the Northern Ireland Potential88 published by the Department of Economic Development for Northern Ireland in 1999 recognised that NI has considerable potential for renewable resources, particularly wind and biomass. However, without significant grid reinforcement, the amount of intermittent renewable generation that can be integrated into the NI grid is limited.
The Utilities Act 2000 does not currently permit Northern Ireland renewable energy suppliers to qualify for Renewables Obligation Certificates with their counterparts in Great Britain. The implementation of the Northern Ireland Renewables Obligation is planned for April 2005, which will permit the trading of renewable obligation certificates (ROCs) right across the UK.
The Energy Bill brings in provisions for the mutual recognition and tradeability of ROCs; GEMA (the Gas and Electricity Markets Authority) will be allowed to issue ROCs to suppliers in Northern Ireland for some renewable electricity supplied in Northern Ireland and for those suppliers to discharge their obligation by presentation of these ROCs.
H. CHP exemption from the Renewables Obligation
Combined Heat and Power (CHP) is the simultaneous generation of electricity and useful heat in a combined, highly efficient process. Heat generated by good-quality CHP, and electricity generation from CHP schemes, are not subject to the Climate Change Levy, evidenced by the issue of Licence Exemption Certificates (LECs).
Most CHP plant is intended to supply a particular industrial operation or site; any spare capacity can be sold to the network, provided the supplier is licensed to do so. However, the supplier will be subject to the renewables obligation and will have to buy ROCs to make up for any shortfall in his use of renewables. The Combined Heat and Power
87 Department of Enterprise Trade and Investment website http://www.detini.gov.uk/cgi-bin/get_builder_page?page=37&site=5&parent=19&prevpage=18 88 http://www.actionrenewables.org/aboutNIBook.htm
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Association (CHPA)89 has lobbied that this anomaly should be corrected, otherwise, they claim, it allows efficiently generated surplus energy go to waste, and at the same time, will cost the CHP industry in the region of £100 million by 2010 to subsidise the development of other renewable technologies.
Baroness Miller of Hendon, in consultation with the CHPA, successfully introduced an Amendment to the Energy Bill during the Report stage that would amend the Electricity Act 1989 so as to exempt CHP generating plants from the renewables obligation.90
The Government is expected to challenge the move once the Bill reaches the Commons. It has set a target achieving at least 10,000 MWh of installed Good Quality CHP capacity by 2010. Recently a target to source at least 15% of electricity for use on the Government Estate from Good Quality CHP by 2010 has been set. It hopes to publish its own CHP strategy shortly.91
I. Microgeneration Strategy
Lord Ezra also successfully moved an Amendment on Report, requiring the Government to bring in a strategy with targets on microgeneration, the generation of energy by means of equipment installed in or for use by a single unit or a small number of units of residential accommodation or office accommodation. The emphasis should be on very small scale renewables, CHP and ground source heat.
Although the Government argued that the draft CHP strategy already includes provision for micro-generation CHP, and saw no need for further endorsement, the Amendment was agreed to on Division.92
Support for the Clause comes from a new industry body, the Micropower Council, launched in London on 23rd April 200493, which has an Action Plan designed to encourage consumers to recognise the energy efficiency benefits of microgeneration within the domestic setting.
J. Renewable Transport Fuel Obligation
Biofuels for use in transport are combustible liquid fuels derived largely from agricultural plant material, and plant or animal oils, and can be blended with or substituted for petrol or diesel to varying extents to extend the fuel used in these vehicles. Depending on their
89 http://www.chpa.co.uk/presre92.htm 90 HL Deb 29 March 2004 c1035GC 91 DEFRA CHP site: http://www.defra.gov.uk/environment/energy/chp/ 92 HL Deb 29 March 2004 c1098-9GC 93 Power News Press Release, UK Microgeneration Council launched, 23 April 2004 http://gee.pennnet.com/news/news_display.cfm?Section=PENEWS&ArticleID=203361
28 RESEARCH PAPER 04/36 method of production, biofuels can offer environmental benefits, from a reduction in greenhouse gas emissions, through to their biodegradeable nature.94
The UK and other EU member states are required under the terms of the Directive 2003/30/EC95 on the promotion of biofuels and other renewable funds for road transport, to set indicative targets96 for the use of biofuels and other renewable fuels in their areas, to be met in 2005 and 2010, and to notify the European Commission of these targets by July 2005 and July 2006 respectively. The Government will consult stakeholders on possible indicative targets in 2004 before deciding on the actual values to be set with a view to having regulations in place by the transposition date of 31 December 2004.97,98
The Government introduced a 20 pence per litre fuel duty incentive for biodiesel that came into effect in July 2002. A similar duty incentive for bioethanol was announced in Budget 2003, fixed for three years, and will come into effect in January 2005.
The Government agreed at Third Reading to accept an Amendment giving powers to implement a renewable transport fuel obligation to support the development of biofuels and help the Government work towards meeting the Directive’s indicative targets. The Government indicated that although the phrasing of the Clause required substantial amendment, it chimed with the likely thrust of options that will be shortly be consulted upon in terms of the implementation of the Biofuels Directive, and would give the necessary powers, should the consultation reveal support for such a measure.99
V Part Four - Energy Regulation issues
…so far what is described as the Government's energy policy is really an electricity policy.100
The comment made by Lord Tombs, speaking during Report Stage of the Energy Bill reflects the fact that although the proposed legislation is titled The Energy Bill, much of the content relates to electricity generation and supply; very little is directly concerned with the supply and regulation of the gas industry.
94 Library Note SNSC- 2697 Biofuels for Transport gives more background on the subject. http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02697.pdf 95 OJ L123 of 17 May 2003 http://www.europa.eu.int/comm/energy/res/legislation/doc/biofuels/en_final.pdf 96 The Directive sets indicative targets of 2% substitution of petrol and diesel with biofuels by the end of 2005 and 5.75% substitution in 2010. Member States must set their own targets and report to the European Commission on progress towards them. They are expected to justify any departure from the reference targets. The Directive outlines possible reasons why a Member State may set different targets, including allocation of resources to the use of biomass to provide energy in other ways or to other sources of renewable power for transport. 97 HC Deb 16 September 2003 c691W 98 HC Deb 18 September 2003 c885W 99 HL Deb 20 April 2004 c264 100 Lord Tombs speaking during Report Stage of the Energy Bill HL Deb 29 March 2004
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Set up under the Utilities Act 2000,101 the wholesale electricity and gas markets are regulated by the Gas and Electricity Markets Authority (GEMA) through its executive arm, the Office of Gas and Electricity Markets (Ofgem). Customer complaints are dealt with by the independent watchdog, energywatch, which is able to refer matters to Ofgem.
The electricity industry in Britain is regulated by the Electricity Act 1989102 as amended by the Utilities Act 2000. Regulation is achieved by prohibiting four principal activities; generation of electricity; transmission of electricity (i.e. transporting electricity by high voltage wires); distribution of electricity (transporting electricity by low voltage lines to customers) and supply (the sale of electricity to customers). These activities are then authorised by licence or exemption and standard licence conditions are imposed on the holder of the licence or the beneficiary of the exemption.
Electricity is traded in a wholesale market in England and Wales, under a system of protocols known as the New Electricity Trading Arrangements (NETA), introduced in March 2001 under section 68 of the Electricity Act 1989.103 Licensed generators compete to transmit electricity at high voltage, which is then sold through a distribution network to retail companies that supply electricity to commercial and domestic customers.
Arrangements under NETA do not encompass Scotland. Other than the introduction of competition in supply, trading arrangements in Scotland have not changed significantly since privatisation in 1990. Wholesale electricity prices in Scotland are subject to a price cap, administered by the energy regulator, Ofgem, rather than determined by competition.
UnderSection13oftheUtilities Act 2000, Ofgem has a statutory duty to protect the interests of customers by promoting effective competition. Amongst other duties it must: ensure that all reasonable demands for electricity are met; ensure that licence holders are able to finance their obligations and have regard to vulnerable groups, such as the sick, disabled, elderly, those on low incomes and those in rural areas. It is also required to have regard to social and environmental guidance issued by the Secretary of State.
Licensed electricity transmission in Britain is currently undertaken in three separate areas. England and Wales constitutes one transmission system owned and operated by the National Grid Company plc (NGC).104 In Scotland the Grid is divided into two transmission systems; the system in the north is owned and operated by Scottish Hydro- Electric Transmission Limited, a member of the Scottish and Southern Energy Group;
101 Utilities Act 2000 (c. 27) http://www.legislation.hmso.gov.uk/acts/acts2000/20000027.htm 102 Electricity Act 1989 (c. 29) http://www.hmso.gov.uk/acts/acts1989/Ukpga_19890029_en_1.htm#tcon 103 Ofgem Press Release “NETA to start on Tuesday 27 March 2001” 22 March 2001. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/1074_r2901_15march.pdf 104 In October 2000 a demerger from BG plc resulted in Transco becoming a part of the Lattice Group plc. Two years on, Lattice Group plc merged with National Grid Company plc to form National Grid Transco plc - the UK's largest utility.
30 RESEARCH PAPER 04/36 transmission in the south is owned and operated by SP Transmission Limited, a member of the Scottish Power group. The Scottish companies have joint control over the interconnector capacity with England.
The major difference between Scotland and England and Wales is that the two Scottish transmission holders are each part of a vertically integrated group, with other members of the group holding supply, distribution and generation interests; in England and Wales the National Grid Group has only transmission interests. Ofgem feels that such an arrangement has reduced the development of competition in Scotland, and by extension the whole of Britain. Additionally, independent Scottish generators, particularly renewable generators, find it difficult to connect to the Grid and sell to the Great Britain market.
The Government proposes to extend market arrangements for electricity trading in England and Wales across Great Britain, based on the NETA model, in order to achieve a competitive wholesale electricity market. The new system will be known as the British Electricity Trading and Transmission Arrangements, or BETTA.
To achieve this requires a single British transmission system operated by a single entity (National Grid Company is the proposed entity) that is independent of generation and supply interests. The separate transmission asset owners would own assets in their areas build new assets and undertake maintenance of them. A separate GB system operator (GBSO) will undertake the purchasing, and call on balancing services and real time configuration of the transmission system. It is important that the GBSO is separate from generation and/or supply interests as it is required to balance the system by calling on extra supplies; calling on integrated transmission owners could otherwise lead to conflicts of interest.
Legislative powers are needed to incorporate the following:
• To give the Secretary of State powers to amend electricity licences to allow for a British transmission system, operated by a single licence holder, and for trading and transmissions arrangements, modelled on those currently operating in England andWales,tobeextendedtothewholeofBritain. • To give the Secretary of State powers to award a transmission licence system to a Transmission operator • To change to the prohibition on transmitting electricity to reflect the fact that ownership of the transmission assets will be separated from the system operators but that both the transmission asset owner and the system operator will have a role in the process of transmission. • Make changes to the licensed owners contained in the Electricity Act (EA) 1989 to reflect the split of the transmission functions • Make other changes to the EA as a consequence of the single trading market and a single transmission system
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• A mandatory licensing scheme for each of the transmission licence holders in Britain so that the existing transmission licence holders continue to be licensed • A mandatory transfer scheme for certain assets required to be transferred to the entity operating the transmission system.
The Bill includes these and further provisions relating to energy regulation.
A. Electricity generation and supply in England and Wales
In pre-war Britain over 600 separate private and municipal undertakings were responsible for the generation and supply of electricity, under the general control of electricity commissioners. The National Grid was set up in 1926 to operate transmission and trading arrangements. In 1947 the electricity industry in the UK was nationalized and the British Electricity Authority was formed to take over the activities of these companies.
The Herbert Committee of Enquiry into the electricity supply industry reported in 1955105 and concluded that the industry was over-centralised and recommended the separation of the distribution and supply of electricity activities between Twelve Area Boards, overseen by the Electricity Council for England and Wales. This would act as an independent regulator for the resolution of disputes. A Central Electricity Generating Board (CEGB) would retain responsibility for all generation and high-voltage transmission in England and Wales.
In Scotland, the organisation took a different form. Two boards, the South of Scotland Electricity Board and the north of Scotland Electricity Board each became responsible for generation and distribution of electricity and were not part of the Electricity Council of England and Wales. (See Section B below).
In 1974 the Plowden Committee’s report106 recommended that generation and distribution activities in England and Wales should be integrated under new Electricity Corporation. Although the recommendation received support from the Government and the Trades Union Congress, legislation was not presented to Parliament for political and industrial reasons.
The nationalized industry remained in place until 1988 when the Conservative Government decided that this structure hindered competition. Two white papers107 signaled the fundamental re-organisation of the British electricity industry. 108
105 Electricity Supply Industry. Report of the Committee of Enquiry, Chairman Edwin Herbert, Cmd 9672 1955. 106 Committee of Inquiry into the structure of the electricity supply industry in England and Wales. Chairman Lord Plowden. Cmnd 6388. 1975 107 Privatising Electricity White Paper: Governments proposals for privatisation of electricity supply industry in England & Wales. Cm 322 February 1988; Privatisation of the Scottish Electricity Industry White Paper. Cm 327 March 1988
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The proposals were examined by the Energy Select Committee in its third report, Structure, regulation & economic consequences of electricity supply in the private sector.109 The Electricity Act 1989 became the legislative platform for reform.
