Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 460-479)



  460. So the implication of what you are saying, in your note to us, is that people have become comfortable about the idea of prices having reduced in the recent past, of relatively low energy prices historically, but they cannot be as comfortable in the future and we have to adjust to that possibility, and how people will respond to that?
  (Mr Bucknall) Exactly.

  461. In an earlier part of your note, you talk about some of the other measures which need to be taken to ensure security of supply, and the electricity and gas networks, I presume by this you mean the transmission networks, in particular, and that the framework needs to encourage a continuing investment in that infrastructure. Now I am not quite sure, from your note, perhaps you would elaborate on that, what sort of mechanisms would you anticipate seeing in a regulatory framework, or what sort of signals would you look for, which would help to ensure that investment?
  (Mr Lescoeur) The kind of questions we have in mind are the following. It takes an awful lot of time to have the effect of investing into a network to increase capacity or security of supply given to the customer. With a price review period of five years, in the current regulatory framework, clearly, the regulator cannot take into account the investments which could be necessary to start now to deliver a step change in the quality of service, or the security of the network, in 15 or 20 years' time, or it is difficult for him to do that; and it is exactly the kind of problem we wanted to point to there.

  462. Okay; but I am not quite sure, in that, I still found a mechanism which is going to be used, because we are essentially dealing with, you rightly say, the regulator is dealing with a maximum five-year time-frame; most companies are undertaking investments on the time-frames but operating in a very short-term market, and the Trading Arrangements made it even more short term. What specifically might be the kinds of measures that the regulator might take, Ofgem might take, in order to help to deliver the investment in the transmission network you are looking for?
  (Mr Lescoeur) I am not sure it depends only on the regulator.
  (Mr Bucknall) Can I add some comments to that. I think that one is to have a long-term view, or a longer-term view, of investment in the network; an issue would be, if a generator comes to connect to the distribution network, that is seen in isolation, then someone else comes along a year later, or two years later, and wishes to connect in the same area, if you had taken a longer-term view of these possibilities arising then one might develop the network in a more optimal way than just doing it piecemeal, as and when, particularly in renewables areas, renewable generation, they arrive on the scene, so to speak. I think the other area is, obviously, about the sort of returns that network operators might expect for investing in the network, particularly to incentivise development, in areas where there is perhaps less degree of certainty, and therefore some degree of risk of stranding of assets.

  463. One of the things I assumed you might be contemplating is creating in the regulatory framework the return framework, or indeed the prices for transmission, paid to the transmission networks, that they are, in effect, given the incentive to invest. Now, under those circumstances, would you rather that they were overinvesting, that, in effect, the capacity of the transmission network was keeping ahead of any realistic estimate of your capacity demand?
  (Mr Bucknall) I would have thought there was some case for a modicum of, how can I put it, contingency in investment in the network, but clearly there is a great risk of gold-plating, I think that is something we should endeavour to avoid as much as possible. But, on the other hand, I think the network has been designed in the past with a degree of resilience, with a degree of security, and I think we would need to continue to ensure that was maintained.

  464. I think we have anticipated already that customers, in the long run, are going to have to pay a premium, over what they would otherwise pay, for environmental obligations; would you anticipate that customers should, or would, be willing to pay a premium for security of supply, whether it is standards of security through the transmission network, or indeed security of supply in the broader sense?
  (Mr Bucknall) I think this is a very difficult question, it is certainly one that is being looked at in terms of the sort of incentives the regulator wants to place on distribution network operators, to increase quality, or improve quality of supplies. It is very difficult. You might want a lower quality of supply, but I am next door to you and I would like a higher quality of supply; how can you deliver that down the same piece of wire. That is quite difficult, and it is quite difficult to capture preferences, individual preferences, about quality of supply. And, I guess, if you ask customers, they will want to have 100 per cent reliability; but how much they are prepared to pay for that is an open question. But it is difficult to value that kind of choice, but the more that can be done to do that I think that would be beneficial.

Dr Kumar

  465. You said in your paper that the proposed Renewables Obligation is a good example of how intervention to achieve a particular policy objective can be managed by a market-based approach, and you stated that again earlier on. Do you think that the Renewables Obligation provides sufficient incentive for the sector to grow; if not, what else do you think should be done to encourage it?

