Podcast: Super Grid Transformer Charging – #2 the full version

0:01:04 – Kyle Murchie

Hello and welcome to another Connectology podcast. I’m Kyle Murchie and this is Pete Aston. Hi, Pete.

0:01:10 – Pete Aston

Hello!

0:01:12 – Kyle Murchie

Today we have had a really interesting day with a number of various parties having a working group on the topic of Super Grid Transformer charging – SGT charging. And we then ran a series of podcasts, getting into a little bit nitty gritty and pulling out the key parts that have been of biggest impact and the biggest concern for each of those individuals. But it hasn’t all been doom and gloom. We’ve also been focusing a lot on the positives and the potential solutions. So, what was your take on today, Pete?

0:01:50 – Pete Aston

My takeaway … we spent some time talking about the problem, but we spent probably the most time trying to talk around solutions. So I think that’s really positive that all the parties in the room – so four different companies represented as well as ourselves – really trying to look through, well, what would we like a change in the codes or the governance around SGT charging to look like, and really trying to set some of those high level requirements out and, you know, almost trying to set the groundwork/framework for what you know a future working group might look like for this. So, I think from that point of view, it’s been really interesting. I’m just trying to read my writing on the list that I wrote down! There’s like 15 high level requirements that we pulled together. So I think that’s really positive. And yourself, what was your takeaways?

0:02:56 – Kyle Murchie

It’s the number of really good quality points that any working group can now pick up and take away. This was a group of well-informed individuals that are already on other working groups, but also a variety of different players that didn’t necessarily all agree with everything, but when we talked about the kind of key points that people were most focused on, I thought it was really good that it was pretty well balanced. You know we had, yes, the actual charging, the cost impact on any given project was obviously up there, as you’d expect. But we also had concern around the socialising and how, making sure that it doesn’t just become another thing that was instantly socialised, that has a negative impact on consumers. So very much a thought about consumers at the same time as individual projects

0:03:45 – Pete Aston

And I thought as well, there was an interesting thread that came through around trying to make sure that this worked in harmony with other changes that are happening at the moment, and you know one of the big ones that comes out through quite a lot of the discussion is with Connections Reform that actually this could be an enabler for Connections Reform. If we sort out super grid transformer charging, that rather than a scheme going through Connections Reform getting a Gate 2 offer and then a scheme sitting there because they can’t pay for SGT reinforcement, actually if the SGT charging can be solved it can actually be an enabler for the delivery of Connections Reform projects. And then we touched on REMA a little bit around wider charging and trying to think about how this interacts with that. So, I think the group was mindful of interactions with other policies and regulations.

0:04:43 – Kyle Murchie

Yeah, it was also that split as well between what we maybe call a traditional developer looking at solar or batteries, wind, etc, and also alongside that demand, and everybody in between, and so really having a broad view of the challenge, not just from projects that are maybe currently in the pipeline, that are already visible. It’s also those invisible or kind of hidden projects that we’re not actually seeing at the moment.

0:05:13 – Pete Aston

Yeah, and the hidden projects were that idea that you’ve got offers that customers have been issued. It’s got SGT charging in. Customer doesn’t accept the offer and so the visibility of that project is then gone. You know, it’s just not a project that’s in the system, but it’s a victim of SGT charging policy that they’ve not been able to accept that offer and proceed.

0:05:39 – Kyle Murchie

Well, without spoiling all the details and getting it covering every aspect without further ado, why don’t we hand over to some of our esteemed colleagues that were here today and having a good conversation with us.  If we introduce them? So you’re going to hear from four businesses effectively. So we had Joe Colebrook from Innova.

0:06:03 – Pete Aston

We had David Bird from Octopus Energy Generation.

0:06:10 – Kyle Murchie

We had Helen Stack and Paul Bennett from Centrica.

0:06:15 – Pete Aston

And, lastly but not least, we had Simon Wilderspin from Diageo, a demand customer – an alcohol producing company.

0:06:33 – Kyle Murchie

I’m joined here today with Joe Colebrook from Innova and also my colleague Pete Aston, so we have some questions that we want to run through with you, Joe, and the idea is just to try to understand a little bit more about your view of the current arrangements and what the kind of next steps from an industry point of view need to be and from your perspective. So, for the first question why are present SGT charging arrangements really a problem for you and your business.

0:07:08 – Joe Colebrook

Well, firstly, thank you for having me on the podcast. So SGT charging, or super grid transformer charging, and, more widely, connection asset charging, transmission connection asset charging. It’s particularly a problem for us because there is a real lack of consistency and general agreed methodology for how that cost should be passed through to us as a developer of a project. So particularly you know Innova do generation, so you know solar and energy storage projects. That’s particularly where we see this problem.

But yeah, there is, you know, DNOs get charged by the transmission owner or NESO and that cost then gets passed through to the DNO, from the DNO to us, and different DNOs do it differently. So Distribution Network Operators, some of them don’t charge at all, some of them choose to charge a proportion of the cost to different developers and others say everyone has the whole cost and at some point in the future it will be proportioned out depending on who’s connected. So it just creates a lot of risk for us as a company because we have an uncertain liability, right. So we don’t know how much that is going to cost us in the future and therefore we can’t commit to an investment business case, like an investment in a project, because that project may not work if we’re charged the full liability, but it does work if we’re only charged what may be the lower end of the liability right.

0:09:09 – Pete Aston

I’m intrigued. So, I know there will be some developers who get an offer with SGT charging in it, with a charge and you go, I can’t accept the offer because of all that uncertainty you’re talking about. You know the cost could increase. Has Innova taken a different view on that generally? Like, have you accepted offers with SGT charging, knowing that there might be a change and then, the barrier is going to be when you come to like financial close or something like that?