1. Privatisation and the Pool
The majority of the electricity supply industry was restructured and privatised in 1990 and a ‘Pool’ system of wholesale trading was introduced in England and Wales. The Electricity Pool was the trading arrangement by which electricity suppliers and large industrial users purchased electricity from the electricity generators, operating under the Pooling and Settlement Agreement, a commercial arrangement between the generators and public suppliers of electricity. The Pool was used to determine which generating sets (stations) were called on to satisfy demand and the price for wholesale electricity (the Pool price) was set for each half hour by the most expensive generator called on during that period. All generators received this price.
Membership of the Pool was compulsory, and attracted criticism from participants and customers early on, mainly on the basis that the operation was not transparent or open to consumers. Prices behaved unpredictably and did not appear to act in customers’ interests. It was also seen as a price setting mechanism rather than a true market, which allowed generators owning large amounts of capacity to exercise of market power.
Library Standard Note SNSC-1392 Electricity Trading I – Privatisation and the Electricity Pool110 explains the drivers for privatisation and the rise and fall of the Pool system.
2. RETA and NETA
With customer confidence in the Pool system low and the demand for reform strong, in November 1998 the Director General of Electricity Supply published a Framework Document, which explained how a programme for the Reform of Electricity Trading Arrangements (RETA) would be taken forward.111
In July 1999, Ofgem published for consultation detailed proposals for the implementing of New Electricity Trading Arrangements (NETA) in England and Wales.112 The DTI and Ofgem’s main objectives for NETA were to promote competition between generators and suppliers in a decentralised market, with buying and selling taking place on the basis of individual contracts, forward and futures markets, and through power exchanges.113
108 HC Deb 25 February 1988 c456-73 109 HC 307 1987-88 110 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01392.pdf 111 Review of Electricity Trading Arrangements: Framework Document, OFFER, November 1998. 112 Ofgem, The New Electricity Trading Arrangements, July 1999 113 Power exchanges bring together buyers and sellers of electricity, allowing them to trade anonymously via screen based systems on the basis of transparent trading information.
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Six critical issues were identified by respondents:
• Imbalance of cash-out prices; • The timing of contract notification; • Separation of production and consumption imbalance volumes; • Meter splitting and aggregation; • Governance; • CHP and renewables
NETA finally went live on 27 March 2001. Essentially, NETA is a wholesale electricity market, made up of a series of bilateral contracts and a futures market comprising physical and derivatives trading between generators and suppliers of electricity in England and Wales. Although longer-term physical contracts still make up a proportion of the market, under NETA, bulk electricity is traded forward mainly through bilateral contacts.
Generators finalise contracts for the sale of their electricity to suppliers at least four hours in advance. Nearer delivery time (the start of a trading period), the Balancing Mechanism comes into play, whereby a generator who delivers less than the contracted amount is liable to charges; likewise a supplier who consumes more than contracted. Buyers and sellers of “imbalance electricity” attract different prices, these constituting a two part cash-out regime. Generators who provide an excess of electricity attract lower prices, encouraging longer-term contracts. Being able to forecast demand is critical to the success of NETA and the companies contracting to sell to the market; the imbalance charges for failure to supply the contracted amount, or for oversupply, can be high and are paid into a central fund rather than paid out to generators.
Library Note SNSC-1393 Electricity Trading II – Implementation of NETA114 explains the legislative basis and implementation of NETA, and a review of the first year of operation. The Ofgem website also has a set of comprehensive briefing documents on NETA on its website.115
3. Issues arising under NETA
Since its launch, opinion has been divided on the success of NETA. Industries and traders initially voiced their criticisms on the complexity of trading, and the wide spread of prices on offer at the start of trading; small and embedded generators felt they were disadvantaged in their access rights to the distribution network. Combined Heat and Power (CHP) generators faced financial difficulty, partly because NETA is less
114 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01393.pdf 115 Ofgem NETA pages http://www.ofgem.gov.uk/elarch/reta_contents.htm
34 RESEARCH PAPER 04/36 favourable to generators which have a less predictable output, and partly because of the high costs of connecting to local electricity networks.
Standard Note SNSC-1394 Electricity trading IV – Embedded generation and small generators116 discusses the issues affecting small and embedded generators and the measures taken by the Government and Ofgem to address these concerns.
A full report on the first year of NETA was published in July 2002.117 An Ofgem Factsheet summarises the main findings in favourable terms:118
• NETA is performing well against objectives set by Ofgem and the Department of Trade and Industry (DTI) when it was decided that the Electricity Pool, whose flawed rules and inflexible governance arrangements failed to reflect falling costs and increased competition, should be replaced. • NETA reforms – alongside other factors such as falling fuel prices, a generous capacity margin and increased competition in generation – have resulted in a 40 per cent reduction in the costs of wholesale electricity since 1998, when NETA reforms were first proposed by Government. • Prices over the first year of NETA (March 2001-March 2002) fell by 20 per cent. • Flexible governance has allowed significant changes to be made to the balancing and settlement rules in the last year to the benefit of all market participants. • Those smaller generators who replied to Ofgem’s latest survey reported that output levels – the amount of electricity generated – were slightly up compared with the previous year. This is in contrast to the reduced output reported after two months of NETA operation in the last review in August 2001. • Prices for smaller generators compare with prices received by larger generators and in some cases, where they attract Government help, are better.
Although more strident critics have blamed the collapse of a number of energy companies, most notably British Energy,119 and TXU in summer 2002, on the large falls in wholesale electricity prices associated with NETA, these companies also had a number of long-term contracts in place that affected their ability to compete effectively in the market. Other companies were forced to withdraw or ‘mothball’ plant, pending higher market prices. This phenomenon can partly be attributed to the high degree of over
116 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01394.pdf 117 The review of the first year of NETA: a review document. Volumes I and 2, Ofgem, July 2002 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/1984_48neta_year_review.pdf 118 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/1027_factsheet1102_24july.pdf 119 Library Research Paper 03/01 The Electricity (Miscellaneous Provisions) Bill, sets out the range of factors affecting British Energy. http://hcl1.hclibrary.parliament.uk/rp2003/rp03-007.pdf
35 RESEARCH PAPER 04/36 capacity in the generating market, driven by earlier investment in new plant during the 1990s, following a moratorium on new coal fired stations during the dash for gas.120
Generating capacity has once again become an issue following power cuts in the UK and across Europe in 2003-04. The issue is explored further in Library Note SNSC-02597.121
4. National Audit Office report on NETA
The National Audit Office reviewed the operation of NETA in a report issued in May 2003.122 It looked at what actually happened when NETA was implemented, and as a consequence of the price falls associated with NETA. The Executive summary123 lists the main finding as:
• NETA has facilitated lower wholesale prices • NETA is developing as a market largely as expected • Prices paid by industrial and commercial customers have fallen sharply since NETA was implemented. Consumers who switch supplier can see substantial reductions. However, prices that domestic customers pay for electricity have not fallen much since NETA was implemented, although they have fallen broadly in line with the trend in suppliers’ overall costs since 1998. • Falling wholesale prices have contributed to the financial difficulties some companies are facing • The detailed operation of NETA’s balancing arrangements has been controversial for some market participants with less predictable output. • NETA relies on market signals to ensure security of electricity supplies • The market base NETA arrangements are more costly than the central Pool arrangements • There is a continuing risk through reduced risk that participants in NETA may manipulate prices to their advantage. • Ofgem make their regulatory decisions transparent and this will continue to be a vital part of their work.
Seeing a continuing need for regulation, the report recommended that Ofgem should:
• Keep under review why domestic consumers who have not switched supplier have benefited much less than other consumers from falling wholesale prices
120 See Part Three: the consequences of price falls associated with NETA, The New Electricity Trading Arrangements in England and Wales, HC 624 2002-03, National Audit Office, 6 May 2003, for a wider discussion of these issues. 121 SNSC-02597 Will the lights go out? http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02597.pdf 122 The New Electricity Trading Arrangements in England and Wales, HC 624 2002-03, National Audit Office, 6 May 2003 http://www.nao.org.uk/publications/nao_reports/02-03/0203624.pdf 123 http://www.nao.gov.uk/publications/nao_reports/02-03/0203624es.pdf
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• Ensure efficiency in the administration of the balancing arrangements is met by ELEXON,124 the company responsible for administering these arrangements. • Continue to undertake detailed market surveillance of the wholesale market to detect any abuse of market power. • Report regularly on whether there are barriers that could prevent market participants responding to market signals to ensure security of supply. • Develop further the way they articulate the potential impact of regulatory changes they sponsor.
Ofgem estimates that electricity companies have incurred costs of more than £500 million in implementing NETA, with the DTI and Ofgem incurring costs of £39 million.125 The NAO findings are significant to the implementation of BETTA, as one of the benefits is said to be the potential price benefit to customers in Scotland.
5. Public Accounts Committee Report on NETA
On the basis of the NAO findings the Public Accounts Committee undertook its own enquiry into NETA and issued a report in December 2003.126 The Committee took evidence from Ofgem in three main issues: consumer benefits from competition, the competitiveness of the electricity markets and security of supply.
In terms of consumers, the Committee concluded that the public had received a ‘poor deal’ from electricity companies, which had failed to pass on falls in wholesale prices of around 40%. Domestic customers had fared worse than the industrial and commercial customers.
1. Electricity prices have fallen, but by much less for domestic customers than for industrial and commercial customers. Wholesale prices have fallen by around 40% since 1998 and reductions for industrial and commercial customers have been consistent with this fall. But domestic reductions have been much smaller and only 1% to 3% since NETA was implemented in 2001. 127
The Committee also found that customer loyalty was penalised; the 60% of domestic customers who have not switched supplier, including many of the elderly and those who
124 ELEXON is the company responsible for managing the provision of the necessary central systems and services to effect the balancing and imbalance settlement rules under NETA, and for managing the governance processes relating to those rules. It also supports the BSC Panel that considers modifications to the trading rules. 125 See: Part 2: the immediate consequences of NETA, The New Electricity Trading Arrangements in England and Wales, HC 624 2002-03, National Audit Office, 6 May 2003, for further details of costs and cost recovery under NETA. 126 Public Accounts Committee, The new electricity trading arrangements in England and Wales, 16 December 2004, HC 63 2003-04 http://pubs1.tso.parliament.uk/pa/cm200304/cmselect/cmpubacc/63/6302.htm 127 ibid
37 RESEARCH PAPER 04/36 live in rural areas, have benefited much less from competition and pay more than those who have switched. This may be due to a lack of information or awareness of the benefits of shopping around. The Committee recommended that:
Ofgem, working with energywatch, should increase consumer awareness of the information already available to assist the switching process including price and quality comparison services, for instance by requiring these to be signposted more visibly on customer bills.
It also recommended that:
Ofgem should carry out a review to determine whether the suppliers are acting in an anti-competitive manner to the detriment of domestic consumers and Ofgem should take action such as fines or price caps as appropriate.
Although there is not sufficient evidence to say if consumers are being exploited, profit margins do appear to be higher than under the old system of price controls; the Committee suggested Ogfem should gather information on this in order to form clear judgements. Likewise Ofgem should adapt its competition analysis of the wholesale market and retail markets to reflect the new reality of the market and take into account the degrees of vertical integration.
The Committee also signalled its concerns about the optimistic signals given by Ofgem that the system can meet future increases in electricity demand even in severe winter weather, particularly the confidence placed in bringing spare capacity out of mothballs.
At present, the electricity system has more capacity to generate electricity than required. Ofgem appears confident that market mechanisms will ensure that companies have sufficient generating plants to produce enough electricity to meet all reasonable demands. But the margin of spare capacity over expected demand has been falling continuously since the introduction of NETA when it was nearly 30%, and currently stands at around 21%. Ofgem takes confidence from the potential for "mothballed" power stations (those taken out of service by their owners) to meet rising electricity demand. Ofgem has, however no formal powers to ensure that, if a power station is mothballed or a generating company goes into receivership, these assets are kept in a serviceable condition for future needs.
(…)
We recommend that Ofgem, with the Department, introduce obligations on administrators of generating companies, and owners of mothballed plant, to ensure that the condition of generating capacity is clearly communicated to enable the National Grid Company to understand better the availability of power stations to meet demand.
Ofgem responded to the report by noting that it was already implementing many of the recommendations and urged consumers to shop around for better deals. It noted:
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The PAC confirms that those customers who do not switch supplier are paying up to £122 a year more for their energy than they need to. Recent price rises have increased the level of savings available to customers who change supplier. Every customer who has never switched has at least five better deals available.
