Examination of Witnesses (Questions 460-479)|
TUESDAY 20 NOVEMBER 2001
460. So the implication of what you are saying,
in your note to us, is that people have become comfortable about
the idea of prices having reduced in the recent past, of relatively
low energy prices historically, but they cannot be as comfortable
in the future and we have to adjust to that possibility, and how
people will respond to that?
(Mr Bucknall) Exactly.
461. In an earlier part of your note, you talk
about some of the other measures which need to be taken to ensure
security of supply, and the electricity and gas networks, I presume
by this you mean the transmission networks, in particular, and
that the framework needs to encourage a continuing investment
in that infrastructure. Now I am not quite sure, from your note,
perhaps you would elaborate on that, what sort of mechanisms would
you anticipate seeing in a regulatory framework, or what sort
of signals would you look for, which would help to ensure that
(Mr Lescoeur) The kind of questions we have in mind
are the following. It takes an awful lot of time to have the effect
of investing into a network to increase capacity or security of
supply given to the customer. With a price review period of five
years, in the current regulatory framework, clearly, the regulator
cannot take into account the investments which could be necessary
to start now to deliver a step change in the quality of service,
or the security of the network, in 15 or 20 years' time, or it
is difficult for him to do that; and it is exactly the kind of
problem we wanted to point to there.
462. Okay; but I am not quite sure, in that,
I still found a mechanism which is going to be used, because we
are essentially dealing with, you rightly say, the regulator is
dealing with a maximum five-year time-frame; most companies are
undertaking investments on the time-frames but operating in a
very short-term market, and the Trading Arrangements made it even
more short term. What specifically might be the kinds of measures
that the regulator might take, Ofgem might take, in order to help
to deliver the investment in the transmission network you are
(Mr Lescoeur) I am not sure it depends only on the
(Mr Bucknall) Can I add some comments to that. I think
that one is to have a long-term view, or a longer-term view, of
investment in the network; an issue would be, if a generator comes
to connect to the distribution network, that is seen in isolation,
then someone else comes along a year later, or two years later,
and wishes to connect in the same area, if you had taken a longer-term
view of these possibilities arising then one might develop the
network in a more optimal way than just doing it piecemeal, as
and when, particularly in renewables areas, renewable generation,
they arrive on the scene, so to speak. I think the other area
is, obviously, about the sort of returns that network operators
might expect for investing in the network, particularly to incentivise
development, in areas where there is perhaps less degree of certainty,
and therefore some degree of risk of stranding of assets.
463. One of the things I assumed you might be
contemplating is creating in the regulatory framework the return
framework, or indeed the prices for transmission, paid to the
transmission networks, that they are, in effect, given the incentive
to invest. Now, under those circumstances, would you rather that
they were overinvesting, that, in effect, the capacity of the
transmission network was keeping ahead of any realistic estimate
of your capacity demand?
(Mr Bucknall) I would have thought there was some
case for a modicum of, how can I put it, contingency in investment
in the network, but clearly there is a great risk of gold-plating,
I think that is something we should endeavour to avoid as much
as possible. But, on the other hand, I think the network has been
designed in the past with a degree of resilience, with a degree
of security, and I think we would need to continue to ensure that
464. I think we have anticipated already that
customers, in the long run, are going to have to pay a premium,
over what they would otherwise pay, for environmental obligations;
would you anticipate that customers should, or would, be willing
to pay a premium for security of supply, whether it is standards
of security through the transmission network, or indeed security
of supply in the broader sense?
(Mr Bucknall) I think this is a very difficult question,
it is certainly one that is being looked at in terms of the sort
of incentives the regulator wants to place on distribution network
operators, to increase quality, or improve quality of supplies.
It is very difficult. You might want a lower quality of supply,
but I am next door to you and I would like a higher quality of
supply; how can you deliver that down the same piece of wire.
That is quite difficult, and it is quite difficult to capture
preferences, individual preferences, about quality of supply.
And, I guess, if you ask customers, they will want to have 100
per cent reliability; but how much they are prepared to pay for
that is an open question. But it is difficult to value that kind
of choice, but the more that can be done to do that I think that
would be beneficial.
465. You said in your paper that the proposed
Renewables Obligation is a good example of how intervention to
achieve a particular policy objective can be managed by a market-based
approach, and you stated that again earlier on. Do you think that
the Renewables Obligation provides sufficient incentive for the
sector to grow; if not, what else do you think should be done
to encourage it?
