A Whole System Opportunity – Securing Shetland’s Energy Supply
Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Power Distribution (SHEPD) under licence, has today published a summary of its ‘whole system’ recommendation to secure Shetland’s future energy needs.
As Shetland remains unconnected to the main GB energy system, all its energy needs are met from on-island sources, with a dependency on Lerwick Power Station. As the distribution system operator for Shetland, SHEPD has been working to identify the future security of supply solution for Shetland for a decade in anticipation of the closure of Lerwick Power station, which is nearing the end of its operational life and is expected to cease operations no later than 2025.
In its recommendation, which was submitted to the energy regulator, Ofgem, in November 2018, SHEPD has proposed that Shetland’s future energy needs can be met through the sharing of, and financial contribution towards, the proposed transmission link to Shetland. SHEPD has proposed making a financial contribution of £251m towards the transmission link, which is based on the value of services the link would provide to its local distribution network. This has the potential to secure all of the benefits for SHEPD’s distribution consumers which could be provided by the best alternative solutions identified in the market, but at a total cost of around £140m lower to GB electricity bill payers, who the costs of Shetland’s new energy solution will be recovered from.
A ‘whole system’ solution offers the potential to meet Shetland’s dual energy needs of securing its future security of supply and providing Shetland developers with export opportunity by improving the economics of the proposed transmission link.
SHEPD has also proposed applying the same principle to Scotland’s other two island groups, Orkney and the Western Isles, with the value of contributions based on costs saved by avoiding the replacement of parts of the existing island networks. This would see a contribution of around £20m to the Western Isles transmission link due to reduced reliance on on-island back up generation, and a contribution of around £15m to the Orkney transmission link based on the costs associated with reduce reliance upon, and avoiding the need to replace, its existing back up generation at Kirkwall.
Commenting on the proposed recommendation, Managing Director for Networks, Colin Nicol, said:
“Our whole system solution presents an opportunity to secure Shetland’s future security of supply at a saving of around £140m to GB electricity bill payers. If approved, our whole system principle will also improve the economics of connecting Scotland’s two other major island groups, Orkney and the Western Isles.
“We now await clarity from Ofgem on their assessment of our recommendation, which will be important to provide sufficient clarity to developers participating in this year’s CfD auction in May.”
If the proposed recommendation is accepted and Shetland developers are successful in this year’s CfD auction, SHEPD will begin the process of tendering for a backup solution to ensure security of supply in the event of a fault or planned outage to the transmission link. However, if the recommendation is not accepted and Shetland developers are unsuccessful in this year’s CfD auction, an alternative solution will be required. SHEPD’s analysis indicates that the alternative solutions likely to come forward are estimated to cost in the region of £400m+, costing GB electricity bill payers substantially more than SHEPD’s whole system recommendation.
SHEPD has already made two recommendations to Ofgem to secure Shetland’s future energy needs, the first being a replacement thermal power station which in 2014 was rejected on the basis of cost and in favour of a competitive tender. Following the subsequent open market competitive tender, SHEPD proposed a 60MW HVDC distribution link to the GB system supported by thermal backup generation, which was also rejected by Ofgem, in 2017. Its rejection followed the introduction of new environmental derogations for islanded thermal generation plants, allowing Lerwick Power Station to run beyond 2021 when it was previously forecast to close; a decision by the UK Government to allow remote island wind to compete in the 2019 CfD auction, opening up the potential for the transmission link to proceed; and significant community, stakeholder and political opposition to its low capacity, which would have provided limited opportunity for Shetland renewable generators.
SHEPD understands that Ofgem intends to issue a publication on SHEPD’s whole system recommendation within the next several weeks, setting out their views and next steps, and inviting stakeholder feedback on the proposals.