“Ofgem will continue to monitor the domestic market to ensure that suppliers do not act in an anticompetitive manner. We have already proposed financial penalties of £2.6 million on companies that have damaged customer’s interests.128
B. Electricity generation and supply in Scotland
An overview of the electricity network in Scotland, the proposals for upgrading and issues under BETTA of relevance to Scotland can be found in a briefing for the Scottish Parliament.129
At the privatisation of the electricity industry in Great Britain in 1990, wholesale electricity trading in Scotland, with its different legal, commercial and corporate structure, differed significantly from that in England and Wales. The two host Scottish energy companies, Scottish Power and Scottish & Southern Energy, remained vertically integrated, each retaining significant generation, transmission, and distribution and supply interests.130
The two companies control around 98% of generation within Scotland, either through direct ownership or long-term ‘restructuring’ contracts; and supply around 87% of the Scottish market. They also have duopoly control over the bulk of interconnector capacity with England & Wales. As a result, in contrast with the development of competition in England and Wales, competition has been slower to develop and there has been very little change in the structure of the market or the ownership of assets.
Other generated output comes from British Nuclear Fuels Limited (BNFL), which sold all of its power under a long-term contract to England & Wales, and from British Energy’s Hunterston B and Torness nuclear stations under an arrangement known as the Nuclear Energy Agreement (NEA). Under NEA ScottishPower and Scottish and Southern Energy are committed to purchase, between them, all the output from the two stations until 2005. The two, separate transmission systems are balanced independently by the host companies.
128 Ofgem News Release R/125, No prizes for loyalty for energy customers, 16 December 2003 129 The Electricity Network in Scotland, SPICe Briefing 04/07 9 February 2004 http://www.scottish.parliament.uk/research/briefings-04/sb04-07.pdf http://www.scottish.parliament.uk/research/sb-number.htm 130 A detailed review of the electricity industry in Scotland and the extent of competition in generation and supply can be read in the OFFER consultation document on the Scottish Trading Arrangements. OFFER December 1998. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/2388_stadec98.pdf
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Since privatisation, Ofgem considers the structural arrangements in Scotland have changed significantly, in particular the surplus of generation plant over demand. Over- capacity in Scotland is said to be 70%, according to DTI officials.131 This is attributed to a fall in national demand, and for an increase in exports due to strengthening of the Scotland-England Interconnector132 (from 850 MW to 2200 MW) and the northern England transmission network, and the development of a new Interconnector to Northern Ireland.
Speculation in the press that the two companies might merge has been dismissed.133 Such a merger would lead to concerns over the interests of consumers in Scotland, with the possibility of a referral to the Competition Commission. However, the Times reported that a ruling in the European Court of Justice, ordering the UK Government to give up its golden shares in British Airports Authority (BAA) has signalled a determination to outlaw the practice of protecting privatised companies from hostile takeovers. Golden shares in SSE and SP are held by the Scottish Office.
Ofgem feels that these arrangements, together with a number of other factors, have prevented Scottish customers benefiting from a fully competitive market. In addition, it has been recognised that small independent generators in Scotland have difficulties connecting to the Grid and selling to a wider GB market. Ultimately, this may pose problems for the Government as it struggles to achieve its target of 10% renewables by 2010.
As such, transparent, non-discriminatory, competitive wholesale trading arrangements for existing and potential suppliers who wish to compete in Scotland, other than Scottish Power and Scottish & Southern Energy, are seen as important. Such developments would also reinforce the Government’s efforts to endorse measures at a European level to fully open the internal gas and electricity markets, and develop cross-border trading arrangements. The liberalisation of the internal European energy market is discussed further in Library Note SNSC-1713.134
1. Current market arrangements in Scotland
Scotland differs from England and Wales in not having a set of market arrangements within which to establish the wholesale price. Instead generators are subject to an administration price cap mainly comprising an energy component that reflects the cost of
131 “Minister sets out to cut electricity costs for Scots”, Scotsman 15 April 2002 p3 132 A series of transmission lines, rather than one large cable. 133 Scot Power notes logic of deal with SSE, Reuters 5 November 2002; Scot & Southern sees no need of big deals, Reuters, 7 November 2002; http://uktop100.reuters.com/latest/Scottish_Power/top10/20021107-UTILITIES-SCOTTISH- SOUTHERN-MERGER-URGENT.ASP 134 SNSC_01713 Liberalisation of the European gas and electricity markets http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01713.pdf
40 RESEARCH PAPER 04/36 generation. There is also an element to cover balancing services and use-of-system charges for exports to England and Wales, adjusted to take account of differences in costs of overcoming transmission constraints in the two regions. Five generating parties are currently qualified to trade directly with suppliers.
Scottish Power and Scottish & Southern Energy jointly control the inter-connector from Scotland to England. The operation of the Interconnector is governed by the British Grid Systems Agreement (BGSA), between Scottish Hydro-Electric, ScottishPower and National Grid Company but third party access rules are not clear.135 Charges for the use of the interconnector are based on estimates of its long-run marginal costs rather than valuation of capacity, meaning that flows in either direction are charged at the same rate. Falling demand in Scotland means that the majority of the flow is outwards to England and Wales.
New market entrants are only likely to emerge if they can penetrate and arrange access to the interconnector to sell output to England and Wales without excessive charges. It also means that suppliers in Scotland not wishing to contract with incumbent generators in Scotland must contract with generators in England and Wales, who currently have little incentive to sell to the Scottish market, because unit transmission costs are higher when selling electricity northwards.
Ahead of legislative changes to bring in BETTA, Ofgem, Scottish Power and Scottish and Southern Energy have agreed to end a series of long-term contracts and licence conditions put in place before privatisation. This includes the ending of the hydro benefit subsidy, paid to SSE customers in the north of Scotland to offset higher distribution costs, on the grounds that it may contravene EU legislation (see Section 3 below). Long-term contracts, including one worth £27 million to SSE to supply SP with first call on 757MW of electricity from the Peterhead power station, will also be ended.136
2. Scottish administered pricing arrangements from 1 April 2002137
The present Scottish administered prices lapsed on 31 March 2002. In December 2001, Ofgem published a consultation document138 that proposed extending these present arrangements to 31 March 2004, to which Scottish Power UK plc and Scottish & Southern Energy plc subsequently agreed. This approach assumed that BETTA would be
135 A technical and historical overview of the Scotland-England Interconnector is given in the Access to Scotland-England Interconnector Consultation Paper, OFFER, October 1998 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/2289_interconn.pdf 136 “Scottish utilities in line for fillip”, Financial Times, 18 November 2003 137 Scottish administered pricing arrangements from 1 April 2002, Ofgem proposals document January 2002 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/403_25jan02.pdf 138 Scottish administered prices A review of the present arrangements and consultation on prices to apply from 1 April 2002.’ Ofgem December 2001. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/2066_76_scots.pdf
41 RESEARCH PAPER 04/36 implemented with a target date of 1 April 2004. As April 2005 is the more likely date for ‘Go Live’ Ofgem will need to re-evaluate its policies on administered prices.
3. The Hydro benefit
The costs of supplying electricity to the Highlands and Islands of Scotland is high compared to the rest of the UK (£225 per customer compared to the next highest of £131 per customer).139 Consumers in the north of Scotland are currently protected by a distribution subsidy provided by Scottish and Southern Energy, known as the hydro benefit. This is a legacy from the licence condition formerly placed on SSE when the Scottish electricity industry was privatized in 1991, to subsidise its distribution costs from the generation business. Residents in the north of Scotland facing high distribution costs were able to benefit from hydroelectric stations in their area.
Ofgem has been advised that the hydro benefit may be discriminatory and contrary to EU law and it is intended to remove the subsidy. A consultation document proposed the removal of the relevant licence condition.
Energy Minister, Stephen Timms, was keen that Scottish energy consumers should not be disadvantaged by potentially higher bills and promised to investigate means whereby the removal of the benefit could be mitigated.140 The loss of the subsidy would add around 55p a week or £30 a year on electricity bills for some 650,000 SSE customers in the hydro benefit area. SSE said that it would continue the subsidy on a voluntary basis in the short term141 and would not raise tariffs until after legislation is passed.
On 11 December 2003 it was announced that the distribution costs in the north of Scotland should continue to be subsidized at the same level but the subsidy should be recovered from all suppliers in Great Britain, via their transmission charges paid to the GB System Operator.142
Amendments to the Energy Bill were introduced at Report stage that provide the Secretary of State with the power to make, by Order, adjustments to transmission charges for renewable generators within a single area shown to be of high renewable potential where there is evidence that an unadjusted transmission charge might have a material impact on the future renewable build. The order would be made for ten years, reviewable
139 DTI News Release P/2003/604, New proposals to provide fair deal of Scottish energy consumer,11 December 2003 http://hcl5.hclibrary.parliament.uk:81/weblink/html/press_results_frameset.html/no=899844762 140 DTI News Release P/2003/562, Timms to investigate fairer deal for Scottish Electricity consumers,17 November 2003 http://hcl5.hclibrary.parliament.uk:81/weblink/html/press_results_frameset.html/no=899842446 141 “EU move will push up cost of electricity”, Scotsman 18 November 2003 142 DTI News Release, P/2003/604, New proposals to provide fair deal for Scottish energy consumers, 11 December 2003
42 RESEARCH PAPER 04/36 after five.143 A draft of the proposed scheme must be published, and every year thereafter following the introduction of the scheme, there must be an annual report to Parliament on the costs of the scheme. This was seen as the minimum required given that the new scheme constitutes a new subsidy, that is, according to Lord Tombs, contrary to the renewables obligation.144
There are also measures to ensure that the policy intention of replacing the hydro benefit condition is not undermined by future changes in the electricity market. The Bill seeks to ensure that the recipient of assistance under the new scheme is the appropriate distribution network operator rather than the distribution company and that the scheme is passed on to suppliers rather than passed on as future charges on generators.
The Bill also sets out the limited circumstances when it will be possible to disclose information provided under the hydro-benefit replacement scheme and the adjustment of transmission charges for the renewable generators scheme through the application of Section 105 of the Utilities Act 2000.
C. Electricity prices
1. Unit prices
Chart 3 shows total unit prices of electricity, in real terms since 1990, for both domestic and industrial customers in the UK. While industry prices fell slightly between 1990 and 1995, domestic prices remained relatively flat. From 1996 onwards, however, both sets of prices declined considerably, subject to regulation within the market.
A domestic price of 6.25 pence per kWh in 2002 represented a 25.9 per cent decrease from the 1990 level of 8.43 pence per kWh, and a 27.1 per cent decrease from the 1995 level of 8.57 pence per kWh.
Similarly, an industry price of 3.10 pence per kWh in 2002 represented a 38.9 per cent fall from the 1990 level of 5.07 pence per kWh and a 33.4 per cent fall from the 1995 level of 4.65 pence per kWh.
143 HL Deb 30 March 2004 c1206-8GC 144 HL Deb 30 March 2004 c1200GC
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Domestic and industrial electricity prices have fallen in real terms since privatisation
5.41 1990 8.60
5.24 1991 8.88
5.33 1992 8.99
5.43 1993 8.72
5.15 1994 8.86
4.97 1995 8.75
4.64 1996 8.43
4.25 1997 7.80
4.10 1998 7.24
4.03 1999 6.99
3.69 2000 6.75
3.49 2001 6.55 Industry
3.31 Domestic 2002 6.37
012345678910 pence per kWh
Chart 3: Unit price of electricity to domestic and industrial customers: UK 1989-2002 Notes: Data derived from applying price indices to actual sales figures. Sources: Quarterly Energy Prices December 2003, DTI, Tables 2.1.2 & 3.3.2; Digest of United Kingdom Energy Statistics, DTI, various years, Table 1.7
2. Household bills
The tariff paid by domestic electricity consumers depends, in part, on the method of payment used. Broadly speaking there are three distinct options: standard credit, direct debit and prepayment. Standard credit is, in effect, the default method of payment for most electricity consumers. Choosing to pay by direct debit confers a discount, while prepayment involves a surcharge.
Chart 4 compares typical standard credit electricity bills in England & Wales with those in Scotland. While bills have fallen both north and south of the border since 1990, decreases have been greater in England & Wales. The high cost of distribution in Scotland is a significant factor here. Average bills in England & Wales fell by 31.4 per cent between 1990 and 2003 compared with 20.0 per cent in Scotland. As such, Scottish bills, having been £21 lower than English & Welsh bills in 1990, were approximately £21 higher in 2003.
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Scottish household electricity bills have become larger than those in England & Wales
331 1990 310
342 1991 316
352 1992 323
340 1993 317
335 1994 328
339 1995 332
323 1996 326
302 1997 302
276 1998 285
264 1999 277
253 2000 269
240 2001 261 England & Wales
2002 231 253 Scotland
227 2003 248
0 50 100 150 200 250 300 350 400 Average household bill (£) Chart 4: Average household electricity bills (standard credit) in England & Wales and Scotland: 1990-2002 Notes: All bills are calculated assuming an annual consumption of 3,300 kWh. Figures are inclusive of VAT. Source: Quarterly Energy Prices December 2003,DTI,Table2.2.2
VI BETTA
A. Prelude to the introduction of BETTA
The reforms proposed for BETTA - the British Electricity Transmission and Trading Arrangements - have been developed over a number of years in several stages. There have been a number of additional consultations since the initial proposals that have focussed on the development of GB-wide versions of major industry documents and necessary changes to the relevant electricity licences and codes. Details of all of the consultation documents are available on Ofgem’s website.145
145 www.ofgem.gov.uk
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In 1998 the Office of Electricity Regulation (OFFER) launched a consultation to discuss how to enhance trading arrangements in Scotland.146 One option mentioned was the widening of trading arrangements across Great Britain.
