October 2009
Improving Grid Access
As announced at the end of August, the Government (as part of their Low Carbon Transition Plan) intend to reform the manner in which projects are connected to the grid by reshaping the previous system whereby projects receive a connection date on a first come, first served basis regardless of when the project starts generating energy - which often results in connection dates after the point at which the project would otherwise be able to start producing electricity.
It is the intention that the reforms will aid new projects waiting to get a date to feed electricity into the grid and allow them to get out of the existing queue. There are currently over 60 GW of new generation capacity (around 200 projects) waiting to be connected to the grid, including around 17 GW from renewable sources.
Proposals:
The consultation offers the industry a say on three models on which the new system will be based. These three options build on the industry and Ofgem's work over the last year in terms of the short-term "connect and manage" strategy utilised, for example in CAP150 proposals. One of the key benefits of the proposal is that it will now provide investors with confidence that projects will be given a connection date that fits in with their project development timeline.
It should be noted that the novel aspect of this consultation is that it is the government taking the lead and making the reforms, rather than such reform being proposed by the industry and then approved/rejected by Ofgem.
The three models which form the basis of the consultation look at different ways to manage the queue and to share the cost of connecting more plants to the system. The three options are:
Connect and Manage (Socialised): A model which fully socialises any additional constraint costs - under this arrangement costs will be shared between all users of the network and ultimately borne by the consumers.
The key points to note in respect of implementation of this model are:
- guaranteed access to the network four years from the date of application for access (provided local connection works are completed) - this will have two main benefits: (i) the 4 year period should remove any incentive for users to "reserve" capacity for speculative projects and would ensure that projects can progress without any adverse impact from decisions of other developers; and (ii) exposure to transmission charges after this period will encourage developers to take a realistic view of connection prospects;
- security of a firm connection date consistent with the development of the project will allow greater certainty as to the project completion date than existing "invest then connect" arrangements; and
- enhanced security of supply through the removal of connection barriers and provision of additional project certainty for new generators and new connections.
On the negative side, the spreading of constraint costs across all generators means that the incentive on new generators to consider the impact of their connection on wider network costs is relatively weak (on the basis that all additional constraint costs are shared amongst generators).
Connect and Manage (Targeted Costs / Hybrid): A model that targets some, but not all, of the additional constraint costs on new entrant power stations - limiting costs through the incentive for new generators to reduce impact on overall costs through their choice of location and operation.
The key points to note in respect of implementation of this model are:
- as above in the "Socialised Model" there is the security of a firm connection date without the wait for completion of the wider network reinforcements, thereby facilitating earlier access to the network and reducing the uncertainty associated with connection;
- additional constraint costs arising from new connections will be borne by new entrants, providing a strong commercial incentive to join areas of the network with no/limited requirements for wider reinforcement, or wait for completion of reinforcement works wherever appropriate (on the basis that advanced connections will face a charge based on anticipated constraint costs arising from the connection);
- while access arrangements will remain over-allocated relative to the system capability, the scale of over-allocation will be less than the "Socialised Model" on the basis that prospective generators face direct exposure to consequential costs; and
- enhanced security of supply through the removal of connection barriers and provision of additional project certainty for new generators and new connections.
On the negative side (and highlighting the key difference in the above models) are the costs associated with new connections. If the targeted costs of advanced connection act as a barrier, this will in turn undermine progress towards achieving the renewables targets and delivering on the UK's energy and climate change policies. Furthermore, given direct exposure to incremental constraint costs, additional connection in areas already constrained would be limited, with parties seeking where possible to connect to unconstrained parts of the system.
Connect and Manage (Shared Cost and Commitment): A model that offers the choice to new and existing power stations to commit to the network (which is helpful to National Grid in terms of long term management of system) in return for greater certainty over charges, or to opt out and be exposed to additional constraint costs.
The key points to note in respect of implementation of this model are:
- if new connections choose to advance their connection, they are thereby opting to bear a share of the additional incremental constraint costs linked to the accelerated connection with the remainder being socialised over multiple years;
- as with the "Targeted Costs" model, users will have some commercial incentive to seek connections in areas with little or no transmission constraints;
- the model will create an option for generators to make longer-term commitment in terms of its requirement for transmission services - National Grid will have a clearer signal following the uptake of this option as to the need for transmission investment required;
- this proposal would also add certainty to the connection process and timelines - note that the proposal is for a 20% share of the forecast incremental constraint cost to be borne by the generator, and the remainder being socialised (which should encourage more connections, but not as many as under the fully socialised model);
- existing generators would be required to accept a 5 year rolling commitment for TNUoS charges with a 5 year notice period to opt out - this has the effect of presenting choice to existing generators, though there is an element of perceived complexity to this model. In addition to this, those generators who chose to commit to such arrangement will find themselves exposed to the 80% of incremental constraints costs being socialised.
The relative complexity and mixture of both the socialised and hybrid models is the negative aspect of this model - this adds uncertainty as to the model and therefore it may be perceived to add complexity to the transmission arrangements, which may in turn deter the progression of new generation projects.
Consultation:
DECC are seeking views on the three models presented and acknowledged as the best means forward for reforming the manner in which projects are connected to the grid - the steer from the Consultation is that the "Hybrid / Targeted Costs" model is the most effective way for DECC to meet its objectives while minimising costs to consumers, however as above there are clearly positive and negative aspects to each model.
The Consultation is open for response until 17th November 2009. For further information please see the below link:
http://www.decc.gov.uk/en/content/cms/consultations/improving_grid/improving_grid.aspx
If you require any advice in respect of the implications of the proposals or on responses to the Consultation please contract your usual contact at McGrigors or:
Euan McVicar
Partner, Energy & Infrastructure
Tel +44 (0)131 777 7081/ +44 (0)20 7054 2756
Email euan.mcvicar@mcgrigors.com
Peter Ward
Solicitor, Energy & Infrastructure
Tel +44 (0)131 777 7465
Email peter.ward@mcgrigors.com