(Dr Porter) It is premature really to
say whether it will deliver or not, because there is a buyout
there and only time will tell; we have yet to see what it can
do in practice. So I am not sure that I can give a better answer
than that to your question; it is something that we shall have
to wait and see. But, as we have said, we do welcome it as a market-based
mechanism; a number of companies in our membership, if not all
of them in the supply business, have moved to introduce green
tariffs, and to promote renewable energy, so the industry is wholeheartedly
behind the use of renewable energy and the promotion of renewable
energy. But, as we know, the target of 10 per cent by 2010 is
a challenging one. We will certainly, within the industry, be
playing our full part in attempting to deliver that, but it remains
to be seen whether there are other factors which may constrain
it, for example the planning processes, which have already been
referred to today, and interconnections of renewables into the
grid system may be another issue. So there are a number of contributing
issues within this, which all need to work, in order for the target
to be met.
466. I am just wondering, what percentage of
electricity is lost in transmission, and what scope have you got
for reducing that loss?
(Dr Porter) The percentage which is lost in transmission,
to precisely answer your question, is between 1 and 1.5 per cent.
The percentage which is lost between generation and final end
user totals between 7.5 and 8.4 per cent, of which 1 to 1.5 per
cent is transmission and the other 6.5 to 6.9 per cent is distribution;
those distribution figures include a figure of about 1.2 per cent
which is due to illegal abstraction, or theft.
467. It is a high-risk business, is it not,
connecting up to that; but what scope have you got for reducing
the loss from transmission and distribution, as well as theft?
(Dr Porter) Not an awful lot, because unfortunately
the laws of physics mean that about 5.5 to 5.7 per cent of those
total losses are due to simply ohmic heating of the wires. Most
of the losses are also in the transformation systems rather than
in the wires themselves, and whilst there are ways of improving
the efficiency of the transformation, and I know National Grid
have a policy of putting low-loss transformers in for new installations,
to refurbish the entire distribution network would be incredibly
costly for a relatively modest return; and if you were looking
at it from a cost-effectiveness point of view that money would
almost certainly be better spent in, for example, more energy-efficiency
measures on the demand side. So there is a small amount which
could be done, it would be rather expensive, and you do come up
against the laws of physics fairly quickly.
468. Perhaps on the transmission, we were talking
this morning to the Minister about the cable which is being considered
for the western seaboard of the UK, and it was put to us by one
of our advisers that there might well have been insufficient attention
paid to the state of the seabed and the impact of wave power on
a cable which would be lying on, I think it was called, gneiss
rock, which is a bit like putting it on the edge of a razor, and
we wondered if your organisation had any thoughts on this, as
to whether or not these fears are practical or of any substance?
I realise I am lobbing in a kind of technical grenade, and it
may be that you would like to pause, reflect and answer this by
letter, but if anyone is bold enough to come in; it certainly
disturbed the Minister, I have to say?
(Mr Bucknall) I am not known for being shy about these
things, Chairman, so I will bat it back to you. I think, speaking,
perhaps, on behalf of my own company, rather than the Association,
we have some association with the link that is in place now between
Scotland and Northern Ireland. I am not sure of the sub-sea conditions
there, I suspect it is slightly softer; maybe the thought was
there would be rock further north, off the west coast of Scotland.
But I believe Hydro-Electric have cables running between a number
of the islands off the west coast of Scotland, and I am not sure
that they have necessarily raised particular concerns about damage
they might sustain on the seabed there.
(Mr Armour) I think your question is dependent, and,
as I understand it, a study will look at the geographical and
geological formation of the Irish Sea route that this will take,
but, generally, if it can be done, I think we are all supportive
of the fact that, one of the constraints on the development of
renewables, and one of the constraints on the UK system generally,
is the capacity, or bottle-necks, and so forth, and if we can
get power from renewable sources off the islands and to market,
or if we can get strengthened routes that provide diverse routes,
particularly out of Scotland south, that is a useful development.
Sir Robert Smith
469. Can I just clarify on the transmission
costs, which are all fixed. If the bottom line bedded generation
within the local community, would that reduce the overall losses
of the system?
(Dr Porter) If there were more embedded generation,
obviously, that looks attractive because it reduces the distances;
but, as I have said, most of the losses are in the transformation
system, so the benefit would be limited by that, and there would
still be required transformation to the distribution network.
So it is not a panacea, by any means, for those losses.
470. But would it miss out one of the transformation
stages, depending on the...
(Dr Porter) It might; it depends on the voltages involved,
(Mr Armour) But the whole issue of how you eradicate
transmission access and losses was one of the things that Ofgem
looked at fairly recently; and one of the concerns the Association
had, if you put it in broad terms and you say it is 10 per cent
is the total losses from distribution and transmission, and 2
per cent of that is from transmission, I think you will find,
the National Grid are coming before you, I think their figures
would indicate that the losses within that transmission section
are about of the order of, say, 3 per cent of that 2 per cent.