During discussions on the introduction of NETA, Ofgem launched an initial consultation paper on the review of Scottish trading arrangements.147 This suggested that NETA should be extended to Scotland in April 2002 creating BETTA - the British Electricity Transmission and Trading Arrangements.
Ofgem’s reform of the Scottish system was prompted by three main factors:
• Growing concern over lack of competition in all parts of the Scottish electricity market • Pressure from the European Commission for the liberalisation of electricity and gas markets, including open, transparent and non- discriminatory access and charging arrangements • Desire to ensure consistency between Scottish wholesale arrangements and NETA148
Under the proposals, England, Scotland and Wales would be covered by a single system operator with the England-Scotland interconnector being treated in the same way as other congested points in the national transmission network.
The document proposes the creation of new arrangements in Scotland for generators and suppliers which would also enable them to trade with their counterparts in England and Wales under the New Electricity Trading Arrangements (NETA) to be introduced later this year.
Also, in an effort to increase competition in the Scottish generation market, Ofgem has given its first thoughts on liberalising interconnector access, introducing charging regimes and other measures to free up the market in Scotland including:
• the introduction of an independent system operator • revised arrangements for an administered wholesale price • and creation of a single settlement area.149
The proposed changes will have an impact on Scottish wholesale arrangements, with pricing and access arrangements treated in the same way as the rest of the network. This
146 Scottish Trading Arrangements Consultation Paper, OFFER December 1998. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/2388_stadec98.pdf 147 Initial proposals for consideration on the reform of the Scottish Trading Arrangements,OfgemMay 2000 148 A BETTA deal for Scotland, Utilities Journal 3 September 2000 pp20-1 149 Ofgem News Release PN 55, Ofgem proposes reform of Scottish electricity industry, 10 May 2000
46 RESEARCH PAPER 04/36 is thought to be favourable to the creation of a wholesale market in Scotland and differential arrangements through the interconnector. Basing the system on the England and Wales model is thought to offer practical benefits of a known and tested system, and would allow all participants access to the same markets on equal terms.
A second detailed consultation set out the principal components that BETTA would introduce:
• a common set of trading, balancing and settlement arrangements across Great Britain. Generators, suppliers and customers will be able to trade with each other and agree bilateral contracts for the purchase and sale of electricity. Supply and demand will be balanced on a second-by-second basis. • a common set of transmission pricing arrangements and contractual provisions for transmission access across GB on fair and non- discriminatory terms. • a common independent balancing arrangement, through the creation of a single independent GB System Operator that is separate from generation and / or supply interests. There will be a new Balancing and Settlement code. 150
The Ofgem consultation paper issued in December 2001 also described a number of options for allocating the functions between the activities of the licensed System Operator and Transmission Ownership.
The then Energy Minister, Brian Wilson, welcomed the plans to create BETTA. He said:
"Scottish households are paying on average around 9% more for their electricity than customers in England and Wales. They have less choice over who supplies their power. A Great Britain electricity market would also help ensure Scottish power companies are even more competitive in an increasingly liberalised EU market by creating a British wide market"151
Prior to privatisation prices were 7% lower for consumers in Scotland than in England and Wales.
A list of the 26 non-confidential responses received to the December consultation is listed on the Ofgem website. Nearly all respondents supported the vision set out for BETTA,
150 The Development of British Electricity Trading and Transmission Arrangements (BETTA): a consultation paper, Ofgem 74/01 December 2001 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/1910_74_BETTA.pdf 151 DTI News Release P/2001/709 Wilson welcomes plans to drive down Scottish electric bills 12 December 2001
47 RESEARCH PAPER 04/36 although a few expressed some reservations about particular elements of the proposals. The key conclusions and detailed responses were analysed in the ‘next steps document’.152
1. Interim arrangements
Prior to the proposed introduction of BETTA, Ofgem planned interim measures to facilitate competition in the region. 153
• Renegotiation of the Nuclear Energy Agreement (NEA) between British Energy (BE) and the incumbent Scottish generators, effectively allowing BE to control its nuclear assets in Scotland rather than selling them through long-term contracts • Ensuring wholesale price reductions in England and Wales feed into Scotland by administering a price cap linked to the England and Wales price • New arrangements for interconnector access, whereby the incumbents will be obliged to grant unallocated capacity (up to 850MW) to any company that requests it whilst being entitled to reserve capacity for their own use. • Revised pricing arrangements with no charges levied on the interconnector flows from England to Scotland to encourage English generators to sell to Scotland. 154
The interim arrangements are designed to allow the development of separate interconnector arrangements without impacting on wholesale trading in Scotland. Progress on the interim measures was outlined in the ‘next steps’ document 155
2. Towards BETTA
Primary legislation is needed to implement BETTA, particularly to amend existing licences that would otherwise system balancing difficult to achieve, and the need to establish a single licensed System Operator. Powers are required to modify licences, arrange new contracts and agreements, create a single licensed system operator separate from generation and supply and create licensed activity of transmission ownership.
On 15th April 2002 Brian Wilson announced that a Bill would be introduced to join the separate markets in Scotland and England and Wales.156 A joint Ofgem/DTI document 157
152 The development of British Trading and Transmission Arrangements (BETTA) report in consultation and next steps, and Appendices, Ofgem/DTI 38/02 May 2002 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/408_20may02.pdf http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/409_20may02app.pdf 153 Scotland-England Interconnector: access and charging principles to 31 March 2002 and access principles to 31 March 2004, Ofgem December 2001 154 Interim administered access arrangements on Scotland-England Interconnector final proposals, Ofgem March 2001 155 op cit See Footnote 16 http://www.ofgem.gov.uk/docs2002/38betta_report.pdf
48 RESEARCH PAPER 04/36 was published on 20 May 2002158 indicating that the process would be taken forward through a combination of papers, seminars and expert groups.
• A number of consultation papers will be issued over the next few months. These will cover topics such as: • the creation of GB industry Codes - full and detailed consultation as to whether the Balancing and Settlement, the Connection and Use of System and the Grid Codes in place in England and Wales are applicable and appropriate to apply across GB. • the allocation of functions between system operation and transmission ownership; transmission access and charging; • system security and quality of supply standards; • appointment processes - a GB system operator cannot be appointed until the relevant legislation has been passed, as until then no legal basis exists for such appointment. Before then, however, Ofgem/DTI intend to consult upon the processes and criteria under which such an appointment might be made; • price controls and incentives - the December consultation document indicated that creating a GB system operator requires the separation of present price controls and incentive arrangements between the system operator and the transmission owners. In addition the absorption of the Scotland-England interconnector circuits into the regulated transmission asset bases of Scottish Power UK plc (Scottish Power) and the National Grid Company plc (NGC) will need to be addressed;
The document also contained a Draft Regulatory Impact Assessment for statutory consultation.159
The original target implementation date for BETTA was April 2004. Ofgem and the electricity industry later hoped that BETTA would ‘Go Live’ in October 2004.160 On 15 January 2003 Brian Wilson indicated that the Government:
are committed to bringing forward legislation on the British Electricity Transmission and Trading Arrangements (BETTA) as soon as parliamentary time allows. The Government intend to introduce legislation in order to have British Electricity Trading and Transmission Arrangements in place no later than April 2005.161
156 “Electricity reform could save £16 million for Scottish users”, Daily Telegraph 15 April 2002. 157 The Development of British Electricity Trading and Transmission Arrangements (BETTA) Ofgem/DTI report on consultation and next steps with Appendices Ofgem/DTI May 2002 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/408_20may02.pdf http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/409_20may02app.pdf 158 DTI News Release P/2002/308 Joint DTI/ Ofgem consultation 20 May 2002 159 Appendices http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/409_20may02app.pdf 160 Ofgem BETTA project seminar, London, 4 February 2003 161 HC Deb 15 January 2003 c647W
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BETTA will be implemented against the backdrop of the live (NETA) market, and any modifications will still take happen in England & Wales. After the Second Reading of the Bill in the House of Lords, all modifications to the England and Wales Codes will be consulted on for their effect if applied across GB.162
Work in 2002/03 concentrated on resolving legislative, licensing and contractual issues; once legislation is passed, detailed licence and code drafting will take place during 2004/05. 163
B. Pre-legislative scrutiny
The Electricity (Trading and Transmission) Bill was published on 29 January 2003,164 which was subjected to pre-legislative scrutiny by the Trade and Industry Select Committee. A report was published in April 2003165 and the Government’s response published in July 2003.166 The Draft Explanatory Notes167 provided commentary on the fourteen Clauses and four schedules in the draft Bill. Library Note SNSC-02146 discusses the pre-legislative stage in more detail.168
The Summary of the report indicates that the Committee was largely in favour of the proposals in the draft Bill.
Summary
In principle, we support the creation of a single GB market for electricity which will be created by the introduction of the British Electricity Trading and Transmission Arrangements (BETTA). The formation of a GB-wide market should encourage competition and the development of the transmission network in Scotland and provide better access to the major electricity markets in England and Wales for renewable generators and for British Energy's power stations in Scotland. We hope that it will also deliver the financial benefits to industrial and domestic customers in Scotland which the Government has anticipated.
162 BETTA Seminar questions and Answers February 2003, Summary document, Ofgem, March 2003. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/2420_seminarsummary.pdf 163 op cit http://www.ofgem.gov.uk/docs2002/38betta_report.pdf 164 Draft Electricity (Trading and Transmission) Bill http://www.dti.gov.uk/energy/domestic_markets/electricity_trading/draft_bill.pdf 165 Trade and Industry Committee, The British Electricity Trading and Transmission Arrangements: Pre- legislative scrutiny of the draft Electricity (Trading and Transmission) Bill, 8 April 2003, HC 468-I 2002-03 http://pubs1.tso.parliament.uk/pa/cm200203/cmselect/cmtrdind/468/46802.htm 166 Trade and Industry Committee Tenth Report BETTA: Comments on the Government Reply to the Committee's Fifth Report of Session 2002-03, 2 July 2003 HC 937 2002-03 http://pubs1.tso.parliament.uk/pa/cm200203/cmselect/cmtrdind/937/93702.htm 167 Electricity (Trading and Transmission) Bill [Draft] Explanatory Notes. DTI January 2003. http://www.dti.gov.uk/energy/domestic_markets/electricity_trading/notes.pdf 168 SNSC-02164 Electricity Trading V – BETTA Pre-legislative scutiny
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The benefits of BETTA as identified by the Committee are outlined in Section 1 below. The Committee identified some issues that would need careful consideration during the implementation phase if BETTA is to be successful. These are discussed in Section 2 below.
1. Potential benefits of BETTA
The report found the three main benefits of BETTA to be; the extension of competition, the further development of the renewables sector, and the spreading of investment in the upgrading of the transmission network:
9. The Government regards BETTA as an important building block in its Energy Strategy which will extend the benefits of competition to energy consumers in Scotland; help create the conditions for the development of the renewables sector; enable the costs of investment to be spread among all users of the GB transmission system, which should in turn encourage reinforcement of the transmission network in peripheral areas, thereby helping renewable generators; and create one set of rules for correction and use of the transmission system. a. Consumers and Competition
Lower electricity prices in Scotland for domestic and industrial customers are expected to follow the introduction of competition, as witnessed in England and Wales, according to Ofgem. They estimate that Scottish industrial electricity customers will benefit by £50 million and Scottish consumers by £45 million, or £20 per household per year. The DTI’s Regulatory Impact Assessment is more cautious even than its previous draft RIA,169 noting that the total economic benefits of BETTA would be approximately twice the cost of its development and implementation. This would amount to around £8 million per year, with a predicted fall in prices for consumers in Scotland of, at best, 0.5% per year. 170
The National Audit Office (NAO) report on NETA171 suggests that domestic electricity customers have seen little benefit from NETA in terms of price reductions, and questioned whether the benefits of lower prices had been worth the cost of introducing the scheme.172 The Trade and Industry Committee are also cautious on the benefits, stating that:
169 BETTA draft Regulatory Impact Assessment, Appendix Three, The Development of British Electricity Trading and Transmission Arrangements: report on consultation and next steps. Ofgem/DTI May 2002. http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/409_20may02app.pdf 170 BETTA Regulatory Impact Assessment, DTI, 30 January 2003 para. 7.3.3 http://www.dti.gov.uk/energy/domestic_markets/electricity_trading/ria.pdf 171 The New Electricity Trading Arrangements in England and Wales, HC 624 2002-03, National Audit Office, 6 May 2003 http://www.nao.gov.uk/publications/nao_reports/index.htm#2002-2003
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It remains to be seen whether domestic customers will see the level of benefit from BETTA that Ofgem has predicted
(…. )
In our view, the uncertainties surrounding the estimation of costs and benefits associated with BETTA are such that the immediate financial impact of the arrangements may not be sufficient in itself to justify BETTA as a concept; however, there are other factors to consider.173
Others are critical of the view that NETA has been the main factor in the reduction of wholesale electricity prices in England and Wales. Dieter Helm of New College, Oxford and others contest that other external factors should also be taken into account for the fall in wholesale prices since 1988. These include the ending of long-term coal contracts and the amount of excess generating capacity in the system. Energywatch, the consumer arm of the energy regulator, Ofgem, pointed out to the Committee that the full benefits of falling wholesale prices had not been passed on to the domestic consumer; industrial customers have fared better.
