ECONOMY, ENERGY AND TOURISM COMMITTEE AGENDA. 5th Meeting, 2009 (Session 3) Wednesday 11 February 2009

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1 EET/S3/09/5/A ECONOMY, ENERGY AND TOURISM COMMITTEE AGENDA 5th Meeting, 2009 (Session 3) Wednesday 11 February 2009 The Committee will meet at 9.30 am in Committee Room Determining and delivering Scotland's energy future (in private): The Committee will agree lines of questioning. Not before 10:00 AM 2. Determining and delivering Scotland's energy future: The Committee will take evidence on the issues of transmission charging and energy infrastructure from Alex MacKinnon, Regulation and Trading Arrangements Manager, ScottishPower (Energy Wholesale); Jason Ormiston, Chief Executive, Scottish Renewables; Alison Kay, Commercial Director - Transmission, The National Grid; Paul A Neilson, Transmission Development Manager, Scottish and Souther Energy's Power Distribution Business; Audrey MacIver, Head of Energy, Highlands and Islands Enterprise; and then from Steve Smith, Managing Director of Networks, Ofgem. 3. Subordinate legislation: The Committee will consider the following negative instruments The Scottish Register of Tartans Fees Order 2009 (SSI 2009/6)

2 EET/S3/09/5/A Stephen Imrie Clerk to the Economy, Energy and Tourism Committee Room T3.40 The Scottish Parliament Edinburgh Tel:

3 EET/S3/09/5/A The papers for this meeting are as follows Agenda item 1 Note by the clerk - Private paper EET/S3/09/5/1 (P) Agenda item 2 Note by the clerk EET/S3/09/5/2 Agenda item 3 Note by the clerk EET/S3/09/5/3 The Scottish Register of Tartans Fees Order 2009 (SSI 2009/6)

4 Economy, Energy and Tourism Committee 5th Meeting, 2009 (Session 3), Wednesday, 11 February, 2009 Transmission charging and energy infrastructure written evidence Background 1. The Committee has received 2 additional written evidence submissions in relation to its energy inquiry: a submission from Highlands and Islands Enterprise; a submission from Scottish Renewables. 2. These submissions are attached as the annexe to this paper. 3. Also attached in annexe are the original energy inquiry submissions made by ScottishPower, National Grid and Ofgem. Recommendation Members are asked to take these submissions into account in their deliberations when questioning today s witnesses. Stephen Imrie Clerk to the Committee February

5 Annexe HIGHLANDS AND ISLANDS ENTERPRISE (HIE) SUBMISSION TO THE ECONOMY, ENERGY AND TOURISM COMMITTEE (EETC) ON ELECTRICITY NETWORKS AND TRANSMISSION CHARGING INTRODUCTION Highlands and Islands Enterprise (HIE) welcomes the opportunity to submit further evidence as part of the overall Energy Inquiry being conducted by the Economy, Energy and Tourism Committee (EETC) and looks forward to joining the Committee on 11 February 2009 to discuss Grid and Transmission Charging. The Energy sector and particularly renewable energy, offers the Highlands and Islands region significant economic growth prospects, and as per the Government Economic Strategy, is a key priority sector for HIE. The current policy environment at EU, UK and Scottish Government levels regarding carbon emission reduction and increasing the share of renewable energy, combined with an enviable renewable resource in terms of wind, wave and tidal, presents the region with a strong competitive advantage and a favourable environment in which to encourage business growth. HIE has long argued, however, that critical to realising the full economic and social potential from renewable energy development, is investment and upgrading of the electricity networks (both transmission and distribution) to accommodate new generation from areas which have the best renewable resource. Capacity of the grid in the Highlands and Islands is highly constrained, with the prospect of even small scale developments now not being able to connect until post Also, critical to achieving investor confidence in developing renewable energy projects is certainty over transmission charging, and this remains an urgent issue particularly for islandbased developments. The comments below offer more detail on progress being made with respect to grid capacity, faster connections and alternative charging. HIE welcomes commitment by Scottish Government to date in this regard. Specifically inclusion of National Development 10 in the National Planning Framework 2, and the Committee s support for this is welcome, and in proposing alternative charging methodology to National Grid and Ofgem. There are, however, still significant challenges to be overcome. ELECTRICITY GRID HIE welcomes the work being taken forward by the Electricity Network Strategy Group and looks forward to the publication of their 2020 Study which should provide a strong signal to Ofgem for investment in new capacity in order to meet EU, UK and Scottish targets. 2

