Energy and Climate Change Committee - Minutes of EvidenceHC 275

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 26 June 2012

Members present:

Mr Tim Yeo (Chair)

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Albert Owen

John Robertson

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Nick Winser, Executive Director, and Mark Ripley, Project Director, Electricity Market Reform, National Grid, gave evidence.

Q260 Chair: Good morning and thank you for coming in. As you know, there is a lot of interest in this Bill, and the Committee has been asked to complete its prelegislative scrutiny in only five weeks, compared with the 12 weeks that Committees are normally allowed for this process. It is not entirely satisfactory for us, as it is quite a complex issue, but we are doing our best. Today is the last of our oral evidence sessions; we are seeing the Secretary of State and a Minister this afternoon. We have been unable to see a Treasury Minister despite two requests. That is the background.

We do not need introductions; obviously we have had evidence from you before, Mr Winser. Could I start with the issue about the counterparty? This has attracted a lot of attention, and the form proposed in the Bill is not quite what was suggested in the consultation a couple of years ago. Is it right to say that National Grid is unenthusiastic about the role that is proposed within the counterparty arrangements?

Nick Winser: So far, there has not been a role proposed for counterparty. I want to distinguish very clearly between a delivery body and a counterparty body. I am sure the Committee is very clear on it, but I have tried to make sure I am. In terms of our role as a delivery body, we think that is quite clear: we can help with the design; we are going to provide analysis to help Government make decisions; and then we will go through looking at eligibility for contracts, and look at the operation of those contracts. We distinguish that quite clearly from a counterparty.

The early discussions on counterparty were clearly about a multiparty counterparty. We are very aware that, in evidence to this Committee and elsewhere, there have been some views expressed that a single counterparty would be better. We think it is very important to listen to developers on these things, and to try to understand exactly where those arguments are and what benefit that may bring. Ultimately, getting exactly the right arrangements around counterparty will minimise cost for customers. We are taking part in those discussions and, broadly, there seems to be a good debate going on at the moment about whether it is better to set up a thin counterparty body, which would be the single point for administering the contracts after they have been let. We are taking part in that debate, and we think it is a good and important debate.

Q261 Chair: We know there is a debate going on. I wanted to know what your views were. Do you think it would be better to have a single counterparty or not?

Nick Winser: We listened very carefully to the arguments, and I think some of those arguments certainly bear scrutiny at the moment. Personally, I think that the arguments do have sufficient weight; if we can see a sensible way of doing it, that is something that really should be considered, but that is ultimately a matter for DECC. We sit in the design team with them and try to help them to see things clearly and to contribute our worth in there. We contribute to these decisions, but they are ultimately matters for the design of the Bill and Government.

Q262 Chair: It is indeed a matter for DECC, but you are one of the influential advisers in this matter. Can I just pin you down in a slightly less weasely way, if I may say so? Would you advise DECC that the industry would benefit from a single counterparty that would reduce the cost of capital and therefore electricity bills for consumers?

Nick Winser: So far we are not in a position to see the pros and cons absolutely clearly enough to say definitely that that is a good thing to do. I think that good arguments have been made. We do need to think carefully through exactly what the implications of a counterparty would be, and until we see exactly the specification of it-forgive me for still seeming weasely-it would be wrong for us to give a very clear guide at this point in the design process.

Q263 Chair: Hang on: we are just about to pass legislation. We are not exactly at the early stages; it is rather important that we know exactly what your views are. Is it not the case that, if it were not for some Jesuitical, theological objection from the Treasury, the obvious answer would be for the Treasury to be the counterparty?

Nick Winser: I am certainly not here to answer for the Treasury on those matters.

Chair: Neither are they, unfortunately.

Nick Winser: It seems to me that the debate at the moment is between a multiparty counterparty to the contracts or a thin-balance-sheet sole counterparty, effectively, which would be set up in some convenient way. That is much the same, in a slightly different context, as the existing settlement role was set up back in 1989 with ELEXON.

Q264 Chair: A thin balance sheet does not necessarily mean a small balance sheet.

Nick Winser: In my mind it does. Mark, do you have some greater wisdom to add?

Mark Ripley: Yes, I think in large part the effectiveness of the arrangements rely on their enduring reliability and predictability. As we have said before in these sessions, ultimately this does get funded through the consumer route, through the supplier organisations. With the statutory contract model that was originally proposed, I think there was a degree of understanding within the industry that it would probably work. In terms of understandability to the investment community, though, it was a mix of public and private law, and therefore it was perhaps harder to invest against, or less obvious to invest against, than more traditional arrangements. Therefore, investors are saying putting in a thin counterparty to make it look and feel more like a private contractual arrangement is a better proposition. Given that it is of vital importance that the arrangements are investable to reduce the cost of capital, as you said, that is certainly something that is very worth pursuing.

Q265 Chair: Pursuing? We are very close to legislating. The way we are debating with you sounds as though we are at the early stages of the consultation process. What is proposed in the Bill as it stands is quite complicated-this multiparty contract model. It seems to us one that is open to a certain amount of difficulty in its administration, and it certainly does not seem to have won a lot of confidence on the part of the people who are going to be actually making the investments.

Nick Winser: Your point about where we are in the process is a very good one and I will try to respond to it. For me, it is a question of the statutory contract having been the first thought on this, and the thought that was defined. It seems to me that good arguments have been made about the benefits of a single counterparty. Why I am just holding back a little bit on this is that in assisting DECC we do need to think through all the implications of that and make sure that, as well as the benefits-which I think we can all understand, and which Mark spoke to just now-there is not collateral damage and some disbenefits coming in. I am just holding back a little bit.

I do think it is important that we think through the whole idea very clearly, because these arrangements have to be enduring. I am not saying to you that I think there is an awful lot of further thought to be done, but I do think we have to go through all the implications of setting up a single counterparty, rather than just jump to it. There have certainly been some strong arguments made for it.

Q266 Sir Robert Smith: What disappointed a lot of investors was the initial simple model, where they thought they were having a contract with the Government underpinned by the credit of the state, albeit that credits of state are not as good as they used to be. Is the problem the legal structure, or the fact that the Government is no longer standing behind the contract?

Nick Winser: This comes back to the thin capitalisation issue a bit. I think that while people may have expressed views that they were looking for the state, essentially, to stand behind the contract, as I understand the debate, the central idea was always essentially that electricity consumers ultimately stood behind those contracts. Clearly, in principle that can give a very robust and bankable set of arrangements, because we see that currently in the market. That is how the market is currently devised.

There are two different dimensions to this playing out: there is the issue of who stands behind the contract, which, for both the single counterparty and the multiple counterparty, in the central thinking has still been the electricity consumer. Having decided that having the future electricity consumer actually stand behind the contracts is the best way of making these arrangements bankable, there is then a second argument about whether it is best to have a single counterparty, and we have just talked that through.

Q267 Chair: Given that the single counterparty was in the White Paper, it is a bit staggering to say that we should now be having a debate about whether it is the right thing. What have we been doing for the last 18 months?

Nick Winser: There has clearly been a lot of discussion in the industry, and there has been the mobilisation of all the stakeholder teams to think about all this, and we have been part of that with DECC. We are where we are; this idea has cropped up and definitely bears some scrutiny at this point.

Chair: It has not "cropped up"; it was in the White Paper.

Nick Winser: There is a lot of hard work going on to look at that.

Q268 Chair: Isn’t the obvious interpretation that that is what DECC wanted, that is what you would be happy with, and it is the Treasury that has raised the objections?

Nick Winser: That is not the interpretation I would put on it.

Q269 Chair: Just for clarification for the Committee, exactly what are the disadvantages of the single counterparty?

Nick Winser: That is what we have to work through. You can imagine that, to think through that, there would need to be a lot of lawyers and accountants looking at exactly how those contracts would be accounted for, in particular, under a single counterparty role. Mark, are there others things as well?