The argument that there will be greater consumer choice north of the border might also be overstated; the Committee noted that the rate of switching supplier in the south of Scotland is little different from England and Wales, but is less frequent in the north of Scotland, possibly due to the lack of dual-fuel options (gas and electricity packages), mainly because of the lack of gas infrastructure in the region, or traditional customer loyalty.
The NAO report on NETA found that customers who had switched suppliers had benefited most from price reductions; the 60% who had remained with their suppliers had seen falls of only around 8%. b. Network strengthening and renewables
Another of the justifications for BETTA is that it will create a single transmission network across Great Britain. This will enable the costs of network reinforcement to be spread across all system users. Having a single transmission operator will help to overcome issues relating to the operation of the interconnector, which it is hoped, will lead to a more diverse, secure energy supply, and promote the development of the renewables sector, in line with current energy policy.
172 Ofgem estimates that electricity companies have incurred costs if more than £500 million in implementing NETA, with the DTI and Ofgem incurring costs of £39 million. See: Part 2: the immediate consequences of NETA, The New Electricity Trading Arrangements in England and Wales, HC 624 2002-03, National Audit Office, 6 May 2003, for further details of costs and cost recovery under NETA. http://www.nao.gov.uk/publications/nao_reports/index.htm#2002-2003 173 paras 14 - 15
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Speaking at the Scottish Council for Development and Industry, Brian Wilson said that changes to the UK energy infrastructure are needed if the potential of renewables is to be realised. Crucially, BETTA will provide common trading rules and connection policies, which will reduce barriers for independent generators.174 He said that investment would take place ahead of BETTA to strengthen the network, but costs will be spread across all UK electricity users.
Information on costs of upgrading the network in England is given in a PQ:
Mr. Timms: The plan for remodelling the transmission grid to accommodate new renewable energy generation is currently being prepared by National Grid Transco, Scottish Power and Scottish and Southern Electricity. They are upgrading the initial estimates prepared for, and published by, the Transmission Issues Working Group in June 2003.175 (a)There are no planned upgrades of the transmission system required in Yorkshire. (b)For the rest of England there will be a need to upgrade transmission lines but the final plans have not been presented. The costs of adding an additional 6 GW of wind energy in England were estimated at £605million.176 c. Transmission strengthening in Scotland
The Scottish Executive Renewable Resource Study177 concluded that there is sufficient capacity within the Scottish Transmission Networks to accommodate the volume of generation necessary to meet the 2010 Scottish renewable target (18% by 2010) only if generation is ideally located to match the available network capacity. In practice, new generators will tend to cluster in areas rich in renewable resource and where planning approval can be obtained. Much of the available network capacity in 2001 was within urban areas, often remote from potential renewable resources.
In evidence to the Trade and Industry Select Committee the Chief Operating Officer of SSE stated that the transmission network in Scotland had not been placed under severe stress over the last ten to twenty years, and that the pressures that renewables may place on the system may require considerable investment.178
174 DTI News Release P/2002/07, Wilson: time to open door for huge renewables potential of Scotland,15 November 2002 175 Transmission Issues Working Group Final Report, DTI June 2003 http://www.dti.gov.uk/energy/renewables/technologies/tiwgreport.pdf 176 HC Deb 5 February 2004 c1000W 177 Scottish Renewable Resource Study, Scottish Executive 2001 http://www.scotland.gov.uk/publications/search.aspx?key=renewable%20resource 178 Uncorrected evidence taken before the Select Committee on Trade and Industry enquiry The Resilience of the National Grid. 2 December 2003 http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmselect/cmtrdind/uc69-ii/uc6902.htm
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The Final report of the Transmission Issues Working Group developed options for accommodating in three stages increases in the level of renewable generation in Scotland; indicative costs for the three stages to 2010 were estimated to be £250 million.
The Chief Executive of SSE estimated that around £1 billion would have to be spent over the next ten years to facilitate mainland renewable generation, and also to allow for connecting the Western Isles, Orkney and Shetland. The first £200 million of this been allocated179 to upgrade the transmission line from just south of Inverness into the central belt. Costs are being met by SSE, to be recouped across all generators at a later date. He estimated that virtually the whole of the transmission system in the north of Scotland would require to be replaced, and stated that:
“You would be talking about replacing effectively the whole of the 275 kV line, most of the 132 kV line in Scotland and extending the transmission network out to the islands. You are talking about a significant spend or the largest transmission spend. If you add what ScottishPower and the (National) Grid will be spending, it is the largest investment in transmission the UK has seen probably for 50 years. The industry is clearly at a crossroads as far as where this is going.”180
The SPICe briefing note181 sets out the targets set by Scottish Power and Scottish and Southern Energy for upgrading the core of the transmission network in Scotland to support up to 6000MW of renewable generation in Scotland and the preferred route for transmission line upgrade.
Library Standard Note SNSC-02162 Electricity trading VI – Transmission issues looks at network issues in more detail.
2. BETTA issues to be resolved
Although there was qualified support for the draft Bill, a number of issues emerged that the Committee felt would need to be addressed in the detailed implementation of BETTA to ensure fair and equal competition. These are outlined below:
We recognise that many of the detailed arrangements for the implementation of BETTA have yet to be described, and that the DTI and Ofgem are undertaking an
179 Scottish and Southern Energy News Release, Preferred route for new £200 million 400,000 volt transmission line identified, 20 January 2004 http://www.scottish-southern.co.uk/news/viewcurrent.asp?id=94 180 Uncorrected evidence taken before the Select Committee on Trade and Industry enquiry The Resilience of the National Grid. 2 December 2003 http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmselect/cmtrdind/uc69-ii/uc6902.htm 181 The Electricity Network in Scotland SPICe Briefing SB 04/07 9 February 2004 http://www.scottish.parliament.uk/research/briefings-04/sb04-07.pdf
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extensive programme of consultation. We have identified the following issues which, among others, must be addressed if BETTA is to be successful:
• Further resolution of the evident shortcomings of NETA from the perspective of CHP and renewable generators must be undertaken should the changes recently made to industry codes prove not to be effective in the long term. • It is essential that the GB System Operator acts independently, not only from generator and supplier interests, but also from transmission asset owners.
• The separation of these interests could be addressed through the new GBSO/TO Code rather than through legislation.
• The statutory obligations of the transmission owner as laid down in the Electricity Act 1989 should be amended to reflect the fact that those in Scotland will no longer have responsibility for operation of the transmission system. However, we feel that the rewording suggested in the draft Bill dilutes the obligation too much, and a more precise form of wording needs to be found.
• The implications of Ofgem's proposals for transmission access reforms and transmission charging in England and Wales should be assessed on a GB -wide basis.
• Generators connected to the electricity network at 132kV should be treated equally, irrespective of their location in Britain. a. Combined Heat and Power and Small Generators
Evidence presented to the Committee from a number of witnesses suggested that NETA has acted against the interests of smaller generators.182 Callum McCarthy for Ofgem said that there had been changes to NETA intended to help smaller generators and more were planned.183 The Committee recommended that:
Ofgem should consult on the issues affecting smaller generators as soon as possible. It is essential that when BETTA is introduced such generators are not faced with obstacles to their development of the same magnitude as they encountered with the implementation of NETA.184 Ofgem and the DTI assessed the impact on smaller generators of extending the English/Welsh electricity wholesale markets to Great Britain in November 2003. This was taken forward in a consultation document ‘Small generator issues under BETTA’ launched by DTI/Ofgem in November 2003.185
182 Para 21 183 Q.15 Oral Evidence to the Trade and Industry Select Committee 25 February 2003, HC 468-II 184 Trade and Industry Committee, The British Electricity Trading and Transmission Arrangements: Pre- legislative scrutiny of the draft Electricity (Trading and Transmission) Bill, 8 April 2003, HC 468-I 2002-03 http://www.parliament.the-stationery-office.co.uk/pa/cm200203/cmselect/cmtrdind/468/46809.htm 185 Small generator issues under BETTA, Ofgem/DTI November 2003 http://www.dti.gov.uk/energy/consultations/smallergenerators.pdf
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The Government has said it will announce its CHP strategy in spring 2004. Wider issues affecting CHP, small and embedded generators under NETA, and beyond are explored in Library Standard Note SNSC-01394 Electricity trading IV – Embedded generation and small generators186. b. System Operator
BETTA envisages a single GB transmission system operated by a single organisation, the Great Britain System Operator (GBSO).
On 17 December 2002 Brian Wilson announced in a Written Statement that:
Licensing of the GB system operator cannot take place until the necessary legislation has received Royal Assent. I am minded to accept the recommendation of the GB system operator Selection Panel, that The National Grid Company plc's application for the role of GB system operator should be accepted.187
If approved, NGC would take over from the two Scottish companies their responsibilities for the operation of the transmission system in Scotland. To keep matters straightforward, the Government decided to leave ownership of the transmission system assets in the hands of the current owners. The GBSO will have to own certain assets, which will be transferred to it by the Bill but it is seen as important that the GBSO is separate from generation and/or supply interests as it is required to balance the system by calling on extra supplies; this effectively rules out the Scottish energy companies in the role of GBSO due the level of vertical integration in their structures.
The Committee found there was general agreement that the separation of the GBSO from competitive generation and supply interests should be one of the central pillars that will establish fair competition in Great Britain through BETTA. The Government also sees this as an important mechanism in ensuring security of supply.
However, Scottish Power was concerned that under the proposals, the GBSO would not be sufficiently removed from all the transmission owners, by virtue of being fully integrated into the largest owner, namely NGC.188 SSE also agreed that to avoid any conflict of interest the detailed split of responsibilities should be enshrined in the licences and statutory instruments.189 NCG disagreed that it was unable to distance itself from
186 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01394.pdf 187 HC Deb 17 December 2002 c45WS 188 Scottish Power memorandum to the Trade and Industry Select Committee HC 468-II 2002-03 Appendix 16 paras 6.3 - 6.6 189 Scottish and Southern Energy memorandum to the Trade and Industry Select Committee HC 468-II 2002-03 Appendix 14 paras 5.2
56 RESEARCH PAPER 04/36 these conflicting roles, citing its experience in combining the roles in England and Wales since 1994.190
The Committee agreed that it would be essential to clearly distinguish the roles of system operator and transmission owner, but felt that this could be achieved by careful drafting of the licence conditions and the proposed GBSO / TO industry code, rather than a legal separation enshrined in legislation.
Due to the detailed pre-legislative scrutiny of the provisions for BETTA, many of the Clauses in the Energy Bill were agreed to without amendment during its passage through the Lords. In part the Bill is seen as giving enabling powers for more detailed provisions that will be resolved in the final phase of BETTA. However, the issue of the separation of system providers and system operators was revisited in the light of further representations to Peers from Scottish Power on potential discrimination against Scottish interests, and Transco, the monopoly gas transmitter, which is strongly opposed to the concept of the strict separation of functions because it might lead to a substantial loss of inefficiency and increased costs to consumers.191
Lord Whitty for the Government noted that there were a number of ways in which a uniform structure could be created between the England and Wales system and the Scottish system, and that “no way of altering the system to create exact congruence will be popular”. He also noted that DTI and Ofgem had formed the view that there were synergies to be gained from having the same person undertake system operator and system provider functions that it would be hard to justify by proposing to end them. He restated the opinion that the system operator can be prevented from discriminating in favour of its transmission assets effectively through licence conditions.192 c. Responsibilities of the transmission owner
As responsibility for the operation of the transmission system will transfer to the GBSO under BETTA, the current requirements on the TO under the Electricity Act 1989 will need to be amended. Currently Section 9(2) of the EA requires them to “develop and maintain an efficient, co-ordinated and economical system of electricity transmission”. d. Transmission access
Generators are charged to connect to and use the transmission network. Investment in the network is funded from this income, subject to price controls under the licence conditions. Access arrangements to the network appear to work to the satisfaction of large generators, although small and embedded generators feel that their access
190 National Grid memorandum to the Trade and Industry Select Committee HC 468-II 2002-03 Appendix 10 Annex 2 191 HL Deb 24 February 2004 c65GC. 192 HL Deb 24 February 2004 c68GC
57 RESEARCH PAPER 04/36 arrangements have been disadvantaged under NETA.193 The concerns of small and embedded generators under NETA are discussed in Library Standard Note SNSC- 01394.194
Ofgem presented proposed amendments to the present system,195 ahead of BETTA, designed to send long-term market signals to the System Operator to invest in new demand capacity, which is seen as critical for the development of renewables. Generators would still pay a charge for connection to the network, but they would be required to enter into long-term contracts for network access at a price depending on the demand for capacity and the incremental cost to NGC for providing additional capacity. Long term access rights would be allocated through capacity auctions, akin to the gas network.
