UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 388-iiiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREENERGY AND CLIMATE CHANGE COMMITTEE
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Energy and Climate Change Committee
on
Members present
Mr Elliot Morley, in the Chair
Mr David Anderson
Charles Hendry
Anne Main
Judy Mallaber
Sir Robert Smith
Paddy Tipping
Dr Desmond Turner
Mr Mike Weir
Dr Alan Whitehead
________________
Memoranda submitted by Scottish Renewables, British Wind Energy Association and Renewable Energy Association
Examination of Witnesses
Witnesses: Mr Gordon Edge, Director of Economics and Markets, British Wind Energy Association, Mr Tim Russell, Russell Power Ltd, Renewable Energy Association, and Mr Jason Ormiston, Chief Executive, Scottish Renewables, gave evidence.
Q144 Chairman:
Good
morning and welcome to the Energy and Climate Change Select Committee. We very much appreciate you coming today to
talk about
Mr Ormiston: My name is Jason Ormiston. I am the Chief Executive of Scottish Renewables, which is also known as Scottish Renewables Forum, or SRF. We will hear those being interchanged within the next few months, I think.
Mr Edge: My name is Gordon Edge. I am Director of Economics and Markets at BWEA, also known as British Wind Energy Association.
Mr Russell: I am Tim Russell and I am here today representing the Renewable Energy Association. I advise them on network matters.
Q145 Chairman: Thank you very much. I will start off. There is a huge interest, discussion and hopefully investment in networks going on at the present time. There are a lot of strategy groups. The Electricity Networks Strategy Group, for example, stated that reinforcements to the transmission system can be delivered in time to meet the 2020 renewables target. That is an ambitious target. There is an awful lot of investment in the pipeline, which is not yet built and connected. Do you think that the investment programme so far and the regulatory framework are suitable in terms of giving that delivery within that kind of timescale to renewables?
Mr Ormiston: It is probably the major question about whether or not we will deliver for 2020. You use the word "can", which is crucial, of course. We can deliver that investment by 2020. I think the regulatory infrastructure is being developed to be able to deliver that. The ENSG's transmission study was very useful and is the kind of visionary document that we require to deliver the 2020 target. I think it needs to be regularly reviewed, however, because the demand to connect, the amount of capacity that will likely want to connect by 2020 may be greater than that identified in the current ENSG report. Those are the longer term drivers which I think are useful. Shorter and medium term, the regulatory background has to be fit for purpose. Our experience to date over the last ten years trying to deliver our 2010 target has not been good.
Q146 Chairman: Could you give us an example of why it has not been good?
Mr Ormiston: A very good example is in
Q147 Chairman: You said the regulatory framework was developing. Does that suggest it is not there yet?
Mr Ormiston: No, it is not there
yet. The Transmission Access Review has
to play out, and there are also an awful lot of modifications and proposals for
reform outwith the Transmission Access Review. You take a view whether that is
useful or not, but, nevertheless, that continuing debate dominates much of the
discussion within the industry about what is probably the principal issue for
the renewable electricity sector in the
Mr Russell: I think it is quite important very early on that everybody acknowledges the elephant in the room, and the big risk with all of this is that currently the planning system does not adapt to be able to give more timely decisions, whichever way they go, and everything else that you may or may not wish to ask us about this morning all really arises because of the inordinate length of time it often takes to get planning for networks but also, of course, generation projects of all types.
Q148 Chairman: Can I perhaps pick this up, Mr Russell. Some of the timescales are really quite remarkable, shall we say. Indeed, if we have got time, you may want to address some of these issues of planning. Do you want to say something, Mr Edge?
Mr Edge: Yes, please. I think we need to acknowledge that there has been some considerable progress here. The ENSG process and report are actually quite significant advances in taking us on the way. Our view is that there is a current delivery gap between this visionary plan, which is really good, it is excellent and it is on the table and we are really pleased that Ofgem is bringing forward new initiatives for investment ahead of user commitment - again, that is a major advance - but there just does not seem to be someone with whom the buck stops and who is the back-stop, who makes sure that all the different things that need to happen happen in the right time, in the right place, and that leadership element is what we think is missing.
Q149 Chairman: Who do you think should give that leadership?
Mr Edge: We cannot see anyone else but government being the one that holds the ring here.
Q150 Chairman: Not the regulator?
Mr Edge: Government is the one that is setting the targets; I think it has to be the one that actually actively propels us forward.
Q151 Chairman: So it is the Government, basically?
Mr Edge: Basically, yes.
Q152 Sir Robert Smith: You touched on investment ahead of need. How much difference will it make if you go down that route?
Mr Edge: I think it will make quite a significant difference if the incentives are right. There are many slips between cup and lip in terms of putting that system in place. What I have a problem with is, incentives are all very well, but people do not have to take the incentive, there is no compulsion for them to actually take it up. It is an enticement, but it does not necessarily ensure that it happens.
Q153 Sir Robert Smith: So you may be being a bit more fundamental and so using the market.
Mr Edge: I think the market is good, but there needs to be a back-stop to make sure that, if it is not coming forward, buttons can be pushed to make sure things do happen, and there needs to be that back-stop power because we do not have much time.
Q154 Sir Robert Smith: How do you respond to the concern that, if you do it ahead of need, you could end up with investment in all sorts of a nice shiny bits of network that are not actually going to be needed but make money for the network provider?
Mr Ormiston: I think that is a bit of a red herring, to be honest. I think we already have a situation where there are parts of the networks that are under utilised, and that is managed perfectly well and acceptably by Ofgem, National Grid and other organisations. Are there likely to be bits of the network in the future that are likely to be under utilised as such? I think the answer to that is probably, yes, but that may have happened in any case. I think the key is in planning and things like the ENSG report and our understanding of where development is likely to take place, not just the renewables but in other generation as well, and what type of response is required in terms of delivering the networks. If we are clever about it and we are sensible about it, we will get that right. You will find that where there is spare capacity, there is an encouragement to develop projects in any case, and that can be an incentive as well.
Mr Edge: I think the only risk is that it may be under utilised for a bit longer than we thought it might be. The other side of this is that we do not build the capacity; we do not get anywhere near our targets.
Mr Russell: Can I just correct an unfortunate use of words. Nobody actually in this context, when they say "investing ahead of need", means that. The investment is needed now, but if it is genuinely not needed, it should not be done. What people actually mean by "investment ahead of need" is investment ahead of individual generation projects being able to give specific and substantial financial commitment. So we are not investing ahead of need; nobody is talking about that. What is actually meant is investing ahead of specific financial commitment. Now, with a large number of (for the transmission system) often not very large projects, you know there are, for example, going to be several gigawatts of new generation in Scotland, as an example. You do not, however, know which of the many individual projects are going to be successful. Therefore, those individual projects cannot themselves incur liabilities of many millions of pounds to give financial security to the investment, which is why this sort of requiring specific projects to give financial commitment does not work any more, but there is a high degree of certainty that the reinforcements are needed, which is why the investment is needed now. The other thing that is very important to say in this context is that most transmission, the expensive part of building it, when you actually order the kit and buy the wires and string them up on overhead lines or bury them in the ground, the timescales for that are not dissimilar to the timescales for constructing most types of power stations. The one exception would be nuclear, I guess, but we are talking two to three years. What has got to be done ahead of that is doing the preliminary engineering work and starting the planning process and getting planning consent. That expenditure is not hundreds of millions or billions of pounds. The really expensive stuff really only starts at the same time as the power stations that precipitate it are being built. So there is no expenditure ahead of need. What people are talking about is expenditure ahead of individual plants being able to put their hands in their pocket.