Mark Ripley: There are many practical considerations that apply under either model. For example, disputes that might arise under the contract are matters that can be dealt with at an administrative level, or matters that might be reserved for Government because they affect policy. We need to work through whether that is easier or more difficult to manage with a counterparty rather than this central body. There are the financing arrangements, the credit arrangements and a lot of practical issues to work through to understand that there are not any pitfalls before we go down that route.

Nick said that that work is going on, and you have expressed some concern that it is a bit late in the day. These are not necessarily long pieces of work that need to be done. We are certainly doing work with DECC to understand how you might structure such an organisation. Whilst we would always rather be further on than where we are in projects like this, I am not uncomfortable about where we are in the process.

Chair: You might not be uncomfortable about it, but we certainly are. It is absolutely breathtaking that, 18 months or two years from when the consultation started, we are now saying we need to have some advice from lawyers. That is a ludicrous position to be in, whether it is your responsibility or not.

Q270 Albert Owen: Chair, could I just add to that? You might not be uncomfortable; we are. Certainly the potential investors that we have spoken to are very uncomfortable about legislation coming before the House and these fundamental issues either being changed or not in place at all. You must understand their perspective as well. Mr Ripley, you said earlier that they seem comfortable with it; that is not the impression they are giving to us.

Mark Ripley: You have had the benefit of the evidence that has been provided to the Committee. Certainly, from discussions that we have had with investors in generation companies, some clearly have a preference for a Governmentbacked contract. That is a matter of fact. Others are saying they can see how these arrangements could be workable and have a strong desire to make them workable.

Sir Robert Smith: Get them to write to us.

Chair: Who are these people?

Sir Robert Smith: Could you get the ones that think it is workable to write to us?

Chair: It has been a bit quiet on our front.

Q271 John Robertson: Why do you think they would tell us one thing and you something else? Is that plausible?

Nick Winser: We were not suggesting that.

Q272 John Robertson: That is what you said. When we told you what was said to us; you said, "That’s not what they’re telling us."

Nick Winser: No.

Q273 John Robertson: That is exactly what was said. I am sure we can get it read back to you.

Nick Winser: Let me try to be clear about what is being said. As far as the debates that I have heard are concerned, and of course there is an expert group of people across the industry looking at all this, there have been a variety of views. There have certainly been very strong views expressed by some, which we think need to be considered carefully, that a single counterparty would be better. I think it is true to say that others are more ambivalent about it, so if we have that wrong, apologies, but that is what I have heard.

Q274 John Robertson: Can I ask you, then, whether it would be fair to say that the larger companies are the ones that are really ambivalent, and it is the smaller ones who would be more affected that are not?

Nick Winser: I cannot calibrate that immediately in my mind.

John Robertson: Because that is how it comes out to us.

Mark Ripley: I have certainly come across larger companies who have some concerns with the model as well.

Q275 John Robertson: I can believe that. I am getting a bit lost here on whether or not you are just trying to be nice to Government, and whether you are not exactly being open and honest with us here.

Nick Winser: No, we are trying to reflect on a variety of quite often nuanced views. Certainly, we are acknowledging that there have been strong arguments by some parties that we think should be taken seriously. Those views are that a single counterparty would be better. We are absolutely agreeing that we need to look through that. We understand that some of those arguments seem to be very valid. All we are saying is that, in terms of accommodating those, we need to make sure that all the other aspects of a single counterparty have been thought through, and we do not find that we have responded to what seemed to be very legitimate arguments-to me at least-but then found some other disadvantages. Most of all, it is important at this stage that we set up arrangements that are absolutely robust and will allow investments to flow into renewables, potentially nuclear, and CCS, which are so critical to the decarbonisation target.

Q276 Barry Gardiner: When you responded to the White Paper initially, and the White Paper contained the message that there would be a single counterparty, did you raise any query to that, or did you go along with that suggestion?

Nick Winser: I cannot remember our response to the White Paper exactly. Certainly in terms of counterparty, we obviously focused very much on whether there was a role that Government wanted us to do and what would go around those things.

Q277 Barry Gardiner: I am asking you specifically about the issue of a single rather than a multiple counterparty. Do you remember making a suggestion in your submission during the consultation period that actually a single counterparty might not be a good idea? If you did not make that suggestion, when did it enter your mind that actually a multiple counterparty or A.N. Other suggestion might be a good idea?

Nick Winser: As far as the development of this idea is concerned, the original idea-what was in my mind anyway-was that it was a multiple counterparty and ultimately raised funds from electricity consumers. That seemed to us at the time to be a sensible proposition.

Q278 Barry Gardiner: You said "multiple". That was not what was in the White Paper.

Mark Ripley: I think we would have to revisit the response we put into the White Paper. I believe our response to the White Paper was largely in respect of the capacity mechanism, which was what they sought additional views on.

Q279 Barry Gardiner: Yes, but you read the White Paper, Mr Ripley.

Mark Ripley: Yes, I did read the White Paper.

Q280 Barry Gardiner: In the White Paper it was suggested that it would be a single counterparty. The point I am making is that, in your response to that White Paper, National Grid did not suggest that was a bad idea in any way, shape or form. What I am trying to get at is: when did you begin to take on board a suggestion that actually a multiple counterparty might be a good idea? It would be helpful if you could write to the Committee specifically setting out: one, whether in fact you did make any suggestion that it should not be a single counterparty in response to Government at that point; two, at what point in time you first publicly embraced the idea that it might be other than a single counterparty; and three, why.

Nick Winser: We are delighted to do that, and we will pick up on this.

Barry Gardiner: Thank you.

Q281 Dr Whitehead: I appreciate you cannot in any way speak for the Treasury, or put forward or convey their views, but can I just very briefly ask you whether in this whole 18-month period you have actually had any meetings with Treasury or any discussions with Treasury concerning the issue of whether Government should back the counterparty arrangement or not?

Nick Winser: I would say no. We are not really involved in that debate if it goes on. Let me explain where we are involved; that may help the Committee. We attend the expert group that has been set up to devise the arrangements. Mark and I also sit on the Delivery Board that is chaired by DECC, and we see the emerging design coming forward, get the opportunity to contribute on that and help with the design. That really is the limit of our involvement. We have not been closely involved in any debate about whether this should be a Treasurybacked mechanism. That is not frankly one for us to make the call on.

Q282 Dr Whitehead: Have you observed any such communications taking place on the Delivery Board?

Nick Winser: That has not been the main topic of conversation in the Delivery Board. The Delivery Board is really looking at the timetable of delivery, so it is about delivery; it is about when we need to get what done to make sure we stay on path to get these mechanisms in by 2014.

Q283 Dr Whitehead: Presumably in order to get something done, you have to have an idea of what it is you are doing.

Nick Winser: Yes. We have detailed planning charts, which get to the dates by which we feel it is right to have these mechanisms in place. The Delivery Board has done high-level scrutiny of capacitymechanism designs. To give you a flavour, that is the sort of thing we have done in there. The Delivery Board has only been running for about four months.

Mark Ripley: Yes, maybe five or six meetings.

Nick Winser: Yes, so we are really there to monitor the timetable. We take part in the design activity bilaterally with DECC and through the expert groups. We obviously have to have some bilateral interaction with DECC, because ultimately we are going to have to deliver the systems that allow all of this to operate. We are pretty anxious to defer to Government on things that are really matters for energy policy, and to be there to operate the systems, but we do not see ourselves making the calls on energy policy. We think that would be inappropriate, so we are really trying to get ourselves in the discussion and ready to fulfil our role in administering this process, rather than setting policy. That is not one for us.

Q284 Dr Whitehead: However unworkable something looked, you would try to work it. Is that what you are saying?

Nick Winser: Clearly, we would comment on that, because we know that we will have to operate it, but ultimately we would comment on its operability and of course, as part of this energy community, we would comment if we thought in our view it was not going to further the aims of getting the right investment in.

Q285 Dr Whitehead: Have you commented on the arrangements as far as counterparties are concerned at any stage?