Under the current Connection and System Use Code (CUSC) of NETA transmission access to the network is charged on a zonal basis, to reflect the different investment costs imposed on the system by changes in demand and generation in different regions. Constraints are managed by bids under the Balancing Mechanism and costs are recovered via the balancing services use of system (BSUoS) charges.
The Committee received evidence expressing doubts that the capacity auctions would send the necessary market signals; SSE felt that bids would reflect the cost of losing out in the auction rather than transmission capacity. They also felt that the depressed state of the wholesale market would discourage participants from entering long term contracts. SSE and SP were equally concerned that the renewables sector in Scotland would be penalized by higher access charges, possibly to the tune of an additional £50 million per year over current charges.196
NGC felt that the case for Ofgem’s proposals in terms of benefits to customers had not been adequately made. Callum McCarthy for Ofgem emphasized that the results of the consultation were not yet known. Given the potential risks to the Scottish renewables sector, the Committee felt that it might be better if Ofgem delayed any implementation of its plans for transmission access reform until it was able to assess the costs and benefits on a GB wide scale. e. Transmission losses
Part of the BETTA discussion process has centred on the possible introduction of zonal charging for transmission losses (See section f below) across the electricity network. Effectively, this would apply different loss factors to different parts of the electricity
193 Combined Heat and Power Association, and Renewable Power Association memoranda to the Trade and Industry Select Committee HC 468-II 2002-03 Appendices 5 and 13 194 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-01394.pdf 195 Transmission Access and Losses under NETA: Revised proposals, Ofgem 2002. 196 SSE, and SP memoranda to the Trade and Industry Select Committee HC 468-II 2002-03 Appendices 15and16Section4
58 RESEARCH PAPER 04/36 network, with generators and suppliers incurring different charges based on location. Transmission losses in Scotland tend to differ in any case due to the configuration of the system and the lower voltage levels of transmission.
The issue has arisen following another of Ofgem’s proposals for NETA reform in England and Wales.197 Any changes to existing NETA Codes, which form part of the licences, are currently considered by separate Panels for each Code, in this case the Balancing and Settlement Code (BSC) Panel. Modifications cannot be proposed by Ofgem but by parties to the Code and energywatch. The process is managed by ELEXON. 198
Two proposals for modifications to charging arrangements were put forward in spring 2002,199 and were processed together by the Panel. Ofgem, which receives the recommendation of the Panel, issued a decision letter on 17 January 2003 instructing changes to the BSC to implement average zonal losses on the basis of Grid Supply Point groups on an ex-ante200 basis throughout the year in England and Wales in April 2004.
The issue has raised strong feelings in the industry and was put out for consultation by the DTI201 in tandem with the BETTA consultation process. In the meantime SSE and others have successfully applied for a judicial review of Ofgem’s decision, to be heard in January 2005.
On the basis of the responses and further work commissioned from OXERA Consulting Ltd, the DTI announced in June 2003202 that it was not minded to include average zonal transmission losses in the GB Balancing and Settlement Code under BETTA because it felt that the benefits that might flow from the introduction of average zonal transmission losses were ambiguous.203 f. What are transmission losses?
The DTI consultation document notes that:
There are two types of transmission losses – fixed and variable.
197 Transmission Access and Losses under NETA: Consultation document, Ofgem 2001. 198 http://www.elexon.co.uk/ 199 http://www.elexon.co.uk/ 200 Determined before the event 201 Transmission losses in a GB Electricity Market: a DTI Consultation Paper January 2003. http://www.dti.gov.uk/energy/consultations/elec_market.pdf 202 Transmission losses in a GB Electricity market: a DTI Consultation paper Government response. June 2003 http://www.dti.gov.uk/energy/domestic_markets/electricity_trading/lossresponse.pdf 203 DTI News Release P/2003/377, Electricity Transmission Losses Not To Be Included In GB Balancing And Settlement Code 27 June 2003
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• Fixed losses occur in both transformers and overhead lines. In transformers, electricity is lost in their iron core, which are subject to an alternating magnetic field and does not vary significantly depending on power flow through the transformer. Fixed losses in overhead lines are relatively small and depend on voltage levels and weather conditions.
• Variable losses account for the majority of the electricity lost. Losses are caused by current flowing through transmission lines, cables and transformer windings and causing them to heat up. These variable losses therefore increase with the distance the electricity has to travel.
The press notice accompanying the consultation document notes that:204
Losses incurred on the transmission system are currently allocated to all BSC parties in proportion to the amount of energy they meter (consumption or production) and are shared across all of England and Wales.
This is known as the ‘Postage Stamp’ principle, whereby you pay the same to send your electricity no matter where your plant is located. The cost of transmission losses in England & Wales are recovered by uniformly adjusting the metered volumes of all BSC parties to reflect the actual losses incurred overall in a settlement period. The adjustment is based on national losses and is allocated to generators and suppliers in the ratio of 45:55 respectively. Prior to NETA, all losses were allocated to suppliers, again without regard to location. Library Note SNSC-02162 Electricity trading VI - Transmission issues discusses transmission losses and charging in more detail.
The Committee found widespread criticism of the proposal, particularly from Scottish generators who are located at greater distances from their main markets, and feared the costs would be exaggerated in Scotland. Both the Scottish renewables Forum (SRF) and the Renewable Power Association (RPA) identified the locational charging methodology as a barrier to the development of renewables.205
SP, SRF and PRA all indicated that the use of locational charging was not consistent with the requirements of Article 7 of the EC Renewables Directive, which states that charging of transmission and distribution fees should not discriminate against renewable sources, especially renewable electricity generated in peripheral regions, islands or areas of low population.206
204 DTI News Release P/2003/65, Consultation on GB-wide electricity transmission losses, 31 January 2003 205 SRF, and RPA memoranda to the Trade and Industry Select Committee HC 468-II 2002-03 Appendices 15and19Section13 206 Council Directive 2001/77/EC OJ L283 27.10.2001 pp33-40
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The Committee agreed with the view expressed by SP and others that the principles governing transmission charging and losses should be consistent with the Government’s broader energy policy objectives, asexpressedintheEnergyWhitePaper.207 g. High Voltage transmission assets and the meaning of electricity supply
For efficiency reasons electricity is transmitted in bulk through high voltage transmission lines, often over long distances. In England and Wales this usually takes place at 400,000 Volts (400kV) and 275 kV; in Scotland transmission usually takes place at 132 kV, the level usually defined as distribution in England and Wales, whereby high voltage is transformed down for onward distribution to customers through localized networks. The difference is due to historical reasons, given the lower population density in Scotland and the lack of need for high voltage transmission over the distances concerned.
Hence, the lines operating at 132kV in Scotland are defined as transmission lines whereas they are currently considered as part of the distribution system in England and Wales. Potentially this may lead to possible unequal treatment once BETTA is implemented. The Committee report neatly explains the issue:
…the purpose of the transmission system, …concerns the bulk transfer of electricity through the system to a distribution network. The distribution network in England and Wales is a passive system operating at 132kV which takes electricity from the actively managed transmission grid and delivers it to customers. In Scotland, the 132kV networks are actively managed and used for the bulk transfer of electricity as well as for local delivery. They should therefore be regulated as transmission, in Ofgem's view.
46. Logical as this approach may be, once BETTA is implemented it could give rise to unequal treatment, in that a generator connecting at 132 kV in Scotland would be liable for transmission access and transmission Use of System charges even when supplying its local market, while an identical facility in England and Wales would not be subject to such charges. In theory, a generator sited on or near the Scottish border could choose between connecting to the local distribution network in England which would be owned and operated by a distribution network operator, or the local Scottish 132kV network, which would be owned by SP but priced and operated by the GBSO.
The issue is of particular concern to renewable generators in Scotland, most likely to connect to the network at 132 kV, potentially subjecting them to adverse trading arrangements.
All witnesses favoured some fairer means of treatment for the Scottish 132kV assets. SP favoured redesignation of the 132kV network as distribution assets by an Amendment
207 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003.
61 RESEARCH PAPER 04/36 within Section 64 of the Electricity Act. SSE felt that amendment of the Industry Codes, which would have to be redrawn in any case, to define commercial arrangements in terms of generator size and voltage of connection, which may exempt small generators from high transmission charges, to be a more appropriate solution. The Committee stressed that equality of treatment must be established among generators connected at 132kV.
During the process of assessing the impact on smaller generators of extending the English/Welsh electricity wholesale markets to Great Britain, Ofgem and the DTI proposed to address this anomaly in the short term by reducing the charges paid by this class of generator. In the longer term Ofgem have taken forward work to deliver a permanent solution to the problem in a consultation document ‘Small generator issues under BETTA’ launched by DTI/Ofgem in November 2003.208
Clause 175 of the Energy Bill amends the meaning of electricity supply under the EA; previously there had been an anomaly which defined electricity supply as supply by means of a distribution system. Any customers whose supply did not pass through the distribution system were excluded. Electricity supply now includes electricity conveyed by a transmission system to a substation, which is then supplied directly to the customer’s premises.
Under Clause 176 the meaning of a high voltage line as previously defined in the Electricity Act 1989 is now clarified in terms of offshore electric lines. If it is in Scotland or is a relevant offshore line (as defined in the Bill), it is deemed to have a nominal voltage of 132 kilovolts or more; and in any other case i.e. England and Wales it is of a nominal voltage of more than 132 kilovolts.
3. BETTA cost recovery
A consultation document was launched in April 2003 outlining the options for recovering the implementation and operational costs associated with BETTA, and unrecovered costs from previous reforms.209 In the event that BETTA does not proceed two options for the recovery of costs are presented; Option One leaves the costs with those that funded them, whilst Option Two suggests a centralised fund and charging mechanism.
C. Responses to draft BETTA proposals a. Comments at Pre-legislative stage
A number of organisations and individuals gave oral evidence and submitted memoranda to the Trade and Industry Select Committee during its pre-legislative scrutiny of the
208 ‘Small generator issues under BETTA’ Ofgem/DTI, November 2003 http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/5125_Small_Generators_issues_20nov03.pdf 209 Recovery of costs under BETTA, Ofgem / DTI April, 2003 23/03 http://www.dti.gov.uk/energy/consultations/costscp8.pdf
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BETTA proposals. Where individuals / organisations have addressed specific points, these have been included in the relevant section of this paper. The following is a selection of comments from these organisations outlining their general stance on BETTA.
The Chemical Industries Association (CIA) believes that:
a framework where prices reflect costs is the basis for a sustainable energy policy, rather than something that detracts from it. We urge the Government to preserve NETA and to accelerate its extension to Scotland within the British Transmission and Trading Arrangements (BETTA) in Scotland.210
The Electricity Association (EA) used the opportunity before the Committee to highlight the need for a closer examination of existing rights of appeal in the electricity industry.211 EA argued that Ofgem is currently immune to legal challenge, except via judicial review, in almost all its key decisions, and this situation should be corrected in the interests of all sector stakeholders.
The Committee accepted that, in the interests of best practice, it is desirable for parties to have a formal mechanism of appeal against Ofgem decisions. It noted that the DTI would be consulting on this matter, but in the context of both the gas and electricity markets, as signalled in the Energy White Paper. energywatch gave a guarded welcome to BETTA. A press notice gives further details:
The consumer watchdog, which gave evidence to the Committee, said it was pleased that MPs had listened to its ideas on the importance of passing on the benefits of BETTA to energy consumers. (…) In its evidence to the committee energywatch stated that in order fully to support Government intentions, involving reform of the Scottish market by bringing it into a new single GB market, a number of issues would have to be addressed. And the key issue was whether the changes would provide demonstrable benefits for the consumer. (…) The report also acknowledges the energywatch warning that predictions of savings to Scottish domestic consumers under BETTA - estimated by Ofgem to be in the region of £20 per customer - may well be over-optimistic.
energywatch acknowledges that the present system in England and Wales, the New Electricity Trading Arrangements, the precursor to BETTA, had helped to achieve significant savings of £1.8bn for business consumers. But Ann Robinson
210 CIA position statement http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/4861_CIA.pdf 211 EA Press release, Trade and Industry Inquiry into BETTA Bill, April 2003 http://www.electricity.org.uk/default.asp?action=article&ID=455
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stressed: It has to be said that residential consumers have not fared so well, especially those who have never switched supplier. 212
The National Grid Company, as GBSO designate, has welcomed the proposals for BETTA and taken an active role in the consultation exercise. In the initial phase they addressed, in particular, the allocation of activities between the Transmission Owner (TOs) and the GB System Operator (GBSO), notably in the area of investment planning; on the timely designation of the GBSO; and on the recovery of implementation costs.213
Scottish Power and Scottish and Southern Energy, although supportive of the BETTA process, are keen that it does not penalize renewable generators. Both companies have been actively involved throughout the consultation process. In a response to Ofgem / DTI Scottish Power stated:
We continue to support BETTA as part of a package that includes satisfactory proposals for transmission charging and losses in a GB market which will not penalize Scottish generators especially renewables, treatment of the restructuring contracts set up in Scotland as part of the privatization arrangements, socialization of the interconnector and division of responsibilities between the GBSO and the Transmission Owners. 214
Scottish Renewables,215 the Forum for the Scottish renewables industry, cautiously welcomed the Trade and Industry Committee report, principally for its stated concerns on protecting the growth of renewables in Scotland.
