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  • Ofgem consultation on the costs of the new energy solution for Shetland

    Shetland is not currently connected to the electricity network that serves mainland Great Britain so has to be capable of meeting all its own electricity needs at all times.

    Lerwick power station
  • Background

    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. 

    Latest recommendations

    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

    Background to previous recommendations

    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 which ran from 2015 to 2017, SHEPD recommended a 60MW HVDC distribution link to the GB system supported by thermal backup generation, which was also rejected by Ofgem, in late 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.

    Next steps

    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.
    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.

    Notes / background

    Ofgem’s decision on the 2017 tender process can be found here.

     Ofgem has recently published two key documents on the Whole System framework. Its consultation on licence conditions and guidance for network operators to support an efficient, coordinated, and economical Whole System can be found here. Further detail is set out in chapter 5, ‘Enabling whole system solutions’, in its RIIO-2 Sector Specific Methodology, here.

    Ofgem recently published its minded-to decision to approve the proposed 600MW transmission link to Shetland, here. See p.8-9 for Ofgem’s commitment to publish views on SHEPD’s contribution recommendation.


  • Project background

    A new energy solution for Shetland

    Shetland is not currently connected to the electricity network that serves mainland Great Britain.  This means that the islands have to be capable of meeting all of their own electricity needs 24 hours a day, 365 days a year.  Generation and demand in Shetland have to be in balance at all times to keep the lights on.

    What’s the problem?

    At the moment, the main sources of electricity generation which can respond to customer demand are Lerwick Power Station and Sullom Voe Terminal Power Station.  Lerwick Power Station is nearing the end of its operational life and the availability of Sullom Voe Terminal Power Station in the long term is uncertain.

    Who’s involved?

    Scottish and Southern Electricity Networks (SSEN), operating under licence as Scottish Hydro Electric Power Distribution, owns and operates the distribution network of overhead lines and underground cables across the north of Scotland. Every year, we invest millions of pounds to maintain and improve the network that serves our customers.  In Shetland we currently also decide when the island power stations need to run to meet customer demand.

    SSEN is regulated by Ofgem which is responsible for protecting the interests of consumers and ensuring they have access to an affordable, secure and sustainable energy system.  Major investment decisions, such as a new energy solution for Shetland, require approval by Ofgem to ensure they are made on an economic and efficient basis.