So you are talking about losses that you can actually tackle and
do something about in the order of a few million pounds. And the
concern was that the solution proposed had a major impact, in
terms of perhaps over a billion pounds, in terms of the shift
of value that would result, either between consumers in the south
and consumers in the north, or between generators in the north
and the south, which has led us to push for the whole question
of cost/benefit analysis of these sorts of changes being taken
Chairman: Thank you. Can we move on to fuel
Mrs Jackie Lawrence
471. I do want to move on to fuel poverty, but
can I just follow up on one thing that our Chairman asked, about
the idea of the cable. In a way, that was sort of an answer to
a question I did not feel that you fully answered before, put
by my colleague here, about the Renewables Obligation. You mentioned
the barriers to that sector growing, but you did not actually
suggest what else could be done to encourage it. I think, potentially,
the cable we are talking about would. Can you think of any other
measures that might encourage the renewables sector to grow?
(Mr Armour) Clearly, one of them is planning; and
the current rates of refusal of renewable projects are very significant.
And, frankly, the planning barrier to any investment in this sector,
whether it is large-scale investment: say, nuclear; or whether
it is small-scale investment in wind-farms, is a major deterrent,
in terms of either the amount that you have to put into the process:
the length of time it takes and the capacity for objection, the
likelihood that objections are upheld, notwithstanding Government
targets, the rate of rejection, in terms of planning applications,
particularly in England and Wales, is very high for renewable
projects, and all of these make it difficult. So a review of the
planning system and a review of the consent system that then gives
you certainty; once you have got planning, you still, in many
cases, need further consents in order to operate the kit, all
of which is a deterrent to investment and a deterrent to bringing
solutions forward quickly.
472. If I can move on to fuel poverty, in paragraph
21, it appears, from your submission, that you think at present
the most effective way of tackling fuel poverty is through improvement
to the housing stock. In paragraph 23, you go on to say: "Comprehensive
solutions can only be found through a range of welfare, taxation
and incomes policies." Would you like to clarify the two
issues? You appear at first to say it is improvements to the housing
stock, and then you go on to say that these other measures should
be taken for a comprehensive view. Can you expand on that a little
(Mr Lescoeur) The first point is that
the electricity industry has its role to play in tackling fuel
poverty, but only a limited possibility to act, and it is by working
in partnership with all the interested parties that the electricity
industry tries to help to solve this problem. All the studies
which have been comissioned by the Electricity Association itself,
or each individual company, have shown that there is a whole range
of causes of fuel poverty, one of which, a very important one,
is the state of the housing and lack of insulation; but, of course,
it is not the only one. There is also a problem of resources,
ability to pay from the customer, which is clearly an issue for
taxation, or for economic policy, and there are also the other
causes, which can be partially mitigated by a whole range of measures.
Then it was just what we wanted to say in our submission.
473. It was just a general comment then, you
did not have any specific ideas on those three points?
(Mr Lescoeur) No; the Electricity Association has
made a lot of work, and each of its member companies has made
a lot of tests, to try to take initiatives in order to progress
on this issue, and maybe we can send the most recent Fuel Poverty
Task Force report we have to your Committee. There are a lot of
matters of concern; there is no easy answer to this question.
474. Just on that. What view do you take of
the impact, in terms of energy conservation and demand for energy,
of fixed-price schemes for domestic consumers to purchase their
electricity without regard to the volume, things like the Stay
Warm scheme, and so on; and should that be linked to some form
of energy efficiency, conservation activity, in terms of the property
itself to which that applied?
(Mr Bucknall) I am familiar with the Stay Warm scheme.
I think there are a number of schemes which are similar which
operate a sort of fixed price to customers without regard to the
consumption of energy, although I understand the Stay Warm scheme
does involve a reconciliation at the end of the period, so you
actually do pay for the energy you consume. But I think the right
way to go is to have these offerings so that customers can have
a choice, and that is really what the competitive market should
bring out, so that if you wish to choose to go on down that route
you can do; if not, you can choose a more traditional tariff.
And my company, for example, has offered schemes which involve
insulation as well as a fixed-rate tariff, and then you are taking
into account the condition of the property and what sort of additional
investment might be required to bring it up to an acceptable standard.
475. One of your suggestions on Government policy,
you suggest that there should be a Regulatory Impact Assessment
for each of Ofgem's regulatory proposals. How do you envisage
this working in practice?
