The issue of constraint payments – the payments made by National Grid to generators and particularly wind farms to reduce output at certain times – has made the headlines in recent months. Why are these payments necessary and are they in the best long-term interests of the UK? Phil Sheppard, National Grid’s Head of Network Strategy, explains the rationale behind them.
Grounds for constraint
"As system operator we believe this is the right decision and that it is in the best interests of the country to get as much capacity on the system as quickly as possible."
Phil Sheppard, National Grid’s Head of Network Strategy
The early connection of 15 large-scale wind farms to the National Electricity Transmission System has saved approximately 930,000 tonnes of carbon dioxide.
Source: National Grid
At first glance, the idea of making a payment to an electricity generator to stop producing electricity seems illogical. However, the reality of building and operating a transmission network fit for the 21st century is more complicated.
At National Grid, we often have to weigh short-term cost implications against long-term benefits to the UK as a whole. Constraint payments are a good case in point.
A constraint arises when power cannot be transmitted to where it is needed, usually due to congestion at one or more points on the transmission network. When this happens, we need to take action to ‘balance’ the network. This is similar to occasionally using traffic lights to manage the flow of cars joining a motorway during a busy period. It wouldn’t be economic or sensible to build another parallel motorway so that there was never a traffic jam.
These constraint payments are not new. National Grid has been paying coal and gas generators – and for other types of generation – to reduce output on occasion for some time now. We adopted the same approach for wind farms as we cannot discriminate between generators. This is a condition of our Transmission Licence given to us by the Government.
The rationale behind constraint payments
In Great Britain, market generators pay to have firm access to the transmission system 24 hours a day, seven days a week, so they can choose when and how much to generate. When a generator cannot fully use the access paid for, they receive compensation in the form of a constraint payment.
Other approaches that do not offer firm access would increase the risk of developing new generators and therefore raise the costs of people entering the generation market. This increase in costs would result in higher prices for consumers. The Government and the market therefore consider the system of firm access and constraint payments as the most efficient way to keep costs down for consumers.
So why do we need to restrict generation and make constraint payments? To meet our future energy needs, the UK must connect new sources of generation and, at the same time, reinforce the network so that it can accommodate this extra capacity. The UK has also committed to reach a target of generating 15% of all energy from renewable sources by 2020.
We have two options. The first is to hold off on connecting any new generating capacity until the extensive programme of network reinforcement has been completed. This would mean delaying connections by several years.
The second option is to bring on stream these new connections – a large proportion of which are from renewable sources – well ahead of time, but at the expense of some constraints on the transmission system.
Following consultation, the UK Government has decided to adopt the second approach and accelerate the process of new connections.
This new regime, called Connect & Manage, was introduced in 2010. It has increased the rate of new connections by offering generators connection dates based on the completion of ‘enabling works’, or in other words, completion ahead of network reinforcement.
As an example, the Western Link – a £1 billion project being developed by National Grid and Scottish Power to bring renewable energy from Scotland to homes and businesses in England and Wales – should be completed in 2016. This will complete a series of projects that will have more than doubled the capacity from Scotland to England from 2.2GW in 2010 to 5.8GW in 2016.
As system operator, we believe this is the right strategy because it’s in the country’s best interests to get as much capacity on the system as quickly as possible.
It may mean that there are times when we need to pay generators to reduce their output, but the overall benefit to the country of connecting new sources of future generation is hugely significant.
How constraint payments work
Large wind farms are connected to the UK’s high-voltage network and they participate in what’s known as the Balancing Mechanism. This is effectively a trading system run by National Grid that allows us to balance electricity supply and demand on a second-by-second basis.
As demand rises and falls during the day, electricity supply mirrors these peaks and troughs. We need to take this approach because electricity cannot be stored in any significant volume.
Through the Balancing Mechanism, National Grid accepts bids and offers from electricity generators to increase or decrease electricity generation as and when required. We have an incentive to choose the cheapest option, as we share part of the reduced costs that are passed on to consumers. Constraint payments are made when more electricity is being generated than can be accommodated on the transmission system at that moment in time. These are negotiated with the generators as part of the Balancing Mechanism.
Assessing the results
Since 2011, 15 large generation projects have been connected early to the electricity transmission system through Connect & Manage agreements. Between 1st April and 30th September 2013, this resulted in the saving of approximately 930,000 tonnes of carbon dioxide. In total, there are 163 large projects signed up to the process, representing a capacity of nearly 37,000MW.
So far this year, National Grid has paid £33.8m to wind farm operators for limiting their generation output to manage system issues; constraints management was a major contribution to this figure. This represents about 5.2% of the total cost of operating the transmission system. The annual cost of constraints will vary as the amount of new generation increases and as we reinforce the network to move power to where it is needed.
Ultimately it is the available capacity of the network that drives these constraint payments rather than high wind output being expensive to manage. As older power stations close and release capacity – and as transmission reinforcements are delivered – these payments will fall away. The Connect & Manage regime covers power stations of all types, from offshore wind through to biomass and new, highly-efficient gas-fired power stations.
We will still need to make constraint payments in future. But we’re doing everything possible, working together with industry partners, to keep the cost down, to maximise the efficiency of connections and to press ahead with continued investment in the electricity transmission network, such as the Western Link mentioned above.
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