What ‘LEVELISATION’ means for Scotland

In its determination to ensure that our electricity is delivered via a market driven arrangement, albeit regulated, Westminster has created a quite Byzantine generation policy operated under a very complicated regulation arrangement; and it has certainly not designed it with Scotland’s particular electricity generation strengths or need in mind.

The UK Government’s legal obligation to cut greenhouse gas emissions, and it’s decision to load the early part of the carbon reduction process on to the market-driven electricity generation industry has complicated matters, but by continuing with its ad-hoc approach in policy development, DECC is simply producing confusion, higher electricity prices and lower security of supply.

Whether it is keeping track of the Renewable Obligation Certificates and its accompanying Supplier Company Obligation to purchase defined amounts of electricity from accredited renewable sources; or understanding the myriad and ever changing subsidy arrangements for the Feed-in-Tariff outputs for smaller generating schemes; or getting to grips with the latest wheeze, the Contracts for Difference proposals; even an energy expert would be taxed trying to keep up, never mind any simple layman.

I could also add such terms as Levy Control Framework, a scheme imposed by the Treasury to cap the total annual subsidies being added to our electricity bills (expected to reach £7.6billion/year by 2020 ).

Or National Grid’s various ‘Emergency‘ (panic?) provisions made with the generating companies to ensure that our lights will not go out:

  1. Demand Side Balancing Reserve,
  2. Supplemental Balancing Reserve,
  3. Short Term Operating Reserve, and
  4. Notice of Insufficient System Margin

These provisions, made because of the present very low capacity security margin, all entail large payments to various generating companies from National Grid, payments which still end up on consumers’ bills

The result of all the above however has left Scotland, which is simply an appendage to the GB grid and has no real input into the DECC or National Grid policy chaos, in a rather invidious financial position as I will try to explain.

As is well known renewable electricity generation is much more expensive than conventional thermal generation. This means that a subsidy mechanism is required to encourage investment in renewables such as wind, solar, hydro, landfill gas etc. With such a myriad of technologies and the accompanying range of subsidy rates, and an annual subsidy level which by 2014/15 has reached well over £4.0 billion and rising, what ‘mechanism’ does DECC/Ofgem have in place to decide who should pick up this ongoing subsidy bill. It is certainly not picked up by the Government.

The mechanism is called ‘levelisation’.

For each of the generating technologies and subsidy systems Ofgem ingathers from the supplier companies how much they have had to pay out to accredited suppliers as subsidy. This is totalled and reallocated back to each supplier depending on their total share of the GB electricity market. The supplier companies then add their revised ‘levelised’ share of the total subsidy onto their consumers’ bills.

The process may be a bit convoluted but the final effect is that each unit of electricity sold across GB contains the same amount of uplift to cover GB’s total annual electricity generation subsidy cost.

The ‘levelisation’ process however also has another effect which may be of interest to Scots. Taking wind and solar as our two main renewable generating examples, since between them they receive the lion’s share of the subsidies, the following can be said about how Scotland fares in the ‘levelisation’ redistribution stakes.

  • WIND. Onshore wind is much cheaper than offshore wind so requires and receives a much smaller unit subsidy. Almost all of Scotland’s 5,200MWs of wind capacity is onshore. In E&W over 5,000MWs of their total of 8,300 MWs wind capacity is offshore.
  • SOLAR. To date E&W has installed over 5,000MWs of expensively subsidised solar PV, most of it being rooftop installations (although solar farm capacity is catching up). In our not so sunny Scotland we still have under 200MWs of solar PV capacity, less than 5% of the GB total.

It is easy to see that Scottish renewable electricity capacity and output is mainly relatively cheap onshore wind, and we have minimal expensive solar PV, while E&W has mainly expensive offshore wind and extraordinary amounts of what has to date been expensive and highly subsidised solar PV.

Under the ‘levelisation’ redistribution process for the GB-wide grid Scotland has to pick up its proportionate share of the whole GB subsidy cost of this wind and solar.
And while subsidies to onshore wind are now being stopped (when there is still a fair amount of potential onshore wind resource available in Scotland), England is being encouraged by DECC to press ahead with a massive expansion of expensive offshore wind. The DECC also is still hooked on tripling the amount of solar PV in England when the subsidy cost for this alone reaching almost £800 million last year.

Finally there is new nuclear – Hinkley Point. This is potentially a really big future ‘levelisation’ whammy‘ for Scotland as an appendage part of the GB grid.

As a result of a Westminster/DECC political dictat (so much for reliance on market forces delivering on a National need) a financial agreement has been cobbled together to ensure that a new nuclear plant will be built at Hinkley Point (and at possibly two more sites). The negotiations were apparently a bit one sided as DECC were desperate to get a nuclear power plant built and the Westminster Government were forced to abandon its long held pledge that it would not subsidise new nuclear.

The eye-watering – price agreed with the French/Chinese consortium is the following.

The base price will be £92.5/MWh (at 2012 prices), index linked for 35 years from the date of commissioning of the plant (expected to be 2025).

Who knows what the guaranteed eventual unit price we will contracted to pay in 2060?

The financial terms of this agreement were arrived at by DECC without any consultation with the Scottish Government and in the full knowledge that the Scottish Government has in any case made it clear that it considers nuclear power to be too expensive and risky. However, it may well be that the Scottish Government have turned its back on nuclear power in Scotland, but as part of the GB grid, and under the usual ‘levelisation’ arrangements presently in place, consumers in Scotland will still have to accept their proportionate share of the massive cost for any new nuclear plants built south of the border.

The Scottish Government has no power to say ‘’ no thanks ‘’ to the ‘levelisation’ arrangements, even those for nuclear power which it opposes, or for solar which is an entirely inappropriate technology for a country at 55 degrees N latitude.

We do however have two very valuable generating resources in Scotland when it comes to balancing a Grid the size of Scotland’s. These are our hydro and pumped storage facilities. Our hydro output is probably producing the lowest cost electricity in GB (10% of Scotland’s annual demand ) and our pumped storage is invaluable in making best use of our excess electricity either when our renewables or our base load is producing at off-peak times and can be put into storage for peak time supply. Unfortunately both these resources are owned by private companies operating within a GB grid arrangement and thus Scotland gains no advantage from them.

The real mystery is why the Scottish Government is apparently happy to remain part of this GB grid arrangement which is surely not in Scotland’s best interest. Think also of the connection charge regime which penalises power plants the further they are from London and which is now inhibiting SSE or Scottish Power proceeding with a replacement gas station for Longannet.

It is surely time for the Scottish Government to demand that control of electricity generation be transferred to Holyrood. With that Scotland could operate an electricity generation policy totally suited to Scotland’s renewable resource strengths.