(Mr Armour) In coming forward with any investment
or proposal in any of our companies, we would currently look at
what we see is the cost/benefit, and I do not see a huge difference
in applying this same sort of discipline to the work of regulators;
because, clearly, they will want to look at what is proportionate
and what is effective and what is overall in the interests of
consumers, and it is clearly not in the interests of consumers
to spend a huge amount for very little benefit, because the knock-on
disruption effects are major. So I think the way you would go
about it is the same discipline as any of us would apply in our
476. So if I take that a little bit farther
then. Given that Ofgem has clear views about its priorities, and
the main one being competition, which is a big improvement for
consumers, are you not just adding another level of bureaucracy
then, because we know what the aim and objectives are?
(Mr Armour) It comes back to, do you take any particular
philosophy to its ultimate conclusion, or do you say it is worth
doing something in order to get a benefit, but it is only worth
it if there is a benefit at the end of the road; if the cost of
doing something is disproportionate then it is not worth it. So,
yes, Ofgem clearly has an obligation to further competition, but
there must come a de minimis level, where it says it is
not worth the candle doing something.
477. It is another way of looking at electricity
as well as life, through candle-power! But just to take it through.
Your idea is that competition, bringing down prices, it is all
the benefits for the consumer; are you not really looking at it
from a different angle, to saying, `well, what we ought to do
is think about just putting in a little bit more bureaucracy and
slow the whole procedure down', is that not what you are really
(Mr Armour) No. The industry has been
through a number of major changes, whether you go back to privatisation
or whether, more recently, you look at NETA; all of these have
major expenditure implications on the industry, it involves a
change of systems, in many cases, it involves splitting up companies
and organisation. That has a cost, which ultimately has to be
paid for somewhere. And the question is whether the benefit of
the exercise is worth the expenditure. And all we are saying is,
we think there is an appropriate discipline in looking at that
and in having an assessment of that nature before you go into
it; and, interestingly, it was, I think, the Better Regulation
Task Force which said, `look, we think this is good, standard,
regulatory practice,' it is interesting that Ofgem has said, `we're
not convinced that we should do this sort of exercise where we
have a statutory requirement.' And all we are saying is there
is a danger of wasted expenditure at the end of the exercise,
if you go through that, and it is not particularly solved by doing
an evaluation post the event, if you have made a mistake it tells
you you have made a mistake; it is much better to avoid that mistake
in the first place.
478. And if I accept that argument, just to
sum up, presumably then you came forward with this idea because
there have been failures previously; where were those failures,
for you to come up with this idea?
(Mr Armour) I think, as an industry, we are on the
receiving end of a great many consultations and proposals from
regulators; they probably come out at about one or two a week,
with the variety of regulators that we have. And all we are saying
is better regulation makes it worthwhile thinking these things
through and trying to get them right, because more regulation
is not necessarily better regulation.
Mr Hoyle: I agree with you on that.
479. Can I just follow up on the Regulatory
Impact Assessment, because I got the impression from what you
were saying that you saw Ofgem undertaking Regulatory Impact Assessments
in order to focus their minds upon the specific benefits that
will accrue from the specific costs that are imposed by whatever
measure they take. Now I understood that one of the reasons for
encouraging Ofgem to undertake RIAs is that Ofgem has its own
statutory responsibilities but it does not have responsibility
for the whole of the range of factors which you, as an industry,
have to live with, the whole range of social and environmental
factors, for example, and a measure undertaken by Ofgem interacts
with policies being promoted by other agencies and by Government
Departments, hence the whole issue about CHP, on the one hand,
and the New Trading Arrangements, on the other. Now, as I understood
it, the point of a Regulatory Impact Assessment is to push Ofgem
into a position where Ofgem has to show what are the externalities
and the external costs and factors consequences flowing from its
regulatory proposals. Now, sorry to go on a bit at length, but,
as I understood it, that was what this was all about, not just
simply internal rigour in Ofgem's own assessment of its own responsibilities?
(Mr Armour) I think both are true. One, the approach
we think is a good discipline, in general, and, secondly, you
are obviously right, in terms of, we are regulated by a number
of regulators who have distinct requirements. For instance, Ofgem
is, in general, not required to take into account the environmental
aspects. There is provision in the Act for environmental targets
to be set for the regulator; in fact, the Government has not set
environmental targets as part of its remit and guidance to it.
But, looked at holistically, from the view of the country, from
the view of the industry, from the view of the consumer, the issue
is what will be the impact of the decision; and if the impact
of the decision is disproportionate to the benefit, we think there
is a case for joined-up regulation and joined-up thinking.