6 Equally HIE welcomes the work being taken forward by the Scottish Government in terms of developing links with the EU to help with the case for a North Sea Super Grid. In the short to medium term, however, significant focus has been placed on the Transmission Access Review, and HIE s interest in this review is the extent to which it will allow faster connection for renewable generation to the grid, to help accelerate the growth of on-shore renewable and facilitate the development of the emerging marine energy sector. Background to Transmission Access Review The Transmission Access Review (TAR) set out measures and recommendations to remove or significantly reduce grid-related access barriers including actions that would: Allow faster connection of some renewable generation to the Grid in the short-term Introduce new, enduring grid access arrangements to allow faster connection and expansion of Grid capacity The review has been taken forward largely through the creation of proposals for changes to the Connection and Use of System Code (CUSC) via an Amendment Proposal (CAP). The last of the CAPs were formally accepted by the CUSC Panel on Friday (30 January 2009), and the next formal step in the CUSC process is an impact assessment by Ofgem on all of the proposals. Initial outcomes from TAR One of the positive proposals to come forward was CAP164 Connect and Manage which will allow generators to potentially connect ahead of the necessary transmission infrastructure upgrades required to support it and receive constraint payments until the necessary capacity is available. Combined with GB queue management whereby consented projects are prioritised for connection over non consented projects, National Grid has identified 450MW of renewable projects in Scotland that could be connected in However, Ofgem has publicly stated its concern that the constraint payments (and subsequent cost to end users) could outweigh the carbon benefits, security of supply improvements and contribution to EU targets. Even though these projects have been identified as beneficial, they may well be rejected by the regulator. HIE would argue that this is a narrow view, assuming constraint payments are an enduring position rather than a natural product of the transition to a higher penetration of renewable. Constraint payments are a prime indicator of the need for investment in Grid. In contrast to this position, the regulator has made some promising progress on establishing funding methods for transmission infrastructure. They have made funds available for 100% of the pre-engineering works for the Grid required to deliver against 2020 targets and are also consulting on allowing the Transmission Owners (TO s) to invest in Grid in advance of need. Investing in advance of need could allow more intelligent Grid design 3

7 and earlier connection for generators. The action by the regulator is significant and welcome. Nevertheless, while well intentioned, proposals outwith the TAR process could undermine some positive outcomes such as CAP167, which seeks to identify the level at which generators can be deemed to have an impact on the UK transmission system. In the Highlands and Islands this is currently 10MW which allows the Transmission Owner (TO [Scottish & Southern Energy]) to squeeze small projects on where capacity permits. CAP167 seeks to reduce this limit to very near zero because of the highly constrained nature of the Grid in the Highlands and Islands. This would mean that all projects would need to apply to National Grid for a Statement of Works (SoW) which typically adds around 10% to upfront development costs for community projects and could mean that no new connection offers are made in the region until post 2018 when several major infrastructure projects are completed (including Beauly to Denny and Scotland to England inter-connectors). If CAP167 is agreed as currently proposed, this change could call a halt to the development and deployment of renewable energy in the Highlands and Islands until 2018 and is therefore a major threat to the industry. Scotland has recognised an opportunity in marine energy and has made significant investment in ensuring research and development, manufacture and testing of marine energy converters happen here. A leading role in marine energy is currently maintained by Scotland by investing in marine energy through the creation of the 16m European Marine Energy Centre (EMEC), the 13m Wave and Tidal Energy Scheme (WATES) and the 10m Saltire Prize to name but a few. In order to prove their commercial viability, the marine devices will first require to deploy small pre-commercial arrays of around 5-10MW prior to scaling up to full commercial scale wave/tidal developments of several 100MW. If we are to capture the economic benefit of early development, deployment and supply chain related activities it is vital that small, early connections are achievable. Currently this can be handled locally by SSE who already made several connection offers of this scale. CAP167 could signal the end of this. Summary HIE is concerned that TAR will not deliver its stated aims of achieving early grid connection and allowing faster, more intelligent Grid expansion. The process has to date suggested a strong interest in maintaining the status quo. More definitive action will be required by UK Government if we are to succeed in our ambitions of capitalising on Scotland s renewable energy resource. TRANSMISSION CHARGING As stated in HIE s previous submission, HIE maintains that the current transmission methodology discriminates against renewable energy generators in the Highlands and Islands. 4

