The offshore renewables community breathed a sigh of relief last week as the UK Government took the momentous - and long-awaited - decision not to impose a zonal power market in the UK through its REMA process.
That relief was keenly felt in Scotland, where developers had committed to billions of pounds of investment which they warned would be jeopardised by the market upheaval.
Instead, a single national GB-wide wholesale market will be retained with “ambitious” reforms to follow.
There is a huge amount of work to do; locational price signals pose an urgent and significant challenge for Scotland’s offshore renewables ambitions, particularly in surging transmission charges, where Ofgem has also made a big call in recent days.
Zonal debate
Scotland, as home to the greatest wind resource but also some of the UK’s least densely populated areas, became the frontline of the zonal policy battleground, with the debate looking at the potential for lower bills and addressing constraint payments.
Fundamentally, however, a zonal market is not yet designed - and could not be implemented until 2032 at earliest by industry estimates.
That would have meant years of uncertainty where developers would not know the price of their power and could not green-light investment at a time when it is needed most. Several said projects would be cancelled or put on hiatus.
As the government seeks £40bn annually of (mainly private) investment to achieve its flagship “Clean Power by 2030” policy, it would have been gambling its huge green energy investment pipeline for the possibility of lower bills in future. It should also be considered that, as well as putting CP2030 out of reach, introducing zonal would have had implications for the energy supply chain and green jobs growth - at a time when the North Sea energy sector is facing accelerated decline under the windfall tax.
Relief, then, as Ed Miliband announced the retention of a single national GB-wide wholesale market with substantial reforms.
Locational price signals still pose a major barrier to Scottish renewables
And those changes are urgently needed for transmission charges – a serious risk for Scotland’s offshore wind hopes. Last week’s REMA update promised a package of ambitious reform on this front by 2029 at the very latest.
Transmission charges, or Transmission Network Use of System (TNUoS) charges – the levy developers pay for build-out and maintenance of the grid - are surging. Developers in Northern Scotland have seen these charges climb 400% in recent years, eroding tens of millions of pounds annually from project values. Unsettling projections show these are expected to surge much further in the years to come - by 100% within just five years, climbing still further into the 2030s - while projects in southern parts of the UK receive a payment under the TNUoS system.
It was designed at a time when coal and gas dominated our power mix, signalling to developers to build their projects close-by to major cities. Now, as national objectives ask developers to build more infrastructure where the wind resource lies - such as northern Scotland - TNUoS sends a regulatory signal not to do so.
On the same day REMA was announced, Ofgem published a blink-and-you’ll-miss-it “minded to” decision not to put a 10-year cap and floor on these TNUoS charges which had been proposed. While this would have been a sticking plaster only, the Cap and Floor would have protected developers in the near-term. The decision means companies with existing assets will be left exposed and seeking grandfathering arrangements. It also raises questions on whether Scottish projects - exposed to higher TNUoS costs which Ofgem is apparently content to leave them with - should bid in the upcoming AR7 auction in August, the next Contracts for Difference subsidy round for offshore wind projects.
Allister Thomas, Senior Energy Advisor at True North Advisors
Hopefully, that decision is because Ofgem is doubling down on longer-term TNUoS reform.
And we won’t have to wait until 2029, the deadline set by last week’s REMA announcement for reforms, for the next big call to be made on transmission charging.
Another key proposal and a longer-term fix is a change to the “security factor”, the amount of redundancy needed to be built into the grid, which would make transmission charges more predictable and reflective. Proposals, backed by Scottish developers, are being considered by Ofgem, which is expected to decide on that in the coming months (mid-September at time of writing, but it has already been delayed).
In the absence of a Cap and Floor, with the attrition of value in existing Scottish projects and the risk to future investment prospects, developers are right in urging Ofgem for enduring intervention to protect investment, jobs and clean power ambitions.
Big changes to the CfD
In other news, this week the government published details of reforms to this year’s AR7 Contracts for Difference round - and just in the nick of time for the application window to open next month. It follows a consultation in May.
A significant shift is in allowing (fixed) projects without full planning consent to apply for a CfD. While opening a greater number of projects to bid, it may cause instability if, for example, a project receives CfD but does not subsequently receive planning consent. These developers may also not be as far along with their supply chain engagement, and risk underbidding on the CfD price - a challenge government will be aware of given the recent Hornsea 4 cancellation by Orsted (note that the changes also mean withdrawn projects can’t reapply in AR7). It will be interesting to see what comes of this for Scotland’s Berwick Bank which has been in planning since December 2022 without consent.
Another major reform is extending the length of CfD contracts to 20 years, rather than 15, for offshore and onshore wind, floating wind and solar (note that floating and the cheaper fixed tech will compete). This will lower the strike price by around 10% by government modelling and help developers commit to larger and longer-term projects. This should improve investor confidence and encourage more projects to bid. It does, however, extend the subsidy support provided by UK Government well into the 2040s, which may cause issues if wholesale power prices drop as the system is decarbonised.
There are also reforms to how DESNZ sets the final budget for the auction. For fixed wind, the budget will be published before the sealed bid window, however Secretary of State Ed Miliband will be able to view bids on projects which breach that budget cap - and could then potentially increase the amount of cash available to get the capacity DESNZ wants “if there is benefit to the consumer”.
The reforms have some news for floating wind - with the government saying AR7 will set budget and parameters to support “multiple” test and demonstration scale floating offshore wind projects. This may prove positive for smaller “Innovation” projects from Crown Estate Scotland’s INTOG round (Innovation and Targeted Oil and Gas) from 2022 – perhaps not for the larger TOG developments to decarbonise oil and gas assets.