0:09:41 – Joe Colebrook

Yeah, we, we have generally accepted the offers where we’re not paying that cost right now, but it has limited our ability to actually invest in that project i.e. get it through planning and through the development process. So you know, and we’ve had to take a view on how that cost may change in the future. And you know there’s several things that go into that. One might be what are the other projects around you? What are they doing? You know, are some of them in construction. Are you, you know, are you actually connecting to a grid supply point that is going to become an infrastructure site in the future? Because it’s, you know, it’s got a tertiary winding, that’s connecting to the super grid transformer?

Or you know, you know, there’s several, several different reasons why that cost may not be the same in the future. So we, we try and say, okay, well, let’s accept the project and try and work out how to solve the problem in the future. And hence why we’re on this podcast today is that, you know, we think that there is an argument for a more collaborative or more consistent approach that is codified in the regulation of the CUSC or DCUSA or something like that –  that there is a way of saying, a way of helping these projects, and I think if you don’t accept those projects, it’s hard to have that discussion right?

0:11:16 – Pete Aston

Yeah, it is. Yeah, if you’re not in the queue then it’s speculative. You can’t, it’s just hypothetical. Yeah, in terms of like the magnitude of that SGT cost for projects, are you seeing a typical range of costs for a scheme?

0:11:32 – Joe Colebrook

Yeah. So we’ve got one in UK Power Networks, actually a quite well-developed site, so that was limited to £600,000 as an indicative cost and saying you’re going to pay for a proportion and I think it was about £600,000. Now there are another site where we it could be anywhere from sort of a few hundred thousand to £20 million. I think it was because there was three SGTs at that site and they were saying in our offer it’s written in a sentence saying you know, you may need to cover the full connection asset charge of £21 million.

And we’re obviously like well, yeah, like well, we’re obviously not going to pay that. If we, if we get to that point and we’re paying £21 million, that project doesn’t work, we’re not paying that. So yeah, it is extremely large numbers that you’re talking about.

0:12:34 – Pete Aston

And not just large numbers, but a large range as well.

0:12:36 – Joe Colebrook

Yes, yeah, yeah,

0:12:37 – Kyle Murchie

And the opportunity that that will change as well. It’s not because none of that’s fixed, even that £600,000.

0:12:43 – Joe Colebrook

Yes, that’s based on projects in the queue connecting. Yes, obviously many of those could fall away. In fact, several of them probably will with Connections Reform.

0:12:53 – Kyle Murchie

That was going to be the next question, actually on Connections Reform was what’s that going to do to the queue? Is that going to improve this from an SGT charging perspective? Is it going to potentially make it worse?

0:13:10 – Joe Colebrook

I think it’s hard to know for certain, which is not ideal, but obviously we’re about to have a complete rationalisation of the queue. Now, many of those projects which are being charged for this super grid transformer, they may fall away. So you might have enough projects fall away that that super grid transformer is not needed anymore, which means that for those projects left actually is okay, but it might be that they fall away, but not enough that the SGT is still needed and therefore you end up paying a much larger proportion of it, at which point our project, which is potentially in the Clean Power Plan, is actually no longer financially viable. So suddenly we’re then at risk of not being able to deliver Clean Power 2030, right.

0:14:10 – Kyle Murchie

So that project you had at £600,000 that’s contributing now. If the others fell away around it, you could be now talking into the millions.

0:14:18 – Joe Colebrook

Yeah, and at that point it just doesn’t work.

0:14:21 – Pete Aston

So that’s really interesting because of course Connections Reform hasn’t addressed SGT charging, so across the piece you could end up with quite a few projects who go through Gate 2, successful in Connections Reform still can’t progress because of SGT charging. I guess we just don’t know the quantum of that across the country yet.

0:14:38 – Joe Colebrook

Yeah, and I guess that’s the difficult thing that, you know, it would be good to try and find out is what is that quantum of this issue? Because we know it’s going to be. There is going to be this issue, we just don’t know how many projects are going to be affected by it.

0:14:52 – Pete Aston

And because Innova have got a portfolio and you know how do you, because obviously an individual project is impacted specifically by an SGT charge. But how do you take a view of this across a big portfolio? Because I guess you could say, well, if my portfolio is large enough and one or two projects can’t proceed because of SGT charging, well maybe you don’t care about it. Do you have a view on that from a sort of larger portfolio perspective?

0:15:24 – Joe Colebrook

Yeah, so we have what, around 30 distribution connected projects. Um, we’re actually quite lucky. I believe there are only two projects out of those 30 that are affected by this in our portfolio. So you know, I’m not necessarily doing this just for purely Innova’s benefit here, or talking about this for purely Innova’s benefit. I also sit on the Regen, so I’m chair of the Regen Grid Connections Working Group and this is one of our key policy areas, because there are so many of our members or Regen’s members, sorry that have said that this is an issue that is impacting multiple of their projects. So we know it’s an industry-wide problem. In Innova we have one that’s directly impacted and another that is the one with £600,000 which is currently impacted, but we believe that that’s going to become an infrastructure site, so actually it will fall away. And then there are another six or so projects which have SGTs in their reinforcements, so they need a super grid transformer reinforcement. We’re just fortunate that they ended up being in a infrastructure site, which may have been to do with the fact that we work with you guys! So, I think we’re relatively shielded from it, but we know this is a massive impact across the industry okay,

0:17:02 – Kyle Murchie

So we’ve got a problem, but let’s you know, we’re not here to just air the problems. What solutions? I know we’ve been talking about solutions today as part of a wider working group, but from your perspective and from Innova’s perspective, what do you see as potential solutions?

0:17:23 – Joe Colebrook

So I mean to start with, it’s a very complicated issue, right? You have to be able to understand electrical engineering and how you sort of build up a connection and cause super grid transformer reinforcements to be needed. You also need to understand how transmission network charging works, how distribution network charging works.  Like, it covers a lot of areas and it’s a very complex thing, so I wouldn’t say I have a clear solution. I think there are many ideas that have been explored, either through the Strategic Connections Group or by Roadnight Taylor and ourselves, and I think that the next step is to sort of, you know, have a more structured discussion, so a working group to actually work out which one of those solutions is the best one.