8 Transmission Network Use of System (TNUoS) TNUoS charges are applied to all generators connecting to the transmission system (classed as 132kV and above in Scotland). There has been extensive debate as to whether locational TNUoS is appropriate for the GB market. TNUoS introduced greater socialisation of transmission costs by reducing the assets for which an up front connection charge must be paid. It also introduced a locational element to TNUoS charges. Very approximately the locational part of the charge is skewed for generation in favour of areas where there is a deficit of generation compared to demand. This is to the extent that some generators in the south of England are actually paid, rather than charged, for using the transmission system (e.g. mainland charges range from - 4/kW in the south of England to 21/kW in the north of Scotland). HIE has argued for some time that the current methodology significantly discriminates against renewable generation in the area and does not recognise that development of renewable generation cannot react to pricing signals of this kind the resource is fixed and not close to the main centres of population. Therefore, it is questionable whether locational charging methodology should indeed be applied to renewable generation. It is important to note that the TNUoS charges represent the single biggest operating cost for renewable generators in the North of Scotland and are therefore a major consideration in assessing the economic viability of projects. This, compounded by significant uncertainty of charges particularly in our island areas, poses a significant threat to investor confidence and ultimately to securing maximum economic benefit for the Highlands and Islands. For example, the Viking Energy proposal for Shetland aims to build one of the world s most efficient wind farms producing 540MW of electricity and making a significant contribution to Scotland s renewable energy targets. The opportunity is regarded as equivalent to that offered by the discovery of oil off the island s shores. As yet, however, it is not clear what TNUoS charges will be, but latest indications equate to million per annum the single biggest operating cost and larger than all other operating costs combined. Despite the uncertainty and risk of punitively high charges, projects like Viking Energy are still being progressed, but certainty over charging remains essential and urgent. Section 185 In recognition of the difficulties posed by TNUoS charging to island projects, the UK Government, under Section 185 of the Energy Act 2004, consulted on the introduction of applying a ceiling to island TNUoS charges. However, the current position is a minded to reject calls to use those powers in Orkney and Shetland and to defer a decision on the Western Isles until April 09, on the basis of higher load factors achieved in these locations. HIE responded in October 2008 at the time to BERR stating that the evidence base for coming to the above view was questionable and urged that the power to introduce a ceiling is not relinquished on this basis. The grounds for 5

9 questioning the evidence base include the fact that capacity factors are not yet fully known, construction and cable costs were based on 2006 prices, TNUoS charges used were indicative, and the findings were technology specific (wind). A response to the submissions is awaited. Current Action HIE welcomed the proposed alternative charging methodology which was presented to National Grid and Ofgem in September, which recommends a uniform rate for each unit of energy that enters the Great Britain transmission system, irrespective of its location. This proposal has now been approved by the Transmission Charging Methodology Forum to go forward to the next stage of the consultation process. The Scottish Grid Group, including HIE, Scottish Government, Scottish Renewable Forum, SSE and Scottish Power, will now seek to influence the content of the fuller consultation process, to ensure a more holistic view is taken including the wider economic impacts and to pre-empt much of the negative points likely to be raised. Continued support for the case for an alternative charging methodology is required and more certainty over island charging is urgently required. HIGHLANDS AND ISLANDS ENTERPRISE 5 February

10 Scottish Renewables supplementary evidence Electricity Transmission & Distribution Networks in Scotland Scottish Renewables, the leading green energy trade body in Scotland, appreciates the opportunity to provide both written and oral evidence on the fundamentally important issue of electricity networks in Scotland. It is fundamentally important because investment in new infrastructure enables economic development but in the case of the investment in transmission networks in Scotland it also allows, through the development of renewable electricity projects, an effective Scottish response to climate change and energy insecurity. We were particularly pleased to see the strong support given to the transmission upgrades identified in the second National Planning Framework as National Developments. The successful generation of electricity in Scotland relies upon transmission and distribution networks to deliver reliable supplies of electricity to consumers. Traditionally transmission networks have been used to move large amounts of power quickly and distribution networks, teeing into transmission, delivering that power to users. However, the need to generate more renewable electricity to displace generation from fossil fuel power stations means that increasingly the distribution network also harvests power from new renewable generation in Scotland and passes much of that power to the transmission network. The need to connect can require more, sometimes significant, investment in networks to accommodate in areas where there is limited capacity. This is precisely the case in much of Great Britain and is a particularly acute problem in Scotland. In response to this demand Scottish Hydro-Electric Transmission Ltd and ScottishPower Transmission Ltd (collectively known as the Scottish Transmission Operators or TOs) have both come forward with plans to make major investments in transmission networks in the next ten-years or so that more than eight gigawatts (GW) of new renewable electricity capacity can connect and make a telling contribution to tackling climate change and securing electricity supplies. However, the principle barrier to this investment is Scotland s planning system. The time spent and uncertainty in decision making is a major barrier to efficient investment by the Scottish TOs. Whilst this is in part addressed by second National Planning Framework the rest of the planning system appears to be ill equipped to respond effectively to complex and major transmission investment proposals. This is thrown into stark relief by the experience of the proposal to upgrade the Beauly to Denny transmission line. The planning for this line started in 7