Nick Winser: Not in the context of whether it should be Treasury or not.

Mark Ripley: Not directly. We have looked at the arguments put forward by generators and worked with DECC to start to develop a counterparty model to try to address those issues, but, as Nick says, it is in terms of providing advice and a view on whether this will work in practice. In other areas we do the same from a system operator point of view: we understand the technicalities of operating the system and we provide that insight to DECC. So, in designing the interventions, we hope to avoid going down routes that would be difficult to operate in a practical sense.

Q286 Chair: Just to wrap up this topic, it is 18 months since the Government proposed there should be a single counterparty. They have now come up with something quite different. You have acknowledged that there are at least arguments that deserve to be heard in favour of it. How long do you think we should wait before a decision is made, given that, for example, EDF said to us last week that they need this Bill to have Royal Assent by the end of the first quarter next year? Are we going to spend the summer debating the single counterparty, the alternatives, the merits and so on? Don’t you feel we have got to the point where the decision should be made-maybe this afternoon by the Secretary of State when he comes to our Committee?

Nick Winser: To follow my previous comments on this, these are going to be enduring, longterm relationships and arrangements, and it is very important we get them right. Seeing the debate about single counterparty, which we have seen in the Delivery Board and through the expert groups, there is some urgent work going on. As Mark says, that does not seem to us to have a very long lead time to bring it to fruition. However, I do think it important that it is well thought through before a final decision is made.

Q287 Barry Gardiner: Do you regard the setting of the CfD strike prices as a part of energy policy making?

Nick Winser: Certainly in the early operation of this, we would see it as part of setting energy policy, and we would not expect, as operator and administrator of this, for National Grid as system operator to be setting those prices. I caveat that just slightly, because we all share an ambition that, as soon as these technologies come to maturity and can engage in single lowcarbon auctions, there will not be the need to set those strike prices when you can get enough contestability in that lowcarbon sector. At that point-

Q288 Barry Gardiner: Things will move on.

Nick Winser: Things will move on, and our role still will not be to set those prices, but we will essentially run the auction that discovers them.

Q289 Barry Gardiner: But DECC has proposed that, as the system operator, you will make recommendations for the CfD strike prices, haven’t they?

Nick Winser: There is a distinction we are drawing here between advice to Government, in which we do have a major role as being the centre point of providing lots of advice on how this should operate, but then very much deferring to Government to make those decisions that are energy policy. Obviously that raises the question about how customers can be content that that advice is absolutely evenhanded.

Q290 Barry Gardiner: Mr Winser, sorry, but you are taking me off on a sidetrack from the essential question here in your discursive response. What I am seeking to get at here is this: in response to my previous question, you said that you did not regard the setting of the CfD strike prices as primarily your job-that it was part of Government policy and Government should do that. Then I said, "Nonetheless, Government has charged you with giving them advice on that." The first thing I want to know is why you are comfortable exposing that discrepancy, in your view, as to what you should be doing and what Government has asked you to do. You were very clear in your response on the first question not to take a stance that was setting yourself an independent view of Government, but said that this was something that was a consideration and it was an iterative process that you were discussing. Here you have quite candidly come out and said that you do not regard this as your job, despite the fact that Government has asked you to do it.

Nick Winser: I do not think the Government has asked us to set strike prices. I think the drafting says the Secretary of State or any-

Q291 Barry Gardiner: "Propose that the system operator will make recommendations for the CfD strike price".

Nick Winser: Yes, but we are drawing a distinction between making recommendations and making the decision, which we will not be reckoning to do. We will reckon that that recommendation that we make will be based on analysis that will be very transparent and tested by stakeholders. If you like, we will be running analysis that is defined to be run. We will hopefully run that very professionally and in a very transparent way, and we will provide the output of that. But the decision will be with Government.

Q292 Barry Gardiner: So you won’t make a recommendation or you will make a recommendation? Are you just providing the stats upon which the Government and the panel will make the recommendation, or are you actually making a recommendation?

Mark Ripley: We would not be making a recommendation on what the strike price should be.

Q293 Barry Gardiner: But that is what the Government has asked you to do.

Mark Ripley: Our understanding is that we will be providing analysis and economic modelling, and the detail of how that is kicked off, in terms of scenarios that they would like us to do, is still to be defined. We will then provide information with Government about what different strike prices might achieve, in terms of deployment of lowcarbon energy and how that might progress to carbon reduction targets. That could be worded as being a recommendation on what the different strike prices might achieve. The decision on which scenario of strike price to adopt we would see entirely as a matter for Government.

Q294 Barry Gardiner: Are you confident that National Grid has the capacity to take on the sort of analysis that is required here?

Nick Winser: We are confident of this. We obviously run the system day to day and do an awful lot of analysis around that. We also in recent years have developed a very substantial capability to look at future energy scenarios, which we have felt really was part of our current job, to inform discussion in the industry. We will want to enhance that capability and we are working very hard on that, but we already publish to the industry very long-range scenarios that we can build on, with additional input to give this advice.

Q295 Barry Gardiner: Fine. So you believe you have the capacity, and on the basis of that transparent analysis and data you will then make your recommendations, and Government will then set the strike price.

Nick Winser: We will give a series of scenarios, with what we think would be the implications of different strike prices, to go to Marks’s point.

Q296 Barry Gardiner: What happens if the panel of experts scrutinising your submissions disagrees with your recommendations?

Nick Winser: We will want to understand exactly why they disagree, take on board their comments, and provide further evidence and analysis, playing through and making sure that they get comfortable that we have analysed the position correctly and robustly, and taken on board all their comments and concerns.

Q297 Barry Gardiner: So there will be a discussion between you.

Mark Ripley: Check and balance.

Nick Winser: Absolutely. I see them very much as being there to help make sure that we are doing an excellent, professional job.

Q298 Barry Gardiner: DECC has said that there might also be a role for the Committee on Climate Change, and also for Ofgem, in advising on prices. This is going to be quite a debate, isn’t it?

Nick Winser: Of course, the Committee on Climate Change works very closely with Government and DECC anyway to advise on the achievement of the targets, and indeed the setting of the targets themselves. Clearly, they will be involved anyway with Government. There is a question being debated about whether they sit in any of the framework exactly around EMR, but they will be in play anyway. Ofgem of course will have a role, we very much expect, in scrutinising our performance and how we do our job as the administrator and the delivery party for EMR, much as Ofgem today look at an awful lot of analysis we provide about future security of supply and today’s security of supply. They have some real expertise and they are clearly going to have expertise to contribute; there is a good debate about where exactly they fit into those arrangements, but certainly they have some value to add.

Q299 Barry Gardiner: Do you have any concerns whatsoever that having the Secretary of State, the panel of experts, the National Grid, Ofgem and the Committee on Climate Change all involved in this decision about strike prices-having this great debate that you have talked about-might be an overcomplicated structure?

Nick Winser: I know that given the way you have put the question, it is difficult not to say this-

Barry Gardiner: It is a simple question, though, isn’t it?

Nick Winser: But I am going to say "no", and let me try to explain that, because it was a very well-put question. In my mind, each of those bodies has a very clear, distinct role in what is going on.

Q300 Barry Gardiner: Just like the Bank of England, the Financial Services Authority and the Treasury did?

Nick Winser: I won’t comment on that, but just give me 30 seconds to play with this. In my mind there is a very good, distinct role for each party. Ours is to provide the mechanics of running scenarios that will be developed, and discussing with stakeholders and the expert group what sort of analysis we should play. We turn the handle of the analytical machine to make sure that everybody can see the various implications that come out of data. Ofgem oversee that, and it is very important that they oversee that we are doing a good and professional job. Government makes the decision, having looked at that array of different things.

Q301 Barry Gardiner: Mr Winser, I understand what you are saying. You are saying that it may be complex, but actually everybody has a distinct and disparate role within it.

Nick Winser: And I think it is very important that we make sure it is clear.