  (Dr Porter) It is premature really to say whether it will deliver or not, because there is a buyout there and only time will tell; we have yet to see what it can do in practice. So I am not sure that I can give a better answer than that to your question; it is something that we shall have to wait and see. But, as we have said, we do welcome it as a market-based mechanism; a number of companies in our membership, if not all of them in the supply business, have moved to introduce green tariffs, and to promote renewable energy, so the industry is wholeheartedly behind the use of renewable energy and the promotion of renewable energy. But, as we know, the target of 10 per cent by 2010 is a challenging one. We will certainly, within the industry, be playing our full part in attempting to deliver that, but it remains to be seen whether there are other factors which may constrain it, for example the planning processes, which have already been referred to today, and interconnections of renewables into the grid system may be another issue. So there are a number of contributing issues within this, which all need to work, in order for the target to be met.

Mr Hoyle

  466. I am just wondering, what percentage of electricity is lost in transmission, and what scope have you got for reducing that loss?
  (Dr Porter) The percentage which is lost in transmission, to precisely answer your question, is between 1 and 1.5 per cent. The percentage which is lost between generation and final end user totals between 7.5 and 8.4 per cent, of which 1 to 1.5 per cent is transmission and the other 6.5 to 6.9 per cent is distribution; those distribution figures include a figure of about 1.2 per cent which is due to illegal abstraction, or theft.

  467. It is a high-risk business, is it not, connecting up to that; but what scope have you got for reducing the loss from transmission and distribution, as well as theft?
  (Dr Porter) Not an awful lot, because unfortunately the laws of physics mean that about 5.5 to 5.7 per cent of those total losses are due to simply ohmic heating of the wires. Most of the losses are also in the transformation systems rather than in the wires themselves, and whilst there are ways of improving the efficiency of the transformation, and I know National Grid have a policy of putting low-loss transformers in for new installations, to refurbish the entire distribution network would be incredibly costly for a relatively modest return; and if you were looking at it from a cost-effectiveness point of view that money would almost certainly be better spent in, for example, more energy-efficiency measures on the demand side. So there is a small amount which could be done, it would be rather expensive, and you do come up against the laws of physics fairly quickly.


  468. Perhaps on the transmission, we were talking this morning to the Minister about the cable which is being considered for the western seaboard of the UK, and it was put to us by one of our advisers that there might well have been insufficient attention paid to the state of the seabed and the impact of wave power on a cable which would be lying on, I think it was called, gneiss rock, which is a bit like putting it on the edge of a razor, and we wondered if your organisation had any thoughts on this, as to whether or not these fears are practical or of any substance? I realise I am lobbing in a kind of technical grenade, and it may be that you would like to pause, reflect and answer this by letter, but if anyone is bold enough to come in; it certainly disturbed the Minister, I have to say?
  (Mr Bucknall) I am not known for being shy about these things, Chairman, so I will bat it back to you. I think, speaking, perhaps, on behalf of my own company, rather than the Association, we have some association with the link that is in place now between Scotland and Northern Ireland. I am not sure of the sub-sea conditions there, I suspect it is slightly softer; maybe the thought was there would be rock further north, off the west coast of Scotland. But I believe Hydro-Electric have cables running between a number of the islands off the west coast of Scotland, and I am not sure that they have necessarily raised particular concerns about damage they might sustain on the seabed there.
  (Mr Armour) I think your question is dependent, and, as I understand it, a study will look at the geographical and geological formation of the Irish Sea route that this will take, but, generally, if it can be done, I think we are all supportive of the fact that, one of the constraints on the development of renewables, and one of the constraints on the UK system generally, is the capacity, or bottle-necks, and so forth, and if we can get power from renewable sources off the islands and to market, or if we can get strengthened routes that provide diverse routes, particularly out of Scotland south, that is a useful development.

Sir Robert Smith

  469. Can I just clarify on the transmission costs, which are all fixed. If the bottom line bedded generation within the local community, would that reduce the overall losses of the system?
  (Dr Porter) If there were more embedded generation, obviously, that looks attractive because it reduces the distances; but, as I have said, most of the losses are in the transformation system, so the benefit would be limited by that, and there would still be required transformation to the distribution network. So it is not a panacea, by any means, for those losses.

