Ofgem's ongoing review is considering whether its formula for setting charges is fair, given the large amount of new low-carbon generation that needs to be connected to the electricity networks.
The existing methodology, known as investment cost-related pricing (ICRP), charges generators more the further they are located from demand. This means that charges for wind farms in less-densely populated parts of Scotland are higher than elsewhere in the UK.
Ofgem's preferred option is to retain the locational element, but update it to take into account the type of generator and how much it uses the network to transmit power. This would be fairer for variable sources such as wind.
Ofgem did consider charging generators the same regardless of location. However, although this approach reduces the risk of missing the UK government's 2020 renewable generation target, it judged that this would place disproportionate costs on consumers and the power sector.
The islands of Orkney, Shetland and the Western Isles are very far from demand and have no high-voltage connections to the mainland. Infrastructure costs to connect power to the mainland are therefore very high and this needs to be reflected in charges, Ofgem argues.
It further points out that once high-voltage connections are installed, variable generators such as wind could see their charges halve. SSE, which manages transmission to the islands, has proposed upgrades from the islands to the mainland. The exact timetable is unknown, but work will take place during the period 2013-2021.
However, modelling by economic development agency Highlands and Islands Enterprise (HIE) shows that UK consumers would be £1.8 billion (EUR2.2 billion) better off over the life of a wind project if the charges are changed to enable the 1GW of wind currently delayed to go ahead.
Capacity factors in the islands are extremely high. One wind farm on Shetland has never had an annual capacity factor of less than 50% - meaning it has always operated at half its full capacity or above.
Gavin Mackay, a senior development manager at HIE, said: "Ofgem wants to achieve targets at the lowest overall regulatory cost, but they're not taking into account the total cost. It's quite reasonable that they would do that if you look at their remit, but it's disappointing that there hasn't been a greater discussion between Ofgem and the Department of Energy and Climate Change throughout this process to arrive at a charging methodology that brings generation on in all parts of the UK, particularly the areas of best resource."
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