So I think, the best way to do this, I sit on the Connections Use of Systems Code panel. I’m a panel member, so I’m quite a big advocate of codifying things and having things clearly written down in what is essentially a contract, a legal text, so that it’s very clear how to follow for everyone – both distribution network operators, transmission network operators actually follow what is the rules and what to do. So we need to codify a set of rules, because currently the rules don’t exist for this situation. So we need to codify a set of rules, and I think there are a couple of different options. I think that, from our point of view, probably something which sort of, at the very minimum, caps our exposure.

But I think super grid transformers are such, as an asset, they benefit multiple customers, both generation, you know, demand users, and it can be often quite difficult to know which, how many people they benefit. And obviously, as more people come and connect, they create a lot of capacity which allows other people to come and connect lower down in the distribution network. So I think there’s also potential benefits that are not costed for when they first built and they last 40 years. So I think that probably going down a socialization route, either through a TNUOS, so Transmission Network System Use of Systems or distribution use of systems, probably, in my view, is easier or more is more fair. But and transmission use of system is probably the easier way to do that from a legal text perspective and a, you know having a simplified code. So I would I’m going to err on TNUOS socialization, but I think a working group would help get everyone’s view.

0:20:35 – Kyle Murchie

We won’t hold it to you!

0:20:38 – Joe Colebrook

No commitment, please!

0:20:41 – Kyle Murchie

Perfect. Well thank you much, Joe, for joining us and we’ll see you in the next one.

0:20:47 – Joe Colebrook

Thank you very much.

0:20:52 – Kyle Murchie

I’m joined today by David Bird from Octopus Energy Generation and my colleague Pete Aston. Hi guys.

0:21:00 – David Bird

Hi.

0:21:03 – Kyle Murchie

So what we wanted to do is talk a bit more about SGT charging and what it means for you, the Octopus business, and, more broadly, your views. So what sort of problems do you really see with the existing arrangements around SGT charging? What are the big challenges from your perspective and the perspective of your business?

0:21:21 – David Bird

So, from our point of view, we’re investing in a range of different projects, but particularly at the moment we’re investing quite a lot in developers who are looking to bring forward the infrastructure we need to accelerate the transition to net zero. And for a long time now, getting an affordable and timely grid connection has been one of the real challenges in England, Wales & Scotland, trying to bring these projects forward, both for generation, but also we’re funding demand type projects like green hydrogen projects and increasingly even things like data centres. So anything that slows down or makes it too expensive to get those assets built is a real problem for us and it’s slowing down the mission of bringing these assets forward. And now, as we’re starting to see some of the grid connections come through, anything like the problems with the current charging regime that might slow that down or block projects that otherwise are ready to get built is a real issue for us.

0:22:24 – Pete Aston

From your point of view and the business point of view, is cost uncertainty the biggest problem or is absolute cost the biggest problem? Because obviously with SGT charging you’ve potentially got both. You know, potentially got high cost, cost but potentially quite a high uncertainty as well. So you know, from a sort of investment point of view, you know are either of those two worse?

0:22:48 – David Bird

They’re both issues because clearly if the absolute level of cost is beyond a certain level the project just won’t make sense, or for it to make sense it might have to have such a high PPA or CFD that it’ll just never get built and won’t be competitive with other projects.

So that absolute level is definitely important. But what we really can’t do either is go into a project and make the capital commitment, put things through planning, start ordering equipment and then get sprung with a surprise months or even years later down the line that when we thought we had a certain level of exposure for the connection side of things, suddenly it’s a lot more. And if we don’t have that certainty up front, or enough certainty, if we’re exposed to really quite unknown risks on how big that cost can be, it’s almost just as bad as the cost being too high and known upfront. We just won’t do it because we’ll find something else we can do, whether the risk reward trade-offs just better

0:23:49 – Kyle Murchie

And thinking about connection reform, because we could often do it this moment in time, it’s been the big focus, and rightly so, um, but aspects like this do get left behind a little bit, and it’s been noted that yet Connections Reform could potentially improve the situation. But is it as simple as that? What’s, what’s your kind of thinking?

0:24:10 – David Bird

Well, I think that’s why this is an issue that’s that really needs to get some increased prominence right now, because we are hopefully getting towards the stage where Connections Reform can and will really make a difference and make sure that projects that otherwise might have been blocked or delayed can come forward, and can come forward quickly. It would be a real shame and a real missed opportunity if projects that got offers then can’t take them forward and all the hard work that’s been going on in industry to sort of clear out the queue and figure out who’s got what offer when. If then this issue and the uncertainty on cost stops those projects, then we’re going to have to go around the whole cycle again at figuring out what’s next. So the time seems right to kind of sort it out now and not miss that opportunity that we have with Connections Reform.

0:25:02 – Pete Aston

And do you have a view within the business as to at what point you put the brakes on? So, for example, some developers might get the offer that says you’ve got super grid transformer charging and it, you know, indicatively it’s you know, a hundred thousand but it could be a, you know, up to 20 million or something. And so some developers would go we just can’t accept the offer, you know, and so that the breaks going at that point, um or or other developers will accept the offer knowing there’s a risk there, but you know couldn’t then take it to financial close. Um, is there a view within the businesses to you know couldn’t then take it to financial close. Is there a view within the business as to at what point you end up having to put the brakes on, you know, with that sort of uncertainty?

0:25:46 – David Bird

It’s probably not one size fits all actually, and we support a number of different developers from a number of different funds, so all of them, one of the key things we think makes the difference between a successful developer and one where we wouldn’t want to back them is being able to be disciplined and being able to target their spend to the projects that have got the best chance of success. So I think it’s more towards that earlier end. If you get something where there’s that risk and uncertainty and you’ve got a limited number of people in your team, a limited number of pounds you can spend on bringing stuff through, you’re more likely than not you’re just going to put that one on ice, if not drop it completely, and target where you can get something done with more certainty.

0:26:31 – Pete Aston

So whilst if you accepted an offer you could potentially have conversations and maybe work something through in the future. But actually, if that’s taking the people, resource and money to do that, then why not look somewhere else.?

