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Electricity Network Grid Charges

Volume 698: debated on Thursday 8 July 2021

Motion made, and Question proposed, That this House do now adjourn.—(Mike Freer.)

6.2 pm

It is a privilege to introduce my first Chamber Adjournment debate. Ideally, it would not have been at this time on a Thursday, but beggars can’t be choosers.

This is a long overdue debate on the need to reform the grid charging regime. It is an issue that has been simmering for a long time, and it is now reaching a critical period where, if change does not happen, renewable energy investment and job creation in Scotland will be put at risk, needless sums will be added to consumers’ electricity bills, and the UK Government’s pathway to net zero will also be put at risk. I will go into further detail on that, but a key issue is that the UK Government do not seem to understand the problems or have the desire and willingness to change. As a result, the remit of the regulator Ofgem is not fit for purpose either. It is not just me saying that change is required; the wider industry is saying it too. Scottish Power, SSE, Vattenfall, RWE and Red Rock Power, among others, have all called for changes to the grid charging regime, so I hope the Minister will take these matters seriously and engage with the industry to find a solution.

The national grid system was founded in 1935. There were massive and significant upgrades in the 1960s, effectively giving us the footprint that we still have, although of course there have been ongoing upgrades. With the privatisation following the Electricity Act 1989, systems had to be developed to create a framework for the private market to operate in, so in 1992 a charging system was developed that is still with us to this day. This means we have a system and a charging regime that are still aligned with the concept that electricity is generated from coal, gas, oil and large nuclear stations. That means that the charging system is still geared to incentivise power generation sites close to centres of population or, to be more accurate, the closer to London, the better.

It beggars belief that three decades on from when the system was devised based on the factors pertaining then, we are still having to highlight the absurdity of the system to the UK Government. What it means in reality is that instead of having a long-term plan for where the best locations are for the generation of renewable energy and the system required to facilitate that, we have one that does the polar opposite.

The Minister will be aware that Scotland has 25% of Europe’s offshore wind potential, but at the moment offshore developers connecting to the north of Scotland will pay the highest connection charges in the whole of Europe. Meanwhile, connections to the south of England result in generators actually getting paid to connect to the grid. That in itself shows how wrong the system is. I understand that it can be argued that there are transmission losses when moving electricity long distances, but that aspect is dealt with separately via the transmission loss multiplier, which is applied to Scottish generators.

I know it can be argued that the further away a generation site is, the more extensive the national grid network needs to be, and there are associated maintenance costs with that, but I would argue that geographical charges are not the best way to deal with that. Why penalise developers for constructing in the areas best placed to give maximum power output? Also, the charges cannot be reflective of the true cost, either, because clearly it is impossible to have a negative cost of operation, which is effectively what the payments to southern connections indicate.

What that means in numbers is that a 1 GW offshore wind farm off the north Scottish coast will pay £38 million a year to connect to the grid, yet a similarly sized offshore wind farm connecting to southern England will get paid £7 million a year. That is a £45 million a year differential between the same size Scottish and English offshore wind farms. Over 20 years, that would equate to nearly a billion pounds of difference between the two.

The reality is that Scottish offshore wind farms are now 20% more expensive than those in English waters. When lowest price is the winner takes all in the contracts for difference auctions, that is clearly a major issue. It means that investment in offshore renewable energy in Scotland is at risk, which means fewer direct jobs and less supply chain work in Scotland, but it also potentially hampers the just transition for the oil and gas industry.

The effects of the charging burden on Scottish projects can already be seen. In the 2015 auction round, Scottish projects accounted for about 40% of offshore wind contract awards made. In the 2019 round, it was less than 10%. Surely that is not an intended consequence of the charging regime. Worse, if nothing else is done, in the next few years, grid charges will be charged at a rate equivalent to 50% of the current offshore wind strike rate, and that would make it utterly impossible for Scottish projects to compete with those bidding in English waters.

The charging burden also means that the most appropriate efficient locations for renewable energy will not be utilised and maximised, which risks the net zero targets for the entire UK. Achieving net zero is now legally binding, and it is accepted that net zero is required by 2050—or 2045 in Scotland—to mitigate the effects of climate change and abide by the Paris agreement, yet there is no net zero plan in place, and we have a regulatory regime that is not fit for purpose. It makes no sense that the Government have set a legally binding net zero target, but as yet have not made net zero a statutory consideration for the regulator, and that clearly affects long-term planning for the grid transmission network. It could lead to short-term investment that needs further future upgrades, costing bill payers even more money. Both the National Infrastructure Commission and the Business, Energy and Industrial Strategy Committee recommend that Ofgem is mandated for net zero, so could the Minister advise when she thinks Ofgem will be legally bound to consider net zero?