Q302 Barry Gardiner: Can I just ask you one further question, then, on the back of that? Do you think that an investment committee looking at that structure, taking even into account all that you have just said, is going to say, "Well, this looks like a good idea, putting our money into this investment, with this structure regulating the strike prices," or are they going to say, "And what’s this guy supposed to be doing? What are these people supposed to be doing? Oh, to hell with it"?

Nick Winser: I believe this structure should give enough certainty to investors.

Q303 Barry Gardiner: It is not the certainty but the complexity I am asking about.

Nick Winser: I am casting my mind across other areas of investment, and all the complex things that any company of any size has to take account of. Most investment decisions are quite complex and have multiple actors in play. It is not immediately apparent to me that the complexity of what you have described means that those investments would not be able to go in. Obviously the Committee has taken direct feedback from those who would invest in these assets; that is not us, so I think the Committee really should weight its feelings on that to the direct feedback you have had from those who would make those investments. We can only stand back and comment from the sidelines.

Q304 Chair: Given that quite a lot of investment will be made before they know what contract they are going to get, because the timing of when the contract is sealed is after quite a lot of work has been done on the project, isn’t it quite important that, whatever system is set up, people can at least try to have some predictability on what kind of contract environment they are going to be working in to make that preinvestment? Obviously, if the contracts were awarded straight off before you made any investment, we would have a flood of contracts lying all over the place.

Nick Winser: I will let Mark take the detail, but in principle, back to my point about all investments, there is a prefinal investment decision phase to all big investments, and I would say there is always the need for companies to go through some of that on a speculative basis before they can get to a final investment decision.

Mark Ripley: I think this is a distinction between the strike-price-setting process and the access to that strike price as a product for an investor on an enduring basis. The technical expert group will provide a degree of quality control on the modelling we have done-is it robust? Are the conclusions credible? Those will be a range of conclusions. Then, as we say, the Government will make a decision about which of those outcomes it sets as its policy. The Government is talking about setting a fiveyear delivery plan, where those prices would then be in the public domain with the terms of the contract and available for a period of five years until the next delivery plan.

There is some detail still to be worked out about the point at which a project actually becomes eligible to sign a contract in its lifecycle-is that its final investment decision or is there some kind of preallocation process?-but in essence, the intention is that the investor will have visibility of the strike price for its technology and the terms of the CfD contract for quite an extensive period once it has been set for that fiveyear delivery plan.

Q305 Dr Whitehead: Do you think there is a role for demand reduction in EMR, and if so, what do you think it might be?

Nick Winser: Yes, we do. We think not only should there be a role for demand reduction, but we are very interested in how storage fits in and how interconnectors fit in. We do already use demand reduction very substantially in the balancing services that we currently procure under this thing called STOR, and we have bought demand reduction for those purposes for many years. Mark, do you want to talk about how that might exactly fit in?

Mark Ripley: Just to build on that, in terms of STOR, at any one time. Perhaps one third of our service is procured from the demand side. We have done a lot of work with demand providers and aggregators to enable us to bundle up a number of smaller demandside players to create a significant service. However, it is worth bearing in mind that the services we have produced so far have been short term. They have been measured in hours, rather than days.

Q306 Dr Whitehead: So it is demandside response we are talking about here?

Mark Ripley: Yes. Thinking ahead to a world where we have large amounts of wind generation, and where, for periods of time, the wind does not blow, there are not yet demand services that have come forward that are available for a number of days at a time. We see it as very important that the design of things like the capacity mechanism is such that it can accommodate the demand side in the future. We have certainly talked within the capacity mechanism expert group about setting up a pilot project that we would run to try to facilitate demandside responses and encourage them into the market. It is very much a part of the future, but the services for longterm demand reduction are still at a fledgling stage.

Q307 Dr Whitehead: You have been looking at this. Does that mean that you are involved with, I presume, a working party of some description working on the questions of both demand reduction and demandside response? The Bill states: "we are currently reviewing the potential for incentivising further demand reduction in the electricity sector. This work will report over the summer, in time to fit with legislative timetables, should it be required." I would assume you are therefore involved in that work, are you?

Mark Ripley: That work is feeding in to the capacity mechanism working groups with DECC, yes. As we said earlier, we are able to provide a perspective of the system operator-the practical limitations and things you can do-so we are able to explain and help understand things like how STOR works, how frequency response works and what demand does now to provide some background to the development of broader services in the future.

Q308 Dr Whitehead: We are still talking about demandresponse though, aren’t we? What is in your mind, or in that of this working group you are involved in, on permanent demand reduction, as such?

Mark Ripley: We have been looking at it from the demandresponse perspective in that group.

Q309 Dr Whitehead: So you are not looking at demand reduction.

Mark Ripley: We have had some briefings by DECC about demand reduction targets. We are not directly working on demand reduction at the moment.

Q310 Dr Whitehead: I note that you have predicted that peak demand is likely to be down to about 57 to 59 GW next year. That is about 10 GW down on your predictions six or seven years ago. Have you analysed why that is so? Clearly, you must have analysed why you made those predictions. What is your view on why that is the case?

Mark Ripley: We have. This is probably an area where it might be helpful for us to write to you because I am grasping for figures from memory. We have done some analysis. Demand has come off and will remain low. Recessionary effects have played into that, and our assessment is that, as recessionary effects subside, you would not return back to your previous level of demand, because energy efficiency would reduce overall demand in that space. We have assumed some demand reduction, but as I say, if it would be helpful for the Committee we can provide further detail on that analysis.

Q311 Dr Whitehead: That would be very helpful, but have you added to that analysis, in terms of your discussions with what DECC is clearly undertaking and your analysis of reduction in capacity, whether there should, for example, be a feedin tariff for energy efficiency perhaps coming forward into the Bill?

Mark Ripley: We have not had a direct discussion on the feedin tariff for energy efficiency; we have looked more in the realms of how demand can provide capacity rather than feedin tariffs. That is not something we have looked at in depth so far.

Q312 Dr Whitehead: Have you looked at how capacity mechanisms might enhance longer-term storage, as opposed to the STOR system-that is, development of longer-term, larger demandresponse storage arrangements, a sort of son and daughter of Dinorwig?

Nick Winser: We think it is very important that the capacity mechanism either accommodates those sorts of resources or has a development path to do so, because the three that we have talked about-storage, interconnectors and demand side-are going to be incredibly important in that. They have very different characteristics to a piece of physical generation plant. We need to make sure the design adequately picks up those different attributes, and there may be the opportunity to incorporate them on day one, or there may be a journey where we, as Mark laid out, try to pilot some way of dealing with those resources. Let me say, though, it seems to us that it is very important that those resources get captured as effectively as they can.

Q313 Dr Whitehead: It being important, do you think there are specific items of legislation that need to be incorporated into this Bill in order to enable that to happen?

Nick Winser: At the moment the critical debate is about the exact design of the capacity mechanism. As that goes through the expert group, we will want to see how that picks up on those resources other than fossil fuel generation. One of the critical things as DECC settle on the design is to look at whether that design can accommodate all four types of resource. That is the first place we are going to look for that, because if that can be incorporated easily in the capacity mechanism, that is a good way of doing it, as well as in STOR, which is where the demand side has a significant opportunity to contribute. In STOR the delivery duration that we need is quite short, because STOR is to manage the short-term perturbations on the system. It plays very strongly in there; we want to see whether it can play strongly in the capacity mechanism.

Q314 Dr Whitehead: One of your non-regulated businesses is interconnectors.

Nick Winser: Yes.

Q315 Dr Whitehead: How do you relate what you are doing and what you wish to do on interconnectors with that process of demand-side response and demand-side reduction?

Nick Winser: There is a debate about the design of the capacity mechanism and whether interconnectors themselves, or the resource that is behind interconnector flow, can play into that mechanism. That comes to a very interesting debate about the capacity mechanism being there for, if you like, low-frequency events-events that do not happen very much, such as if you have a particularly cold snap with perhaps low wind conditions.