0:26:48 – David Bird

Yeah, exactly that. There’s finite time and finite money, so to put a lot of time and money into something that might never work. If you’ve got other things that that could you, you’ll target those other things

0:27:03 – Kyle Murchie

And we’ve talked about really key requirements, what needs to come out of any working group and any you changed or a new policy, but, thinking ahead towards an end solution, what was your view? What would an end solution potentially look like based on what you know today?

0:27:20 – David Bird

Yeah, well, I think that’s where, again, we talked a bit about Connections Reform, but also everything that’s been going on around CP 2030, around the sort of strategic planning around what sort of assets do we need and where do we need them to be. Anything that happens on this sort of specific issue, I think, needs to really tie in neatly with that. So, again, if the effort’s gone in to identify what we need and where it needs to be, then we need a charging system that supports that rather than fights against it. So we need those two things to come together. But we always need to be mindful that one of the main reasons we’re doing all of this is to deliver a system which is affordable for the end consumer. So, again, it needs to be done in a way that we’re not kind of creating a load of extra cost and inefficiency or blocking innovation in the way that consumers can be sent price signals on when to consume and how. So those, I think, are really important parts of the end solution and how it interacts with the much bigger picture drive to know this sort of massively, increasingly electrified and sort of consumer-led system. It’s all got to fit together rather than fight against each other.

0:28:40 – Kyle Murchie

Yeah, I think we’ve been talking about this today that it’s quite complicated when you get into the nuts and bolts. But it doesn’t just stand alone. It really has to be part of the wider development as an industry and the wider, not just Connections Reform but the wider market reform.

0:28:55 – David Bird

Yeah, absolutely. And all the more reason that it needs to come through quickly, because those other processes are coming to a point where people are supposed to be making decisions on them and so we need sort of this issue fixed alongside it to stop those important sort of strategic decisions just being delayed further.

0:29:17 – Pete Aston

Definitely would be a shame if Connections Reform, you know, said, you know we’ve whittled the queue down and now we’ve got this best group and 20% of them can’t proceed because they’ve got SGT charges that they can’t afford. That would just be a crying shame and a waste of everyone’s time.

0:29:33 – David Bird

Yeah, a massive missed opportunity.

0:29:38 – Kyle Murchie

Great Well, thanks very much for joining us and we look forward to seeing you on the next one.

0:29:45 – David Bird

Great, thank you very much for having me.

0:29:52 – Kyle Murchie

We are joined today with Helen Stack and Paul Bennett from Centrica and, of course, I’m here with my trusted colleague, Pete Aston. We’re going to look into a little bit more detail on SGT charging, that is, super grid transformer charging, to be specific, and we’ve had quite a bit of conversation today about a number of different topics, and what we wanted to try to understand first of all from your perspective, is what are the present SGT charging arrangements that are really a problem for you and your business?

0:30:26 – Paul Bennett

Yeah. So I think where they’re a problem for the business is they are firstly, they’re inconsistent in terms of how the application is, both at distribution level and then again when it’s a customer site versus an infrastructure site. I think that leads to distortions in terms of an experience for the customer. If you have, for example, a manufacturing customer with two sites, they can have two very different experiences. With super grid transformer charging, I think the lack of certainty around cost when it’s a customer site is critical. When it’s a site where you’re given a range so if you’re sharing it with 10 people it’s £600 grand and if it’s on your own it’s six million that’s not something that can work with a decarbonization case. We’ve certainly had that with a large-scale manufacturing site where they just can’t sign off that kind of variable cost within a decarbonization project. Decarbonizing for businesses isn’t easy. It’s not always the best financial thing to do and to have a sort of huge unmoored cost as part of that is pretty much going to kill the project in terms of their ability to proceed because it’s just too uncertain to sign off. So that’s it from sort of like a decarbonisation perspective. Again, from a power generation perspective, it’s just too much uncertainty, too much inconsistency and, again, ultimately, from a consumer perspective, our consumers getting the best deal in terms of how the money is spent, that infrastructure sites are effectively charged through TNUOS and then put across on to customers bills, whereas some others are charged to the customer in varying ways without any way to recover. So I think it’s is that also the best deal for the consumer in terms of building the network that’s needed for the future to enable things like Clean Power 2030, lower energy bills, most efficient use of the system. So the fact that it’s been left for such a considerable period of time, when everybody knows that the current methodology isn’t really fit for purpose, the fact that the cans just kept being kicked down the road, isn’t benefiting customers. It’s something that needs to be resolved.

I think another element which we’ll touch on a bit more is will it then become a blocker to Clean Power 2030 and the need? Do you fix the problem of the queue to a degree, and then a number of projects run up against that, again as a problem. So, again, it’s certainly significant in terms of Connections Reform as well, in the ways that it can impact and the fact that, the way it currently is unless you’re hostage to where you are it’s not a cost that you can afford to take through because it’s just the range is so big. It’s just something that a CFO or a Project Director just can’t sign off because there’s too much lack of understanding.

0:33:50 – Pete Aston

From a business point of view, how do you deal with that? So if you get an offer that says SGT reinforcement, current charges x, but it could go up, do you tend to accept those offers and then deal with that at a financial close stage, or do you tend to just go I’m not accepting the risk from the very beginning and just go on to something else?

0:34:15 – Paul Bennett

We wouldn’t accept the risk from the very beginning. So as soon as we saw that and thought, right, there’s not really a particular, there’s not really a good way for us to resolve this, then you might look at is there a way to remove ourselves from this sort of pot, effectively make it a non-transmission impacted site? But if the scale of difference is too big, then we just have to abandon that project. There’s no real point proceeding with it because the delta between sort of best and worst case is just far too great.

