Electricity Market (Scotland)

Part of the debate – in Westminster Hall at 2:00 pm on 8th September 2004.

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Photo of Alex Salmond Alex Salmond Parliamentary Leader (Westminster), Spokesperson (Constitutional Affairs; Treasury), Leader, Scottish National Party 2:00 pm, 8th September 2004

It is a great pleasure to introduce the debate. I make no comment on the fact that the Minister for Energy, E-Commerce and Postal Services is not present; I understand that he is in China. He told me on the telephone the other day that he had been inspecting the great wall. If Ofgem, the subject of this debate, had been in charge, the great wall would never have been built. If Ofgem's plans proposals and theories go ahead, it will make it extremely difficult to exploit Scotland's renewable energy and electricity potential.

It is entirely suitable, and very welcome, that the Minister for Trade and Investment is present, as the debate is about whether there can be trade in electricity between the nations of Scotland and England.

This extremely serious matter is coming to a conclusion: in November we will know whether the proposals being made by the National Grid company will be accepted by the Ofgem board, and pursued. If the proposals in option B of the consultation exercise are carried through, there will not be a significant increase in the generation capacity of renewables in Scotland, and we will miss out on the renewables boom that so many of us hope for, exploiting Scotland's vast energy potential and allowing it to supply markets across the UK and perhaps further afield. I thought that all parties shared that desire.

I hope we can agree on the scale of the renewables potential. Scotland already has 1,200 MW of hydropower because of the vision of a Minister, Tom Johnstone, after the second world war. He pursued hydro schemes against a huge amount of official opposition and blockage by landlords and vested interests. He wanted to develop the project because he had a vision that the highlands and islands of Scotland, especially the highlands, could have a vast generating capacity, serving the whole of Scotland. No one would now argue that we do not welcome our 1,200 MW of installed hydro capacity; indeed, many would argue that there is scope and room for more.

There is a huge array of energy resources in Scotland, both traditional forms of energy generation and hydrocarbons, including Europe's finest and most technically efficient combined cycle gas station, which is in my constituency of Peterhead. The station has 73 per cent. technical efficiency, which shows that even hydrocarbon stations can be so technically efficient that they help the Government's targets in respect of energy balance and the greenhouse effect.

Scotland has substantial coal-fired stations and nuclear capacity, but many debates on the subject concentrate on what will happen in the renewables sector. According to the Risoe laboratory in Denmark, which has a long-established wind farm industry, Scotland has 25 per cent. not of the UK's wind capacity but of Europe's. The other Scottish Members present in the debate know that we are a windy nation, and sometimes our constituents suffer the consequences. None the less, 25 per cent. of Europe's potential wind capacity shows Scotland's enormous potential in that respect.

Scotland also has 10 per cent. of our wave power capacity—at present, the only working commercial wave power station is on the island of Islay. Professor Ian Bryden of Robert Gordon university described the Pentland firth as the Saudi Arabia of tidal power. Let us start with the agreement that there is enormous potential for renewable energy in Scotland, which is the why the Government's 40 per cent. target for Scotland is higher than the target for south of the border.

It would therefore be a tragic missed opportunity if exploitation of that renewable energy were prevented by regulations and the arbitrary imposition of unfair and discriminatory charges. Yet that is exactly what might happen under the National Grid company's proposals, which are unfortunately being put forward because it is adopting charging policy based on theories conducted within Ofgem about how to decide the interest charges on a system. Let us be clear that we are not talking about charges for transporting electricity—we all accept that a transportation charge should be built into the transmission of electricity. We are talking about entry charges: what is paid per kilowatt to get electricity on to the national grid.

The absurdity of the proposals can be best shown by the following example. In the north of Scotland, option B under the National Grid company's proposals would be to charge generators £20 per kilowatt to get on to the grid. However, the good news, I suppose, is that someone who wants to put a wind farm on top of Big Ben would be paid a subsidy of £9 per kilowatt. So a wind farm up Big Ben brings a £9 subsidy, whereas a major offshore wind operation in the north of Scotland carries a £20 a kilowatt tax.

The theory behind the proposal is locational pricing. Basically, Ofgem wants power stations in the UK to be approximately configured to the population: they want the population to match the power stations, or vice versa. There are a couple of obvious difficulties with that for renewables and particularly for wind power. I do not think that the population of London wants a wind farm up Big Ben. Indeed, the population in many areas of the country is resisting wind farms anywhere. I do not think that the population of London would be particularly enthusiastic about any power station in the precincts of outer London. In many senses, it does not matter what subsidy Ofgem comes up with; it will not reflect the reality that there will not be many new power stations in central or outer London.

The other obvious difficulty is that if there was a wind farm up Big Ben, the wind required to keep that station operational blows about 30 per cent. of the time. A wind farm offshore—in the Moray firth, for example—would be up 50 per cent. of the time, because the Moray firth, and this may come as a surprise to the academics and to Ofgem, is somewhat windier than central London.