Maf Smith, Development Manager for Scottish Renewables said: ’we are heartened to see that the report has noted that it would be very easy to get BETTA wrong. As currently being taken forwards, BETTA could increase charges for Scottish generators, and frustrate work to develop renewable energy in Scotland.’
BETTA is meant to create a level playing field for electricity generators, suppliers and users. However, we remain concerned that the needs of smaller generators such as renewables are not being taken seriously by BETTA. This report is welcome as it shows that our message has been heard within the UK Parliament.’216
212 Energywatch News Release, energywatch sceptical of BETTA benefits for consumers, 10 April 2003 213 Letter from National Grid Company to Ofgem, 28 June 2002 214 ScottishPower response to Ofgem / DTI consultation on changes to electricity genrtation, distribution and supply licences under BETTA. January 2003. 215 Scottish Renewables http://www.scottishrenewables.com/home.asp 216 Scottish Renewables News Release, Scottish Renewables welcomes Trade and Industry Select Committee report on British-wide electricity market, 8 April 2003
64 RESEARCH PAPER 04/36 b. General comments
The SPICe briefing217 on electricity networks outlines the way that BETTA may impact on the electricity market in Scotland. In essence, the inherited design of the electricity network presents several challenges to the renewable energy industry. As noted, some organisations, SSE included,218 have serious concerns over the cost of access to electricity networks under BETTA, and feel that proposals for charging for the use of the network discriminate against Scottish generators, particularly small-scale renewables generators.
SSE considers that under BETTA small generators would pay significantly more than their English and Welsh counterparts (£19/kW against £6/kW in England and Wales). They consider that fair outcome would be a generator charge for connections at 132kV in Scotland of around £6/kW. This would put generators north of the border on a comparable basis to their competitors in England and Wales. SSE, in evidence to the Scottish Parliament Enterprise and Culture Committee inquiry into renewable energy in Scotland, stated that:
“…the proposals as they currently stand undermine the prospects for investment in renewable generation in Scotland.”219
As noted, DTI and Ofgem have consulted on their short term proposals on this issue, with the aim of finding a longer term solution.
The Briefing also points to more recent comments made by Scottish Renewables220 in response to the Ofgem small generators consultation, where the key points raised are:
• The smaller generator consultation contains proposals that will frustrate rather than support achievement of BETTA’s objectives. • Ofgem must ensure that use of system charges are equivalent in England, Wales and Scotland. The level proposed is inadequate for this purpose. The best way to ensure discrimination is removed is to set a fixed Transmission Use of System (TUoS) tariff for smaller generators connected to 132kV. This tariff should be equivalent to charges faced by generators connecting to 132kV distribution in England and Wales. • Scottish Renewables are concerned that an incorrect TUoS charging methodology will make this smaller generators consultation an academic one by removing all incentives for generation of any kind in Scotland.
217 The Electricity Network in Scotland, SPICe Briefing 04/07 9 February 2004 http://www.scottish.parliament.uk/research/briefings-04/sb04-07.pdf 218 Scottish Parliament Enterprise and Culture Committee (2004). Written Evidence from Scottish and Southern Energy to Enterprise and Culture Committee. http://www.scottish.parliament.uk/enterprise/papers/ecp04-03.pdf 219 http://www.scottish.parliament.uk/enterprise/inquiries/rei/ec04-reis-scottish&southe.htm 220 Scottish Renewables response to the DTI/Ofgem consultation on Smaller Generator Issues under BETTA January 2004 http://www.scottishrenewables.com/data/reports/srf_smaller_generator_response.pdf
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• Ofgem must seek to reassure smaller Scottish generators that the future British grid system operator (most likely the National Grid Company) will honour obligations given by the two Scottish DNOs. Generators currently being connected to the network, or being given connection quotations and offers, need the reassurance that these obligations will be continued. If this is not remedied then there will be huge uncertainty and financial instability added to the renewables market in Scotland.
The Utilities Journal 221 reported that the introduction of BETTA could have a negative effect on competition in Scotland. Generators are forced to pay an imbalance price under NETA if they fail to provide enough capacity to match their contract position. Costs or benefits can also be imposed on the network depending on transmission constraints. Given that there is most demand in the south whilst the bulk of generation is in the north, the average value of a unit of generation in the north is lower than the equivalent in the south. Without differentiated transmission prices to reflect the difference in value, generators in England would still have no incentive to sell electricity to Scotland.
Another issue is the potential distortion of imbalance prices in the Balancing Mechanism caused by congestion on the England Scotland interconnector. Buying and selling prices in England and Wales may not correspond to imbalance costs at that point in time in Scotland, although, as prices in Scotland become more reflective of those in England and Wales, the levels of distortion may not be as great as the mechanism might suggest.
Identifying who should be responsible for network investment and reinforcement at congestion points is also a difficulty, which may lead to potential short-term volatility in prices around congested points and affect the value of generating capacity in different regions, thereby reduce the incentive to build new capacity in Scotland. This may conflict with Government policy to increase the promotion of renewable energy where Scotland is well served with potential resources.
The Utilities Journal also considered the impact BETTA may have on wholesale prices.222 It sees the removal of the administered price system in Scotland to be replaced with a competitive trading market, as affecting the overall supply side of the market, including the generating mix and capacity margins. This may influence prices in the two markets. Extra capacity may push prices downward for baseload generation, although long-term contracts and interconnector congestion may slow the pace of potential price falls.
The nature of the mix of generating capacity in Scotland, with a higher percentage of wind and Combined Heat and Power (CHP) capacity than England and Wales is also significant. The less predictable flows and a lack of certainty on how the network will operate may result in increased reliance on the balancing mechanisms, which may lead to
221 A BETTA deal for Scotland, Utilities Journal 3 September 2000 pp20-1 222 For BETTA or worse? Utilities Journal 5 January 2002 pp 30-1
66 RESEARCH PAPER 04/36 price volatility. Overall, the Utilities Journal considers that although more competitive market based prices will prevail, the risks faced in the balancing mechanism may increase risk premiums in the market, negating some of the beneficial price effects.
VII Other energy regulation matters
A. Licensing regime for interconnectors
Inter-connectors are physical connections between the gas or electricity system in one country and another. Their purpose is to facilitate cross-border supplies, and may serve to increase security of supply and permit more efficient scheduling of generation, supply and reserves.
Electricity interconnectors link the England and Wales system with France via a submarine cable and with Scotland overland. The Isle of Man is also joined to the mainland UK grid; three connections exist between Northern Ireland and the Republic of Ireland.
There is a gas interconnector between the UK and Belgium, landing at Bacton, in East Anglia.223 Northern Ireland’s natural gas is supplied via an underwater pipeline from Scotland; gas is supplied to the Republic of Ireland from an indigenous supply of natural gas off the Kinsale coast, and via an interconnector from Southwest Scotland.
Interconnectors have become a key feature of the EU energy markets and EC energy policy supports increased interconnection between European electricity markets by encouraging enhanced third party access rights and more transparent access charging schemes. All Member States have now adopted national legislation implementing the provisions of the Gas and Electricity Directives (Directives 96/30/EC and 96/92/EC); in 2003 the European Parliament and the Council of Europe approved common rules on the electricity and natural gas markets (Directives 2003/54/EC and 2003/55/EC) and on the conditions for access to the network for cross border exchanges in electricity (Regulation (EEC) 1228/2003). The legislation currently in force will be replaced as from 1 July 2004.224
The Energy Bill makes provision to extend the licensing regimes under the Electricity Act 1989 (EA) and the Gas Act 1986 (GA) to electricity and gas interconnectors. At the moment, participation in the operation of an electricity interconnector is not a licensed activity covered by the EA, or regulated in anyway. The Bill’s provisions will now make this activity prohibited, subject to licence or exemption by the Secretary of State, or GEMA. Anyone holding a licence for another activity under the EA will be prevented
223 http://www.interconnector.com/PhysicalOps/IUKSystem.htm 224 Further information on the liberalisation of the European energy markets can be found in Library Note SNSC-01713
67 RESEARCH PAPER 04/36 from holding an interconnector licence; this is to prevent possible conflicts of interest in capacity allocations.
The Gas Act prohibits the transport of gas through pipes to any premises or pipeline system without a licence; to this extent transportation through an interconnector is prohibited by implication, but the provisions of the Energy Bill will make this prohibition explicit. In both cases the normal licence application procedures will not apply; instead the Secretary of State will consult prospective licence holders, GEMA and others before considering issuing a licence.
B. Energy supply business failure administration scheme
In the Energy White Paper the Government made a commitment to consult on whether to introduce a special administration regime for energy network companies in the event of a company becoming insolvent:
6.52 Gas and electricity networks, and their uninterrupted operation, are essential to security of supply. In other utility sectors, there are provisions for the appointment of an administrator in the event that the operator of a network becomes insolvent. During the passage of the Enterprise Bill last summer, we undertook to consider further the case for special provisions for gas and electricity. We now propose to undertake a public consultation on the need for an administration regime for gas and electricity networks, including the scope of the provision, its potential effectiveness, and other details.225
Similar regimes are already in place to ensure the uninterrupted, continuous and safe operation of the water and railway industry. At present, if a gas or electricity business goes into administration and no other company takes over, Ofgem, the regulator, steps in to ensure supply.
In April 2003 the Government published its consultation document: Proposals for a special administration regime for energy network companies.226 It requested views on whether it should take powers to seek the appointment of a special administrator and how the cost of that procedure should be funded in such circumstances. In addition to the normal duties of administrators to creditors, a special administrator would have an additional obligation to ensure that normal services to consumers continued during the restructuring or transfer of an energy network business. Further details are available in the consultation document.
225 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003, para 6.52 226 Proposals for a special administration regime for energy network companies: Consultation document, DTI, 16 April 2003, available at http://www.dti.gov.uk/energy/consultations/special_admin_con.pdf.
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The consultation closed on 20 June 2003; the Government response227 indicated that all but one respondent broadly welcomed the introduction of a special administration regime to the energy sector. Most respondents believed that legislation to introduce special administration was proportionate to the risks of networks ceasing to operate as a result of normal insolvency procedures and would ensure that consumers would continue to receive their supplies of energy in the unlikely event of a network company becoming insolvent. The preferred scheme should be along the lines of the schemes already in place for the water and rail sectors.
In terms of funding for special administration, the Government response noted the lack of favour for an ex-ante scheme:
costs of special administration would be borne in the first instance by creditors and members, but that provisions will be made for any excess funding required to keep the network running. The Government considers that this funding should come from the industry and therefore ultimately from consumers, as the beneficiaries, rather than taxpayers but that provision for an interim Government loan or loan guarantee will be necessary in the absence of an ex-ante fund.
The Energy Bill contains the provisions for the administration scheme, and a Schedule that provides for certain provisions of Schedule B 1 of the Insolvency Act 1986 to have effect in the relation to energy administration.
The order to appoint an energy administrator would be made by a court on application by either GEMA or the Secretary of State, providing it is satisfied that the company is insolvent, facing insolvency or that the company should be wound up in the public interest. The order would apply to holders of gas transportation licences or electricity transmission or distribution licences. The administrator’s duty is to make sure that the company continues to run efficiently and economically and in a manner that best protects the interests of the creditors and the company, and those of the members of the company as a whole. Energy administration may be ended either by rescue of the company as a going concern or by means of transfer, as set out in the Bill. This may be to one company or by separation into several going concerns. The Bill also makes provision for the Secretary of State, with the permission of the Treasury, to give a grant or loan, or loan guarantees to a company in energy administration where this will help achieve the objectives of the administration. In the latter case, a statement must be made to Parliament as soon as practicable after the guarantee is made, and annually thereafter until the liability is discharged.
Following financial difficulties experienced by the nuclear generator British Energy (BE) in 2002, company restructuring was attempted with the aim of its becoming solvent. The
227 Proposals for a special administration regime for energy network companies: Government conclusions from the replies to the DTI consultation document of 16 APRIL 2003, 7 November 2003 Energy Markets Unit DTI http://www.dti.gov.uk/energy/consultations/govtresponse.pdf
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Government prepared contingency plans to ensure nuclear safety and security of supply in case this failed and the company went into administration. The Electricity (Miscellaneous Provisions) Bill, Bill 39 2002-03, was presented to Parliament and subsequently enacted to enable the Government to fulfil its part of the restructuring in the event of either a solvent restructuring or administration. Background and further details are contained in Library Research Paper 03/07, The Electricity (Miscellaneous Provisions) Bill.228
C. Appeals to the Competition Commission against Ofgem decisions
Several witnesses at the pre-legislative scrutiny of the BETTA proposals highlighted the fact that there is no appeal mechanism against many decisions made by Ofgem regarding industry codes, except through judicial review, and none was included in the Bill. This is counter to the advice of the Better Regulation Task Force and inconsistent with controls on other regulators. The then chairman of Ofgem, Callum McCarthy, considered an appeal mechanism unnecessary, pointing out that Ofgem had differed in its conclusions to the BSC Industry Panel in only 15 out of 83 proposals for Code modification. In addition, such a mechanism should cover the gas and electricity industry codes, both regulated by Ofgem, but the BETTA Bill only applies to the electricity industry.