Part of the design of the capacity mechanism will be about how you get assurance in those infrequent events that the flows will be there. You can imagine, as you start to think about interconnectors, that it is interesting to try to think about how you would get assurance. That is not to say you cannot, but it is clearly different to getting assurance that a piece of physical plant that is in Great Britain would be there to contribute, and having the ability, potentially, to ensure that it is run and to ascertain that it will be there. The difference with interconnectors is that the interconnector itself might be there, but will they flow in our direction?

Obviously, more broadly, the market mechanisms between us and other member states should incentivise, and do incentivise, interconnectors to flow towards the country that needs them the most. We need to think about how it fits with the existing arrangements as well.

Q316 Dr Whitehead: What percentage of our capacity would you think ideally should be provided by interconnectors, in terms of the ambitions of this Bill and the relationship to demand-side response and demand reduction?

Nick Winser: I am not sure I see it in the context of the Bill. In our energy studies we look at levels of interconnection. Along with many other people, Pöyry published a study with a lot of interconnection in it. It is a very interesting thing. Some years ago the European Commission postulated that 10% looked an interesting number.

Q317 Dr Whitehead: Do you agree with that?

Nick Winser: We are currently a long way below that. When you think at the highest level about a single market, if you have not got adequate transport to move the product around a single market, it does not actually turn out to be a single market. Looking at 2030, 2040, and 2050, my own view is that getting up to that sort of 10% level to allow renewable resources to flow more easily across Europe seems to me to be a very valuable opportunity that we need to look at, so that when there are high wind conditions in Northern Europe, we allow interconnectors broadly to flow south, and when there is high solar in Southern Europe, we allow interconnectors to flow north.

Q318 Dr Whitehead: In terms of that magic number, we are about 7% off, aren’t we?

Nick Winser: Yes.

Q319 Dr Whitehead: Would you welcome a capacity mechanism being applied to the development of interconnectors?

Nick Winser: There is another debate going on about interconnectors, which comes into the frame. Ofgem are currently looking at what the right regulatory model is for interconnectors. Clearly, in the past the model has been that they have been built on a merchant basis. There has been comment that that could systematically underbuild interconnectors; there is some sort of energy economics that sort of says that might happen. There are debates going on with Ofgem about the overall market arrangements, and whether some sort of hybrid regulated merchant model would be better at bringing forward interconnectors. This interacts with that debate as well.

Q320 Dr Whitehead: Bearing in mind that we are about to produce a piece of legislation in which capacity mechanisms will feature quite substantially-and clarity, as we have heard previously, will need to be sought on what is in capacity mechanisms when capacity auctions will be held and so on-isn’t that a rather urgent consideration, rather than an interesting debate?

Nick Winser: As we see what the exact design is of the capacity mechanism coming forward, we will have to see how it fits with the emerging thinking on what is the best way to regulate interconnectors. At that point, we have to look at that and make sure either that it fits together immediately, or that we can see a path of development for the arrangements forward to ensure that, as best we can, the right level of interconnection gets built, either funded through a hybrid regulatory model or through the capacity mechanism. That is complicated, but it is where we are, and it is a sensible place to be to make sure those things are joined up well in the short term.

Q321 Chair: On this question of interconnectors, I draw attention to my entry in the Register of Interests as a Director and shareholder of Eurotunnel, which has announced that it is considering building an interconnector through the tunnel. Interconnectors, as Dr Whitehead mentions, are an unregulated part of your business. Do you have any difficulty in resolving conflicts of interest about whether to grant access from the proposed interconnector in which you have an unregulated financial interest to the grid?

Nick Winser: No, because we separate those considerations out completely in our business, and we are overseen very closely by Ofgem in making offers to any interconnector project on an absolutely non-discriminatory basis. Ofgem do a very thorough job of making sure that is all done in that way, and done properly.

Q322 Chair: Does that include making offers to yourself?

Nick Winser: Ourselves with partners-we normally develop interconnectors with partners, and we apply business separation rules, as we do in many parts of our business. We have to demonstrate compliance with those business separation rules to Ofgem, which ensures that all decisions are being made properly on a non-discriminatory basis, and in the best interests of customers.

Q323 Dr Lee: In listening to all these questions, I wonder whether you are the vicar at a wedding where, as the bride is coming down the aisle, they have not decided on the order of service, the flowers, or who is paying for it. Is that how it feels?

Nick Winser: It does not feel like that to us. We are very aware of the urgency of working through this and very strongly believe that delivering these two mechanisms in a working state in 2014 is very important, both for delivering the environmental targets and security of supply. As always in these processes-as when we did NETA and BETTA, and put in place the arrangements back in 1989 in this industry-it feels frenetic. It feels like there is a lot to do, and we are working very long hours to try to do that responsibly and professionally. It feels like those processes did; we are very busy, and that is because we are very anxious to do a good job and get this done in time for 2014.

Q324 Dr Lee: Forgive me, but I do not find that terribly reassuring. I look at this and I think, "Is this just not some complex, glorified PFI?" Is there not a sense about all of this that it is an exercise in trying to incentivise private investment with Government subsidy? I cannot work out whether the goal is energy security, low carbon, or industrial activism; I cannot work out what the primary goals in these documents are. Be honest, if you can: would you design energy policy like this? I think it is like coalition politics. It is hiding nuclear subsidy. It is a dog’s breakfast, isn’t it?

Nick Winser: We think that this Bill has the right mechanisms at this time.

Q325 Dr Lee: At this time. In 20 years’ time, are my successors on this Committee going to look back and go, "God, they got that right. Didn’t they see the future? Wasn’t it a fantastic mechanism?"?

Nick Winser: I very much think so. We are extremely clear that, at this point, to hit the environmental targets-to get the investments into nuclear, renewable, and CCS-we will need, at the very least, more predictability of future revenues. There are all sorts of good reasons for that around the types of technology and their place as either base load or intermittent. The centrepiece of the Bill is about giving more predictability to future returns when there are very substantial capital costs up front, which investors will need to have bankable arrangements around. It is absolutely in the right place.

Q326 Dr Lee: We are hearing completely the opposite with regards to what the investment community think. This is also an exercise in pushing the risk away-mitigating the risk. The single party/multi-party is all about: "We do not want that on our books. We are not going to cover that risk." Would you invest in a situation where the sands are shifting so much?

Nick Winser: On risk, the development of these mechanisms should and does try to make sure that the right risks are placed on each party.

Q327 Dr Lee: What does that mean?

Nick Winser: For example, one of the things that is going on in the development of CfD is whether non-fossil types of generation resource should be exposed in their future returns to the cost of fossil fuel, because they are not using fossil fuel. That is one of the centrepieces of the CfD.

Mark Ripley: The CfD is an intervention for renewables.

Q328 Dr Lee: It is a subsidy, so it is not an intervention. Call it what it is.

Mark Ripley: Support, subsidy-support is the way I usually think of it. It provides protection for the renewable generator against the volatility in, for example, the gas price. If the gas price were to crash and if they had a plain feedin tariff, then their returns would crash, and that built-in risk needs to be priced into what they originally want. Conversely, if the gas price were to go very high, it provides protection for the consumer, in as much as there would then be a clawback from the renewable generators to consumers.

In a world where it is very difficult to predict energy prices and fuel prices 15-20 years out, the CfD, for us, provides a good balance between certainty and predictability for the investor and for the consumer.

Q329 Dr Lee: It does depend on what this Energy Bill is for. Is it to deliver affordable energy to the consumer? Is it to deliver energy security? Is it to deliver low-carbon targets? What is the number one priority? If you throw into the mix placating Liberal Democrat policy on nuclear power going into the election, it becomes a complete blancmange; it does not make its mind up. If you were making your mind up about energy prices going forward or low carbon, you would be going nuclear hell for leather at the moment. I do not know anybody who thinks seriously about this that comes to any other conclusion, purely on low carbon. It might be that you think it is affordability to the customer, because nuclear is more expensive than gas, but let us decide what it is. At the moment it seems to be trying to set out to please everybody and ending up pleasing no one.

