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Ofgem approves £560m transmission network investment for renewables

20 Dec 2004 00:00:00

British energy regulator Ofgem has announced that it has approved £560 million (EUR 817 million) worth of new funding to bolster the electricity transmission network in Scotland and northern England in order to accommodate the expected growth in renewable generation.

Specifically, as generators have looked to expand the country’s renewable capacity in response to the government’s calls for investment in renewable generation, Ofgem has amended its views on baseline investment requirements, i.e. those projects justified in terms of savings in avoiding network constraints and other costs.

Under the proposals announced on Monday by the regulator, National Grid Company (NGC), ScottishPower Transmission Limited (SPTL) and Scottish Hydro Electric Transmission Limited (SHETL) will be allowed to spend £560 million on network upgrades and expansion rather than the £353 million that was initially announced earlier in the year. This additional investment is subject to agreeing planning consents and the affected companies delivering output levels that will be agreed prior to construction.

Previous uncertainty over the extent of requirement for renewable generation meant that these assets were not incorporated into the last set of transmission price reviews. As this uncertainty has diminished and there has been increased demand for transmission capacity from renewable generators - the majority of which are either onshore or offshore wind that must be connected to either the transmission or distribution networks - such developments have been factored into the price control reviews.

In terms of actual generation volume, the engineering consultants employed by Ofgem to assist with the review - Sinclair Knight Merz (SKM) - estimated that up to 5 GW of new wind capacity could be connected by 2010.

There are four investment projects covered by Monday’s announcement:

• The Beauly-Denny line in central Scotland: £332 million (unchanged from baseline);

• The Scotland-England Interconnector: £168 million (upgraded from incremental to baseline);

• The Kendoon line in south western Scotland: £40 million (upgraded from additional to baseline);

• The Sloy scheme in western Scotland: £21 million (unchanged from baseline).

In order to finance the schemes, Ofgem has proposed that they be assessed on real pre-tax capital cost of 8.8%, which is “broadly equivalent” to that of recent price control reviews and also corresponds to that allowance applied in extending the Scottish transmission price controls. The investment is based on a 40 year lifespan for regulatory depreciation.

Although these projects have now been confirmed, Ofgem stated that other types of investment (incremental and additional) would not be considered until the next transmission price control review unless there are suitable financial signals from power station developers.

Speaking on the announcement, Ofgem chief executive Alistair Buchanan said, “The next price control review for the transmission companies, which is not due until 2007, is the time when decisions about future investment would normally be made. We have decided to take action early to respond to the need for investment to accommodate new renewable generation.” CL

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