11 2001 and the first power stations were expected to connect in December Unfortunately, we still await a determination by Scottish Ministers following a long drawn out public inquiry with great uncertainty about the decision. Even it is consented later in 2009 the first projects to connect will still have to wait until the second half of If it is delayed any further then Scottish Ministers will have delayed capital investment in the order of 1.5 billion. Further, the reinforcements that follow Beauly-Denny would enable a further 10 billion in capital investment through civil engineering projects and new renewables projects. The potential economic benefits of consenting Beauly-Denny in 2009 can have a telling impact on a Scottish economy facing a deep recession and, importantly, send a strong signal to the international renewables industry, and their financial backers, that Scotland is determined to deliver its renewable electricity potential quickly. There is of course a wider context and the Committee should consider UK and European initiatives. Last week Scottish Renewables hosted Georg Wilhelm Adamowitsch, a European Commission Co-ordinator tasked with preparing a blueprint for connecting up Europe s transmission networks and maximising the generation of renewable electricity, at its annual grid conference. We heard that Europe is serious about interconnecting the North Sea but that the barriers are significant. It is important that Scotland continues to make the case for this European wide investment. In the UK the Scottish TOs and National Grid have been preparing a transmission investment strategy that will explain how 2020 renewables targets can be met. It will report to the Department of Energy and Climate Change and Ofgem group the Electricity Network Strategy Group later this month. This is likely to be a credible investment plan that will send a strong signal to transmission operators in GB to begin preparatory work. Scottish Renewables has talked about the need to invest in transmission to deliver access to generators when they need it. However current and future Scottish generators in the North of Scotland and the Islands face considerable burdens from the cost of using transmission network. For many generators the cost of these charges account for 25% of turnover (whereas counterparts in the south of England are paid to use transmission networks), are unpredictable from year to year and highly volatile. That is why we, along with the Scottish Government, ScottishPower and Scottish & Southern Energy put forward an alternative charging model. At present the current charging model is supposed to encourage generation close to demand and is expected to be proportionate to the cost of running the transmission network. However, the locational principle is only an academic point for renewables generators because they can only go where there is a resource unlike conventional power. Also it is clear that cost of the 8

12 charge is not proportionate to the cost of the impact on the transmission network of new generation. That is why Scottish Renewables is clear that transmission charging in the North and Islands of Scotland undermines investment in all new generation, conventional and renewable, and therefore hampers our efforts to make a telling contribution to climate change and deliver affordable supplies of electricity. The model currently used is developed by National Grid and approved on a periodic basis by the regulator Ofgem. The new model that we have put forward with our partners introduces a postage stamp approach that is proportionate, predictable and stable and will do much to promote new generation in Great Britain. Importantly this approach will not add to the cost of electricity to the consumer. It also has the virtue with being inline with current European thinking which says that renewable generation in geographically peripheral areas must not be discriminated against in any charging regime. We believe that Ofgem and National Grid have strong case to answer. Scottish Renewables believes that the Social & Environmental Guidance that is due to given to Ofgem by the Secretary of State of DECC may have a positive impact on challenging issues of access and charging. However, if it does not then we believe that Ofgem s remit should be changed by legislation in Westminster so that it gives equal prominence to affordability and action on climate change. Often when there is a debate about transmission issues the generators that use the distribution networks are often forgotten even though many small generators are being forced to pay both distribution and transmission network charges on what is known as the gross- gross model. Many small generators will be contracted to use both networks based on their installed capacity. Where there a distribution network is nominally full up the generator must also pay to use the transmission network. At present these generators are paying charges as if they are using both networks 100% of the time even though only a proportion, and often none, of the electricity generated will reach the transmission network. Scottish Renewables promotes the idea of the gross-net model whereby small generators pay for the amount of transmission they use. Further we propose, and this has some support across the industry, to allow these small generators to contract with the Distribution Network Operators (DNOs, in Scotland ScottishPower Distribution and Scottish Hydro-Electric Power Distribution) rather than the transmission operator and allow the DNO to manage the interface between distribution and transmission. The DNO Agency model would create one point of connection, contact and charging for all small scale generators and incentives the DNO to actively manage networks and demand to maximise asset value. 9

13 This would be positive shift that would enable the connection of more renewable electricity generation and importantly, make it easier for community projects to get off the ground. Any discussion about the electricity grid usually boils down to the related issues of access and cost. Scottish Renewables believes that unless both are resolved in the way we outline above Scotland is unlikely to deliver its renewable electricity potential. 10