In conclusion the Committee recommended:
(j) We agree with those witnesses who said that in the interests of regulatory best practice, it is desirable for parties to have a formal mechanism of appeal against Ofgem decisions. The Competition Appeal Tribunal would seem to be the appropriate appellate body. Where the regulator is exercising his function to create an industry-wide policy framework, appeals on the merits of the policy would create a mechanism for delay and 'second-guessing', and such policy decisions should be subject to judicial review. There is, nonetheless, precedent and a good case for those decisions by the regulator which bear upon individual companies to be subject to appeal on their merits. The draft Bill does not make provision for addressing this issue for both gas and electricity. We accept that it would be administratively inconsistent to have an appeals mechanism which covered Ofgem decisions in the electricity sector and not decisions made by the same regulator in the gas sector, and agree with the DTI that it is better to take forward consultation on this issue in such a way as to cover both markets. (Paragraph 54)229 The Energy White Paper230 committed the Government to investigate this matter further and in April 2003 it published a consultation on strengthening the gas and electricity industry code modification process which included an option to introduce a formal right
228 http://www.parliament.uk/commons/lib/research/rp2003/rp03-007.pdf 229 Section V of the Trade and Industry Select Committee Report HC 468-I 2002-03 http://www.parliament.the-stationery-office.co.uk/pa/cm200203/cmselect/cmtrdind/468/46808.htm 230 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003, para 9.16.
70 RESEARCH PAPER 04/36 of appeal through primary legislation.231 The Government concurred with the Committee that the Competition Commission would be the appropriate appeals body. The consultation set out key issues to be considered in setting up the appeals procedure, including: the standing of appellants; decisions open to appeal; the grounds for appeal; the time limit within which allocations for an appeal could be brought; remedies that the appeal body could hand down; the costs of the appeal, and handling modifications during appeal.
The Energy Bill makes provision that appeals can be made to the Competition Commission. Appeals will be restricted to designated categories, applicable to modifications to the Transco Network Code, the Balancing and Settlement Code for Electricity and the Connection and Use of System Code for Electricity.
Much of the discussion on the provisions during the Lords stages centred on the provision restricting the right of appeal to people ‘materially affected’ by the decisions. Opposition Peers argued that it should apply to those who could demonstrate “a sufficient interest”.232
Lord Whitty for the Government was unable to accept the thrust of this argument:
I cannot accept Amendments Nos. 203C and 203D. They relate to the difference between "materially affected" and "sufficient interest". The whole point of opposing previously the dilution implicit in the change of description is that we should have appeals only from those who are materially affected by this. More than 200 code modifications are made in a year and the possibility of having a flood of appeals from people who are not very directly affected by the change is one that we would wish to avoid.
Moreover, during the consultation last year, the vast majority of correspondents were also concerned about that. Some of the major companies involved have made plain that they believe the current balance is right and that they would not wish to weaken the test. There seems no real justification for allowing appeals from people who are less than materially affected, which is the import of the noble Lord's redrafting.
As to his point about those who had sufficient interest but did not pass the materially affected hurdle and whether they would still have recourse to judicial review, the answer is that they would provided that they could satisfy the usual tests for such a claim. So there is no exclusion of those whom the noble Lord wishes to bring into the main appeals process from going for judicial review. We believe that that is a sufficient safeguard for them. To accept the noble Lord's amendment would widen the scope for others to appeal and I hope that he will not pursue it.
231 Gas and Electricity Industry Codes: Strengthening the transparency and accountability of the gas and electricity code modification process: Consultation document, DTI, April 2003. 232 HL Deb 1 March 2004 c102GC; HL Deb 29 March 2004 c1145
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Lord Whitty re-iterated his objections to such a move on Third Reading when the issue was raised once again.233
Appellants will have fifteen days in which to bring about an appeal, whilst the Competition Commission is given 20 days in which to submit its own observations on an appeal. The Commission has the independence to re-assess the factual basis on which the weights of the arguments were compared by Ofgem, and make its own judgment. Provisions are also made for the recovery of costs of any references for appeal to the Competition Commission.
D. Best regulatory practice
The Government intends to formalise in statute the commitment that Ofgem has made to be guided by the principles of best regulatory practice. This follows similar provisions placed on Ofwat234 and Ofcom235, thus ensuring consistency amongst regulators. Ofgem has responsibility for regulating the gas and electricity supply industry, although it has no regulatory powers over the offshore gas industry, which is regulated by the Secretary of State under the Petroleum Act 1998. Provision to bring the Department under the best regulatory practice regime in this respect would require an amendment to the Petroleum Act, which the Government has indicated it would be prepared to consider. 236
E. Pre-payment Meters
Currently there are restrictions on the payment and service options open to customers who pay their energy bills by pre-payment meters that may affect their take-up of certain energy efficiency or fuel poverty measures, the ability to receive combined energy services, and the opportunity to transfer pre-payment debt when the customer moves house. Such measures are presently restricted due to changes brought in under the Utilities Act 2000.
An amendment to the Energy Bill, introduced at Report Stage, will make it possible to extend the sums collected from prepayment meters. In a letter to Lord Jenkin of Roding, Lord Whitty explained that this may include gas or electricity debts arising from another property or from either fuel.237
233 HL Deb 20 April 2004 c268 234 Under the Water Industry Act 1991 235 Under the Communications Act 2003 236 HL Deb 29 March 2004 c1151 237 Letter from Lord Whitty to Lord Jenkin of Roding 5 April 2004 Deposited Paper 04/839
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F. Planning for major energy projects
The Government has published proposals in the Planning and Compulsory Purchase Bill 2002-03238 to streamline the public inquiry stage of the planning process for major infrastructure projects in England. The proposal would allow extra inspectors to be appointed to assist lead inspectors by sharing their work load, enabling issues to be considered concurrently rather than sequentially, thus saving time. It was proposed in the Energy White Paper to extend these principles to major energy projects such as renewable energy developments:
(…) We will also apply these principles to decision-making for major energy projects in England and Wales, where consents are awarded by the Secretary of State for Trade and Industry.239 This should help streamline planning processes for large renewable energy developments and other large generation plant and help major upgrades of the transmission network.
4.34 There is currently no guidance on the implications for land use planning at local level for projects related to energy reliability. We will prepare a separate guidance note focusing on this for local planning authorities.240
This requires primary legislation to amend Sections 36 and 37 of the Electricity Act 1989,241 which concerns the consent granted by the Secretary of State to build a generating station with a capacity of more than 50 megawatts, or to install overhead power lines. Such matters in Scotland are devolved to Scottish Ministers.
Although the provisions in the Bill are not intended to be used for all public inquiries into power stations and overhead lines, which would normally be handled by one planning inspector, the option would be there should the development warrant it. This could be taken to mean unprecedented local opposition to a development. Revised rules on public inquiries, under the Electricity Generating Stations and Overhead Lines (Inquiries Procedure) Rules 1990 would be required to be placed before Parliament for scrutiny. The proposals would extend to England and Wales, the adjacent territorial seas and to REZs established under the Bill.
An amendment during Grand Committee stage that would allow the National Assembly of Wales into appoint lead inspectors for public inquiries into the planning of power stations over a capacity of 50MW under Section 36 of the Electricity Act 1989,242 rather
238 See Library RP 02/81, The Planning and Compulsory Purchase Bill (Bill 12 of 2002-03) 239 These powers are devolved in Scotland. 240 Energy White Paper. Our Energy Future – creating a low carbon economy. CM 5761 DTI. February 2003, para 4.33 & 4.34 241 Availableonlineathttp://www.uk-legislation.hmso.gov.uk/acts/acts1989/Ukpga_19890029_en_2.htm#mdiv36 242 HL Deb 1 March 2004 c180GC
73 RESEARCH PAPER 04/36 than the Secretary of State was withdrawn. However, The Government noted that work was underway to address concerns in this area:
There is a tripartite working group of officials from the Wales Office, the National Assembly and the DTI already under way to examine the issues of whether consenting powers on power stations, and possibly other aspects of energy infrastructure, should be transferred from central Government to the devolved administration. That is the burden of the amendment. That work is ongoing and will not report in the immediate future, but it will provide the base for potential legislative changes. But those changes would affect very significant statutory processes and transfer them to the National Assembly, if such a strategy were agreed on. My noble friend will appreciate that the vehicle for that transfer would probably be a transfer of functions order under the Government of Wales Act 1998 rather than this particular Bill. That work is being carried out against a background where the case which my noble friend put forward has significant substance and is strongly supported in Wales. 243
Current Government guidance on planning for renewable energy is set out in Planning Policy Guidance Note (PPG) 22 and its annexes. PPG22 is currently being revised and a draft for public consultation was issued for consultation in November 2003. Further information can be found in Library Note SNSC-2739 Renewable Energy planning policy.244
G. Scottish Renewables Obligation
Money arising from the auction of electricity generated under Scottish Renewables Obligation (SRO)245 contracts is paid to GEMA. The Bill will bring in powers to direct GEMA to pay the surplus income over expenditure into the Scottish Consolidated Fund, and will place a corresponding duty on Scottish Ministers to include provision that the monies raised shall be used to promote the use of energy from renewable sources.
Similar powers are already in place under Section 7 of the Sustainable Energy Act 2003 to allocate monies raised under Non Fossil Fuel Obligation (NFFO) Orders in England and Wales for these purposes.
The Explanatory Notes to the Bill explain why Westminster legislation is required to amend powers devolved to Scotland, subsequently amended:
380. In order to give Scottish Ministers the required power over the surpluses in the Scottish Levy fund, a separate Clause, covering section 33 of the Electricity Act as it applies in Scotland, requires to
243 HL Deb 1 March 2004 c182GC 244 http://hcl1.hclibrary.parliament.uk/notes/ses/snsc-02739.pdf 245 SRO contracts are long-term contracts that are predecessors of the current Renewables Obligation (Scotland)
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be inserted in the Bill at Westminster. Although the existing powers under section 33 were executively devolved to Scottish Ministers, and have subsequently been amended, the legislation on using the surplus in Scotland has to be obtained through the Westminster procedures because it amends the Electricity Act in a way that is not consistent with the Executive's limited devolved power to amend section 33 of that Act.246
Baroness Miller of Chilthorne Domer sought to introduce an Amendment on Report measures to address how the surplus monies raised from the non-fossil fuels obligation, above the £60 million allocated through the Sustainable Energy Act 2003 to renewable energy projects, should be disbursed.
Lord Davies of Oldham explained that of the £234 million in the Fund for England and Wales, and the £60 million cap on renewables funding, an additional £30million must be placed in a reserve fund. No decisions have yet been taken on the remainder, which will be topped up with contributions from future auctions of NFFO ROCS.
VIII Part Five – Miscellaneous and Supplemental provisions
The remaining Clauses of the Bill are supplementary and miscellaneous provisions. Energy services provided by the Secretary of State, primarily for the exploration and transmission of oil and gas, incur charges. The Bill extends existing provisions that will allow a consistent and transparent charging scheme to be put in place for individual services where full cost recovery for the services provided needs to be applied, such as in the case of approval of decommissioning plans.
There are powers to modify the Petroleum Act 1998 by Order in Council to give effect to international agreements relating to construction, operation, use, decommissioning and abandonment of pipelines or offshore installations. The powers will apply to areas outside the UK and its water. The Explanatory Notes elaborate on the extension of powers:
385. A modification could reflect the fact that an international agreement might provide that disputes over access to a pipeline on the UK Continental Shelf and the Continental Shelf of another State could either be the subject of co-determination by the UK and the other State in accordance with English law or the law of the other State or fall for sole determination by the UK or the other State. Section 17F of the Petroleum Act 1998 (c.17) currently gives the Secretary of State the power to make such a determination in relation to a pipeline in UK waters.247
246 Energy Bill Explanatory Notes: http://www.publications.parliament.uk/pa/ld200304/ldbills/002/en/04002x-g.htm 247 ibid
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Provision is made in the Bill for certain notifications and documents, and timings related to notifications and documents, to be made electronically, particularly in relation to the Nuclear Decommissioning Agency.
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Glossary
BETTA British Electricity Trading and Transmission Arrangements BSC Balancing and Settlement Code BSUoSC Balancing Services Use of System Charges CHP Combined Heat and Power CHPA Combined Heat and Power Association DEFRA Department for Environment Food and Rural Affairs DTI Department of Trade and Industry Embedded generators Embedded generators supply electricity for the network at a local (distribution) level GBSO Great Britain System Operator GEMA Gas and Electricity Markets Authority MCA Maritime & Coastguard Agency NDA Nuclear Decommissioning Agency NETA New Electricity Trading Arrangements NGT National Grid Transco OFGEM Office of Gas and Electricity Markets REZs Renewable Energy Zones RO Renewables Obligation ROCs Renewables Obligation Certificates SP Scottish Power SPICe Scottish parliament Information Centre SO System Operator SSE Scottish & Southern Energy plc TO Transmission Operator TUoS Transmission Use of System
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