The UK Government initially set an ambitious target of 30 GW of offshore wind deployment by 2030, then last year they increased the target by 33%, so the new target is now 40 GW of offshore wind by the end of the decade. So far, so good—it is a welcome target, except that then we realise that the policies do not match the target. To achieve the 40 GW target, the UK Government need to mandate changes to the grid charging regime as soon as possible. They also need to rapidly increase the current auction caps or, quite simply, not enough offshore wind contracts will be awarded to meet their own targets.

How difficult is it to look ahead and work out how much future capacity needs to be allocated in the next few years? It is not difficult. Here is a hint: it requires 4 GW a year from 2025 onwards. It means doubling the existing 20 GW of offshore wind that has been consented, in a five-year period. If there are no changes to the current policies and systems, that will not happen.

We come to the next contradiction or policy failure in the mix, and that is energy interconnectors. They do not pay connection charges—the Minister confirmed to me in a parliamentary question that that was part of the EU trade deal. That is clearly a disadvantage for companies looking to construct in the UK. It means that a multi-national company is now effectively incentivised to build in another country with zero connection charges, and then surplus energy can be exported to the UK, undercutting renewable projects here.

I appreciate the advantages of a wider interconnected grid and, given that Scotland is a net exporter of electricity, Scotland might benefit, but it still does not seem right to have an uneven playing field that could impact on projects here. What is worse, for me, is that there is no control over the source of any imported energy from interconnectors. The Minister knows that. It means that, while the UK is supposed to be going green, we might end up having imported electricity generated from gas on the continent undermining the cost of renewable energy here. That is another paradox that the Minister needs to consider.

These examples illustrate how dysfunctional the current system is. The UK Government need to do something about it. The one focus they have is nuclear energy, but that is another policy that actually adds to our electricity bills. They have committed to Hinkley Point C and this week reinforced their commitment to signing a deal for another £20 billion nuclear plant at Sizewell. It is so obvious that the £20 billion would be better invested in grid upgrades, long duration storage such as pumped hydro, or even battery storage and hydrogen. Why the nuclear obsession?

The Government cannot stick to the baseload argument, given that 75% of the existing nuclear fleet will be offline before Hinkley even starts generating. To me, that proves beyond doubt that large-scale nuclear is not required. A report recently published by Good Energy in conjunction with Energy Systems Catapult demonstrates that the UK could be operating a net zero electricity network in 2050, based on 98% renewables, with the other 2% being provided by Hinkley, not because it is required but because it is assumed it will be there.

I hope the Minister can consider that report, as well as one published by Imperial College that demonstrates that the use of new pumped storage hydro could save nearly £700 million a year in system costs by 2050.

There is one more point on nuclear, in terms of grid charging. It is frustrating that EDF is going to be paid money to connect Hinkley Point C to the grid. Will the Minister acknowledge that that is effectively another hidden subsidy over and above the 35-year deal to pay £92.50 per megawatt-hour, when the strike rate for offshore wind now sits at £40 per megawatt-hour? Where does the risk for changes in the grid charging system sit? Is it with EDF or the Government? Has the grid charging system been discussed with EDF as part of the current negotiations for Sizewell?

Returning to renewable energy, Scotland leads the world in the development of wave and tidal energy generation, but the UK Government have refused to consider a proper route to market, meaning that the technology development and investment could be lost to countries such as Canada. Will the Minister therefore confirm tonight that the Government will ring-fence a proportion of capacity—the request is 100 MW—in round 4 of the auction process? Will she properly discuss with the Treasury the development of an innovation power purchase agreement to allow companies to enter into agreements to purchase electricity from emerging wave and tidal companies? Does she understand that, if this technology does scale up in the way we want and its generation costs come down, those companies will also be at the mercy of the grid-charging system, unless changes are made? Will she please open discussions with the European Marine Energy Centre on the funding needed to replace EU funding streams?

I wish to make a final point about the current charging system and price volatility. Although the actual cost of maintaining and operating the grid remains stable year on year, the charging prices vary every year. This is another example of how the system is not fit for purpose. Prices can vary by an astonishing 500% in one year. As companies cannot predict such fluctuations, they are a risk that they need to factor into the capital cost of projects. It is estimated that, by the end of this decade, the cost of that risk will be £400 million a year. That is £400 million a year going to companies so that they can hedge against the risk of price fluctuation. That is money added to our energy bills for no reason at all—money that would be better off either in our pockets or, at worst, if the £400 million is realised, at least used for investment purposes. Will the Minister address that as well, please?