Nick Winser: Can I debate exactly your question? You asked whether it is about affordability, security of supply, or environmental targets.

Q330 Dr Lee: I think you should decide what it is.

Nick Winser: I would absolutely say that it has to be about all three. We know that those are absolutely connected at the moment, and if it was not about all three, then I would say to you that it should be. It absolutely is about all three of those things.

Q331 Dr Lee: If it is about affordability, it is gas. We should just be getting gas. I am not saying it should not be about affordability, but I do not quite know what the target is.

Nick Winser: That is why it needs to be about all three, because if it was just about affordability we would not hit legislative targets for environmental reductions. It is very clear to me that this is the right way to hit those legislative targets, to deliver security of supply, in the most affordable way for customers. That is exactly what this Bill does, and exactly what the Bill should do.

Q332 Dr Lee: Just one final, final question: if it is about affordability, why is it better for private companies to be incentivised by taxpayers’ money to go and borrow money from the money markets than for the Government to just borrow the money? Tell me how that fits in with it being cheaper for the customer, because I cannot see that.

Nick Winser: We have a model of an energy market here that is about it being financed by private investment; that is a huge policy issue.

Q333 Dr Lee: Yes, it is a trend throughout Whitehall, which we are seeing the manifestations of this afternoon on the health service in South London. I would suggest that maybe we might have realised that it might not be the model that we should use for our energy infrastructure.

Nick Winser: It is interesting to look at the development of gas security of supply over the last decade in that context. Clearly we have seen a period of substantial decline of UK and continental shelf gas supply. Private investment has come in extremely effectively to invest billions to give security of supply on gas, through what is a very significant shift in the sources of gas. That has been very effective for customers. It is a model that has been tested and has done well.

Q334 Albert Owen: Can I come back to the capacity mechanism, and in particular the answers you gave to Dr Whitehead about the interconnection? How compatible do you think this capacity mechanism is with that, honestly? If we are talking about building up our own capacity here in the country, and having a mechanism for that, you say there needs to be interconnection and we need to increase that, but is that not a conflict in some way?

Mark Ripley: There is clearly a debate going on about the nature of the capacity mechanism; there are models ranging from what you might call a financial reliability option through to a very physical option. Interconnection is able to play in those markets with different degrees of ease, and the financial model is easier for interconnectors to play in, although with the financial model you do not have that certainty of being able to point at a physical plant and give reassurance to consumers that we have the hardware to keep the lights on.

What you do need to do in terms of interconnection, and this is part of the modelling work we are looking at and increasing our capability in, is, at times of system stress, what is your expected flow either into or out of the country via the various interconnection points? That helps you understand what you need in terms of capacity, because that is, if you like, a demand influence.

In terms of interconnection playing in the capacity mechanism, that is certainly going to be influenced by the design; in terms of what you need in terms of capacity, you have to have some assessment about energy flow in or out of the country at times of system stress.

Nick Winser: It could be that interconnection is very difficult to accommodate, and you need that to be picked up in a different way through some sort of hybrid regulatory approach to interconnection. The capacity mechanism would build off the back of that by needing to have an assumption about how much flow would come from interconnection in times of system stress. They need to fit together.

Q335 Albert Owen: How confident can we be that we will know the volume of required capacity in four years’ time?

Nick Winser: We have a long track record of making those forecasts and inputting those to Ofgem to look forward. There is bound to be uncertainty in play, but quite a few things are known. We know the volumes of LCPD opted-out plant, for example. We have already discussed the demand forecasts, which I admit vary from year to year as we look at the prospects for the economy as part of that modelling. We are certainly able to come to quite sensible views that are much better than leaving it to play out, able to observe the market and able to think about what might be sensible interventions.

Q336 Albert Owen: Are you confident that you have got all your past predictions right? Isn’t there a huge gap now of about 10% over what you predicted would happen four years ago? That is external factors, I understand.

Nick Winser: Yes. I think probably if you dug into it, it would be fair to say to us that we did not predict the recession correctly.

Q337 Albert Owen: You would not be alone in that.

Nick Winser: We would not be alone in that, I think. It is an emerging view of the economy that is bound to go into here. That variability from year to year in the strength of the demand curve is an important input, but the other things going on are of a larger magnitude. The amount of generation that we know we will need to close, as other people before the Committee will have said, is very significant in context. It is not that the uncertainty around the demand curve is so large that we cannot take any view of what the likely security of supply needs will be in the future.

Q338 Albert Owen: Should the Bill define a standard of reliability for you to meet, as the system operator?

Nick Winser: We think it is straightforward: to run the capacity mechanism, one would have to define what output we are trying to have, and that would be in the form of defining a security of supply standard. We think that will need to be developed as part of this work.

Mark Ripley: That will be helpful, because historically we have based our capacity assumption against what you might call a traditional backdrop of generation, where the ability of the operator to dispatch it is entirely within the operator’s control, whereas if you move to a world where you have a significant number of wind generators, as you know, that is dependent on weather.

Part of the analysis that we would do, and talked about earlier in terms of making recommendations, is in saying what we believe would be that deployment of low carbon. If that is, for example, very deep deployment of wind, that gets you to one answer with regard to what you need in terms of capacity, compared with having a very deep deployment in nuclear, which is more within the control of its operators.

Moving from a world where you could talk about a gross margin figure, some kind of standard against which you can judge different backdrops of generation would be helpful.

Nick Winser: We quite often stumble across this in discussions with stakeholders; some objective way of discussing future security of supply will be useful to everybody.

Q339 Albert Owen: We have the standard of reliability. Do we then need an auction? If you are predicting it and it is all standardised, why do we need the auction process?

Nick Winser: The auction would then be a piece of that that was used if it seemed that there was not, if you like, naturally enough generation coming forward to meet that security of supply, and then the capacity mechanism kicks in with an auction to give additional funding to get the top-up that is needed to bring us back into the security supply standard.

Q340 Albert Owen: You can understand the frustration of this Committee, because some of the witnesses we have had, including you, are saying, "We need a debate around that," and we have had 18 months to have that debate. In your written evidence to us-you are aware that the Government Ministers will take into account what you tell them-you write: "The policy decision on the capacity auction volume of payments would be done by the Government. We anticipate"-that is you-"that we will present DECC with a number of modelling scenarios via the delivery plan to allow Ministers to make an informed decision." We have got the Minister coming in this afternoon; shouldn’t we be asking him, "When do you expect to receive this from the systems operator?"

Nick Winser: That is probably not very well written, when you read it out.

Q341 Albert Owen: I did read it verbatim and I took my time.

Nick Winser: It covers two very different points. It says that the debate is going on; that delivery scenario is reference to the enduring, not the design. That is reference to us coming forward with a delivery plan of an enduring nature; that is perhaps the debate with Mr Gardiner. That is us coming forward with scenarios in a plan as part of the enduring operation. Perhaps those two sentences sat slightly too close together.

Q342 Albert Owen: When could Ministers expect you to come up with these options for them to take decisions?

Nick Winser: The delivery plan we will start to work on soon.

Mark Ripley: There is a slightly hybrid approach at the outset, because Ofgem has duties under the previous Energy Bill to do a capacity assessment, and we are working with them to produce that. I think that is due to be published in the autumn of this year, which will give a view four years out. That will feed into the analysis we are doing about low carbon for strike prices. We would do an assessment of the likely deployment of low carbon against different strike prices, and with that an assessment of what you would need in terms of capacity and an assessment of what we believe would be there. That suite of information goes to Government to make policy decisions. This would look at least four years out.

Q343 Albert Owen: Is that not available now?

Mark Ripley: We have assessments of capacity adequacy now, yes.

Q344 Albert Owen: If we asked the Ministers this afternoon the very same question, they will say, "Yes, we have seen these models, and we will be making an appropriate decision soon."