Q155 Charles Hendry: Can I broaden it slightly to financing support. We have seen companies like Shell pulling out of the London Array; we have seen Centrica putting some of their offshore schemes on hold. The issue has been raised that the ROCs were not generous enough, and the Chancellor changed that support system in the Budget last week. This goes really beyond the investigation we have got in front of us, but as we have you here it would be very helpful to know whether you feel that they have now gone far enough to encourage those offshore projects to come back into the system?
Mr Edge: I believe so. We have been very pleased with the announcements in the Budget. We think that should be sufficient to keep the projects that are currently in the market going and, indeed, to make orders as they should. So in that sense we think it is probably about right.
Mr Ormiston: Now that we have accepted the principle of differentiated support for different renewable technologies, known as banding, you have to do an objective test of the cost of developing different technologies and respond accordingly. Clearly, developing offshore wind is perhaps a bit more expensive than we anticipated a while ago and the response by the Chancellor last week was helpful.
Q156 Chairman: I wonder if we could just turn to the issue of accessing the transmission network. The traditional pattern has been to invest in "connect", and there has been a proposal that we should move towards "connect and manage". Des, do you want to start off with this?
Q157 Dr Turner: Yes, I will be slightly more keen and start at the tail of last year's questions. Everything that is being planned with grid restructuring at the moment and with reinforcement relates to the needs which are already identified - the queue of onshore wind, et cetera, and several gigawatts - and does not seem me to relate to what could be facing us in, say, five years' time, when the picture could look very different, when we start to see gigawatt scale exploitation of marine resources which will not necessarily even match the grid distribution that is already envisaged. Do you think that our grid vision for the future is going to be adequate to take maximum account of our renewable resources?
Mr Edge: I think the issue there is more of a 2030 issue than a 2020 one. We, obviously, champion the wave and tidal industries, alongside wind, but we do not see it producing much more than the gigawatt scale in the 2020 timescale. You need to be planning into the 2030 level, and that is why we are very keen that there be a vision for beyond 2020 out to 2030, because, particularly with the grid, you talk about long lifetime assets: you need to be planning long lifetime visions. So we need government to be bringing forward its view for the post 2020 era, but what I would also say is that those wave and tidal marine resources are very complementary to wind in a lot of ways. You maximise the use of the network through having that diversity of resources. Indeed, tomorrow we will be publishing a report on precisely this issue, the way that the complementarity of wind and marine resources can actually benefit the system overall, which we are very happy to share with the committee.
Q158 Dr Turner: I would be grateful for a copy of that, certainly. Coming back to the short-term, do you feel that the short-term measures arising from the Transmission Access Review are going to have a significant impact on the current queue of renewable generators waiting to connect?
Mr Ormiston: You use the word "significant". In
Mr Russell: I think the technical position is we are waiting for Ofgem's final decision in terms of its policy on derogations that will facilitate the interim "connect and manage" that I think they have promised by the end of April, which is tomorrow. So as long as it goes ahead, yes, it should make a difference in the short term.
Mr Edge: There is a general issue with Ofgem's attitude to the constraint costs that arise from "connect and manage", which obviously all three of us here very strongly support. Their view is it is all very well, but look at the bill. There was a CUSC amendment to Cap 48 that some of our members brought forward, and we commissioned some analysis of the impact assessment that Ofgem did around that. Ofgem was assessing a net cost of £917 million for this proposal, and our analysis said 23. So Ofgem takes a very high view of what those constraint costs are going to be, which we do not think is actually the reality.
Q159 Chairman: Why do you not think that?
Mr Edge: They take a very pessimistic view of how much constraint will be needed and how much needs to be paid. We can provide you with that analysis to show you what it was. It was a rather strange attitude to the cost of the Renewables Obligation.
Mr Ormiston: Ofgem had some previous history as well on this 450 megawatts. Initially they were responding to a concern that advancing 450 megawatts would cost £100 million extra in constraints. Subsequent research and a reappraisal of the situation brought that down to 40 million, which is a much more acceptable position.
Q160 Chairman: There is a difference of opinion with these figures.
Mr Ormiston: Everyone now agrees that 40
million is the figure that it may cost, and that is only if everything connects
at the same time. These projects, 450
megawatts, will connect over the next three years, so it will be up to
40 million, and this is pending reinforcements of what is known as the
Cheviot Boundary, the wires between
Q161 Dr Turner: Your organisations are very keen on "connect and manage". Can you tell us more about it? Can you tell us about the benefits of that approach and any risks?
Mr Russell: Basically "connect and manage", as opposed to what we have at the moment, which is known as "invest and connect", comes in a lot of different flavours, but the basis of it is that anybody who is prepared to commit to paying transmission charges, and where the local connection to connect them to the network can be built, is allowed transmission access and access to the market after a maximum of a fixed period which relates to the proposals. That is currently four years. So it gets access irrespective of whether any wider transmission works that the transmission owners want to build have been completed or not. The advantage of it is that it allows renewables and, indeed, if it is applied, all other generation to be able to get access to the market in the timescale that is reasonably compatible with its own build timescale, which was one of the principal objectives of the outcome of the Transmission Access Review report by government and Ofgem. It does not require you to do anything about the rights of existing generation: they retain those rights. It is up to the energy market whether and when they retire that generation. The only possible down side to it (and we have got to be completely honest about this) is that if there is continued failure to get the planning system to work sufficiently promptly so that what is needed does not take of the order of a decade but the planning can be done in a couple of years and another two or three years build, then there could be some generation that is on the system without what would be considered the right amount of transmission infrastructure to give it access, and that will result in some cost. How much that cost could be (and it should not be anything if planning is sorted out) people can predict and speculate on, and we have heard it is a wide thing. There is an issue, of course, as to who pays that cost. All I would say is that there is a whole range of options, some of which are on the table. At one end (and this is, I guess, probably the first choice of the three people on the panel), you can say it has spread throughout all generators and demand-side users of the transmission system; so it is spread out, as are, of course, the costs of the constraints that exist at the moment. At the other extreme, there is a proposal on the table that says that that cost is borne entirely by the new generators, who are allowed to connect to the system ahead of some of the infrastructure that is considered necessary being built. So it will be those projects themselves that would pay that cost, and that is an option that is on the table at the other extreme. There is certainly a middle way, where you could envisage that if constraint costs do go up because of new generation ahead of the infrastructure in a particular area, then that could be spread amongst, for example, all generation in that area; that is a locational appraisal. I am not suggesting which I would prefer, although I guess our first choice, contradicting myself in one sentence, is probably the first option. That is a debate, as to how the cost, if any, is met and who pays for it, that can be had in the future, but that is the only down side that I can see of "connect and manage", for today's projects to come forward when they are ready to come forward and does not threaten access rights of plant that is already there.
Chairman: Can we have a look now at the issues of charging. Mike.
Q162 Mr Weir: Obviously this has been a matter of some contention over a number of years, particularly the locational charging regime from Ofgem. In his evidence to us, Professor Strbac stated that only a small proportion of network charges for generators actually relate to location. Do you agree with that statement?
Mr Russell: I think we have got to be
very careful how it is put. What is true
is that only around 15 per cent of the revenue raised by the transmission
companies arises from the locational element.
That is not the same as only a small proportion of the charges are
locational. What actually happens is
that generators, broadly in the south of
Q163 Mr Weir: Does that locational charge impact adversely on renewables, given that many of the areas where renewables are situated are far from centres of population? I notice that Scottish Renewables Forum, for example, have joined the Scottish Government and Scottish Power in pressing for a more postal system of charging, as, I think, exists in Germany. How would that affect renewables?