One small positive in the mix is that Ofgem has now recognised that there is an issue and proposed changes with the targeted charging review and the ongoing access and forward-looking charging review consultation. The downside is that the changes Ofgem currently proposes do not resolve the problem. Indeed, Ofgem’s new proposals could prejudice existing embedded renewable energy sites in Scotland. What assessment have the Government made of Ofgem’s “minded to implement” proposals? Will the Minister finally admit that it is for the UK Government to take charge of the process and make the necessary changes for Ofgem to follow, rather than continuing to say that it is “for the regulator”, which is actually just passing the buck?

To sum up, I have a list of questions for the Minister to consider and I am sure she would love to answer them. Will she consider the impact of the current locational grid charges that make Scottish offshore wind farms 20% more expensive than southern English ones? Does she recognise that the charges applied to Scotland are the highest in Europe? Does she accept that the projections are that the charging burden could go as high as half the current strike rate that is received and paid to companies? Does she understand that the impact of price volatility could cost £400 million a year by 2030? What will be done to assess and mitigate that? Does she understand that the current Ofgem proposals could adversely affect 6 GW of embedded energy projects? Will she consider the cost savings and system benefits that would arise from adding more pumped hydro storage to the grid?

The Minister must realise that it is for the Government to set the policy and regime for Ofgem to implement and that a new policy statement is long overdue. I really hope that she can address those points, and that she will work with the industry and the regulator to shape an electricity system that is designed for the 21st century—one that will lead us on the pathway to net zero.

I congratulate the hon. Member for Kilmarnock and Loudoun (Alan Brown) on securing an important debate.

Network charging arrangements are central to the delivery of a secure and affordable net zero energy system, and the Government absolutely understand that. By law, network charging is a matter for Ofgem, as the independent regulator. Network charges are governed by the principle that the user pays. For the transmission network, that means higher charges for generators in Scotland, as much electricity is sent over long distances to centres of demand in the rest of Great Britain. By contrast, homes and businesses in Scotland pay lower transmission charges than consumers elsewhere in Great Britain. This cost-reflective approach ensures the efficient use of the network and keeps costs down for all bill payers.

Ofgem recognises the critical importance of charging arrangements in progressing to net zero. Last week, it published its consultation on a number of reform proposals as part of its access and forward-looking charges review, including a proposed reduction in the up-front charge paid by generators and demand users connecting to the distribution network. Ofgem’s consultation also noted potential issues with transmission charging arrangements and signalled that it is considering a wider and more holistic review of them.

As the pace of the energy transformation accelerates, it will be important for Ofgem to have clear sight of the Government’s policy priorities for energy decarbonisation. We have therefore committed in our energy White Paper to consulting on Ofgem’s strategy and policy statement in 2021. It will set out the strategic priorities of the Government’s energy policy, the policy outcomes sought and the role of the Government, Ofgem and other parties collectively responsible for delivering these goals.

For the Government’s part, we remain firmly committed to the roll-out of renewable generation projects and are taking a number of measures to support it. We will continue to support low-carbon projects across Great Britain through our contracts for difference scheme. Scotland has benefited significantly from the scheme since its inception in 2015; 34% of all projects are located there. The next round will open at the end of this year.

We have launched the offshore transmission network review to improve the delivery of transmission connections for offshore wind generation. We are working very closely with the devolved Administrations on that.

The offshore transmission review, as the Minister knows, means a lot to my constituents because they strongly support net zero. Offshore wind has been an amazing achievement in East Anglia, but it is bringing new infrastructure and we have the threat of new pylons across open countryside. On pricing, is it not true that one should look not only at the charging, but at expenditure on capital items that are relieving infrastructure pressure? For example, the eastern link, a huge undersea cable off the coast of Scotland that will relieve pressure on the countryside, will be more than £3 billion. People in East Anglia will hope to see similar expenditure so that they have a defrayment of the infrastructure that would otherwise be going over the countryside.

My hon. Friend is a doughty campaigner on the matter and continues to drive the Department to make sure that we are moving the offshore transmission network review at pace to find the right solutions that work for the whole country. We will be working on the review to improve delivery.

If I may, I will reply in detail in writing to the very long series of questions asked by the hon. Member for Kilmarnock and Loudoun, to ensure that he gets as full an answer as possible. In closing, I emphasise the importance of the network charging arrangements, which support the delivery of net zero in a fair and efficient way. The reforms that Ofgem is progressing will help us to achieve that.

Question put and agreed to.

House adjourned.