Nick Winser: These are models that will be established as part of the operation. We do similar work now, which informs Ofgem Security Supply Statement that comes out in the autumn, but it is not the same. It is just a straightforward security supply adequacy statement, which is made each year.

Q345 Albert Owen: I have one final point to make. I agree with you, Mr Winser, when you say that there is not a conflict between getting security of supply and getting the capacity up to speed for the future, and the main tenets of the Bill. But when it comes to the lowest cost for the consumer, I do not see an awful lot in that Bill, or the Government saying, "That will be the outcome." Will, in your opinion, the price of electricity in future be cheaper than it is now, after all these mechanisms are put in place?

Nick Winser: I think these mechanisms will deliver the environmental goals and a satisfactory level of security of supply at the most affordable cost for customers, yes.

Q346 Albert Owen: Do you think electricity will be cheaper in the future? That is what the Minister is telling us, on the Floor of the House.

Sir Robert Smith: Are they not saying that it will be cheaper than it would be if we did not do anything?

Albert Owen: That is right, okay. That is the question and I will ask it.

Nick Winser: I always think it is a complex way to put the point.

Sir Robert Smith: Hear, hear.

Nick Winser: I do think technically it is right. I think there are such possible variations in the other prices of energy globally-coal and more particularly gas-that the thing that you can say about these measures is that they will provide the most affordable way of hitting the environmental and security targets in an acceptable way.

Q347 Albert Owen: To go back to what you were saying, we need a debate on this, don’t we? We need an honest debate on this and to connect with the public, and we are not doing it at this moment in time. Perhaps this Bill was an opportunity to have that debate, or certainly have something in the Bill that says that one of the goals alongside environmental targets, and alongside security supply, is the lowest possible outcome. Is that the way you see it?

Nick Winser: In our whole role in these arrangements, and more broadly, we have very much embraced the need for as much transparency as possible about the trade-offs that are being made and the likely consequences, so I very much support that.

Q348 Chair: Are there any lessons we should learn from your experience of the capacity markets in America, where you have got substantial businesses? I think DECC have looked at quite carefully at those markets in trying to propose what they are here.

Nick Winser: We have looked closely at them. There are all sorts of lessons, both positive and negative, coming out of those. We have, for example, seen substantial demand come forward as a resource in some of those auctions. Mark, you have probably looked more closely at that.

Mark Ripley: We have looked at it, but I think some of the capacity mechanisms in America have not been designed for this particular issue. In the past, we have had capacity payments in GB, which has effectively been a twin price model for energy, whereas the problem we are looking at now is how you make sure you have got sufficient plant on the bars, when it would probably be built to be mid-merit, because you want your low carbon to run in the first instance.

While there are lessons to be learned in the US, it is not a direct comparison of what you are trying to achieve. One of the things that we have discovered in the US is that demand side-which Nick has just mentioned-has been talked of in quite warm terms, but when you look at the detail, it is, again, for quite short periods of time, measured in single figures of hours. We are looking at what is going on in the US, but looking at it with the lens of what we are trying to achieve over here, which is to ensure we have enough plant on the bars, it is quite likely to be plant that will be essentially mid-merit, rather than base load, in the first instance.

Q349 Chair: Finally, I have a quick followup on Mr Owen’s question about whether prices would go up more than they otherwise would have done if these measures were not proposed. Forgive me if I was not attending, but am I right in assuming that the more successful we are at producing renewables, the less actual use of base load power there will be, and therefore the cost per unit for the consumer of maintaining that base load actually rises if we are successful at deploying renewables?

Nick Winser: That is why we think it is very important to look at not only generation in the capacity market but, if we can, other resources. Yes, essentially you are spelling out one of the reasons why, outside of CfD, you need to have a capacity mechanism, because you drive down the utilisation of the fossil plant, with the low carbon resources that we see coming forward at the moment. That is one of the rationales for the capacity mechanism. We will be very keen not just to see that being met by fossil plants. Looking at storage, interconnection, and demand-side resources should help to mitigate that.

Q350 Sir Robert Smith: I should declare my interest in the Register of Members’ Interests to do with the oil and gas industry, in particular a shareholding in Shell. I wondered if you could outline, for the record, what different business units there are in National Grid. We have already heard you have an interconnection unit and you have North American assets.

Nick Winser: We have Grain LNG, electricity transmission, gas transmission, gas distribution, metering-did I miss anything?

Mark Ripley: Interconnectors and offshore business.

Nick Winser: A business that looks at offshore transmission built.

Mark Ripley: National Grid Carbon in GB.

Q351 Sir Robert Smith: Looking at all those different businesses, do you see any conflicts of interest arising from your role with CfDs and the capacity mechanism, and what might be in the interests of your business as opposed to in the interests of the country?

Nick Winser: We are very mindful that people have raised potential conflicts of interest. Those are, by and large, covered off already by business separation requirements, which Ofgem have asked us to meet and that we report on routinely to Ofgem. For example, on gas transmission and gas distribution, with independent distribution networks also out there, there is a potential conflict of interest there.

We have to submit to Ofgem a detailed statement on how we organise our business and how we restrict, in particular, data flows, and how we have independent management, such that that potential conflict of interest does not confer advantage to our businesses. It is an example of many lines that we draw through our business. We then account to Ofgem for our management separation and data control, and that is something that we have to take very seriously.

Q352 Sir Robert Smith: Other countries have gone the whole way and used an independent system operator-separate, without any conflicts of interest. What is the reason for not doing that in this country?

Nick Winser: This exists pre-EMR, so let me take it at that level as well. There are very substantial benefits to customers from managing the TO and the SO tightly together. I use that word advisedly. We manage it tightly together, because when we look at the generation that is likely to come on the system in the SO, it is absolutely critical that we take account of the configuration of that generation on a day-to-day, minute-by-minute basis, and maximise availability of the critical transmission assets-the physical lines out on the system.

There is a lot of money in play with this for customers, and we have made very strong representations many times over the years that that integrated approach to managing the SO and the TO is important; it remains important. The adding of EMR does not change that; we need to ensure we do not undo those benefits for customers, because they have been worth hundreds of millions of pounds.

The Government has reached for National Grid, or the system operator, to administer this, in part because it saw other synergies and other benefits for customers in managing all this together. We need to make sure we capture those, but also absolutely make sure that it does not raise further issues about conflict of interest. For example, we would expect the information that we get for EMR to only be used for EMR. We would expect, and are very likely to have, a data restriction on keeping that information just for purposes of EMR. There are all sorts of requirements on us in this area; it is part of our business, and we are used to managing it.

Q353 Sir Robert Smith: Does the different model in Scotland produce extra costs for managing the Scottish grid?

Nick Winser: We think it is very difficult to drive the same efficiency without an integrated SO/TO, and we have commented on that in the past. Clearly the arrangements that were put in place at BETTA do give many benefits: we had to come up with the charging arrangements, a single point of application for connection, and managing the systems together, so lots of good work has been done.

We would still argue quite strongly that managing the SO and the TO in an integrated way is very important. Most of those benefits historically have played out in England and Wales, because one of the profound transport constraints on electricity is something called flow south, which runs across the Midlands, and we have to maximise that because generation tends to flow north to south.

Q354 Sir Robert Smith: You seriously do not think that with the advent of EMR your role has become even more likely to lead to conflicts, because the signals you are going to be trying to send to the market will make a big difference to your transmission in gas?

Nick Winser: The potential conflict it raises, which people have raised explicitly with you, and which I absolutely acknowledge, is: could National Grid, through those auctions, pick the wrong generation because it suits some purpose of National Grid? Our operation of those auctions will be intensively scrutinised by DECC and Ofgem, and the data going into it intensively scrutinised, because we will ensure great transparency through the expert panel.

I find it difficult to believe, given the scrutiny and the openness of the arrangements for scrutiny by DECC and Ofgem, and looking at the output, that there is any way-even if we wanted to, which I struggle to understand why we would-that would be the case. Furthermore, everything that we build on the electricity transmission system is already separately regulated, and Ofgem, as you know, is looking at the last five years as we speak and is about to make initial proposals on what it feels about that.