14 SUBMISSION FROM SCOTTISHPOWER Summary 1. This memorandum is submitted on behalf of Scottish Power Limited and ScottishPower Renewable Energy Limited (together ScottishPower ). Scottish Power Limited is a subsidiary of Iberdrola SA. It is an energy business that provides electricity transmission and distribution services, supplies more than 5 million electricity and gas services to homes and businesses across Great Britain (GB), and operates electricity generation, gas storage facilities and associated energy management activities in the UK. ScottishPower Renewable Energy Limited (the UK s largest onshore wind developer) is part of Iberdrola Renovables, which is 80% owned by Iberdrola SA. Iberdrola Renovables is the largest developer of renewables globally. 2. In summary, we would make the following observations: We support the need for an energy strategy to achieve a secure, diverse and sustainable energy supply in Scotland. This strategy should harness the direct and indirect energy competences of the Scottish Parliament. It should also explicitly recognise the commercial operation of energy markets across the UK, Europe and internationally. For electricity, a balanced portfolio of energy sources is required. The target levels of renewable electricity should be complemented with appropriate thermal generation. Leaving aside the question of nuclear power, there is a strong role for new investment in clean coal and gas in Scotland s energy mix. The current Scottish renewables target is challenging, but achievable. To make it happen reform to planning must continue; grid access must be strengthened; new grid infrastructure will be needed; and, for fledgling technologies, direct support will be required in the short term prior to market mechanisms (such as the Renewables Obligation) taking them forward. Scotland has the opportunity to lead the world in marine renewables. Funding arrangements and RO banding levels should be set at a level to unlock the potential. New grid infrastructure for offshore and marine renewables should be enabled. Existing thermal electricity generating plant is coming to the end of its natural asset life and needs renewal or upgrades. Given the security of supply needs, the revised National Planning Framework should designate new and upgraded thermal plant as nationally significant infrastructure. Scotland can be at the forefront of carbon capture and storage efforts. This has the potential to facilitate widespread international application. Electricity network investment is vital in all future energy scenarios in Scotland. New transmission infrastructure development, including that 11

15 proposed for Beauly Denny, is vital to harness renewable electricity production. International factors have driven energy costs up for everybody. The impacts of this can be mitigated in Scotland through action on energy efficiency, targeted social assistance and awareness of options to improve behavioural change. Government has the primary responsibility to achieve this, but companies will continue to play an important role in delivering the programmes. Scotland s future energy infrastructure will, in part, be shaped by other Parliamentary priorities including the NPF II, the Climate Change Bill and the forthcoming Marine Bill. 3. We stand ready to provide the Committee with any further help (including oral evidence) that it might require. Detailed evidence Energy Framework 4. Scotland has a need for a competitively priced, secure, diverse and sustainable energy supply. We welcome the Economy Energy & Tourism Committee s decision to bring forward a review of Scotland s energy needs. This should complement both the UK and EU Energy Reviews. 5. The direct competence of the Parliament in energy matters relate to renewables, energy efficiency, heat and industrial development. The indirect competence on energy matters governs those aspects that have significant impact on energy provision, but are not typically classed as energy matters themselves. These include environmental regulation, planning, consents, housing quality, climate change and control over aspects of the marine environment. The Parliament may also extend influence on matters outside its control by persuading partners in the UK, EU and internationally on matters such as grid infrastructure, market operation, access to primary fuel markets, product standards and fiscal powers 6. The Committee should also try to establish a link between the development of an energy strategy and the forthcoming parliamentary activity in respect to the Climate Change Bill and the second National Planning Framework. These two activities will form a framework for energy infrastructure in Scotland for the next years. Electricity Generation Renewable 7. Renewable energy plays a significant and growing role. As a low (near zero) carbon energy source, it makes a valuable contribution towards the climate change programme. The use of renewable energy reduces reliance on imported fuel products, which helps improve security of supply and increases the diversity of energy sources. Public and political opinion is also generally supportive of renewables, perhaps because in many cases they are low not only in carbon but also in other potential pollutants or environmental impacts. 12

16 8. We welcome the 50% renewable electricity by 2020 target in Scotland. This will require at least 8GW of installed renewable electricity capacity in Scotland. However, since setting the Scottish target, the UK Government has issued Renewable Energy Strategy consultation proposals for how it will meet the EU renewable energy targets that encourage c % of renewable electricity to come from renewable sources by 2020 across the UK. Accordingly, the Committee should consider what impact this may have on the potential for further target setting for Scotland. Some estimates indicate that even more installed renewable capacity is possible in Scotland by 2020, which would mean that a higher target may be more appropriate 9. The main challenges to greater deployment of renewable electricity are speed of planning decisions, access to electricity grid connections and (as recognised in the UK Government s Renewable Energy Strategy proposals) maintaining an incentive mechanism which covers the investment horizon of the projects. In common with other countries, the UK is also facing supply chain problems, with worldwide demand for wind turbines, the primary vehicle for delivering renewable energy targets, outstripping supply and leading to long lead times. The fact that Scotland and the UK have limited manufacturing capacity of their own tends to exacerbate this problem. 10. To meet the targets, it is essential that the planning reforms currently in progress are brought to fruition The efforts by the Scottish Government to create greater certainty around planning decisions for renewable infrastructure are welcome. This approach needs to be extended to the marine environment. For marine spatial planning, we are keen for the Committee to recommend integration of the interests within Scottish and UK waters, with consent decisions in Scottish waters taken by the Scottish Government (including out to 200nm), and standardisation of procedures between Scotland and the rest of the UK. It is also important to ensure the needs of sustainable development are properly balanced alongside the wider environmental and energy objectives. 11. There are technical limits on the amount of renewable electricity the Scottish and UK grids, as currently configured, can absorb. There is probably a level of input from wind power which can cause difficulty in maintaining system stability, though we are not near that level at present. There are, however, a number of steps that can be taken to mitigate this issue, including transmission reinforcement, sensible location of back-up thermal plant, and improvements to the design and control systems for wind turbines. 12. The electricity grid is a real time, balanced system. To guarantee continued operation requires effective forecasting and sound operational balancing of supply and demand at all times. For this to occur, adequate plant margin must be maintained by the grid operating company. The nature of complementary non renewable plant will have to adjust in response to higher renewable resources on the grid. The precise nature of this will change over time, but a forecast of what this will look like is informed by the technical work currently taking place within the industry. There may also be a role for 13

