Select Committee on Trade and Industry Minutes of Evidence


Memorandum by National Grid

INTRODUCTION

  1.  National Grid was established as a stand-alone transmission company in 1990 and owns and operates the high-voltage electricity transmission network for England and Wales. Our assets include the 400,000 and 275,000 volt network; interconnectors with other systems; and some 300 substations which form our interface with the distribution companies, suppliers and larger power generators.

  2.  National Grid has two key roles with respect to security of supply:

  (a)  To enable bulk power transfers via our high voltage network.

  (b)  To ensure security and quality of supply through enabling operation and balancing of an integrated electricity system.

  3.  The transmission licence initially granted under the Electricity Act 1989, and a number of associated technical, operational and commercial codes, determine the basis by which we plan, construct, operate and balance the system.

SECURITY AND BULK POWER TRANSFERS

  4.  The transmission system provides a high quality link between generators and the distribution systems. In effect, this link brings together the security contribution which each generator can make, and thereby makes a significant contribution to the security of supply of electricity—regardless of whether generators are connected to the distribution or to the transmission network.

  5.  The transmission system in England and Wales is currently operated, and its development is planned, to meet security standards designated in the transmission licence. This standard provides a transmission system that enables generators, regardless of where they are located in England and Wales, to meet demand with a relatively low level of bottle-necks or "constraints". This means that generators are able to operate at their desired levels of output for the vast majority of time, and, that they are subject to minimal and infrequent restrictions on their levels of output for transmission-related reasons. This, in turn, facilitates security of supply. Non-availability of generation in a particular location does not lead to a failure to meet demand in that location—the transmission system enables energy to be supplied from other generators.

  6.  Furthermore, our security standards require levels of transmission capability which mean that losses of electricity supply due to the unreliability of the high voltage transmission system itself are relatively rare. Energy not supplied to customers as a result of faults on National Grid's network last year represented only about 0.5 GWh out of a total energy transmitted of almost 300,000 GWh. Over the past ten years, transmission-related supply losses have reduced by a factor of three.

NETWORK INVESTMENT IN THE LONG TERM

  7.  The contribution of the transmission system to security of supply is not merely a matter of establishing sufficient transmission capacity to meet the required flows on the system, but also involves appropriate levels of maintenance and timely asset replacement. As a measure of the effectiveness and efficiency of National Grid maintenance policies, average annual availability of the transmission system increased from 91 per cent in 1992 to almost 96 per cent in 2001[4].

  8.  Since it was established in 1990, National Grid has invested just over £3 billion in today's money in the transmission network in England and Wales. This expenditure has been to connect some 22,000 MW of new generating capacity; to disconnect a similar amount of old plant; to replace parts of the transmission system reaching the end of its technical life; and, to increase the capacity of the system to meet increased power flows. By increasing the capability at pinch-points throughout the network, we have increased the capacity to transmit energy by almost one-quarter over the past decade.

  9.  At the same time, this level of investment and our improved system performance have been achieved against a background where National Grid has been subject to RPI-X regulation. Substantial reductions in transmission charges of over 30 per cent have been achieved in real terms since 1990. These revenue reductions have been carried out through substantial reductions in the costs of operating the transmission system.

  10.  However, there are eventual limitations in finding further significant or similar cost reductions, and it is likely that the emphasis of network regulation in the future will need to move away from a total focus on operating costs, to the encouragement of necessary investment. In our submission to the PIU we have made some detailed suggestions on how to encourage a suitable level of spending on networks in the longer term. These suggestions include:

  (a)  Linking that part of our regulated revenue which covers operating costs to a moving-average of past operating costs. This would encourage continuing cost-reduction in the business, while reducing the risk that regulators would assume unrealistically low levels of future operating costs;

  (b)  An approach to assessing network companies' cost of capital which is more obviously informed by the relatively balanced approach taken by the Competition Commission than has been the case to date. In addition, as the Civil Aviation Authority has recently pointed out, setting the cost of capital slightly too low could inflict substantial costs on network users if inadequate network investment results.

National Grid

2 November 2001

TISC—Security of Supply



NETWORK SECURITY—ADEQUACY OF TRANSMISSION SECURITY STANDARDS

  11.  A review of our security and quality of supply standards was completed in November 2000, following widespread consultation amongst all user groups and consumer representatives. The outcome of this review reflects the views of the vast majority of those consulted that standards were appropriate. We therefore do not believe that there is a requirement at the present time to consider increasing or reducing the standards[5].

PLANNING CONSENT PROCESS FOR NETWORKS

  12.  In some scenarios, major development of new sources of power generation could require transmission network reinforcement or extension (for example, for remote renewables or new nuclear plant). The planning consent process for new overhead line development can extend time-scales for transmission network development and connection of new power generation. Consideration is needed on how to conduct the planning consent process, both for overhead lines and for new power stations, so that it does not needlessly restrict the rate of development of new power generation.