Mr Ormiston: The impact of transmission
charges on generators in the north of
Q164 Mr Weir: But given that both the
Mr Ormiston: I do not think they
discriminate against renewables necessarily, but they discriminate against
areas that are further from the centre of all things, which tends to be
Q165 Mr Weir: But at the same time renewables---
Mr Ormiston: That happens to be
renewables, but also, if you speak to Scottish Power and SSC, they will say
that actually their investment case for conventional generation in
Mr Edge: From BWEA's point of view,
we do not think that cost reflectivity and the locational aspects of charging
are bad principles. What we do not think
is right is that 100 per cent of the cost is reflected onto projects. Certainly it is the case that renewables, and
wind in particular, are going to be the first technologies which pay for the
extension of the grid to them in the
Mr Ormiston: Can I say that Steve Smith,
Director of Networks at Ofgem, in giving evidence to the Scottish Parliament in
a similar inquiry to this one, has said that the Scottish generators were
paying 40 per cent of the total
Q166 Dr Whitehead: To put what can be seen as a sort of initial uninformed commonsense view, you might say, it could be said that renewable generators on the one hand are saying they should not pay transmissions charges because they are developing capacity in what you might describe as rather far-flung locations, and yet, on the other hand, as far as the distribution end is concerned, are saying we ought to recoup the savings from actually a very short transmission distance using different elements of the grid and, therefore, gain as far as local generation is concerned. One might say that it appears that renewables want to have it all ways. How would you react to that?
Mr Russell: Can I come back on that, but I will also go back to the first question. The Renewable Energy Association supports cost reflective charging for transmission. Whether cost reflective charging is discriminatory we will leave to lawyers to pontificate about, but if it costs more to connect and transmit power from generators in some areas than other areas, we think the generators who are further from the demand should pay more. There are some very good reasons about delivering the amount of renewable energy that this country wants and needs and is committed to at minimum overall cost, why it is important to have cost reflective transmission charging, that I can illustrate, if you want, in a minute very quickly and simply, but as to whether cost reflective charging stops some projects getting ahead in areas like Scotland, which is an extremely important resource for renewable energy in the United Kingdom, it is not, however, the only show in town. The answer is the majority of projects are either going to go ahead or will fail economic criteria to progress irrespective of what the transmission charges are. It is the projects at the margin, and the margin may be only a few per cent or it may be 30 per cent of all projects whether they go ahead or not, that will be affected by what the transmission charges are. So, absolutely right, yes, there will be some projects a long way from demand that, if transmission charges are cost reflective, will not go ahead that would go ahead if they were uniform. Equally and as importantly, there will be some, as indeed applies to any form of generation but renewable projects at the moment, who are near to demand that will not go ahead unless the transmission and, indeed, distribution charges are cost reflective. So in order to get the overall best balance of where all the generation decides to locate, and in particular for this session the renewable generation cost reflective transmission charges are important, to sum it up, I think there are only three possible worlds for how you decide where power stations, renewable or any other, locate. Either you have central planning, as we had prior to 1990, and it is one body who is responsible for the wires and also decides where to locate power stations, or you have cost reflective transmission charges that generation project developers can take into account as one of the many costings as to where they develop projects, or you have chaos and waste money.
Mr Ormiston: No, you do not. There is a fourth, which is generation equals
zero, which is a model that is applied in many zones in
Mr Russell: Generation is zero, which is what happens currently in Germany - I have connected some plant in Germany - is, of course, the uniform thing and that will lead overall to some projects going ahead when they should not and some not going ahead when they should and more transmission being demanded than would be the optimum and, therefore, the highest higher cost than you would otherwise have.
Q167 Chairman: There is the issue, of course, of their consumers.
Mr Russell: Yes.
Q168 Sir Robert Smith: If you have a postage stamp approach instead of a cost reflective, what is the cost to the consumer?
Mr Edge: The cost to the consumer would be neutral.
Q169 Sir Robert Smith: Why would it be neutral?
Mr Edge: Because National Grid recovers the cost of running the networks in whichever model they have applied. In this model, you just spread the cost of the generation side equally across---
Q170 Sir Robert Smith: What if everyone then located at the periphery?
Mr Edge: Do not forget, I did not say that we were necessarily against the principle of a proportional cost for location, and you can apply that. It may have an impact in terms of transmission losses because you are further away from demand, and we have no problem with the principle of charging for transmission losses. There is actually another transmission charging methodology around losses which is discrete to NUoS, which is applied at the moment, and they are seeking change over that as well.
Chairman: That is very interesting. I think we will have to look very carefully at the points that you have made on this, because they are quite crucial. Unfortunately, we have a second session, so we have to move on. I know that we want to have a look at the issue of connecting offshore wind, which is A very topical issue. David, I think you wanted to start off on this.
Q171 Mr Anderson: I will start off on a negative. I am not actually very positive, particularly
about offshore wind and how you are going to start building in the north-east,
but I want to ask some practical things about when they are in place how they
will be run, particularly in relation to security of supply. How much work is being done about
maintaining, repairing and replacing equipment in what is one of the most
hostile environments in the world, the
Mr Edge: Clearly operating offshore wind farms is a new and challenging area. I think the real challenge is to develop turbines that do not go wrong in the first place.
Q172 Mr Anderson: That will never happen.
Mr Edge: You can design a lot of
reliability into it, particularly if you take a very different approach to that
for onshore turbines. Essentially, each
onshore wind turbine is a mini power station. It has got all the things in one place and
then you just module them up into wind farms.
You can centralise a lot the electronics and some of the supporting
stuff into stuff that you can do onshore, and therefore you are generating
dirty power in a big offshore wind power station, taking it ashore and cleaning
it up and putting it onto the network.
So there are different concepts that you can apply which will make it a
lot simpler, make the things that are actually out at sea a lot simpler and
more robust. That is a process that we
are only embarking on: because actually what people have done is take those
onshore turbines because they work and take them offshore. It is clearly the case that, unlike onshore,
where you can just drive up to the bottom of the tower with a white van and get
out and fix it, you have to go out on a boat or a helicopter and fix
stuff. There is quite a way to go, but
given that we operate oil and gas platforms at high reliability, in fact in some
places they are completely inaccessible, we have incredibly reliable machinery
down at the bottom of the sea, which you simply forget. I fail to see why we cannot apply that kind
of innovation. The trick is to do it in
a cost-effective way, with large numbers of turbines, but I have got a belief
in
Q173 Mr Anderson: I am glad you feel like that. I used to work in the energy supply industry as a mechanic. Things do go wrong. The fact that you say that they will not go wrong is just not true.
Mr Edge: I am saying you can minimise it. Certainly we are also working on ways to improve on it - it is already quite safe, but improve further the safety of the transfer from turbines - so that when you do have to go, it is really safe.
Q174 Mr Anderson: Another issue which has been raised is about the
impact on bird life. The RSPB have asked
us, in discussions we have had up in
Mr Edge: There is a huge amount of
work going on on this one. I think it is
fair to say that my members in the offshore wind sector have spent more money
on researching the offshore environment than any other sector in the history of
the
Q175 Mr Anderson: Lastly, the impact on military radar. We understand that will not happen offshore.
Mr Edge: No. There is definitely an issue, particularly in
the southern
Q176 Mr Anderson: You mean more money or more effort?
Mr Edge: I do mean more money.
Q177 Chairman: It is the R&D as well.
Mr Edge: This is all R&D.
Chairman: I can certainly confirm there is work on a stealth blade going on because I have seen some of the work in my own area.
