Ofgem is considering proposals by Scottish and Southern Electricity Networks (SSEN) for its distribution arm to contribute financially towards a series of transmission links to Shetland, the Western Isles and Orkney.
The subsea cables would allow more renewable energy to be produced on the islands and exported to mainland Great Britain.
But they would also help the islands, which are currently reliant on diesel engines for backup generation, to keep the lights on once they are eventually retired. This is especially the case for Shetland, which currently lacks any connection to the mainland power grid.
SSEN said resolving this issue through other means would be more expensive and on this basis has argued for its distribution business to contribute around £250 towards the 600MW transmission link to Shetland. The total cost of the project is currently estimated at £709 million.
The payment would be added to its regulatory asset value and subtracted from that of its transmission arm. This would have the effect of lowering transmission charges for generators on the islands.
The value of the contribution would be dependent on the actual costs upon completion. SSEN has therefore proposed a cap of £394 million to protect its distribution customers from overruns.
The firm said similar contributions to the Western Isles and Orkney projects would also save money for consumers.
Outlining its initial thinking, Ofgem said it agreed with the proposals in principle and that it may be able to approve the contribution towards the Shetland project.
However, the regulator said it is not clear how it could be implemented under current licence conditions and industry codes. It also said SSEN had failed to present a convincing case for contributions towards the Western Isles and Orkney projects.
Ofgem is now consulting on the proposals and has set deadline of 10 July for responses.
Along with the Shetland project, Ofgem provisionally approved a 450MW connection to the Western Isles in March. The regulator rejected SSEN’s application to build an even larger 600MW power line, saying there was “significant uncertainty” as to whether enough renewable capacity will be built on the islands to justify the oversizing.
It is still considering whether to allow SSEN to build a 220MW connection to Orkney. In December, Ofgem said it was minded to approve the project, provided that at least 135MW of new renewable generation has either been awarded a contract for difference (CfD) or secured planning permission and financing by December 2019.
The third competitive CfD allocation round began last week.
Meanwhile, Ofgem has approved a request from SSEN’s transmission business for £24.4 million of funding to reduce the visual impact of overhead power lines in the Cairngorms National Park by burying them underground.
The regulator has created a £500 million funding pot for visual mitigation projects as part of the RIIO price controls. Following the latest grant, £383 million is still available.