0:34:44 – Pete Aston

So that does suggest to me that there’s quite a lot of hidden impacts from this particular issue that you know, you’re not necessarily have got x projects in the queue that have all got SGT reinforcement, but there might be y projects that never even made it to the queue. It might be an even bigger pot because of these issues

0:35:03 – Paul Bennett

Definitely. I’ve certainly had conversations where we’ve been looking at it in helping a customer decarbonise and we have that conversation up front. It says you can do this, but the risk they’ll build up in terms of securities and other things and put an offer that they fundamentally can’t accept means that that project remains hidden. If they do accept then they’re always very nervous of that domino effect. One person goes, the price goes up. Next person goes, it’s bigger and bigger and bigger. So that domino effect then basically takes it out because nobody wants to pay the full amount.

0:35:38 – Pete Aston

In terms of that amount, what sort of range of costs have you seen in terms of what’s been in an offer and what you know might be there, if the worst happened and you picked up the full cost?

0:35:49 – Paul Bennett

So, I had a look at one last night, sort of in preparation, one of a few and it was, I think the first one was £600 grand, was the lowest, up to £6.9 million.  I think we’ve seen ones where it’s maybe been a little bit less share, but maybe the top end has been nine but maybe it started at three because there’s three parties sharing, so just for an individual SGT. But yeah, it’s definitely quite a large delta between the top and the bottom.

0:36:22 – Kyle Murchie

You mentioned connection reform and CP30, Paul. So, Helen, from your perspective, CP30 and Connections Reform has been hailed as the answer to a lot of problems from a queue perspective. But what do you think that reordering is going to do from a SGT charging perspective? Is it going to remove the issue or actually is there still going to be an issue there when we get Gate 2 offers coming out?

0:36:47 – Helen Stack

So, as we see Connections Reform implemented over the summer, we should see non-viable projects removed from the queue, and also it gives the networks an opportunity to review what infrastructure is needed on a more holistic basis. That may lead to some to less new infrastructure being needed, but equally, the challenge to get us to Clean Power 2030 is unprecedented. So there will still be a huge amount of new investment required, including new GSPs, so that means that the problem is not going to go away. Furthermore, as we see offers coming out of the whole queue to new queue exercise later this year, projects are going to have to decide very quickly if they accept those offers with super grid transformer quotes in them, and that’s really why it would be ideal if there was a solution to this issue by then

0:37:58 – Kyle Murchie

It’s really good point because we’re going to be moving at quite a fast pace. Offers coming out, not necessarily, you know, everyone’s going to have a very short period of time in which to accept and therefore limited time with limited resource to try to push back or question those charges. So we might be in a situation then where there will be cases where offers are coming out, people have actually made the Gate 2 readiness criteria and you’ve met that criteria, met strategic alignment, but then ultimately not be able to proceed from a cost perspective.

0:38:31 – Helen Stack

Yes, absolutely, and I don’t feel that that’s a good thing necessarily for achieving Clean Power by 2030.

0:38:42 – Kyle Murchie

And just thinking ahead to the next window when things open up in CMP434 and subsequent off applications. Based on what you’re talking about there, Helen, we’re potentially then, am I right in thinking, we’re potentially moving into a phase where, even if SGT charges have removed at a particular site, the next wave of applications coming in could ultimately trigger that SGT again if the solution isn’t involved.

0:39:14 – Helen Stack

Exactly, you could see some projects now facing the challenge of a new SGT where that requirement falls away, and they could be if you get earlier connection dates. But, just as you say, the next series of projects that come along may trigger needs for new SGTs.

0:39:37 – Pete Aston

And how does this, because obviously your big company, how does this work across a like a big portfolio of projects? So you know, I could see if you’re a very small developer and you’ve got one project and that’s got an SGT charge in it, you know, that’s it yeah, you’re out! Whereas if you’ve got a lot of projects, you know, maybe you don’t mind that there’s one or two projects that have got an SGT charge. Yeah, I’m just trying to gauge a sense as to how it works across a portfolio.

0:40:08 – Paul Bennett

I think for us each project has got to stand up on its own two feet and if it has got an SGT charge then essentially it’s not going to because there aren’t many projects where the margin is so good or the IRR is so good that you can take a sort of an extra five million quid on the back of what you’ve already got. So even from a portfolio perspective we’ve pretty much removed those because they’re just not viable as they are. Without that certainty you can’t really make an informed decision. So we just don’t have them in the portfolio.

0:40:43 – Pete Aston

It does feel like this is something of an elephant in the Connections Reform room that’s sort of not been addressed, because it wouldn’t, like you were saying, Helen, if I don’t know 5% even of all the projects that came out through Connections Reform and SGT charging and none of them can go ahead because of these financial risks, then that’s quite a lot of capacity that could have been given to other projects that could have proceeded.

0:41:09 – Kyle Murchie

It was a good point actually you made earlier, Paul, because you were talking not necessarily about you, when we talk about new project, you know a project we’re not necessarily just thinking about a solar or a battery project. You’re talking about industrial decarbonisation there. So it might not be directly Centrica’s longer term problem, but it’s the problem of one of your customers?

0:41:31 – Paul Bennett

Yeah, definitely, and I think that’s certainly a huge part of it, because they don’t have the ability to move. If you’re a renewables developer, then you can think we’ll abandon site a and go to site b, whereas if your factory’s been there for 50, 100 years, that’s your only option. Then your choice is do I do the project or do I not? And decarbonization projects do not have huge financial margin benefits most of the time. So adding that extra uncertainty basically means that you don’t do the project and the customer isn’t able to sign that off. They’ve got, they’ve got to go and do the things that they their business is core to their business and it’s like oh, that was a good idea, didn’t work. We’ll have to move away from it and look at another way to decarbonize or see what they can do in the future. But it does sort of stop projects in their tracks, particularly for decarbonization, because it’s just you just either can do it or you can’t. And if the SGT is there, then most of the time you can’t.

0:42:31 – Pete Aston

And I think you mentioned in one of our conversations this morning that we had that um, if the factory A has, you know, picks up SGT charging costs, but another factory might be 10 miles down the road and might be in a different grid supply group, there might be an infrastructure site, they don’t have those charges and they can proceed with decarbonisation, and then the one that you’re dealing with can’t, and that’s this postcode lottery idea and it’s challenging.