Q178 Charles Hendry: Can I look at some of the supply chain issues as well? We have had some interesting evidence given
to us about the benefits of a point-to-point connection for offshore facilities
or for having large DC cables which would connect quite a number of them
together. I think it is broadly agreed
that we might use seven and a half thousand kilometres of cabling, and the
global capacity is about 700 to 1,000 kilometres a year. That means the
Mr Edge: This is why my point earlier
about a vision to 2030 is really important.
You had a Round 1, plus Round 2, plus Round 3, plus the Scottish
territorial waters project. That is
nearly 40 gigawatts of offshore wind projects that will be in process in the
Q179 Charles Hendry: Would there be a case for saying that the 2020 targets
should be allowed to slip back a bit in order for that demand to be managed in
a more constructive way when one looks as well at what is going to happen in
other countries?
Mr Edge: You set a reasonable 2020 target and you set an objective further out as well.
Mr Russell: I think the important thing to bear in mind is that 2020 is most definitely not the end point; it is purely a way mark. Yes, a way mark with legally binding commitments that the Government has entered into, but it is purely a way point on the way to complete decarbonisation of electricity production by 2050, or a bit later. So it is not that at 2020 that is it, by any means.
Q180 Chairman: You are also saying that you felt that the framework was not yet developed to encourage renewables. Does that apply to off-shore wind as well?
Mr Edge: We are looking forward to
when the regime that is in its last throes of consultation will come into
force. We have come through a long
process down here. Perhaps it may be
fair to say that if we had known back then what we know now, we might have
asked for something a bit different, but we are where we are and we want it to
be in place because it needs to be what we want to see, and certainly it is the
case around one or two projects that really all we need is a radial connection
to shore; that is fine; it works. Our
issue is that going for the strategic approach you will need for the larger
Round 3 projects and, indeed, going out in terms of interconnecting with the
rest of Europe, which again I think is another supply chain issue, is going to
require even more cable. We do not think
that the Government is actively engaging on the super grid issue as much as it
could. It is taking very much a back
seat. It is, "Oh, this is a European
project." The
Mr Ormiston: I think National Grid, Ofgem, most of the people in the industry and, I suspect, most politicians have really been caught out by the pace of demand, offshore and onshore, for renewables. When I came back from one of the European summits saying we have signed up to 15 per cent renewable energy by 2020, it took a few people by surprise that they would commit to that target. In other words, that commitment is really worthwhile. What it means though is that you have 35, 40 per cent renewable electricity by 2020, which is an enormous amount of capacity to get built. ENSG tried to respond to that with its Transmission Report and now, with the interest in offshore wind, wave and tidal in Scottish waters, we find the ENSG report perhaps needs a review to look at the potential of the offshore renewables. We just need to keep pace. I do not think we are keeping pace in our forward thinking, what needs to be in place to deliver that potential, but you cannot lose sight of that 2020 target. That 40 per cent carbon commitment that Alistair Darling made last week is really important and he cannot let it slip.
Chairman: Yes, it certainly is. Can I apologise, we are trying to keep to time, but as part of that commitment to renewables and reducing carbon there has to be a range of different technologies and different transmission. That brings to us distributed generation, which, of course, is still quite small but it is developing. Paddy wants to come in on this.
Q181 Paddy Tipping: Yes, but there are benefits from being embedded into the system. The National Grid are going to change the rules, are they not? What are your views on this?
Mr Russell: There certainly is a worry that they are going to change the rules. There are a number of different things that there is concern about. The chief one is that at the moment, for the majority of generation that is connected to a distribution network, the output of which is absorbed by demand within that distribution network and, therefore, does not flow broadly on to the transmission network, you can effectively net-off the two charges as far as transmission charging exists. So there is a benefit by netting-off generation and demand locally, which, of course, affects the physical reality of the power not flowing onto the transmission system, and that is what is known broadly as embedded benefit. There have been noises in Ofgem that they do not think this is justified and they wish to charge generation connected to a distribution network for using the transmission network as if all the power was going onto it and, exactly the same, the demand that that is meeting would also be charged on a gross basis. There was an industry working group that met I think two and a half years ago now and, with the exception of one network company, the industry's view was absolutely unanimous that net charging is what is cost reflective, reflects the physical reality and should continue. Ofgem agreed with the single company in the industry---
Q182 Paddy Tipping: You had better tell us which company this is.
Mr Russell: It is NGC. ---and says that that they do not think under
the current arrangements where if power nets itself off on a distribution
system they should pay charges as if it was flowing onto and then off the
transmission mission, which of course it is not, and they have written a letter
saying that NGC does have to sort this out and come up with enduring
arrangements. Indeed, they are placing
an obligation on NGC to bring forward proposals to do this and have them
implemented not later than April 2011.
So it is, unfortunately, a real threat that generators connecting to a
distribution system are worried about.
It is non cost reflective and, if you followed it through logically, you
would actually have the nonsense of charging every single generator in
Q183 Paddy Tipping: We are going to move to a situation where there are going to be more and more local networks. That is inevitable. What is the ideal charging system?
Mr Russell: The ideal charging system is very simple. Firstly, quite a different issue, obviously there is generation connected to distribution systems, and that should pay appropriately for using the distribution systems, which may in some cases be negative charges if they are deferring the need to invest more in distribution systems; if they are near to demand they may be positive charges. As regards the transmission system, it is very simple: one should pay (and who one is I will come on to it in minute) for the net injection from the distribution system to the transmission system or the net off-take from the transmission system to the distribution system; so that it is the net flow that physically passes onto or off the transmission system that causes costs on the transmission system and for which charges should be payable.
Q184 Paddy
Tipping: Mr Ormiston, you reminded us earlier on that
in
Mr Ormiston: Correct.
Q185 Paddy Tipping: That cannot be right, can it?
Mr Ormiston: It is right. There are generators who theoretically, the National Grid believe will spill their electricity or put their electricity on to the transmission network and therefore have to pay what is known as the gross-net charging model, so they are paying both transmission and distribution charges. Often they also have to be grid code compliant as well and for this theoretical risk of their using the transmission they have to put in significant bits of machinery and plant to be able to grid code compliant. This tussle between National Grid and the distribution network operators is being played out in different ways. Charging models is one, DPCR-5 - the Distribution Price Control Review 5 - is another; and also CAP167, which is all about if there is a theoretical risk of you using the transmission network you have to get what is known as a statement of works from National Grid. Effectively that is a date by which you can connect your small generating station to the distribution network because you might have a knock-on effect on transmission investment further down the line. What that means is theoretically a one kilowatt PV panel on a roof may be deemed to have an impact on the transmission network and therefore in Scotland, in some cases, is not allowed to actually connect to the network until 2018. That is the kind of illogical conclusion of the CAP167 debate and one that is current. Because we have these code numbers it sounds a bit "anoraky" but it is an interesting subject where community projects, small scale renewables, micro generation and distributed generation can be prevented from connecting because of this theoretical risk and this tussle, I think, between distribution network operators and transmission companies.
Q186 Dr Whitehead: Is there not an issue though as far as distributed generation is concerned of volatility? I have an image of the main transmission network, as it were, as a long distance railway with trains timetabled and going on in an orderly fashion and then the distributed system as a branch line and the claim is, apparently, that for the future any train that turns up goes around the branch line system. Is that not a problem as far as the future integrity and viability of a distributed system is concerned because if we are serious about the extent to which distributed generation will move forward over the next ten, 15 years we simply cannot tell who is going to connect up, where, when and under what circumstances.
