Member Article

Ofgem announced last week that it is delaying its decision on proposals relating to transmission losses. The gas and electricity market regulator's previous statement that it favours one of several proposals before it on this subject has caused considerable consternation among commentators in Scotland.

This is due to the proposal in question being widely perceived as detrimental to Scotland's renewables potential, as it would raise charges for users of the national grid based in remote locations. Ofgem itself has consequently come under pressure to arrive at a different decision and the recently announced postponement indicates it is not taking this decision lightly. 

While the majority of flak on this issue has been directed at Ofgem, it is important to remember Ofgem's role as economic regulator of the electricity industry is provided for in legislation passed by the UK Parliament.

The decision relating to transmission losses arises from industry proposals to modify the manner in which charges are imposed for use of the national grid network. These charges apply to all users of that network, not just to operators of renewable generating stations.

Whenever electricity is transmitted across the national grid a certain proportion is lost into the atmosphere. This is referred to as transmission losses, and the proposals in question are intended to charge users of the national grid for such losses in proportion to the amount that they impose on the network.

At present, transmission losses are charged on a flat basis across the UK. However, the longer the journey across the national grid made by electricity, the more will be lost. 

Inevitably, if the method of charging is intended to reflect costs imposed on the system, then users in more remote areas, far from centres of demand, will bear a greater proportion of charges for transmission losses.

Undoubtedly many renewable generators, who need to use the national grid to export power to market, will be located in remote locations. However, these charges are only one element of the use of system charges that network users must pay.

Ofgem's role in this process is to take a decision on various proposals raised by industry to address charging for losses. Ofgem is legally obliged to do so in accordance with its governing legislation.

This legislation, passed by the UK Parliament, places economic considerations at the top of Ofgem's agenda. While Ofgem must also pay heed to environmental considerations, it cannot disregard its fundamental economic role.

This is reflected in its initial show of favour for a cost reflective method of charging for transmission losses. This would indeed be detrimental to many users of the national grid who operate in Scotland. However, this does not necessarily mean that it would be an irrational decision by Ofgem, given the economic factors it is required to consider. 

If the UK Government wishes to ensure that Ofgem's decisions are visibly more supportive of its renewables policy aims, it may have to consider changing the regulator's remit.

If Ofgem is obliged to place greater emphasis on environmental considerations in its decision making it would have to approach decisions of this nature differently. In the absence of such action, if the regulator does take decisions which are perceived as damaging to Scotland's renewables potential, the call for devolution of further energy powers to the Scottish Parliament will only grow louder.

 

First published in The Scotsman, September 2007

Liz McRobb is a partner specialising in energy at law firm Shepherd and Wedderburn.