17 demand side management (including demand side bidding) to optimise renewable electricity production. 13. In the case of economically marginal projects, the high and unpredictable transmission charges from Scotland (where the onshore wind resource is mostly located) and the North of England to the main load centre in the South have the potential to act as a barrier. Reform to the current UK locational transmission charging regime is a key issue which will need to be resolved to support greater deployment of renewables in Scotland. 14. We support the banding of the Renewable Obligation (RO) and its continuation as the primary means of funding renewable electricity development. The economic difference between the RO as now proposed and a properly constructed feed-in tariff approach is small, certainly compared with the disruption and complexity in moving to an entirely new system of support at this stage. The UK Government has proposed in the Renewable Energy Strategy that the RO should offer a 20 year rolling duration for new projects in order to encourage developers to continue investment up to 2020 and we support that approach. In addition, the Government should continue to provide capital support as a means of helping accelerate early technology development that is not commercially viable from the RO alone including marine and biomass developments. Beyond the first generation of such projects, support should then revert to solely the RO. 15. The EU ETS auctions will take place, and the proceeds arise, at a UK level although a significant part of the permits will be purchased by generators in Scotland. While we understand the difficulties in formal hypothecation of the revenues, it will be important in achieving consumer understanding of the costs that a significant part of the money is spent on renewables, other low carbon new technologies and addressing fuel poverty. 16. For marine renewables (wave, tidal and offshore), Scotland has an opportunity to lead the world. We are working on a range of marine initiatives with partners such as Pelamis Wave Power and Hammerfest Strom to accelerate technology development. These include a demonstration wave farm and the development of tidal arrays around the Scottish coast in advance of full scale development. Such early demonstration projects require significant financial support through a mix of grant and revenue support. Funding for new projects is urgently needed in order that another tranche of projects can progress. Post demonstration, RO banding should be set at no less than 4 for tidal and 5 for wave. 17. Grid provision for marine renewables is critical to enable marine projects to become established well before The best wave, tidal and offshore wind resources are typically located in areas away from current grid infrastructure. We anticipate two stages of development. First, a more flexible use of the existing grid to support small scale demonstration projects (up to 20MW) to connect over the next 3 4 years utilising an extension of the RPZ flexible mechanism. More strategic support for grid is then required, with network design options set out in partnership with the regulator. This work 14

18 needs to start without delay. Consenting should then progress as quickly as possible thereafter to large capture projects of 30MW to 100MW that are envisaged from 2013 onwards. 18. Biomass offers meaningful potential in meeting renewable energy targets (both electricity and heat) and in helping sustainable economic development. Dedicated biomass development (including energy crop such as willow coppice) can augment wood waste resources (such as construction and forestry waste) and require continuing support from a banded RO. Most biomass plant will be small scale in nature (5MW 20MW). Although CHP should be considered by developers of biomass installations, there may be site and technical limitations which mean that it will not always be a realistic option for biomass generators. It would be counterproductive if attempts to support CHP (eg through limitations on ROC support) led instead to restricting the growth of biomass generation. 19. The potential for job creation and skills development for Scotland is wide ranging. We are keen to ensure benefits arising from our renewable investment are maximised. In the next three years, we expect to spend over a billion pounds in Scotland which presents the opportunity to generate significant employment benefits. In addition, there is a strong case for the establishment of regional supply chain networks, with a clear role for the Scottish Government and enterprise agencies to facilitate their achievement. 20. In noting the above, the Committee should also not lose sight of the need for an energy strategy to incorporate renewable energy for heat and transport. A massive uptake of renewable content will be required in both sectors. Complementary energy regulation may be required to stimulate renewable heat in Scotland, ideally linked to biomass, solar and heat pump applications. Consultation is presently underway for a new renewable heat initiative within the BERR Renewable Energy Strategy proposals. Sustainable transport solutions can be found via major public transport infrastructure solutions, but consideration should also be given to private alternatives to the conventional motor car such as hybrid, hydrogen and electric powered vehicles. Scotland will also be uniquely placed to increase renewable content in both heat and transport through the direct use of clean electricity, particularly given the 50% renewable electricity target. Renewables penetration will likely be proportionately higher at times of low electricity demand, offering a good match for heat and transport (electrical and hydrogen) demand. Policy measures should encourage market development to help harness this opportunity. Electricity Generation Thermal 21. The majority of thermal plant capacity in Scotland will reach the end of its planned life in the next 10 to 15 years. Of the 7,046MW of installed capacity of the five major power stations in Scotland, 4,276MW will require to be closed or must have major investment to ensure life extension in this period. This includes Cockenzie (to close by 2016), Longannet (investment required by 2020) and Hunterston (to close by 2020/21). In addition, Torness 15