SECURITY AND FUEL DIVERSITY

  13.  Diversity contributes to security of supply both in terms of diverse sources of an individual energy power form (eg gas) or, in terms of a mix of energy forms (eg balance between gas, coal, nuclear, renewables). As outlined in paragraphs 4 and 5 above, the transmission system will continue to be important in enabling diversity of energy forms for electricity generation. On the basis of a continued mix of generating plant, the ability to substitute one form of generation for another in order to take advantage of the diversity of fuel sources to power stations depends fundamentally on the existence of a transmission system that is capable of enabling power stations—wherever located—to meet demand securely.

  14.  Over the past decade, we have helped to facilitate the major shift seen in the fuel-type used for power generation in England and Wales by enabling a one-third turn-over in the total generating capacity connected to our network. We have connected over 20 GW of gas-fired plant to our network and at the same time a similar volume of generating plant has closed. This is a good illustration of the responsive and flexible nature of the transmission network and its ability to facilitate diversity—both now and for the future[6].



  15.  Diversity can also be facilitated by interconnectors between the National Grid transmission system and those of other countries. An increase in interconnections with other countries will increase the diversity of electricity supplies available to meet demand in this country. However, economies of scale on submarine cables will mean that for interconnectors to be economic they will tend to be of significant size—500 MW plus. Interconnectors of this size will require connection to the high voltage transmission system.

  16.  National Grid is currently investigating and progressing new electricity interconnector projects to Norway and the Netherlands (both of up to 1320 MW), and the Republic of Ireland (500MW). The total likely investment amounts to around £600—1,000 million. These projects are intended to be self-financing commercial projects, developed as joint ventures on an entrepreneurial basis response to market requirements. A stable regulatory environment and market framework is essential to get these large entrepreneurial infrastructure projects under way. In some circumstances, regulatory measures can constrain returns to unacceptable levels. Furthermore, political or regulatory uncertainty makes such projects more costly to finance, and, can even deter investment altogether.

SYSTEM SECURITY—PLANT/DEMAND BALANCE

  17.  In terms of installed generating capacity, the current plant-demand balance (approaching 30 per cent) is adequate to provide secure supplies of electricity, subject to supplies of fuel being available to power stations. For the longer term, the adequacy of generating capacity at times of particularly high demand in cold weather will depend on the willingness of generators to install—or to retain—generating plant on the system to meet unusually high levels of demand which occur only very infrequently. This willingness will, itself, depend upon expectation of, and achievement of, very high prices in the market for electricity when such events occur, or alternatively, upon the willingness of suppliers to contract for such supplies on an ongoing basis, so as to avoid the risk of such potential shortfalls.

  18.  The former Pool arrangements for the wholesale trading of electricity incorporated capacity payments for all generators, including those that were available but not routinely generating. The new electricity trading arrangements (NETA) are based on the philosophy that the market will act to bring forward sufficient new generating plant in a timely manner and therefore capacity payments are no longer a feature of the market. Significantly more experience of NETA will be needed before it becomes possible to have a comprehensive view on a whether the more market-oriented approach to remunerating capacity provides adequate investment in new power generation (or to retain old plant on the system) to meet demand in exceptional weather conditions. As we make clear in paragraph 17, the current position does not give rise to concern in this respect, but the position should continue to be monitored regularly by the Ofgem / DTI Group on Security of Supply.

National Grid

2 November 2001

TISC—Security of Supply

SYSTEM SECURITY—REAL TIME BALANCING

  19.  A further aspect of the security of supply of electricity (present technologies do not provide for electricity to be stored in significant amounts) is the capacity to match generation in real time to the level of demand and, indeed, vice-versa.

  20.  Under NETA, market participants have incentives to contract directly with each other to achieve this match to a significant degree, but the task of managing the inevitable residual mismatch in the short-term by balancing the electricity system is a key responsibility of National Grid as system operator for England and Wales. The ability to do so at any given moment in time depends on a large number of inter-related factors, including :

    (a)  The adequacy of generation capacity in relation to the level of demand.

    (b)  The extent to which the level of output of generators can change in real time to meet variations in the level of demand (and vice-versa).

    (c)  The extent to which prices in the market for electricity can be fully communicated to consumers and generators and the extent to which this information enables an effective demand-side response.

    (d)  The capabilities of the electricity transmission and distribution systems to enable available generating capacity to meet demand.

