Energy Intensive Users Group

Position papers

Electricity Transmission Charging

General Issues

EIUG believes due weight should be given to the advantages of stability and predictability in transmission charging. Unanticipated changes to charging regimes raise issues of risk for generators, suppliers and consumers alike. The costs associated with managing increased uncertainty may hinder rather than facilitate effective competition. We therefore believe that charging arrangements should not be altered fundamentally unless there is clear evidence of a resulting benefit to transmission efficiency, or competition between generators, that is certain to be passed on to consumers.

EIUG does not wish to see further increases in the level of complexity in transmission charging, which is already a matter of concern. Complexity presents problems enough for the energy industry itself, let alone for industrial consumers whose commercial focus cannot be concentrated to the same degree on energy matters. Increasing complexity in charging is likely to risk further disadvantaging energy consumers. This is one reason why EIUG is sceptical about whether there would be benefits from auctioning transmission capacity.

EIUG does not oppose the possibility of altering the balance of revenue collected by means of connection and transmission charges to move towards a ‘shallower’ charging regime, but we are sceptical that a radical redefinition of transmission charging boundaries is desirable. We acknowledge a case can be made that removing generator-only spurs (for example) could reduce a potential barrier to new entry, but equally that this would represent a transfer of risk from individual generators to the market as a whole, and hence to consumers.

EIUG could only support a redefinition of charging boundaries if a mechanism was in place to ensure any resulting increases in transmission charges were adequately offset by reductions in distribution charges that fully reflected any reduced costs of connection. We believe that, should such changes be proposed, distribution companies must be required to pass through cost reductions on a transparent and equitable basis. This concern is especially acute for extra-high voltage (EHV) consumers, who are at risk of unfair treatment as their revenue does not fall within the scope of distribution company price controls.

Peak Charging

EIUG believes that the system of transmission charging should adequately reward users who are able to manage demand at times of system stress, which enhances security of supply for all, and reduces the need for costly additional investment in transmission capacity. The current ‘triad’ charging system fulfils this requirement, is well understood by consumers, and has a proven track record. EIUG would not support changes to the current system that reduced incentives to manage peak demand, which would have negative consequences for system security.

EIUG believes interconnector users should be subject to the same incentives to manage demand in order to avoid peak transmission charges as other UK consumers.

Losses

EIUG questions the need to introduce charging for transmission losses on a zonal basis, whether within England or Wales or across a GB-wide market. Even if there is a case to be made for locational losses for generation, it is not obvious why this principle should necessarily apply for demand. We are aware of no evidence that UK industry would locate – still less re-locate – in response to changes in transmission price signals. Introducing zonal transmission losses would therefore create winners and losers amongst individual industrial consumers, depending on the historical accident of their existing location, but no net benefit for consumers as a whole.

EIUG firmly rejects charging for transmission based on a marginal loss approach. Analysis has shown this would result in exaggerated locational signals, and hence distort charges.

We note that, in any case, losses account for a small and declining proportion of the transmission system operator’s costs.

Locational Signals

EIUG questions the extent to which existing demand/generation should be penalised in the event that the geographic distribution of demand/generation alters over time. Our comments on the ability of industry to re-locate in response to locational losses (above) apply equally to other transmission charging signals.

EIUG supports the principle that there should be incentives on new generation to be efficiently located. This reduces the cost of transmission to be borne by new or existing generators that do not require costly extensions, and helps minimise the overall costs of the system that are ultimately borne by consumers.

EIUG is concerned that, in an attempt to ensure that the government’s ambitious renewable targets are met, there will be pressure to further subsidise uneconomic wind generation by smearing the costs of extending the national transmission system across all users. For example, offshore wind operators might be able to locate a substantial distance away from the existing transmission network, necessitating major new investment that provides little or no benefit to other users, without being exposed to the costs of extending the system. Such costs should be internalised, and the associated risks borne by the scheme’s backers, not consumers – if this reveals such investments to be even more uneconomic than their proponents claim, so be it.

© Energy Intensive Users Group 19th January 2004