0:42:59 – Paul Bennett

Yeah, definitely trying to explain to a somebody where connections isn’t really their world sort of like the slightly arcane rules about why site a can do something and site b can’t for them, it’s two sites that both make the same thing or produce the same thing. Why should I care about some sort of strange rule you’ve got about a distinction that I don’t understand. It’s I want to decarbonise, I want to do the right thing and I’m being prevented from doing the right thing by a rule that just hasn’t been fixed.

0:43:33 – Kyle Murchie

Meaning, an unintended consequence of the current system is that you end up skewing the market. Yes, not the energy market, but skewing other markets. Yeah, that clean GB economy.

0:43:45 – Paul Bennett

Yeah, a lot of these, particularly the bigger companies, have got some fairly significant decarbonisation targets and they spend some of their time going yes, we can do this and quite a lot of times going we can’t do this because it’s simply not cost effective or because infrastructure isn’t there, and I think that point about being the elephant in the room. I think there are a number of projects that could and would have gone ahead if it hadn’t been for SGT charging – where they can go and do the thing. That’s relatively straightforward. They just can’t afford that delta between lowest cost and highest cost, which isn’t going to be fixed until pretty much at point of energisation.

0:44:28 – Kyle Murchie

So, with new Gate 2 offers coming out for DNO connected customers from what maybe early next year, early 2026, doesn’t give us much time really. We’re really saying that we need to have a solution in place by that time. So this is complex but also pretty urgent.

0:44:46 – Helen Stack

Yes, I think that’s right and ideally we need a clear and simple solution that could be implemented in time for when those offers come out, but equally that then gives, that doesn’t constrain, because there are lots of potential future developments coming around, potential reforms to the charging regime, so we want something. There should be something clear, simple that doesn’t constrain the potential for future reforms that need a longer time to develop.

0:45:27 – Paul Bennett

I think the other thing is that this is a particular can that’s been kicked down the road for years on end. I think I decided a quick look and I can see it being remarked as a problem in 2021 and I’m sure it was a problem before that and it’s got to come to a point where the can can no longer be kicked down the road. It is something that needs to be resolved. It needs to resolved in with urgency so that it can go into the connection offers that are going to come out.

0:45:57 – Kyle Murchie

Perfect. well, thank you much both for joining us on this podcast and we look forward to seeing you soon. Thank you very much. Thanks.

0:46:09 – Kyle Murchie

We are joined today with Simon Wilderspin from Diageo. Welcome, Simon. And, as always, my colleague, Pete Aston.

So today we are wanting to get into some depth around SGT charging, which is super grid transformer charging and, more specifically, also the costing and how that’s effectively apportioned or socialized across various different customer groups. So we’ve come off the back of a bit of a session this morning where we were getting into the nitty-gritty details of the super grid transformers and their charging and the current arrangements and what needs to change. But while we’ve been talking to a number of different parties in that conversation, it would be good to understand from a Diageo perspective and from what Diageo come up against, but also what you personally come up against in the SGT charging world. You’ve highlighted it as a barrier to decarbonisation. But what does that look like? What does that mean?

0:47:14 – Simon Wilderspin

Yeah, so one of the biggest problems we have is the costing and the timeline. So really, if the costing is a problem, we don’t really know how much that cost is going to be. And when we do get a cost, it’s not socialised. And a typical example at Cameronbridge, where we put an application in and we only wanted an uplift of 20 megawatts, yet the grid transformer was coming at 90 but we were having to bankroll the whole lot. So the other 70 is up for grabs. So the company’s philosophy was well, why are we paying for the whole amount? Why aren’t we just paying two ninths of that amount? So one of the because problems are one of the barriers is it’s costing and charging and getting that over the line from a business point of view is difficult.

0:48:05 – Kyle Murchie

Yeah, I’m just thinking in that example. It’s a good example where it was visible to you at the time when you’re putting the application in and having that conversation with the DNO, but of course you weren’t able to move that forward, so it doesn’t get registered at all. So while you’re seeing these issues, you’re not ultimately able to resolve them there. And then, because I assume that the business can’t take on that risk-

0:48:28 – Simon Wilderspin

No, we can’t take that on because of two reasons.

First of all, we don’t know how much we’re signing up for, and the second one is we can’t allocate that asset against the business because we are effectively bankrolling somebody else. So the asset or the capitalization of that money can’t be, I can’t win, I cannot get, I cannot get budget for it. So it’s a block, immediate blocker. I can’t go forward.

0:48:55 – Kyle Murchie

I suppose just for our listeners. I suppose, in terms of your context, you’re coming at it very much from a predominantly demand perspective. Any generation is obviously there to support your demand, your underlying demand, and you don’t have the luxury where you can choose where to develop.

0:49:14 – Pete Aston

The sort of counterpoint to that is a grid-scale battery, which it could be in Glasgow, it could be in Exeter, it could be in Wales. You know, it sort of doesn’t really matter where it goes, because there’s you know, but you’re not going to move distillery or processing plant or something like that and I think that’s that, that’s like a general issue with demand compared to generation as well, isn’t it? Demand is generally a bit less flexible than generation in terms of location. Not all demand, but a lot of it.

0:49:49 – Kyle Murchie

Yeah, and it might be useful as well just to kind of flag the scale. So from just your brand and the number of sites that you have across Scotland, what sort of numbers are we talking about?

0:50:01 – Simon Wilderspin

Yeah, so you’re talking about 35 distilleries, four maltings, a couple of bottling sites.

0:50:14 – Pete Aston

Just coming back to that issue you raised just now, where the DNO said it was going to cost a certain amount of money to develop a new grid supply point, which was for three and a half times the capacity that you actually needed. So did the DNO come along and say as and when other customers connect to that new grid supply point after you, you’d get a rebate?

0:50:44 – Simon Wilderspin

Yes, they did. Yeah, until 10 years.

