Warning over new energy rules designed to help out consumers
SCOTLAND’S position as an exporter of electricity is under threat from proposed changes to the energy market, a former Scottish Government minister has warned.
Allan Wilson, who served as energy minister in the last Labour-led administration at Holyrood, said new rules designed to give consumers a better deal would put electricity generated in Scotland at a competitive disadvantage.
Writing in The Herald, he warned Scotland may never again be chosen as the location for a “baseload” power station, such as coal-fired Longannet, which closed last month, or the country’s ageing pair of nuclear plants in Ayrshire and East Lothian.
Scottish Renewables, the body representing the green power industry, echoed his warning, saying the proposed changes would “create a barrier” to the development of new windfarms.
Their concerns follow a report by the Competition and Markets Authority (CMA), an arm of the UK Government, which recom- mended a series of changes to the way in which the energy market operates.
It said the cost of “transmission losses” should no longer be shared out between generators and consumers across the UK energy market.
Transmission losses occur when electricity is transported from one part of the country to another through heat and resistance in cables.
At present, the cost of the losses is spread between generators and consumers across the UK. But the CMA has recommended a new system of “locational pricing” for transmission losses.
Mr Wilson s aid the proposal, which is expected to be rubber-stamped by the Department for Energy and Climate Change (DECC), would push up costs for generators in Scotland.
The former minister, who helped introduce the UK-wide pricing system during his time in office, spoke out after the renewable energy industry raised concerns about DECC’s commitment to upgrading grid connections to Scotland’s islands, a move that would allow wind power developments to proceed.
The CMA’s investigation was widely welcomed when it was published. It’s main recommendation was for an electricity price cap for consumers using pre-payment metres, a measure that could cut bills for millions of low-income households.
Among those backing the recommendations was the Scottish Government, which said reforms to help the less well off were “long overdue”.
TRANSMISSION charges are critical to selling electricity generated in Scotland into the UK market. Until now, they have worked strongly in Scotland’s favour by not being fully reflective of actual costs – the exact opposite of the claims made by the current Scottish Government.
I have never believed it was transmission charges that closed Longannet prematurely, as opposed to a commercial decision by its owners. Certainly, the existing system of transmission charges has done nothing to inhibit the growth of renewable energy in Scotland – quite the reverse.
But now this is the classic case of the boy who cried wolf. Whatever problem currently exists, real or imagined, it is as nothing to a change in the system that is proposed – and which, astonishingly, has gone unnoticed by Scottish ministers who last month welcomed a report by the Competition and Markets Authority (CMA), presumably because they did not understand it.
One of many unsung achievements of the early Labour/LibDem Governments at Holyrood was to convince the then Westminster Labour Government to share the costs of transmission losses across the UK network, thereby avoiding increasing charges to Scotland’s generators beyond the level at which they would be able to compete with other generators closer to the major consumer markets in the rest of UK.
Transmission losses occur when electricity is transported long distances and the greater the distance, the bigger the losses. While that simple fact points to generation being located closer to major centres of population, it is equally true that certain forms of generation, particularly wind, require more distant locations. That creates the transmission loss conundrum for politicians and industry regulators.
The political fix we reached in my day as Energy Minister involved the costs of this local variation in losses being allocated to generators and customers in a way that takes only limited account of their location. However, this has always stuck in the craw of some who would prefer a full system of “locational pricing” and claim that anything else discriminates against them.
Now the CMA have found that the absence of full locational pricing for transmission losses gives rise to an “adverse effect on competition” (AEC) likely to “distort competition between generators”. Their proposed remedy is to require that variable transmission losses are priced on the basis of location and to assign 100 per cent of losses to generators, rather than 45 per cent as under the current charging regime.
This long running argument, therefore, has now taken a new and – from a Scottish perspective – dangerous turn. In the past, the Department of Energy and Climate Change (DECC) and its predecessors in Whitehall have responded to political pressure by instructing National Grid to adopt the compromise. Now the CMA is seeking to marginalise this political process and enforce rules it regards as necessary to ensure a competitive market.
This represents a fundamental shift in responsibility from the department to a quite separate regulatory authority – the CMA – and while DECC may not be entirely happy with the outcome, the danger is that future debate is likely to revolve around competition rules rather than political lobbying. Circumventing this would require primary legislation, which I believe the current UK Government would be loathe to introduce.
Having woken up to what is going on, the outgoing Scottish Government or its successor will be extremely unhappy. However, competition policy is not a devolved matter – nor has it featured in any debate on devolved powers to date. Neither, from my experience is it something that ministers can directly influence.
The prospect that now exists is generators in Scotland will have to compete in rest of the UK market on the delivered price of power covering the full cost of interconnector charges. If that happens, Scotland will never have a new baseload station and existing ones will find it difficult to compete with stations closer to the major consumer markets, thus prospectively burdening Scotland with uneconomic and uncompetitive electricity prices and energy costs more generally.
While there is clearly a healthy future in more localised energy generation and localised systems of transmission and distribution in Scotland and the rest of the UK, the CMA report would spell the death knell for conventional baseload generation here while future renewable generation would face a very different financial environment.
It is a matter of great urgency that the CMA recommendations become the subject of scrutiny and debate. The Scottish Nationalists have put a great deal of effort into creating the false impression the existing system is discriminatory against Scotland. It remains to be seen if they are capable of anything more than empty rhetoric now an actual threat has been forced to their attention.
Otherwise, it will be a case of Longannet, “when will we see your likes again?” Not anytime soon and not because it was coal fired either. Allan Wilson is a former Labour MSP and Deputy Minister for Enterprise and Lifelong Learning