Mr Edge: I think this is a wider issue around the management of the distribution networks generally. Distribution is generally the poor relation of the network and grid area and does not receive the attention that it increasingly will need to, given that we will have a feed-in tariff, there will be more micro generation and small generation; we are going to have increasingly demand side participation and this all at the distribution level and this is where this buzz phrase, "smart grids", which I believe a lot of people use and not many understand, actually applies in most cases. And it really is not getting the attention it deserves, particularly, for instance, in the current Distribution Price Control Review, which is for the period 2010 to 2015, which is when we will need a lot of investment to manage exactly these issues and it is not part of the debate. It is being addressed to a certain extent under Ofgem's RPI-X @ 20 Review but they have explicitly stated that it will not apply to this DPCR. So I think there is an enormous gap; we are going to get through to 2015 and realise that we should have done this about five years previously and we are way behind the curve. So I think there are lots of issues in general around here which need to be forced up the agenda.
Mr Ormiston: And in terms of having a long term vision for networks for GB and indeed Europe, how is electricity going to be used, what services are you going to provide by 2050, it is not just going to be powering our lights and our gadgets, it is going to be for transport and it is also going to be for heat and in those circumstances you need a pretty robust distribution network. Moving forward - and I think this may be at the heart of the question - are we emphasising so much on transmission investment and transmission that we lose sight of the small scale and distributed networks? If we do that we have made a massive mistake because we will need to have a robust distribution and transmission network with which to move around our power. Transmission networks almost give you a certain amount of guarantee of security and reliability because you can move that electricity long distances in distribution networks, i.e. people to use electricity, in the many forms that we are using it by 2050. So big investment and innovation in these smarter grids, these intelligent systems and allowing a lot more distributed generation to actually get on the system will require this investment in distribution.
Q187 Dr Whitehead: That being the case, particularly as Gordon has mentioned, the issue of smart grids coming into play, particularly in the distributed end, who pays?
Mr Edge: For investment in smart distribution?
Q188 Dr Whitehead: Indeed; it may strengthen the distribution system or smartening it and getting it more reliable as far as potential volatility is concerned.
Mr Edge: But then you are also getting the benefits of perhaps lower investment in wires per se if you are able to manage the flows and the demands, so that you do not need to pay more for the wires; you invest some in the smartness and that gives you the opportunity to invest less in the dumbness of just the wires. This is a point perhaps I should have made slightly earlier when I was talking, that it may be that you need a distribution system operator to do all the management and the investment around this, but I do not see why it should not just be recovered through the distribution network user system charges. I do not see why it should make a huge difference, and the percentage of the customers' bills which is applied from the distribution network is very small.
Mr Russell: Ultimately, to answer the question in a straightforward manner, the customer always pays. The point is, by having smart networks they are paying less than they would be if you did not have smart networks.
Q189 Chairman: That is what we hope to see.
Mr Russell: That is the idea. If they are not then you should not be doing smart networks. You are not doing them just to keep engineers amused; they are being done because ultimately they will be able to do what engineers do or should do well, which is to do for ten pence what any idiot can do for a pound and deliver the same level service in a smarter, more intelligent way. On something you said earlier - your train analogy - I assume you were talking not about hour by hour management of the system but longer term management and generators that build and connect to distribution networks in an uncontrolled fashion. Nobody is suggesting that the interface between distribution networks and the transmission networks must not continue to be very carefully managed by the respective network operators; they do this at the moment and in general the majority of cases flow from transmission to distribution and connecting some new generation at the distribution level. All that means is that those flows are less and may indeed reverse. That is no different from demand reducing and there is continues to need to be liaison very regularly between distribution network operators and transmission system operators to manage the interface and the connections between the systems.
Chairman: These are very important areas and I wish we had a little bit more time to go through them, but unfortunately our time is constrained, as you appreciate. But there is an awful lot of food for thought here, on which we would like to reflect. Just to bring this session to a conclusion, we did mention the problem of planning, which you flagged up and Anne Main wants to come in on this.
Q190 Anne
Main: I can almost need a one word answer on
this. Do you believe that the changes
that were brought about in the 2008 Planning Act will actually speed up the
process for new electricity network infrastructure and do you think that any
improvements in the planning in
Mr Edge: It should, in
Q191 Anne
Main: So
Mr Ormiston: In
Q192 Anne Main: Shoulds and oughts are not exactly ---
Mr Ormiston: It remains to be seen. We have an 11-year process of Beauly-Denny at the moment and we need to get that down. I imagine it would come down but would it come down to the point where it is acceptable? That remains to be seen.
Mr Edge: The issues around things liker resourcing of the Infrastructure Planning Commission is that they are actually going to have to do an awful lot of different things and they need to have enough resources.
Q193 Anne Main: You have concerns about the resourcing?
Mr Edge: Yes.
Mr Russell: Can I say a different
word? Not surely or will but hope. We hope it will. There is one concern and this is not to do
with wires, it is to do with generation projects and that is in
Q194 Chairman: It is exempt.
Mr Russell: That it does not affect the local authority process.
Q195 Anne Main: Is that a failing?
Mr Russell: We would like to see that
made as certain in terms of timescale and not going over the same arguments,
national ones, again and again for projects of that size, as we hope the new
legislation in
Chairman: Thank you very much, gentlemen. I have to draw this to a conclusion there but thank you very much for the detailed way you have answered the questions; it has been very helpful to the Committee.
Memorandum submitted by Association of Electricity Producers
Examination of Witnesses
Witnesses: Mr David Porter, Chief Executive, Ms Barbara Vest, Head of Electricity Trading and Mr Alastair Tolley, Head of Renewable Energy, gave evidence.
Q196 Chairman: Good morning, ladies and gentlemen; welcome to the Select Committee. As with our previous witnesses, for the record would you care to give your name and organisation? Mr Tolley, if you would like to start?
Mr Tolley: I am Alastair Tolley; I am the Head of Renewable Energy at the Association of Electricity Producers.
Mr Porter: David Porter, Chief Executive, Association of Electricity Producers.
Ms Vest: Barbara Vest, Head of Electricity Trading, Association of Electricity Producers.
Q197 Chairman: Thank you and welcome. Can we start off with accessing the transmission network, which of course is very topical at the moment? We have the current Transmission Access Review, which has made a number of short term recommendations, particularly in trying to address the queue of capacity, which we know is in the system. Do you think those short term recommendations are going to have an impact?
Mr Porter: I think our views are not too far apart, Mr Chairman, from those that you heard earlier. We are reasonably comfortable with some of the short term measures because it makes sense to make the best possible use of the existing capacity. We do have a huge level of new production being proposed but of course you simply cannot get away from the conclusion that these short term measures are sticking plasters; they have attached to them sometimes some risk of unintended consequences and of course the answer is to get much more network built.
Q198 Chairman: Are we seeing some unintended consequences in the short term measures?
Mr Porter: There are risks with some and those risks were referred to earlier - the constraint costs, for example - and I know that the regulator is already quite concerned about the increase in constraint costs that we have seen in the last couple of years and we are under a bit of pressure from that now. So we cannot ignore these things; we have to take a very careful look at them because these costs end up to some extent or other on the customers' bills.
Q199 Chairman: So disagreement on those constraint costs in terms of the calculations, is that view as well?
Mr Porter: I am not sure how deeply we have got into the differences between the two extremes that were put forward, but I will ask Barbara whether we can comment on that.
Ms Vest: I would just reiterate what was said earlier, the fact that there are a wide range of views on how much those constraints are actually going to cost and we have seen recently some urgent proposals being brought forward by Grid in response to concerns raised by Ofgem. Unfortunately the industry really did not get the opportunity to have proper dialogue and input into those proposals because they were raised in extremely short timescales under an urgent banner, and it meant that we really did not fully understand the full intention of those proposals. In fact I am a member of the Connection and User System Panel who had to sign off the urgency for those proposals and, to be quite honest, at our subsequent meeting following that, when we had seen the legal drafting for what the full proposal was, many of us said that we would not have signed off on urgency and we would have preferred to have the industry understand more about the full extent and range of what had been proposed.