0:50:47 – Pete Aston

But only up for 10 years?

0:50:48 – Simon Wilderspin

Only up for 10 years and it wouldn’t be significant. It would be a small rebate.

0:50:54 – Pete Aston

Yeah, and so clearly, as a business you’ve gone. Well, I can’t fund, you know, three and a half times in that capacity I need anyway, and on the risk of you know what if no one comes along.

0:51:06 – Simon Wilderspin

No, and these were significant charges. The figure of 20 to 40 million was suggested Significant money and that money can’t be capitalised. So it’s very, very difficult, if not impossible, to get it off the business.

0:51:22 – Kyle Murchie

It was a really good point, because you’re not starting from, you know, quite often when we’re talking to developers who, as you mentioned earlier, like a battery or a solar farm, they may already be part of a queue, so they might be contributing to an SGT. But because all that sheer number of applications came in at roughly similar sort of time, you might have those sorts of costs shared across five, ten different sites. So sure, there’s a risk, obviously, that those will go up and down. But we mentioned earlier, with some of the other parties, kind of £600,000 plus was noted. But ultimately because you’re the one that’s driving it or some of your competitors or other demands in the area might be driving it, you get to that first hurdle and you’re not able to move forward. So are you aware of any other parties that you’re working with that are in a similar sort of situation across your industry?

0:52:11 – Simon Wilderspin

Yes, yeah, I mean, I think it’s a problem for all of us at the minute to get that over the line with the costs. The other thing I think as well is worth mentioning is the timelines. The timelines aren’t set in stone, they’re indicative. So it’s very difficult again, even if you were to secure CapEx, to secure it against a project that you happen to pay upfront for with a timeline that you don’t know.

0:52:36 – Kyle Murchie

Yeah, I suppose the first hurdle at the moment is the timeline to get to any cost certainty. So at the moment, the timeline, if you were accepting an offer, you would then have to go through quite a long process before you actually have certainty over what that cost would look like, not absolute certainty down to the exact pound, but of a range so you then know what your ultimate liability is.

0:53:01 – Pete Aston

And I guess the context of triggering the new grid supply point and so on is a decarbonisation drive, isn’t it for your business? So could you talk us through what options you’ve got? So you’ve got sort of an ideal that you’d like to decarbonise, but what sort of options are you looking at as a business? If cost is too high on the decarbonisation, what’s your other option?

0:53:34 – Simon Wilderspin

So I think what’s happened with us is that our strategy or our roadmap has been dictated by what’s available. So our initial roadmap has literally been torn up and the grid has dictated our roadmap. So, for example, if there is a geographic location where energy is freely available, then that has directed us to say, ok, we can maybe put in heat pumps and an e-boiler here. But if, for example, there’s a site which is rural that I can’t get power to, then that has to be biomass or maybe even green gas certificates or whatever to get that over the line, to get us to carbon zero.

0:54:14 – Kyle Murchie

So inadvertently, the grid capacity now and also SGT charging going forward is ultimately skewing the market because you’d have built something. What you want isn’t what you’re ultimately able to get.

0:54:28 – Simon Wilderspin

I can’t get what I want. I get what I can get, if that makes sense.

0:54:33 – Kyle Murchie

And I suppose it’s worth noting. We’ve talked about megawatt here and there, for example, but it’s worth taking an example where, if you’re moving towards from existing site loads of a few hundred kVA, for example, at a site, and you’re moving towards putting in a hybrid boiler or a fully electric boiler, what’s that sort of boiler capacity For one boiler? What are we talking? How many megawatts?

0:54:59 – Simon Wilderspin

So initially we did think we probably need about seven, eight, even up to ten megawatts, but with heat pumps we can get that down to probably around about four or five megawatts.

0:55:07 – Kyle Murchie

Um, because, of course, you’ve got the heat pump load as well.

0:55:09 – Simon Wilderspin

Yes, yeah, yeah so with with a good CRP we can get it down. So typically for a typical distillery you’re typically looking at around about four or five megawatts would get us over the line comfortably.

0:55:18 – Pete Aston

But that’s a good 10 times multiplier on existing demand.

0:55:24 – Simon Wilderspin

Yeah, because typically typical distillery would probably pour maybe 150 kVA, maybe. Not a lot so it’s a good 20 times more.

0:55:37 – Kyle Murchie

And take that, multiply that out by say 35, of which, if you’re thinking about your distilleries fleet versus the rest of the industry, roughly what percentage are you across the industry?

0:55:55 – Simon Wilderspin

So our next biggest competitor is about half to a third in sites that we are in Speyside. So, yes, we’re probably the biggest.

0:56:06 – Kyle Murchie

Yeah, but if you’re taking that, but if you take the industry as a whole then you’re talking hundreds of sites across …

0:56:15 – Pete Aston

Hundreds of megawatts. Yes, you know hundreds and hundreds of megawatts just on distilleries in Scotland. Yeah, you know, and that’s none of which can move location.

0:56:24 – Simon Wilderspin

No, because of water supply,

0:56:29 – Pete Aston

All of which want to decarbonize at more or less the same time, and so you know you’ve got this actually really big issue. And if you’re talking hundreds of megawatts, so obviously in Scotland GSPs are 132 to 33 kV level, where there’s higher voltage level in England and Wales, but for hundreds of megawatts you’re talking many tens of new grid supply points.

0:56:52 – Kyle Murchie

Yeah, because I think if you take Perth, for example, strip out the heavy industrial load, Perth is effectively supplied by two GSPs, but the main one that’s doing most of the work is a 50 megawatt peak demand. So if you’re putting it into that context, you’re talking about several times several Scottish cities from a scale point of view, which is a significant change, not just from a distribution network, therefore, it’s also transmission.

0:57:20 – Pete Aston

But if you’re looking at triggering tens and tens of GSPs as an industry decarbonising, and each GSP is in the region of 40 million, something like that, plus maybe upstream reinforcement works on the 132 or 275, 400kv networks, you’re into hundreds of millions of pounds, if not into billions of pounds, worth of network investment. And I guess the question is how does it get funded?