19 has a life expectancy that is scheduled to last to 2027/28 and much of Peterhead s capacity will be out of commission by 2030/31. New investment in thermal plant will be essential to ensure supply security, even under the circumstance where inter-connector capacity is directed to imports from England and Wales. 22. We are presently undertaking a feasibility study into investment options for our two major coal stations in Scotland Longannet and Cockenzie. Within this review, consideration is being given to: Advanced Supercritical Coal technology plant replacement; upgrades to existing plant with new pollution abatement equipment; and, new build CCGT plant. This review is expected to be completed by early An application for new planning consents will follow soon thereafter. All future coal scenarios include the retrofit option for carbon capture and storage. 23. In the absence of a new nuclear programme in Scotland, cleaner coal and high efficiency gas generating plant should be promoted as a national priority to ensure diversity of fuel supply and to provide adequate support for increasing levels of renewable electricity. Sustainable coal plant development is especially important as a platform for the understanding and roll out of carbon capture and storage in the UK. We encourage the Committee to recommend further work on security of supply scenarios within the Scottish Energy Study framework. 24. To secure the future for thermal plant in Scotland, it is important that supporting measures are undertaken on environmental regulation, transmission charging and planning. 25. Environmental regulation is a very important part of power station consent and operation. Any new regulations that govern emissions, heat utilisation and carbon capture readiness should be developed to provide certainty for operators during the lifetime of their investment. Too frequently, environmental regulations operate on a markedly different cycle to those that are required to recover investments. This often means that plant investment can occur in piecemeal manner rather than through structured investment programmes. In agreeing controls that will apply over the lifetime of an asset, regulations must also continue to be able to reflect the site specific circumstances. Regulators must be able to retain discretion to enable the attainment of environmentally equivalent outcomes. Current proposals from the EC in relation to the Industrial Emissions Directive may inhibit this approach and run the risk of undermining the necessary investment in the upgrade and replacement of Scotland s existing thermal fleet between now and Also heavily impacting renewable electricity development, the financial arrangements for transmission charging within the UK electricity market do not favour thermal generation investment in Scotland. The locational formula introduced in 2005 impacts our two thermal stations by as much as 30m more than a station located in the south east of England. It is essential that this unjust charging arrangement is reformed as soon as possible. 16

20 ScottishPower is proposing simplification to these arrangements to ensure greater predictability, equity and cost reflectivity. One option would be to levy usage via a uniform rate for each unit of electricity that enters the system, irrespective of location in Great Britain. 27. Transmission loss costs are currently allocated uniformly across generators and suppliers throughout Great Britain. Ofgem (the UK Energy Regulator) and generators located in the south of England may propose zonal loss factors that recognise the locational loss due to north-to-south power flow within the UK market. Such proposed changes would not reduce technical losses but would add an extra cost of 7m per annum to ScottishPower s thermal power stations located in Scotland. This would present an additional cost against the thermal generation investment case in Scotland. We have opposed similar proposals that were made in the past. 28. Transmission access reform is also necessary in the UK to connect new renewables and to ensure supply security is maintained. Current proposals from Ofgem and National Grid for new connect & manage arrangements may be limited in Scotland. As part of this process, it is also possible that thermal generators in Scotland may be further penalised through the removal of evergreen transmission capacity rights. This could have an adverse impact on supply security and could undermine investment decisions at ScottishPower s two thermal stations. 29. The Committee will be aware that the National Planning Framework will be coming before the Scottish Parliament within the next three months. As we note above, we urge the Committee to identify the designation of thermal power plant development within the NPF II. There is no question that thermal power plant development is of strategic importance to Scotland s infrastructure needs. 30. The Scottish Climate Change Bill is also scheduled to be presented to the Scottish Parliament in the near future. We would also bring to the attention of the Committee that the governing framework for major installations such as power stations is the EU Emissions Trading Scheme. This will set a trajectory for cap and trade to reduce emissions at a global level. The Climate Change Bill should reflect this legal underpinning. 31. Carbon Capture and Storage (CCS) represents a promising instrument for addressing the environmental issues associated with continued use of fossil fuels. ScottishPower is actively pursing the investigation and demonstration of the CCS technology. As part of this, ScottishPower has been successful in pre-qualifying in the UK Government CCS Demonstration Competition. Our proposal captures carbon dioxide (CO 2 ) from Longannet coal fired power station ( post-combustion CCS), transports the CO 2 either by ship or pipeline to the Brae area, followed by storage in the central North Sea. Our strategic bid partners include Marathon Oil as primary partner and Aker Clean Carbon & Aker Solutions as sub-partners. The ScottishPower Consortium proposal involves the utilisation of existing assets and infrastructure. This means commercial scale demonstration of the entire chain 17