Mr Porter: As a result of things like this, Mr Chairman, we get accused at times by the regulator's office of being obstructive in terms of improving the prospects for new networks and improving the arrangements for access and we have objected very strongly to that sort of thing. We have had people sitting for months on end very thoroughly and properly engaged in the issues that Ofgem have brought forward, and at times it seems like they are trying to find a scapegoat for a problem which, as you all know, from what you have heard already, is actually quite difficult. We are moving from a situation where we are today where by 2020 we are meant to have something like 50 per cent more generation connected to our electricity system. This includes offshore wind and it includes the generation to replace retiring plant and also the generation that we will have to have to provide back-up. This is a massive change and it is something which some people - not many in the industry, I ought to say - think can be done as if by magic and it simply cannot. I hope that in the course of this discussion we will bring out some of the difficulties but in a way which reveals that we want to see them solved. After all, we represent a very wide range of companies, including not only the conventional generators but a great many others as well - some in renewable energy that have been members of our Association since we were formed at the end of the 1980s. I ought to point out as well that those which are involved in conventional generation are also the companies that are going to put a very large part of the money into the investment to bring forward new renewables. So we want to see things happen but we are much less likely than some to pretend that it can be done simply.
Ms Vest: Can I add something about the Transmission Access Review and modifications that were raised in reference to the short term proposals? We had six proposals raised in April 2008 and as someone who has had the joy of attending many of the 70 plus industry meetings, held in London and the beautiful place of Warwick, I can tell you that we have really, really tried hard to make the proposals work. Unfortunately, what were initially raised were proposals based on a zonal approach and it became very apparent early on that was just was not possible; we could not make it work. Therefore, we have developed a range of alternative proposals. The short term proposals include the system operator releasing additional capacity as and when they can see that it is available and could be used. There are proposals even now for generators to share access, so if you have someone who runs a hydro plant and they are not going to run at times when a neighbour who is a wind producer could use the network then they will come to some commercial agreement and share that access. Then we got on to the proposals for Connect and Manage. It is absolutely great that Ofgem have now changed their view and allowed the derogations to go ahead that will bring on an additional 450 megawatts of generation. This is a very positive and timely move. We have really seen a lot of progress on the short term arrangements. However, part of that suite also had within it a couple of proposals that looked at longer term arrangements and, honestly, they were just so problematic to deal with. As I say, this zonal approach for something, for example like auctions, National Grid, their staff behind the scenes have put in an awful lot of additional work to try and move that on, in addition to what we did in the working groups. But basically what we ended up with was an Excel spreadsheet that was meant to model what was going to happen, and it is frankly not enough for an arrangement that is fundamentally going to change the approach of a generator's access in the future. So from my point of view - and I am not saying anything untoward here - honestly I would just concentrate on these short term arrangements, make them work, continue with the move by Ofgem to a different regulatory approach to enable Grid to get on with this investment, to enable the generators to deliver and keep the lights on; and let us deal with the long term stuff much later when we have the time to catch our breath and see if the arrangements are appropriate long term. We need to move now.
Q200 Dr Whitehead: You could say that the two are indissolubly connected in as much as if you are going down a Connect and Manage route then there are consequences in terms of finite access rights; there are consequences if you do go down the finite access route of then logically having to have some sort of system, as it were, of redistributing the access rights in the long term, and the auction process therefore may appear to follow. But you have strongly resisted both and I believe that you are even in the process of taking legal advice about, for example, the taking away of access rights if there is to be a finite access regime. Do you think that those are contributions to the long term position or a defence of the short term position?
Mr Porter: They are both, in fact, but they are first a defence of the company's existing position. They do not have any commercial option really, other than to say, "I am sorry, but we were vested with these rights; we have made all our business plans on the basis of these rights and it is not something that you can take away from us lightly. So all the companies concerned will have been consulting their own lawyers about that. I ought to say that in the discussions about this with the regulator I do not think that we have ever heard anybody make the case that there is the right to take them away. So I am afraid that there is a battle to be fought.
Q201 Chairman: Could I just say very briefly that I would like to welcome visitors from the Youth Parliament who are visiting Parliament today for an engagement, accompanied by the MP for Brigg and Goole. I would like to say how welcome you are; I hope you have a very good day and welcome to the Select Committee on Energy and Climate Change.
Ms Vest: Can I just say on whether rights can actually be taken away or not, right at the very beginning of this transmission access work, the very first working groups, we asked Ofgem to show us where within the code agreements it actually stated that rights could be taken away, because if we know exactly what we are dealing with at the start of the process then that is great. So way back in April 2008 they were asked that and they point-blank refused and said, "This is a totally legal situation now; we cannot discuss or will not discuss it," and they were most unhelpful with that. But for Connect and Manage and the short term arrangements that are actually looking as though they will help to bring on additional megawatts you do not need the finite rights issue; we can handle it, we can get them on.
Q202 Dr Whitehead: I understand that in the short term but if you go down a Connect and Manage route in the long term, which you have given an example of, Ms Vest, of how access might be shared depending on the nature of a particular form of transmission, does not the Connect and Manage regime inevitably mean that there will have to be changes to access rights and that if they are not to be finite that the entire long term future therefore of the sort of Connect and Manage arrangements that you have suggested relies on the voluntary goodwill of people to actually do it, as opposed to any sort of better planning of how the system might work. Therefore, is there not a problem arising between the idea that perhaps the Grid cannot take away rights - and indeed there is nothing in the documentation, as it were, that says that they can - and on the other hand the ambition of a Connect and Manage system, which seems to point in a different direction?
Ms Vest: I do not know what we are getting hung up on here because, honestly, the Connect and Manage process that we are going through and the short term arrangement for giving up access and sharing it, we are saying that the generators through this Transmission Access Review are better understanding the problems. For example, the initial proposals that were raised, the problem then was about the socialisation of costs, and we have come up with a range of options now because we have better understood the issue. In addition, there was a problem or a misunderstanding between the notice we needed to give Grid about when plant would be closing. It was very unfortunate that the one proposal that looked at finite rights also included in it this termination arrangement as well. If the two modifications had been separated we could make progress on that and the working groups have come up with some solutions that have actually been with Ofgem now since 6 January, waiting to see what the next steps are. It is quite rich that they are saying that the industry is building up this process when we are sitting here wondering where is the regulatory impact assessment; are we actually going to get a reasonable amount of time to respond to that, which should be 12 weeks? We are hearing from Ofgem that whilst they are using this time that is eating into our consultation time we might only end up with four to six weeks' consultation on something that is as big and as important as this. And on something that, quite honestly, because there were so many meetings ---
Q203 Chairman: What do you think would be a better consultation period then, or a better system?
Ms Vest: They should follow the Better Regulation requirements and give us the full time. The problem is not for the members who were involved in the process - we understand what it is all about - but this is for impacts that are far wider than those people who were lucky enough to have employers that enabled them to engage properly in the process. There are an awful lot of other smaller generators, smaller businesses that it is only now they will be able to understand the full impact.
Chairman: Can we turn to the issue of charging for the use of transmission networks, which is a very hot topic, of course, with all concerned.
