TNUoS charging: counting the hidden cost to consumers

A blog by Andrew Urquhart, Head of Whole System at SSEN Transmission

We’ve got nine years to avert climate disaster in the UK. Nine years to deliver a target 40GW of offshore wind. Nine years to deliver the UK’s critical network infrastructure that will deliver this clean electricity to people’s homes and businesses and put us collectively on a just and fair pathway to net zero emissions by 2050.

In the year of COP26, which SSEN Transmission is a proud sponsor through SSE’s group endorsement, this conversation about the “how’s and the what’s” becomes very timely as the world descends on Glasgow to explore and agree climate solutions for the benefit of society and the planet. For offshore wind delivery, the UK Government’s Offshore Transmission Networks Review will be key to finding timely solutions, and it’s a review that SSEN Transmission is actively supporting and feeding into. The review aims to break down delivery barriers by improving coordination in delivery and is making excellent progress in doing so.

However, there remain wider barriers that also require reform, such as the impact of the current transmission charging regime (TNUoS) on the competitiveness and delivery of offshore wind projects, particularly in Scotland. Our TNUoS Offshore Wind Addendum paper, published this week, aims to explore this in further detail, whilst also seeking further views on our key findings.

As chicken and eggs go, it’s a tricky one to crack (excuse the pun) and we welcome recent confirmation from Ofgem and the UK Government that a regulatory review of the current regime is likely. As this develops, we hope that industry will be invited to participate in any review process to overcome current blockers. However, in the meantime we have some views, based on our stakeholder-led analysis, on what the key issues are that need to be solved. Developers have told us that there are two material impacts from this uncertainty about transmission costs that increase the costs of offshore wind deployment:

• First there is impact on financing costs for the multi-billion pound offshore wind farm investment. Uncertainty and volatility from unpredictable transmission charges increase risk in future cashflows. This, in turn, will decrease developers’ credit ratings and hence increase cost of capital throughout the lifetime of operation.

• The second impact relates to the CfD auction. At the time of placing a bid in the auction – some six years prior to energisation – developers need to forecast volatile and uncertain transmission charges over the 15-year lifetime of the CfD award.

The outcomes from both have several perverse effects. Successful projects in the CfD potentially become commercially unviable if TNUoS is under-forecasted. But if it’s accurately or over forecasted the project risks being uncompetitive in the auction, or at best is successful but then increases strike prices for cheaper projects below it (which ultimately ends up on consumer bills).

It’s also important to note that while our analysis has undoubtedly found that the current regime results in Scottish generators paying a higher cost for use of the transmission network compared to other areas in GB, making projects less competitive in CfD auctions and creating risk to future offshore wind deployment, it also suggests that TNUoS is not purely a Scottish issue. The volatility and uncertainty of future charges impacts developers across GB, with the current charging methodology developed at a time when the electricity system was not so focused on renewable deployment to support decarbonisation goals.

With this uncertainty, comes great risk and cost – risk to green recovery and decarbonisation targets, and increased cost for end consumers as developers look to mitigate the unknowns. Analysis undertaken by NERA Economic Consultants for Ocean Winds estimates that this could represent a total cost to consumers of between £122 and £391 million per year by 2030.

We wholeheartedly support a user pays principle for use of the transmission network, however it is clear that the current regime is not fit for purpose in a net zero world, for industry or consumers. Locational charging signals, designed to encourage developers to locate in areas close to demand in the days when fossil fuels were the only commercially viable option to meet our electricity needs at scale, seem like an irrelevant and frankly bonkers proposal for today’s innovative offshore wind sites that must locate and bid for approved leasing areas from the Crown Estate.

It’s with these concerns in mind that we continue to support calls from our customers on the case for urgent reform of TNUoS in the context of a decarbonised future, and we look forward to receiving further feedback on our latest paper to help inform our final stakeholder-led recommendations which is planned for publication in the coming weeks.

To read the paper and share your views, please click here. You can read more about SSEN Transmission’s stakeholder-led analysis on our brand new TNUoS Stakeholder Advocacy Hub here.