21 of capture, transport and storage could be operational by The ScottishPower Consortium proposal would offer an extremely valuable insight into the commercial-scale feasibility and operation of the entire chain of capture, transport and storage in the central North Sea and assist in developing the overall regulatory framework to apply to enduring CCS arrangements. The experience provided from this unique project would facilitate widespread international deployment and application of the technology. This would put us at the forefront of the development of this technology. 32. We strongly support additional funding for CCS during the technology s development and demonstration phase. Beyond a demonstration phase, it seems likely that some form of support mechanism will be required for early stage deployment, though the principal long term method of funding CCS should be the carbon market. 33. The EU Emissions Trading Scheme will ensure that a certain level of CO 2 abatement occurs whether or not plants have CCS fitted and accordingly in the long term it can be left to the market to determine whether CCS is installed on any particular station. There is no need for there to be a mandatory requirement to fit CCS and indeed such a requirement could have adverse impacts on security of supply given the current state of the technology s developments and costs. However, if provisions that require new plant to be Carbon Capture Ready are considered appropriate, it must be on the basis that clear and proportionate readiness criteria are specified. Electricity Grid Access and Development 34. Ofgem has recently published the conclusions of a Transmission Access Review. This review was established because the current rules for connecting capacity to the grid are not sufficiently supportive of renewables. We support changes to these rules to facilitate connection such as the connect & manage and elements of the Transmission Entry Capacity (TEC) sharing. The former involves offering generators a firm future connection date subject only to local connection without being required to wait for any deeper network reinforcement (with National Grid managing any constraints that arise), while the latter achieves a similar result through sharing of capacity by agreement between renewable and local thermal stations. We believe that connect and manage is particularly appropriate for smaller generation schemes that can connect to the distribution network. We are concerned, however, at the removal of evergreen rights for incumbent generator sites and the potential for transmission capacity auctions. These changes may create investment problems and greater industry uncertainty for forward planning. 35. Electricity networks require significant improvement and investment under all future energy scenarios to support renewables, maintain security of supply and facilitate economic development. A supportive and stable regulatory and planning framework is required over the long-term if this investment is to be delivered. It is important to avoid overly complicated 18

22 incentive mechanisms to fund infrastructure as these introduce unnecessary uncertainty and delays in delivery. 36. Our transmission business, SP Transmission, continues to play a leading role in identifying and delivering the strategic upgrades to the transmission network necessary to renewables targets. SP Transmission was the driving force behind the Renewable Energy Transmission Study (RETS) of 2002 which identified a number of strategic upgrades to the transmission system to support renewable targets. These upgrades are at various stages of planning and delivery. A similar piece of work is underway to consider the strategic infrastructure requirements to 2020 and beyond. The outcome of this work should inform the requirements of the forthcoming National Planning Framework II. 37. A key part of any upgrade to electricity grid infrastructure to facilitate new renewables is the need to connect to marine, tidal and offshore wind resources. Up to 2013, it is estimated that up to 100 MW of marine and offshore renewables could be connected in Scotland. Up to 2020, this figure could be as high as 1000MW. As well as revision to the NPF II, the Committee should examine the need to integrate the future needs of electricity network connection with provisions included in the new draft Scottish Marine Bill. In particular, recognition to marine renewable areas should be made statutory in spatial planning guidance and should be incorporated in arrangements for integrated coastal zone management. 38. Also important to the physical electricity infrastructure in Scotland is the maintenance and reinforcement of the current transmission and distribution system. In the next five years, it is estimated that almost 2 billion will be dedicated to renewal of existing infrastructure in ScottishPower s area of the South of Scotland, a significant proportion of which was installed in the 1950s and 1960s and is now approaching the end of its useful life. In addition to this, increased investment will be required to connect more generation to the distribution system and to reduce electrical losses. 39. Major sub sea transmission network projects should also be considered by the Committee as part of a Scottish energy strategy. It is noted that the Irish-Scottish Links on Energy Study and the North Sea Energy Grid will identify opportunities for capitalising on opportunities from the coast of Scotland and potential connection to partner countries in Europe. Due to the long lead times for major sub-sea connections and detailed planning, these studies are unlikely to bring forward proposals that can be enacted much before Energy Markets - Operation 40. Recent increases in international markets have had a significant impact on end user prices. Although the markets move on a daily basis, at the time of writing the market price for wholesale gas has increased by 69% and coal by 43% since ScottishPower last adjusted prices in February this year. A steady but smaller upward pressure on end prices is also taking place due to 19