    (e)  The extent to which the availability of generating plant is dependent on the availability and reliability of the fuel supply systems. In particular:

    —  Capability of the gas transmission system both in terms of total capacity and its ability to meet rates of change of demand for gas caused by changes in power station demand;

    —  Adequacy of gas supplies reaching the gas transmission system;

    —  Adequacy of gas storage;

    —  Availability of alternative fuel sources and capability of power stations to switch fuel;

    —  Fuel stocking policies of primary fuel sources (eg. coal at coal-fired power stations) or secondary fuel sources (eg. distillate-oil at gas-fired stations).

  21.  Both under the old Pool system, and since NETA was introduced in March 2001, we have maintained the security of the electricity system and continue successfully to match generation and demand in real time. Looking to the future, we view the position very much as a function of the factors outlined in paragraph 20. Experience to date suggests that these can be successfully managed for the future.

National Grid

2 November 2001

TISC—Security of Supply

  22.  For example, the development of gas fired generation (from below 10 per cent of installed generating capacity in 1993 to around one-third in 2001) entails a number of new considerations from a system balancing point of view, but, given that gas will form a significant part of the power generation fuel-mix for the foreseeable future, our expectation is that technical and commercial issues can be resolved.

  23.  From the point of view of the system operator, provided there is sufficient plant available to operate in a reliable and flexible manner (ie able to come on and off the system rapidly) we are relatively indifferent as to fuel-type or fuel-mix per se.

RENEWABLES AND CHP

  24.  National Grid is committed to assisting the development of the electricity industry to support the Government's 2010 targets—and beyond—for renewable energy and for combined heat and power. The transmission network has a distinct and long-term role to play in facilitating the future development of distributed generation, and we cover this in more detail in our evidence to the PIU. We indicated that major development of such plant is likely to boost the need for an enduring transmission system, both for purposes of bulk power transfers, and, also, in continuing to maintain security and diversity of supply.

  25.  First, the transmission system will continue to enable bulk power transfers. Much of the new large-scale renewable generation will tend to be sited away from areas of major consumption, and there will therefore continue to be a need for long-distance power transfers.

  26.  Second, although many smaller renewables and CHP projects will find it more economic to connect at low-voltage—to a distribution network—this will not necessarily result in reduced overall power flows across the transmission network. The main determinant will be the geographic location of this small plant in relation to centres of electricity demand. Much of the on-shore and off-shore wind and wave plant is likely be sited in the north or the west of the country—while demand centres are likely to continue to be concentrated in the south and east. It therefore follows, irrespective at which voltage this plant connects, that such developments are likely to add to the flows on the transmission system.

SYSTEM BALANCING AND GREATER INTERMITTENCY IN THE LONG TERM

  27.  Finally, for the very much longer term, possibly with significantly higher volumes of intermittent renewable energy on the system (ie wind and wave) than indicated by the 2010 targets, we also anticipate that the system operator will be able to balance the system successfully. This will most likely give rise to the need to develop new market approaches to system balancing, but is unlikely to present insoluble commercial or technical issues relating to transmission operation. Our PIU submission includes more detailed material on the topics of intermittency and active networks.

National Grid

2 November 2001

TISC—Security of Supply

CONCLUSIONS

  28.  With respect to electricity transmission and security of electricity supply we therefore conclude that :

    —  Transmission is an essential long-term enabler of electricity security both through bulk power transfers and by enabling fuel diversity. The requirement for a high-voltage transmission system will continue to be a part of a sustainable energy policy both now and in the long-term.

    —  Present transmission security standards are satisfactory.

    —  Adequate network investment for the long-term is an important regulatory consideration going forwards.

    —  Interconnectors have a part to play in delivery of security and diversity—but regulatory and market conditions must encourage new, entrepreneurial, interconnector development.

    —  The current plant-demand balance is adequate but the position should continue to be monitored by Ofgem and DTI.

    —  Real-time balancing of the system depends upon a complex set of inter-related factors. Both under the Pool, and now under NETA, system security has been maintained. Experience to date suggests that these factors can also be successfully managed for the future. This is so today with respect to gas-fired plant, and in the very much longer-term, with respect to significant volumes of more intermittent renewable generating plant.

    —  National Grid is committed to assisting the development of the electricity industry to support the Government's 2010 targets—and beyond—for renewables and CHP.

    —  Major new long-term development of renewable and CHP plant is likely to boost the need for an enduring transmission system—both for purposes of bulk power transfers and also in maintaining security and quality of electricity supplies.

2 November 2001


4   One possible short-term counter-balance to this trend could arise from a large amount of capital-investment activity taking place on the network. Back

5   Transmission System Security and Quality of Supply Standard-available at www.nationalgrid.com/uk/library/documents/mn_license_standard.html Back

6   Even so, a number of projects have been delayed by the consents process-and this could be exacerbated in the future given the potential remote siting of some new renewable and nuclear projects. Back


 
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