Rt Hon Alex Salmond MSP
First Minister of Scotland
St Andrew’s House, Regent Road, Edinburgh EH1 3DG
T: 0845 774 1741
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16th December 2010
ELECTRICITY MARKET AND REGULATORY REFORM
You wrote to me on 20th April 2010 calling for a review of the UK electricity transmission
charging regime. I replied on 31st May welcoming the support of business, industry and
trades union leaders and highlighting the work Scottish Ministers are doing to deliver both a
fairer transmission charging regime and the electricity regulatory framework that better
delivers Scotland’s full energy potential. Jim Mather has been working on the detail on this,
including updating you in September on areas where our collective efforts are proving
successful including a long awaited review of transmission charging by Ofgem and also of a
review by DECC of the review of the roles and responsibilities of Ofgem itself.
I am now writing again to highlight the publication on 16th December by UK Energy Ministers
of the next phase of Electricity Market Reform. With significant challenges in moving to a low
carbon electricity generating mix and substantial new investment needed, the Electricity
Market Reform consultation assesses market and support mechanisms for low carbon
electricity. DECC intend to publish a White Paper in 2011 to inform the UK Governments’
second Energy Bill.
Getting the EMR, and other current strands of energy market and regulatory reform right,
could deliver an energy regulatory framework better able to deliver Scotland’s energy
potential. It could deliver even more effective support mechanisms for renewables and
Carbon Capture and Storage in Scotland. But getting the EMR wrong could impact on
investor confidence in the renewable energy sector in Scotland. It could see support
mechanisms for nuclear generation in England at the expense of renewable energy sources
and CCS in Scotland.
In view of the importance I attach to these issues, I wanted to outline the initial position of the
Scottish Government. A supporting annex discussing the areas in the paper in more detail is
also attached.
The main proposals from DECC fall into four areas:
Carbon Price Support: with a higher tax on fossil fuels used for energy generation. It
will be important Scotlands receive a fair and proper share of any such tax revenue from
fossil fuels to strengthen low carbon price signals. There are strong policy arguments to
support targeting revenue support at areas of the highest renewable energy resources to
accelerate the low carbon transition. Any such tax must avoid undermining confidence or
investment in our existing fossil fuel generating plant, and it will be particularly important that
it does not impact on CCS development and deployment. The UK Government track record
here is not convincing, and the UK proposition on the Fossil Fuel Levy, falls well short of our
long argued case for funds to be made immediately available in full to provide in accelerating
renewables development in Scotland.
Feed In Tariffs for forms of low carbon generation: We have used our devolved powers
very successfully to create a strong and effective framework of support for renewable energy
technologies. We plan to do likewise for CCS and welcome the UK Government’s proposals
to make long-term price support available for CCS. This can incentivise the investment in
CCS that will be necessary to decarbonise our thermal generation by 2030. We need to
consider carefully how any move to a feed in tariff and away from the existing Renewables
Obligations will affect investment – particularly in new and emerging renewable technologies.
Any new system must be at least as effective as the current framework of banded ROCs,
where we have delivered unique and enhanced levels of support for offshore wind and for
wave and tidal capable of delivering capacity as well as new industries and jobs. We are
concerned that changes which are designed chiefly to extend our support mechanisms to
include nuclear power run a material risk of being delivered at the expense of investment in
renewable generation and CCS in Scotland. We will strongly resist any change for a support
mechanism for nuclear power at the expense of renewable generation and CCS in Scotland,
and we believe that Scottish Ministers should have full control over any new financial support
mechanisms for renewables and CCS in Scotland.
Capacity Payments to incentivise peaking plant and ensure security of supply while
making the transition to a low carbon generating mix. It will be important to understand
which power sources could balance intermittency from renewables. This also needs to be
looked at in the context of constraints management and payments (which are socialised
across all users) and transmission charging (which is currently under review). I will be
particularly keen to ensure any thinking on capacity payments does not replicate an unfair
locational approach, such as exists in transmission charging.
An Emissions Performance Standard to ensure no new investment in unabated coal
plant: The design of an Emissions Performance Standard needs careful consideration. Its
key objective must be to decarbonise electricity generation by 2030 by incentivising
investment in CCS to reduce emissions from both coal and gas plant. That is why it is
essential that clear, long term price support is given to CCS that is also consistent with
decarbonisation of both coal and gas by 2030. Since control of emissions is a devolved
matter, alongside consenting of thermal power stations, the Scottish Government must be
closely involved in the design of an EPS to ensure it delivers our domestic policy objectives
for CCS, backed by clear long term price support.
I am determined to ensure any reforms properly and fully reflect the current powers of both
Scottish and UK Ministers. I am also determined to see proper recognition given to the
crucial role that renewable energy from Scotland will continue to play in helping the UK
progress towards meeting its renewable energy target and delivering our low carbon
renewable energy future.
Our recently-released Draft Electricity Generation Policy Statement sets out a clear evidence
base for Scotland to meet 80% of its electricity demand from renewables by 2020, backed up
by a minimum of 2.5GW from new or upgraded thermal plant, progressively fitted with CCS
by 2030. It also shows clearly that there is no need for new nuclear power stations in
Scotland to meet our future electricity demand. I am clear that if the Electricity Market
Reform exercise succeeds, it will be able to help Scotland achieve the ambitions set out in
the Draft Electricity Generation Policy Statement. To do that, it will at least confirm, and
better, enhance, our existing devolved powers. If it does not, the huge renewables and CCS
potential of Scotland will not be fully realised. That would be an unacceptable outcome for
the Scottish Government..
My officials will work closely with you and other key Scottish industry and business
stakeholders and with the UK Government as the EMR – and other strands of regulatory and
market reform - progress. These are vital pieces of work and I would welcome your views
and input.
I am writing in similar terms to all of the signatories of the open letter on transmission
charging 20th and also to the convenor of the Energy EEnterprise and Tourism Committee of
the Scottish Parliament.
Alex Salmond