If only the economists and Ofgem could have had a tutorial from the late Member for Portarlington, David Ricardo, one of only two great English economists in history, the other being John Maynard Keynes. Some of us remember that David Ricardo developed a theory of comparative advantage, which states that one should produce things where it is technically best to do so in order to increase the wealth not only of that area, but of the international community. I am sure that the Minister in charge of international trade is absolutely up on the international trade theories of David Ricardo. Therefore, to increase the benefit under that theory to both Scotland and England, the right place to produce renewable energy, such as wind power, is where the wind blows most and where it is technically most efficient to produce that power. That would certainly benefit the economics of Scotland but also the economics of England. Instead of creating obstacles, trying to prevent that happening, putting barriers in the way of that development, and trying to strangle at birth the development that we all hope for in wind and other forms of generation, Ofgem should be encouraging the development of renewable energy in the places of best comparative advantage.

Ofgem's latest press release was issued before this debate—they must have got wind of what I was going to say. Ofgem is in a state of some confusion. On the one hand, the press release repeatedly states that the proposals are those of the National Grid Company and that Ofgem has still to judge them when they are submitted. For example, I quote:

"The company"— that is, the National Grid Company—

"will then submit final proposals to Ofgem for its approval at the end of September."

That is technically true, but it is under the Ofgem scheme and its theory of locational pricing that the National Grid Company has produced these ridiculous proposals.

It is not only me and other Scottish Members who are jumping up and down about the issue—if one looks at the exchanges at Scottish questions yesterday, it is fair to say that the Secretary of State for Scotland is also deeply concerned. I do not think that the former Energy Minister, Mr. Wilson would mind me saying that he is equally concerned about the implications. For many years, he had a vision of the north of Scotland being the powerhouse for renewable energies and—if I interpret his remarks in debate correctly—I believe that he is deeply frustrated at the prospect of an obstacle being placed in the way of that development. If it was just politicians talking about the matter, we might have to bow to the experience of the experts in Ofgem and the National Grid Company, but the very companies on which we will depend to develop the resources are saying the same as we are.

A week last Thursday, I attended a glittering dinner in Fyvie castle, which is not currently in my Banff and Buchan constituency, but will be shortly, although the event was not to celebrate that. It was to celebrate Talisman Energy's 10 years in the North sea. The dinner was addressed by the Minister for Energy, E-Commerce and Postal Services and by the First Minister of Scotland, both of whom celebrated the fact that one of the projects that Talisman is engaged in with Scottish and Southern Energy Group is the development of the Beatrice field in the Moray firth, which is potentially Europe's largest offshore wind farm.

It seems to me that offshore wind has many advantages over onshore wind. There will be nothing like the same environmental resistance that is experienced with onshore wind farms. Despite a relatively benign climate at present, Scotland has only 200 MW of installed capacity in wind farms. If the Beatrice project comes to fruition, that single offshore project alone will generate 1,000 MW of power, which is five times the entire installed wind capacity onshore. That single project would meet some 20 per cent. of Scotland's entire electricity needs, and would be up and running for 50 per cent. of the time, as opposed to installations in even the best location for onshore wind, which would run for less time than that.

Let us agree that it would be marvellous to have the Beatrice project come to fruition—that was certainly the view of the Energy Minister. The Government, the European Commission and, to a minor extent, the Scottish Executive, have backed the demonstrator models that will go on to the Beatrice platform over the next year or two. There is funding for the research and for the demonstrator models, which will establish and prove the technology, but what does Talisman Energy say about the proposals that are currently being made by the National Grid Company? I shall read exactly what it says:

"It is bad news for us and for anyone producing renewable energy in remote parts of Scotland. The changes Ofgem is talking about are 50 per cent. to 60 per cent. higher than we thought. At the moment it is the biggest single threat we see and it could threaten the viability of the project."

The very company that is being celebrated by Ministers both for its huge success in 10 years in the North sea and for its vision in being one of the partners in that amazing project, which would put 200 wind farms into the Moray firth and generate a gigawatt—1,000 MW—of electricity says that the proposals from the National Grid Company and Ofgem are "the biggest single threat" to the viability of the entire project.

Moreover, it is not just Ofgem. I am sure that the Minister knows of the proposals relating to Scottish Power. I am considering legal action against the discrimination that is implicit in the proposals if they come to fruition; although in its area of generation the charges are less than they are in the north of Scotland, they are still discriminatory. Ian Marchant, the chief executive of Scottish and Southern Energy Group has said:

"Whilst Scottish generators account for 14 per cent. of total installed capacity they will pay all of the UK's generation and transmission charges. Yes, England and Wales will net pay nothing.

I can't believe this is true but my experts assure me it is. I have even double checked it."

The major generator in the north of Scotland is perfectly clear on the discrimination implicit in the charges.

