n the beginning of 2020, figures provided by the Renewable Energy Foundation (REF), a UK charity organisation, showed that so-called ‘constraint payments’ have reportedly totalled up to £650m over the last decade as compensation to wind farm owners for discarding 8.7 TWh of electricity. In some cases, wind farm operators have been paid more to switch off than produce power.
This situation has called into question whether the contractual agreements currently put in place are working best in both operators’ and consumers’ interest as costs are ultimately passed down through bills.
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By GlobalDataWhat are constraint payments?
The establishment of constraint payments is part of a regulatory framework called “Connect and Manage”, introduced by the UK government in 2010. It has been put in place to allow the development of electricity generation projects and their connection to the transmission system.
The Electricity System Operator in Great Britain, a private company called National Grid, has the responsibility to identify surges and shortages and balance supply and demand accordingly. As part of this process, occasionally low demand in Scotland and congestion on the interconnectors to England and Wales will require National Grid to reduce power flow from wind generators; in these cases it will ask specific wind farms in affected areas to reduce output in order to avoid damage to the system in Scotland.
As to who actually foots the constraint payment bill, the REF explains that they are ultimately paid for by electricity consumers through their bills, via the Balancing Services Use of Systems (BSUoS). The BSUoS, which is added onto bills as a charge, recovers the cost to the system operator (National Grid), who pay out energy producers when the system requires this form of balancing.
What has led to excess constraint payments being paid in Scotland?
According to a REF spokesperson, there are several factors that led to excess levels of constraints payments, including lack of regulations in the country, desire for more renewable energy, and faults with the subsea interconnector.
Firstly, the low price of land in remote areas has attracted the construction of wind farms in areas with little energy demand. As the Scottish planning regime is not as restrictive for wind developments as England, operators are more likely to have their projects approved.
In addition, according to the REF, the growing desire for more renewable energy and the encouragement of wind production has led to less scrutiny for wind operators in Scotland, as well as lower charges for the electricity grid connection needed for their development.
Finally, REF says there is a particular problem with the Western Link subsea interconnector, which goes from Scotland to North Wales and moves power near English consumers. The interconnector was built to resolve the grid constraint problem between Scotland and England, but according to REF its construction was severely delayed and the interconnector was built faulty. When it failed for a couple of weeks in January 2020, constraints payments averaged £1m a day.
Could companies be targeting constraint payments?
The spokesperson for the REF believes that this practise can provide “a perverse incentive to seek out areas with low demand and weak grid connectivity,” therefore it can encourage more operators to take advantage of constraint payments by constructing more farms in such areas.
Furthermore, REF perceives wind farms as a foreseeable market risk which should not be eligible for financial compensations when they have to be restricted in order to prevent grid overloading.
The company does not see such compensations as justifiable, especially as they provide higher income for a restricted period of time compared to when wind farms are actually working. It also warns that this procedure poses “a recognisable risk of siting a development” in low income areas such as less populated counties in Scotland.
The REF spokesperson concluded that “the effects of this perverse incentive are now being seen in many planning applications for industrial wind developments coming forward”.
What justifies constraint fees?
It is a little known fact that when a wind farm is asked to reduce output, it loses subsidies such as the Renewable Obligation Certificates and the Climate Change Levy Exemption Certificates, referred to as Levy Exemption Certificates, meaningthe constraint payment it receives is also a form of compensation for this loss.
In a statement, the NGESO has said that overall it is “significantly cheaper to pay the constraint costs,” rather than upgrade the grid to eliminate overloading and the issues that come from wind power not always being able to join the power flow.
It has also added that “all electricity systems around the world use constraint payments” and this is an essential process to keep the grid intact.
In regards to regulations, Ofgem took the decision in 2017 to introduce the Transmission Constraint Licence Condition, aiming to prevent any potential abuse of funds. This amendment to previous regulations prohibits electricity generators from seeking to be paid an excessive amount, which should have eliminated any intentional misconduct in the wind power industry.
Analysis by the Energy & Climate Intelligence Unit, a non-profit organisation, even pointed out that restriction costs in 2018 immediately fell after a very necessary grid improvement – the opening of the first part of a 2GW HVDC link between Scotland and England providing “relief on the main bottleneck that stopped all of the power generated north of the border being transmitted south.” This in turn indicates that excessive fees might be provoked by a shortage of grid updates instead of misuse of constraint payments.
With the UK currently operating approximately 57GW of wind power and planning to keep increasing it in the future, a grid expansion to accommodate more capacity and interconnector enhancement becomes even more important.
The current situation of constraint payments in Scotland has become a major concern and the solution lies somewhere in between curtailing compensations for wind operators in an attempt to encourage an even spread of farms throughout the UK and a considerable investment in extension and update of the grid to accommodate more wind power.
For the time being, however, wind farms will keep benefitting from constraint payments every time they are required to stop producing energy.
