Module B1 Study Book - the Graduate School of the Environment

a) System regulatory barriers: what NETA / BETTA does:
• favours large conventional energy producers, competing to inject into
the national grid the cheapest possible wholesale electricity, produced
by generating plant long since amortised;
• encourages the big producers to establish contracts with major
consumers so as to ensure a market for their base-load output. These
consumers then pay for their electricity at or near cost price, fractionally
over 3p per kWh in 2004, while small commercial consumers paid
just over 6p and domestic customers just under 8p. There is thus
a major disincentive to invest in onsite industrial power, where the
environmental benefits of doing so could be huge.
• hits small operators, whose output fell by 44% at the introduction
of NETA79 and recovered only slightly in the following year. Big
operators can play the market by keeping power stations on standby
in anticipation of profitable wholesale price spikes..
• hits cogeneration hard, as there is no financial penalty for wasting the
heat, and no incentive to switch to CHP.
In theory these ‘externalised’ costs might be internalised by the EU’s
Emissions Trading Scheme, but at the moment it does not help.
Under the ETS, emissions are allocated on a site basis, not a net emissions
basis (which would reflect the capturing of heat and the consequent saving
in emissions). Therefore the environmental benefits of cogeneration [which
already delivers total emission reductions of between 3.3 and 4.6 million
tonnes of carbon each year in the UK, according to the DTI] are not recognised
by the scheme: cogeneration plant operators are expected to buy equivalent
amounts of carbon certificates to their wasteful centralised counterparts.
• penalises renewable energies, via the financial penalties attracted by
intermittency; also, these penalties are greater than the real cost of
grid balancing.
Also via locational pricing, especially in remote areas abundant in renewable
energy resources, such as parts of Scotland.
• isolates sellers from users, stifling market innovation and ultimately
economic efficiency, There can be no price differentiation of different
quality energy products – yet the quality of electricity supply required,
for example, by an aluminium smelter is very different from that
required by a manufacturer of electronic parts.
• Fails to insist on the introduction of real-time pricing information – for
example through smart metering.
b) Regulation of the transmission and distribution networks
The National Grid Company and the Distribution Network Operators [DNOs]
are able to recover their operating costs, future investment costs and
depreciation through user charges agreed with Ofgem. They also receive an
additional return based on the value of their investments in infrastructure.
Therefore there is a strong incentive to make the transmission and distribution
networks asset-heavy and to seek capital-intensive solutions such as feeder
and substation upgrades, perpetuating the existing centralized model.
Lecture: Britains Power System 105