However, new research says reformed system could save electricity billpayers £16bn.
A trio of firms planning some of Scotland’s largest offshore wind farms has warned that the industry is in “significant and immediate risk” due to punishing grid costs.
However, billpayers could save £16bn and see investment protected through reforms to the system - known as transmission charging - according to new data from Aurora Energy Research, ahead of a key decision on changes from the energy regulator Ofgem.
Ocean Winds, which is Scotland’s largest wind operator, Northland Power, developing the Havbredey and Spiorad na Mara projects in the Outer Hebrides, and West of Orkney Windfarm have commissioned the research. Collectively their projects could generate enough power for over a third of the UK’s homes.
The report assesses transmission charging, the levy on generators which was designed for an era when gas dominated the UK power market. These charges incentivise the build of generation projects near major cities in England and effectively penalise generation in remote areas, particularly Northern Scotland.
Developers are warning that the system undermines UK Government plans to build huge wind projects off Scotland’s northern shores, creating a signal not to invest.
That’s despite the report warning that another 6.7GW of Scottish wind power needs to be commissioned to reach the UK Government’s goal of Clean Power by 2030.
Meanwhile, existing projects are also under threat as the volatile charges can erode as much as half of their value. The impact will worsen, as the report warns that Northern Scotland transmission charges are expected to climb by 100% within five years without intervention.
Adam Morrison, UK Country Manager at Ocean Winds
The Aurora Energy Research highlights that transmission charging, means a 1 GW Northern Scottish project would cost one billion pounds more through its life to run compared to an equivalent in Southern England.
Ofgem is deciding on a “cap and floor” model in coming weeks to mitigate the costs.
Transmission charging is not to be confused with Zonal Pricing - a similar but distinct issue being decided upon by UK Government - the introduction of which would double down on adverse locational price signals for northern Scottish projects.
Claire Mack, Chief Executive of Scottish Renewables, said: "Scotland’s abundant natural resources should make it the home of the UK’s biggest and most productive renewable energy projects but our outdated transmission charging rules, designed over 30 years ago, are unbalancing how the modern-day electricity network should be paid for which is negatively impacting the development of major sites.
"These charges are both volatile and unpredictable, unfairly penalising Scottish projects by tens of millions of pounds every year.
“Quite simply, the UK Government will not meet the targets set out in its Clean Power 2030 Action Plan without the abundance of wind power generated around Scotland and it must work with Ofgem to urgently implement a ‘cap and floor’ model for transmission charging that alleviates these costs and keeps projects on track.
“Delivering this meaningful reform will provide a stable, investment-friendly environment - one that protects the clean power projects vital to creating green jobs at scale and delivering a secure, sustainable energy system for the future."
Adam Morrison, UK Country Manager at Ocean Winds, said: “The magnitude and volatility of transmission charges are harming existing Scottish projects and undermining investments which will be vital for Clean Power and Net Zero ambitions.
“Amid a rapidly changing energy market, the UK has to reckon with the fact that the charging methodology is broken as it is pulled in directions it was never designed to go.
“Most importantly, the system bares a hidden cost to billpayers of billions of pounds of unnecessary subsidies for projects not burdened by these locational prices.
“We need a reformed market for the UK which protects investment, and in turn the clean power projects which will generate green jobs at scale for our future energy system.”
The report sets out that transmission charging is having a bearing on billpayers due to its combination with the “pay as clear” model of the CfD process which grants the same price to all projects on the basis of the highest successful bid.
Transmission charges push up the costs of Scottish projects, and therefore CfD prices - southern projects unaffected by transmission charges do not need the same level of CfD, but still receive it.
An Ofgem decision to back a reform proposal - known as CMP444 WACM 1 - would save billpayers £16.2bn between 2028-2050, according to the data, which reduces Scottish Transmission Charges by 59% and mitigates subsidies.
Emanuele Dentis, Commercial Manager at Northland Power commented: “The investment signals are just inconsistent at the moment. Ofgem has greenlit billions of pounds of transmission investment works in Northern Scotland, without recognising that – without reform – these works are too expensive for generators to pay back. It’s like building brand new motorways that too few users are going to use because the toll is too expensive.
“In the meantime, projects in the Southern England are paid (rather than pay) transmission credits. This was historically justified as an investment signal to minimise transmission costs, but this system is simply incompatible with renewable energy deployment, whereby generation is most efficiently produced where natural resources are strongest.
“We are in support of a regime that redistributes transmission charges costs more fairly, is better aligned with other locational incentives such as option lease fees and the CfD, and delivers on the government’s Clean Power 2030 targets and beyond. CMP444 WACM 1 and CMP432 are the best tools in the short term to kickstart this reform.”