One might of course say, "Well, that's MPs. They are up in arms and so are the major companies going ahead with the projects, but the MPs have a vested interest in getting development in their constituencies and the companies have a vested interest in not paying huge charges." However, I was impressed to receive this morning a message from Maf Smith—I was more impressed than I was by the Ofgem press release. Maf Smith is the chief operating officer of the Scottish renewables forum. He writes:

"Under BETTA Scottish generators will subsidise English and Welsh generators by £70 million per year."

He adds:

"If you wanted to remove the £70 m subsidy you would need to reduce the Scottish locational charges by at least £10/kW . . . The corresponding increase . . . in English-Welsh generation charges would be approx £1/kW. Thus a small increase in English-Welsh charges would allow significant drops in Scottish charges and make the system equitable."

It is Ofgem's view, and the Government will no doubt echo it, that all the huge increases, which are not denied, and the amazingly high charges in Scotland and, to some extent, the north of England are offset by the fact that under BETTA the interconnector will now be paid for by the entire system as opposed to the Scottish generators alone. There are two difficulties with that argument. First, it is not true. There will still be a net loss to Scottish generators—with respect to existing capacity; never mind what comes on stream in the future—of £6 million a year under option B of the National Grid Company. With, hopefully, increased generation in Scotland, that net loss will become greater. There will be more power stations paying those large charges. There is a moving target, and the figure is already net.

The second reason the argument is wrong is that the fact that the interconnector fell only on the Scottish generators was already a block to competition in the system. That is why more electricity is not being exported from Scotland to England and Wales now. The fact that that a system was created under the vision of the previous Energy Minister to remove the blockage in the system and allow proper competition across the generating capacity of the UK and to allow Scottish generators to sell more of their technically efficient energy into the UK market, is being used to justify unfair discriminatory charges on new power stations in Scotland. Surely the Energy Act 2004 was designed to remove the blockages to competition and allow the increase in generation capacity—not to institutionalise charges by introducing them in another way.

Things could not be graver. We do not know definitely that option B of the National Grid Company will go ahead or that Ofgem will accept it. Neither of the two options is good for Scottish generation, although option A, despite the fact that it still includes discriminatory charges, is slightly better. There is much informed comment in the industry, and the attitudes displayed in Ofgem's press releases would lead one to believe that that it is so thirled to the ridiculous theory of locational pricing that option B might well be the one to come forward.

If we can we want to get our retaliation in first. The Government will look ridiculous if on the one hand they help and stimulate the development of renewable energy, and set it hugely ambitious targets of 40 per cent. of generation in Scotland, while on the other hand Government agencies such as Ofgem prevent the realisation of the dream of Scotland as the renewable energy capital of Europe.

The stakes could not be higher. Not only will the Beatrice field development generate 1 GW of electricity, but the total investment costs of the project will be approximately £1 billion and it will generate, directly and indirectly, thousands of jobs—300 alone in the construction phase and many others in the long term. That is only one of potentially half a dozen major projects of such a scale across the variety of renewable energy resources.

Not only are such new developments under threat of being strangled at birth by the ridiculous charges. Existing generation, the hydro power and the Peterhead power station are also threatened by the imposition of the charges. The Government say that they have given a 10-year protection for renewable energy—five years that then rolls on for another five years. That is true if we are talking about a small wind farm development up a hill somewhere. If it has a short payback period and can be up and running in nine months to a year, the protection might be effective. However, even if the Beatrice project demonstrators work perfectly and show that the project can come to fruition, it cannot be up and running until 2010 or 2011, and the payback period for the project is estimated at 15 years. Even in the best possible scenario, a major project such as Beatrice would have two, three or four years of protection before facing the full blast of paying £20 million tax just to get into the national grid.

What I hope to have demonstrated is that both arguments—first, Ofgem's claim that the charges on Scottish generators are offset by the removal of the interconnector charges, and secondly, the Government's argument about the 10-year protection for renewables—do not apply. The first is simply not true, and in any case, the balance would change over time, institutionalising unfairness in the system. On the second argument, although the provision might protect small-scale renewable projects in the 10-year horizon, it will not protect major projects such as the Beatrice field and the ones that the Government like to boast about their help for.

The stakes could not be higher. On the one hand, if we have a fair and equitable pricing regime to get into the electricity system, there could be billions of pounds of investment and thousands of jobs, particularly in the north of Scotland but all over Scotland as well. On the other hand, we could be undermining our existing capacity in the north of Scotland and strangling at birth the hope that we can become the renewables capital of Europe.

My final point takes me back to the former Member for Portarlington, David Ricardo. I repeat the point that producing renewables in the areas of technical efficiency and taking advantage of Scotland's range of amazing resources in wind, wave and tidal power is certainly a good thing for Scotland. However, it is also good for the rest of the UK and for Europe as a whole in making a more effective contribution to the protection that we all want to give to the environment. I appeal for consistency in Government policy and the removal of the unfair charges, and I hope that, as the Minister for Trade and Investment is now acquainted with the subject, David Ricardo will prevail and Ofgem will be defeated.