  470. But would it miss out one of the transformation stages, depending on the...
  (Dr Porter) It might; it depends on the voltages involved, yes.
  (Mr Armour) But the whole issue of how you eradicate transmission access and losses was one of the things that Ofgem looked at fairly recently; and one of the concerns the Association had, if you put it in broad terms and you say it is 10 per cent is the total losses from distribution and transmission, and 2 per cent of that is from transmission, I think you will find, the National Grid are coming before you, I think their figures would indicate that the losses within that transmission section are about of the order of, say, 3 per cent of that 2 per cent. So you are talking about losses that you can actually tackle and do something about in the order of a few million pounds. And the concern was that the solution proposed had a major impact, in terms of perhaps over a billion pounds, in terms of the shift of value that would result, either between consumers in the south and consumers in the north, or between generators in the north and the south, which has led us to push for the whole question of cost/benefit analysis of these sorts of changes being taken forward.

  Chairman: Thank you. Can we move on to fuel poverty.

Mrs Jackie Lawrence

  471. I do want to move on to fuel poverty, but can I just follow up on one thing that our Chairman asked, about the idea of the cable. In a way, that was sort of an answer to a question I did not feel that you fully answered before, put by my colleague here, about the Renewables Obligation. You mentioned the barriers to that sector growing, but you did not actually suggest what else could be done to encourage it. I think, potentially, the cable we are talking about would. Can you think of any other measures that might encourage the renewables sector to grow?
  (Mr Armour) Clearly, one of them is planning; and the current rates of refusal of renewable projects are very significant. And, frankly, the planning barrier to any investment in this sector, whether it is large-scale investment: say, nuclear; or whether it is small-scale investment in wind-farms, is a major deterrent, in terms of either the amount that you have to put into the process: the length of time it takes and the capacity for objection, the likelihood that objections are upheld, notwithstanding Government targets, the rate of rejection, in terms of planning applications, particularly in England and Wales, is very high for renewable projects, and all of these make it difficult. So a review of the planning system and a review of the consent system that then gives you certainty; once you have got planning, you still, in many cases, need further consents in order to operate the kit, all of which is a deterrent to investment and a deterrent to bringing solutions forward quickly.

  472. If I can move on to fuel poverty, in paragraph 21, it appears, from your submission, that you think at present the most effective way of tackling fuel poverty is through improvement to the housing stock. In paragraph 23, you go on to say: "Comprehensive solutions can only be found through a range of welfare, taxation and incomes policies." Would you like to clarify the two issues? You appear at first to say it is improvements to the housing stock, and then you go on to say that these other measures should be taken for a comprehensive view. Can you expand on that a little further?

  (Mr Lescoeur) The first point is that the electricity industry has its role to play in tackling fuel poverty, but only a limited possibility to act, and it is by working in partnership with all the interested parties that the electricity industry tries to help to solve this problem. All the studies which have been comissioned by the Electricity Association itself, or each individual company, have shown that there is a whole range of causes of fuel poverty, one of which, a very important one, is the state of the housing and lack of insulation; but, of course, it is not the only one. There is also a problem of resources, ability to pay from the customer, which is clearly an issue for taxation, or for economic policy, and there are also the other causes, which can be partially mitigated by a whole range of measures. Then it was just what we wanted to say in our submission.

  473. It was just a general comment then, you did not have any specific ideas on those three points?
  (Mr Lescoeur) No; the Electricity Association has made a lot of work, and each of its member companies has made a lot of tests, to try to take initiatives in order to progress on this issue, and maybe we can send the most recent Fuel Poverty Task Force report we have to your Committee. There are a lot of matters of concern; there is no easy answer to this question.

Mr Lansley

  474. Just on that. What view do you take of the impact, in terms of energy conservation and demand for energy, of fixed-price schemes for domestic consumers to purchase their electricity without regard to the volume, things like the Stay Warm scheme, and so on; and should that be linked to some form of energy efficiency, conservation activity, in terms of the property itself to which that applied?
  (Mr Bucknall) I am familiar with the Stay Warm scheme. I think there are a number of schemes which are similar which operate a sort of fixed price to customers without regard to the consumption of energy, although I understand the Stay Warm scheme does involve a reconciliation at the end of the period, so you actually do pay for the energy you consume. But I think the right way to go is to have these offerings so that customers can have a choice, and that is really what the competitive market should bring out, so that if you wish to choose to go on down that route you can do; if not, you can choose a more traditional tariff. And my company, for example, has offered schemes which involve insulation as well as a fixed-rate tariff, and then you are taking into account the condition of the property and what sort of additional investment might be required to bring it up to an acceptable standard.