Q204 Mr
Weir: We had a discussion about locational charges
with the last set of witnesses. Clearly
you represent both renewable and traditional - if you want to put it that way -
generators throughout the
Mr Porter: There are a great many things that a trade association like ours with a very broad membership can agree on quite easily, but if you want to find something that gives us a headache it is geographical things. You heard a few minutes ago that the Scots have one very clear view of this and I can tell you that people in the South of England have a very different view of it and I have been personally involved in trying to broker a deal in the past that failed dismally because it just did not recognise the business impact of these changes. Broadly, the Association is in favour of cost effectiveness; it runs through most of our policy. But we are grown up enough to recognise that we have a huge problem here where companies can be hugely disadvantaged by change.
Q205 Mr
Weir: What about the balancing services' use of
system costs? Scottish Power and
Scottish and Southern, for example, have raised concerns about the new
proposals from National Grid at the behest, it appears, of Ofgem, which they
say will impact upon investment and plant in
Ms Vest: This was something I referred to earlier. Ofgem raised at very short notice this issue about constraint costs. We have heard earlier - and we support the view - that there is a vast array of views on what that actual figure is. We have concerns as an association that something as fundamental a change as that could be brought forward, first of all without being honest about the full impacts of it. And just to give you a flavour of what it means, there is currently a derogated boundary - it is the Cheviot Line. It has always been there; we knew there was a problem with this meter; we have had better come along and we needed that line to be reinforced. There are certain flaws across that line and unfortunately at times energy has to be constrained, so we are seeing this rise in costs, which have been forecast - maybe not to the level that we have seen but lots of things change over lots of years and so we are where we are. But this proposal under an urgent banner will mean that special kit has to be installed at certain plants that are subject to this derogation and have signed what is called an inter-trip agreement, and it is a new form of an inter-trip which will reduce their output under certain conditions. The industry was not really involved in discussions about what compensation there would be and you have someone who might have a coal plant and who might be tripped off who can return to production and get their product to the market at relatively short periods; but then you might have a nuclear generator that is affected in the same way and they have to stay off for five days because the Health and Safety rules state that, and yet they are subject to the same amount of compensation. So there is a lot of worry there about something that has been brought in around a subject and values that are not fully investigated or understood. We do not know what the future behaviour is and what those levels will stay at and we are also concerned about maybe there were other options that could have been looked at if we had had an appropriate length of time to do so.
Q206 Mr Weir: So it is a rushed thing that is ill thought out is basically what you are saying about it. To what extent do renewables receive priority access to the electricity networks at present, and is this not necessary given the government's ambitious targets for renewable energy?
Mr Tolley: At present they do not, is the short answer. The new Renewables Directive I think requires either priority or guaranteed access to the network, and that is for things that are already connected; so it is not the connection itself, it is the actual access once you are connected. It is up to the government to determine what guaranteed access would mean in that context and whether we comply. My view is that we probably do at the moment because once you are on the network you have access to the network unless you are constrained for security reasons or for liability reasons.
Q207 Mr Weir: Given the now very ambitious targets for electricity from renewables, does that mean that renewables will have to be given that priority to enable us to meet these targets, and what is the effect going to be on other generators; or is there going to be an effect on other generators?
Mr Porter: I think you are alluding to
another big question about what is going to happen to pricing and price
volatility and so on when we have a large amount of variable renewable energy
production on the network. These are
very big questions. We are a bit fearful
of the present trading arrangements being able to cope with this. It even leads us to questions about the
incentives, the signals that are given for people to build new plant, to back
up variable renewable energy; and we do not have all the answers to this yet. There are some quite big issues lurking
there. It is possible to envisage prices
dropping to very low levels at times, as we have seen in parts of Europe -
Q208 Mr Weir: To put you on the spot then, what incentives do you think are necessary to deal with the intermittency problem?
Mr Porter: I have talked at a very senior level to people in the major companies about this, and I have to say - and they can be forgiven for this - not everyone is of one accord on how you deal with this. They are, however, of one accord that we have a problem and one Chief Executive said to me, "I simply cannot sign off the building of a brand new power station to come into occasionally to deal with variable supply of energy from renewables." One possible route out of that is that we have some kind of new incentive mechanism to get people to do that but all these things in the end have an impact on the customer's bill and we are faced all the time with the strong desire to see change in the composition of the energy mix. It is being driven more politically than it is being driven by the companies - they want to do what it is necessary to do, but I think if it were not for the level of the Renewables Directive that we have signed on to they would be choosing commercially a mix which is rather different from what it looks like we have to have. At the same time we have pressures on the industry to make sure that customers' bills do not rise unduly. We are talking here, in effect, about how much insurance we buy. The back-up plant is covered and it looks as though we are going to get into very high levels of insurance. As somebody who believes that the first priority of energy policy is to keep the lights on I am not out of sympathy with that, but we all have to recognise that the political drivers to bring forward new types of generation do have a cost attached to them.
Q209 Sir Robert Smith: Earlier on you mentioned this inter-trip; is that controlled by the grid operator and the power plant has virtually no say?
Ms Vest: It is controlled by grid, yes, and grid controls the piece of kit that they install at the generating site.
Q210 Sir Robert Smith: Suddenly you find you lose access and you have to switch everything off.
Ms Vest: It goes.
Chairman: Can we move on to the issue of connecting to offshore wind, which, as we know, there is an awful lot of capacity in the system and there are concerns about delays and also the regulatory regime for that.
Q211 Paddy Tipping: Can you give us a view on whether the approach is right that DECC and Ofgem take?
Mr Porter: On the DECC and Ofgem approach to offshore wind? I think to start with we do not have a problem with the idea of National Grid extending its role offshore; that is the starting point. Neither do we have a problem with a competitive regime.
Q212 Paddy Tipping: Do you think that there are enough people around who are going to tender for this offshore process?
Mr Tolley: We do not know for certain, do we, but it is not a foregone conclusion that the existing onshore companies will be the only people who win out in these competitions because offshore transmission is slightly different and there could well be new entrants from other countries and other companies getting involved. For the round one and two offshore wind projects we are quite confident that the competitive arrangements, OFTOs, will deliver benefits in terms of lower costs, more innovation, getting more companies in to finance these networks. I think the question really arises in terms of round three when you have much more offshore wind being built, whether you get that strategic approach, coordinated approach to designing an offshore network that you may need.
Q213 Paddy Tipping: The Sea is a bit of an unknown frontier. There is going to be some big engineering work here. Do we really understand the marine environment enough to make this happen?
Mr Porter: We have to rely on the business judgment of our member companies that want to do this. We heard earlier from I think it was Gordon Edge of the British Wind Energy Association that a lot of the issues are similar to issues that were addressed by the offshore oil industry, so we ought to have a certain amount of confidence. But there is a lot of work going on in the industry now to get the assurance that some of these things can be delivered. Technical work - there is work going on on metering currently.
Ms Vest: I think as well that our members think that if it is a competitive tender and, say, somebody else were to win that, they could bring in innovative new ways of dealing with things which we can learn from and then look across to National Grid and the Scottish transmission operators and say to them, "Why are you not delivering something similar? Where is the innovation here?" So we can see benefits from this.
Q214 Sir Robert Smith: There is one warning from offshore, of course, that the history of the offshore was that each different operator had their own infrastructure and now new entrants are finding it difficult sometimes to access. So presumably any regime has to be careful that it does not embed rigidities that do not allow future development.
Ms Vest: Yes. I think they understand that as well.
Chairman: Could we turn to an issue
potentially for the future, the issue of interconnection with other countries
and the supergrid. Interconnections with
Q215 Judy Mallaber: Briefly, what are the benefits, do you think, and what are the risks of greater interconnection with other countries?
Mr Porter: Having plenty of connection goes with having a good, well working market and that should help to deliver greater security of supply; it ought, as well, to make the best possible use of our resources by drawing on power where it was sometimes surplus and getting power from where it is most economically available. So we feel very comfortable with the idea of much more interconnection.