0:57:49 – Simon Wilderspin

And that just gets the power to your doorstep. Once that power’s on my doorstep, then I need to invest on-site for my on-site technology. So my on-site infrastructure, my technology, my heat boilers that’s going to be millions on top of what I’ve just paid out.

0:58:07 – Kyle Murchie

And while we’re talking about, you know, obviously there will be some distilleries and other demands that wouldn’t all come off. You know they wouldn’t all decarbonise to the same level as predicted. So if you add a kind of diversity factor in there you’re still getting to huge numbers. And then when you consider, you know, I know that your sort of operating profile is pretty continuous you know, if you had that electricity available and you were using it for boiler am I right in saying that would be pretty much 24-7?.

0:58:37 – Simon Wilderspin

Yeah, yes, yes and no. We do have silent seasons which take sites down for around about six weeks of the year. Outside of that six weeks, we’re pretty much in full production.

0:58:49 – Kyle Murchie

So it’s a base load to change. We’re not just talking…

0:58:53 – Simon Wilderspin

But the silent seasons are staggered, so you’re not having them all go down together.

0:58:57 – Pete Aston

So on that SGT charging question, because this morning when we had a bit of a roundtable with others, we talked about a few options and so on have you got any thoughts on what a good solution to this looks like?

0:59:12 – Simon Wilderspin

Yeah, so I think it needs to be socialized. And I go back to our point with Cameronbridge If we take 20 megawatts out of a 90 megawatt SGT, then we pay pro-rata. And that’s fine, we don’t mind doing that, but we’re not paying the whole lot. But then I guess who’s going to pay the other? It has to be led by Government, I think, because we’re talking billions here, so effectively.

0:59:41 – Kyle Murchie

I think, as we were kind of pulling out earlier, it was part of that the SSEP, the strategic spatial energy plan kind of at that level of saying this is what we need, therefore, this is how it’s going to be driven forward and the charging, therefore, whether it’s socialised or if it’s the sounds of it, you would be open to taking a portion of it, potentially as a kind of calf, but not necessarily, I don’t think it’s right.

1:00:05 – Simon Wilderspin

We pay the whole lot and then the DNO say to us well, if somebody comes along in 10 years and we give you a rebate, well, how much Is it pro rata. At year nine? Is it only 10%? It doesn’t make sense that we do this.

1:00:18 – Pete Aston

I think the complexity of the situation is that, because, of course, you are applying to the DNO and the DNO is then applying to the transmission company and the transmission companies giving the DNO on offer that says this new GSP costs 50 million and the day DNA is turning around to you and going oh no, here’s 50 million. So if there is socialization, who pays it? Does the DNO pick it up, and how does the transmission company pick it up.?

1:00:47 – Simon Wilderspin

It needs to be simplified, but I think you know probably government needs to take a lead in it.

1:00:54 – Kyle Murchie

Perfect. Well, thank you very much, Simon. It’s been such a great day to have you here and we will absolutely keep in touch and speak on the next one.

1:01:03 – Pete Aston

Well, there we have it. We’ve heard from four different companies their perspectives on SGT charging. It’s been a really interesting conversation. It’s been a great day, but I guess we’ve got to sort of bring it to a close, to wrap this up up. So, firstly, thank you to all those who participated in podcasts. It’s been brilliant to have your engagement, but I guess we’re now looking for a call to action from this Kyle. This wasn’t just a talking shop. So, yeah, what your thoughts on what next steps might look like for this particular subject?

1:01:42 – Kyle Murchie

Yeah, I think one thing that came out today really was the urgency. We don’t really have the luxury as an industry to kick this into 2026 and allow Connections Reform to happen and then this to be picked up. We need to be, you know, the call to action is we need to do something now. So really it’s an engagement from Ofgem, from the ENA, from the networks as well and from NESO. That this does need to be picked up as a further conversation with urgency and also that if a party does raise a Code Mod that, given the time that it needs, ie it does get branded as urgent, as seen as an urgent Code Mod, and the working group then is put together so that realistically, if one was looked at this summer, there’s every possibility a solution could be found before Gate 2 offers come out. I think that’s where we need to get.

1:02:34 – Pete Aston

I think the danger is that if this doesn’t happen there could be a real impact on the deliverability of Connections Reform projects and that would just be a shame given all the hard work the industry’s put in to then sort of fall on this hurdle. So yeah, that urgency just needs that dialogue and, like you said, it needs a working group so that people can sit down, because it’s not easy. We completely acknowledge this is a quite complicated subject. It covers transmission, distribution, capital works, use of system charging. The whole piece is really difficult. But that’s why I need a working group to pull all those threads together and come up with a good solution.

1:03:16 – Kyle Murchie

Absolutely. I think we’ve laid some good foundations today on top of all the great work that has been done. There have been good conversations in the past, but it’s taking that to the bull by the horns effectively and really moving that forward so that we get some positive solutions. It’s very easy to look at it from a high level, thinking the scale is or certainly the visible scale, as we mentioned earlier is maybe relatively small in the grand scheme of the full queue, but the impact, talking to Diageo at the end there, that’s really clear that there’s a whole industry there that’s sitting behind these sorts of challenges.

1:03:54 – Pete Aston

I’m also conscious that all those people who’ve been sitting on Connections Reform working groups are going to be looking for something else to do.

1:04:02 – Kyle Murchie

Everyone’s going to have free time. They’ve put through their Gate 2 evidence.

1:04:06 – Pete Aston

What else are they going to do over the summer? So yeah, let’s have a working group!

1:04:10 – Kyle Murchie

Cancel holidays. Let’s have another big working group over the summer!!

1:04:14 – Pete Aston

But, joking aside, I think it does need to happen to talk it through.

1:04:19 – Kyle Murchie

Perfect. Well, thank you much again for joining this podcast. Hopefully it’s been really informative and we look forward to seeing you soon.

1:04:22 – Pete Aston

Thanks, everyone.