Mr Hoyle

  475. One of your suggestions on Government policy, you suggest that there should be a Regulatory Impact Assessment for each of Ofgem's regulatory proposals. How do you envisage this working in practice?
  (Mr Armour) In coming forward with any investment or proposal in any of our companies, we would currently look at what we see is the cost/benefit, and I do not see a huge difference in applying this same sort of discipline to the work of regulators; because, clearly, they will want to look at what is proportionate and what is effective and what is overall in the interests of consumers, and it is clearly not in the interests of consumers to spend a huge amount for very little benefit, because the knock-on disruption effects are major. So I think the way you would go about it is the same discipline as any of us would apply in our companies.

  476. So if I take that a little bit farther then. Given that Ofgem has clear views about its priorities, and the main one being competition, which is a big improvement for consumers, are you not just adding another level of bureaucracy then, because we know what the aim and objectives are?
  (Mr Armour) It comes back to, do you take any particular philosophy to its ultimate conclusion, or do you say it is worth doing something in order to get a benefit, but it is only worth it if there is a benefit at the end of the road; if the cost of doing something is disproportionate then it is not worth it. So, yes, Ofgem clearly has an obligation to further competition, but there must come a de minimis level, where it says it is not worth the candle doing something.

  477. It is another way of looking at electricity as well as life, through candle-power! But just to take it through. Your idea is that competition, bringing down prices, it is all the benefits for the consumer; are you not really looking at it from a different angle, to saying, `well, what we ought to do is think about just putting in a little bit more bureaucracy and slow the whole procedure down', is that not what you are really up to?

  (Mr Armour) No. The industry has been through a number of major changes, whether you go back to privatisation or whether, more recently, you look at NETA; all of these have major expenditure implications on the industry, it involves a change of systems, in many cases, it involves splitting up companies and organisation. That has a cost, which ultimately has to be paid for somewhere. And the question is whether the benefit of the exercise is worth the expenditure. And all we are saying is, we think there is an appropriate discipline in looking at that and in having an assessment of that nature before you go into it; and, interestingly, it was, I think, the Better Regulation Task Force which said, `look, we think this is good, standard, regulatory practice,' it is interesting that Ofgem has said, `we're not convinced that we should do this sort of exercise where we have a statutory requirement.' And all we are saying is there is a danger of wasted expenditure at the end of the exercise, if you go through that, and it is not particularly solved by doing an evaluation post the event, if you have made a mistake it tells you you have made a mistake; it is much better to avoid that mistake in the first place.

  478. And if I accept that argument, just to sum up, presumably then you came forward with this idea because there have been failures previously; where were those failures, for you to come up with this idea?
  (Mr Armour) I think, as an industry, we are on the receiving end of a great many consultations and proposals from regulators; they probably come out at about one or two a week, with the variety of regulators that we have. And all we are saying is better regulation makes it worthwhile thinking these things through and trying to get them right, because more regulation is not necessarily better regulation.

  Mr Hoyle: I agree with you on that.

Mr Lansley

  479. Can I just follow up on the Regulatory Impact Assessment, because I got the impression from what you were saying that you saw Ofgem undertaking Regulatory Impact Assessments in order to focus their minds upon the specific benefits that will accrue from the specific costs that are imposed by whatever measure they take. Now I understood that one of the reasons for encouraging Ofgem to undertake RIAs is that Ofgem has its own statutory responsibilities but it does not have responsibility for the whole of the range of factors which you, as an industry, have to live with, the whole range of social and environmental factors, for example, and a measure undertaken by Ofgem interacts with policies being promoted by other agencies and by Government Departments, hence the whole issue about CHP, on the one hand, and the New Trading Arrangements, on the other. Now, as I understood it, the point of a Regulatory Impact Assessment is to push Ofgem into a position where Ofgem has to show what are the externalities and the external costs and factors consequences flowing from its regulatory proposals. Now, sorry to go on a bit at length, but, as I understood it, that was what this was all about, not just simply internal rigour in Ofgem's own assessment of its own responsibilities?
  (Mr Armour) I think both are true. One, the approach we think is a good discipline, in general, and, secondly, you are obviously right, in terms of, we are regulated by a number of regulators who have distinct requirements. For instance, Ofgem is, in general, not required to take into account the environmental aspects. There is provision in the Act for environmental targets to be set for the regulator; in fact, the Government has not set environmental targets as part of its remit and guidance to it. But, looked at holistically, from the view of the country, from the view of the industry, from the view of the consumer, the issue is what will be the impact of the decision; and if the impact of the decision is disproportionate to the benefit, we think there is a case for joined-up regulation and joined-up thinking.

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