Ms Vest: I just remember in the not
too distant past we had problems - if we face a severe winter it is quite
likely that they are facing one in
Mr Porter: There is another implication, of course, that the more that you have of this and the more that the European market becomes integrated - and we supported that - you are going to need a different type of regulation, and this was actually alluded to by the Chairman of Ofgem yesterday at a meeting at which your Chairman and I were present.
Q216 Chairman: He was indeed.
Mr Porter: This is also going to present
us with some challenges because regulation viewed from a European perspective
may not always fit comfortably with regulation to which we have become
accustomed in the
Q217 Judy
Mallaber: So with a lack of market liberalisation in
Mr Porter: It does. We are hoping that the third package will lead to a greater freeing up because that is something that, as an Association, we support very strongly and always have. We now have within our membership a number of companies which are not British owned but they are in effect European companies and they also feel that very strongly.
Q218 Judy Mallaber: The Chairman referred to the supergrid. What do you think is the potential?
Mr Porter: This has attracted a lot of interest and I think a great deal more work is needed on this before we can be very confident about any net benefits. I suppose that in principle what I was saying just now applies to this supergrid as well, that you are back to how you run it, how you coordinate it, how you regulate it. Apologies to our own regulators who think that you can deal with these kinds of things almost overnight - these things do take time and they take even more time when you have lots of different countries' interests to consider.
Q219 Judy Mallaber: Can you identify which of the main regulatory considerations need to be covered? It is obviously a very complex area.
Mr Porter: There are things like how much it costs to move electricity across borders and if you move across more than one border are you into an issue of paying two charges, that kind of thing. These are challenging issues that take a lot of working out and I am still sore from being told by our regulator as recently as yesterday that we need to wake up and smell the coffee. We know about the coffee.
Chairman: That is indeed what he said, yes.
Q220 Judy Mallaber: Where do you start in sorting out that regulation because it strikes me as being incredibly complex?
Mr Porter: It is going on now and to his credit the Chairman of Ofgem, Lord Mogg, has actually been one of the prime movers and has chaired the working group to get these things going. He pointed out at an Ofgem event yesterday how difficult it actually is; it is cultural and it is also economic - people are very, very careful not to lose out on anything they have today. So these things take time.
Q221 Sir Robert Smith: In terms of the security of the network, do you think that as it does become more integrated - and you mentioned the past problems you had with the gas integration - given the role that gas plays so much in electricity as well as power, does there need to be more modelling to see how the two different grids, the gas grid and the electricity grid interact with each other in terms of security?
Mr Porter: I think that is probably true but a little more liberalisation on the gas side would be very helpful to the electricity side. But there are also physical questions as well in that the pipes for gas tend, if my memory serves me correctly, to run roughly east-west and there is not much that crosses them north-south as far as I know. There may be arguments for much more building of networks for gas.
Ms Vest: The Energy Network steering group report that people have referred to, I do not think there has been a similar study done for gas. I stand to be corrected if that is right. Something like that exercise would be good and something that was in the public domain and under constant review as well and we can then compare the two more easily if we have the information to hand.
Chairman: Can we now look at the issue of distributed generation, which is a growing area and also featured in the discussion yesterday with Ofgem and we would like to explore your views on that.
Q222 Dr Whitehead: The claim of the renewable energy trade associations is, of course, as far as the distributed network is concerned, the vast majority of future renewables - and indeed present renewables - would be firmly embedded in the distribution network system and therefore do not wash over into the transmission system and therefore should have what I think are the widely embedded benefits. But you do not agree with that, though, do you?
Mr Porter: We do. We are probably quite well in sympathy with I think what Mr Russell said on behalf of the Renewable Energy Association earlier. In fact I ought to say that we drew attention to the likely growth of electricity production connected to local networks as long ago as July 1998 and published a report on it trying to highlight some of the issues that were going to arise. We sent this to the regulator and to I think it was then the DTI, and it actually took years to get them interested in the issue. We were pleased eventually when some of these things got picked up by industry committees, but we are aware of those issues and we have a history of being involved with small-scale generation - it is in fact where we started as an association, and our sympathy there is for the net approach that was discussed by Mr Russell earlier.
Q223 Dr Whitehead: So your view of the National Grid proposing to move to gross charging as far as embedded generators are concerned is that this would be a wrong move?
Mr Porter: This is not something new, by the way. I remember having discussions years ago - and they have gone on at various intervals - with National Grid. They have a problem, which I understand. Tiny amounts of local generation do not count for them; it barely shows on the radar and it does not give them difficulties. They can now see that we will have much larger amounts and they can see risks arising for them where generation would perhaps spill over. If it was maybe clustered in fairly large amounts close to their system this concerns them. It is a risk that they face but they cannot under the present rules fully control. So I see the tension there but I do not think we are yet at the point where National Grid needs to control the output of a photovoltaic array, but it is something that we need to sit down with them seriously to discuss as the growth of production on the distribution system develops.
Dr Whitehead: Could I take you a little further on that point in as much as you are obviously absolutely right, I happen to be a miniature power station in my own right.
Chairman: Not personally!
Q224 Dr Whitehead: My roof, sorry! It is, as you say, an extremely miniature version. However, in the city I represent we will probably be bringing forward large-scale CHP around the city, for example, which will put substantial electricity into the distributed grid. Do you see - and you have expressed some sympathy for the concerns that have been expressed - a short, medium term imperative for strengthening of the distribution system, or do you see that there are methods by which what some people might say is the potential chaos of large numbers of distributed energy producers coming into the grid. Do you see other methods by which that might be regulated and planned so that actually it works well for the future?
Mr Porter: It looks to us like the issue of strengthening distribution systems. It is in a smaller way much the same issue as having to strengthen the transmission system, and with regard to the transmission system I think we are fairly comfortable with the idea that the National Grid should be encouraged to go ahead and build ahead of the time when new plant actually requires to be given access and I think much the same thing would apply at the distribution level. If there were risks there, yes, we can recognise those risks and we ought to be able to work out a way of sharing them.
Ms Vest: The grid codes that look after how we behave within the transmission network, there is a distribution code governing how the distribution network is run and it is all about communication, is it not, making sure that those who look after both networks actually understand what each other are doing. But there are quite clear and distinct roles within those codes for the distribution companies and grid and as long as we can encourage communication and understand the impacts, etcetera, then we should be able to rub along well together. This embedded generation should be used within the distribution area and provided security of supply within there as well.
Mr Porter: I think that there are one or two technical issues which I cannot go into too deeply, but last year when we had quite a major power cut on 27 May the investigation into how all that happened - it was largely to do with two major power stations tripping off within a minute or so of each other - revealed that there was an issue that was to do with distributed generation. There was some wind power which might have been expected to run which got tripped off because of the change in the frequency.
Ms Vest: The investigation is still ongoing into that. The Grid Code Review Panel has been asked to establish a group to look at what happened via the - E3C committee?
Mr Porter: The Emergency Executive.
Ms Vest: So that is ongoing and we are currently doing a lot of investigation with the different people in the industry to see if they noticed anything strange on that day, and we are asking them to provide us with evidence of adverse operation, or something that looked a bit strange.
Mr Porter: We are not saying that these things cannot be done; we are saying that you need to be aware of some of the technical issues and we have to find answers to them. Everything in this industry is connected to everything else.
Chairman: Literally as well as metaphorically! That brings us to the end of our session. Thank you very much for your responses which have been very helpful to us. You have certainly covered a whole range of issues to which we need to give some very careful thought. Thank you very much indeed.