In these reviews and on an ongoing basis, Ofgem look at everything we invest in. If Ofgem felt that we had invested in assets that we should not have done, they have the liberty to completely disallow those investments and give us no return whatsoever on multi-million-pound investments.

Those two things together should give a very high level of comfort to everybody, but we are open to what else needs to be added to the picture. However, we do not want to see the existing benefits of operating the existing TO and SO together unpicked as a piece of collateral damage.

Q355 Sir Robert Smith: One of the other things is that in advising on the CfDs, you might have a propensity, instinctively as a business, to want to see your gas transmission benefiting from gas generation.

Nick Winser: As I say, all those decisions will be very, very open to external scrutiny. Another little example of this is that every day in the balancing mechanism, in the control room, we pick generation to come on the system. When these arrangements were set up in 1989, stakeholders worried whether we would always do that objectively and cleanly. There is an annual audit to ensure we have absolutely followed the exact rules and picked whatever was going to be cheapest for customers. That has gone on every year for 22 years, and always provides certainty to stakeholders that we are doing everything in the best interests of customers.

Q356 Dr Whitehead: Since your whole raison d’être is capacity, isn’t there an overwhelming bias in favour of deciding on measures that increase and maintain capacity, rather than those that de-capacitate the system?

Nick Winser: Increase the amount of generation, do you mean?

Q357 Dr Whitehead: Yes. Both capacity and used capacity.

Nick Winser: We obviously fulfil the system operator role, and part of our job, to acknowledge your question, is to worry 24 hours a day, every day, about security of supply; it is in our DNA. I just wanted to say that to acknowledge your question. The answer to it is the answer about defining a security of supply standard. We need to define something that is absolutely objectively a measure of security of supply that we can, in a mechanistic way, push data through and come up with an answer that says, very transparently to stakeholders and to Government, "This is the picture four years out, this is the picture six years out, and this is how much plant would be needed to meet the defined security of supply standard." That, if you like, checks any natural conservatism that I think you would hope we have in operating these important systems.

Q358 Chair: Very briefly and lastly, you would be disappointed, I am sure, if I did not raise with you in front of the Committee my concerns about my constituency and the impact of your new transmission line, which is proposed to be built in part across an area of outstanding natural beauty in Suffolk. The Minister told the House in March that "Deciding where and how this infrastructure is delivered requires informed and balanced consideration of a number of factors including costs, environmental impact, and the needs of local communities and the country as a whole." How do you make that assessment in practice?

Nick Winser: As you know, we are in pre-application consultation. We make that balance by taking that process seriously and having a very large number of meetings and opportunities for all stakeholders to input into striking that balance between many things, but in particular visual amenity and cost. We are currently in that process, as you know. Ultimately we will do our best to listen carefully to what everybody has to say and, through the independent work that we now have in the industry, weigh up the different costs of delivering the different amounts of visual amenity.

We will go through all of that. Ultimately we will do our best, and we have a very strong incentive to do our best, and to put forward a completely objective view of everybody’s feelings about this and what the data say. The Planning Inspectorate can even say, "We do not accept this application, because you have not gone through the process properly"; that is a potential thing that can happen. We would have to go back to pre-application consultation.

If the Planning Inspectorate believes that we have done a good job of taking all views on board, and have done a professional job of trying to weigh those up in putting forward our proposal, it will allow formal deliberation on that application. The Planning Inspectorate will then take a view, with statutory consultees, as to whether we have balanced those things, and ultimately make a recommendation to the Secretary of State. The Secretary of State will have to take a view on whether we have proposed an appropriate balance between those things. We are working very hard to try to do that sensitively and professionally, and we understand there are very strong views out there, and we are doing our best and, I hope, doing a good job.

Q359 Chair: Do you think that the publication of the Parsons Brinckerhoff study at the start of this year, which produced conclusions that some people might interpret as being different from your earlier claims about the relative cost of undergrounding as opposed to overhead pylons, has altered the debate about whether lines should be overhead pylons or undergrounded?

Nick Winser: I do not think it has changed the debate. I do not think it said anything different from what we had said. It played out as we had always said. To be brief, we had always talked about ratios, as you know, Chairman. That is a way of giving a sense to people about the decision we had made. We had always caveated that very clearly with "it depends how much power you have got to push through it; it depends on the landscape you are going through; it depends on many different things". We are completely technology-neutral in all of this.

What the Parsons Brinckerhoff report did was play out all the detail-and I think it did a good job-around trying to explain, in all those different ways, what the balance of visual amenity versus cost was. We felt it very much supported, albeit in much greater depth, the sorts of numbers we had said. The fact that, at high capacities, the Parsons Brinkerhoff report played out numbers that show a very substantially higher cost for undergrounding than using overhead lines very much played to one of the things that we had put into that debate.

Ultimately, it may be that is a price that society-electricity consumers-feel is worth paying for visual amenity, and we can only do our best in this to listen to views, to look at landscape, to look at environmentally designated areas, and to put forward proposals for others to judge, in two stages, whether we have got that balance right. Our objective is to try to do that professionally and to give those decision-makers the best possible opportunity to strike the right balance for society, individuals, and communities.

Q360 Chair: Finally, do you think it would be helpful if the Bill incorporated wider environmental sustainability criteria? I am not just talking about greenhouse gas emission targets, but wider environmental criteria. Would that be helpful?

Nick Winser: Coming back to the previous point, I think it is very important that this Bill proceeds in its current form. The EMR provisions in particular need to be delivered by 2014 if we are to hit the carbon targets and, looking at the security of supply outlook, if we are to give Government options, in our advice, about whether a capacity mechanism needs to be used. My own feeling on your question is that it is important to get that bit of the job done; I think that is pressing, and we need to work urgently on it. It is through those provisions hitting on very important environmental developments. Whether there is scope in a further piece of legislation for a broader assessment of sustainability, I would have to think about that; I am not sure.

Q361 John Robertson: Why do you think it is that practically every company we have talked to totally disagrees with what you have just said?

Nick Winser: I do not know. I was just trying to give you my views.

Q362 John Robertson: Okay, but surely you have an idea of what has been said to this Committee, and most of them want to throw it out of the window or start again.

Nick Winser: I think these provisions are really important to hit the targets-both environmental and security of supply targets-at lowest cost.

Q363 John Robertson: I understand that; that is not what I am saying. What I am asking you is why you think these companies put forward reasons for not wanting to continue. Is it just purely financial to them, or do they just not care, or are they wrong?

Nick Winser: Having seen their comments, I had not categorised them in my mind as them just not wanting to proceed with this Bill. We had a debate about this earlier, so I apologise if I have got this wrong, but I was of the feeling that a lot of the likely investors in these low-carbon technologies thought the Bill should proceed in some form. They may well have a variety of views on amending the form of it.

Q364 John Robertson: That is true as well-there are some that would want to not have it at all. Others basically want it, yes, but want to go back and start again, and that is not just a few.

Nick Winser: I can only give you my best view, and my best view is that these provisions are our best option to get to the variety of targets as affordably for customers as possible. I will absolutely take the opportunity of picking up with other energy companies, which I already do, and testing out your point, because I think it is very important to listen to other companies.

Q365 John Robertson: I would suggest you particularly speak to SSE.

Nick Winser: Yes, I would have to admit to not having had a detailed debate with SSE recently on this, although they are represented in all of the expert groups where Mark and his team are working. I have not chatted to Ian directly on that, so I cannot really give you a rationale for why we are in different places.

Q366 Chair: Thank you very much for your time. We have overrun significantly on our estimate of how long this session would last, but we are grateful to you. I think that reflects the level of interest from the Committee in what you have been saying and the very important role that National Grid has in the proposed arrangements, so we appreciate that.

Nick Winser: Thank you very much for your attention.

Prepared 20th July 2012