House of Commons - Trade and Industry

Select Committee on Trade and Industry First Report

7 Adapting the electricity networks

134. For more than half a century Britain has had a centralised electricity network, fed by large power stations. However, in recent years we have seen a growing number of smaller-scale generators connecting to the grid network, locating closer to the point of demand. If local energy capacity increases significantly in the coming years, instead of tens of power stations providing our electricity needs, potentially hundreds of thousands of generators will be connected to the networks. There has been some debate over the implications of such changes for the future of Britain's transmission and distribution systems. Would a significant expansion in local energy capacity do away with the need for a national grid? Could the distribution networks cope with a large number of local energy installations exporting their surplus generation? In this Chapter we look at the origins of the electricity network infrastructure we have today and the current issues it faces. We go on to analyse the implications of greater levels of local energy for both the distribution and transmission systems, before considering the role of long-term planning for network infrastructure.

The origins of our current system

135. In the early decades of the last century, Britain's network infrastructure consisted of a number of geographical zones in which electricity demand was met through localised generation. The foundations for our current network were laid in the 1930s when these zones began linking together to supply each other when in need. This process accelerated following nationalisation of the industry after the Second World War, resulting in the system we have today. Now, 85% of total electricity generation is connected to a high voltage transmission network, which enables electricity to be efficiently transported around the country. From this, electricity flows into lower voltage distribution networks, which then supply electricity to connected customers. The transmission network is operated by National Grid in England and Wales, and by Scottish and Southern Energy and Scottish Power in Scotland. In total, seven companies operate the 14 distribution networks that cover Great Britain.[200]

136. Two underlying economic drivers explain why our network developed in the way it has. First, it allowed central planners to take advantage of economies of scale in generating capacity. In the 1960s and 1970s, larger power stations offered a lower cost per megawatt of capacity than did smaller-scale units. As a result, this period saw the construction of a number of very large power stations, including Drax (3,280 megawatts), Cottam (2,008 megawatts), Didcot (1,940 megawatts) and Longanett (2,304 megawatts), amongst many others. The second main driver for centralisation was the economies of system offered. By supplying all electricity through one transmission network, planners were able to provide greater security of supply, as a lack of capacity in one part of the system could be more easily accommodated by generation elsewhere. As such, the model provided the most cost-effective means of meeting demand.[201]

Recent developments

137. In recent years, however, changes have occurred, which have begun to challenge the current centralised approach. Technical advances and privatisation have made it cheaper and more advantageous for firms to build smaller power stations better able to respond to demand fluctuations, many of which connect directly to the distribution networks. The same is true with the growing number of onshore wind farms and other large-scale renewables. And, in recent years, policymakers have become aware of the growing potential of local energy sources to contribute a significant proportion of the energy mix in the long-run. These developments have been enabled by advances in network control and information technologies, which have made it easier for distribution network operators to manage generating capacity being connected directly to their systems.[202] In so doing, these changes are beginning to unravel the distribution networks' traditional, essentially passive function.

138. Two further factors underline why this current period could represent a turning point in the development of our energy networks. First, around 30% of the UK's large-scale generating capacity will disappear in the next 20 years as the current nuclear stations are gradually decommissioned, and the EU's Large-Scale Combustion Plants Directive brings about the closure of many coal-fired power stations.[203] Unless the UK implements significant energy efficiency measures in the coming years, this gap will have to be filled. The second major development is the fact that much of the UK's electricity network infrastructure is coming to the end of its design life. The Energy Networks Association estimates that about two thirds of the network will need to be replaced in the near future.[204] Indeed, Ofgem acknowledged this necessity in the most recent Distribution Price Control Review, in which it allowed network operators to increase capital investment by 48% over the five years to 2010. Many commentators, including the Energy Networks Association, argue the current situation provides a unique opportunity to begin installing new technology, which will reduce losses, increase efficiency, and allow more intelligent and 'active' management of distribution networks.[205] In so doing, the system will be better able to respond to a range, and potentially multitude, of new energy sources connecting to it in the future.

Implications for the distribution networks

139. The potential for much greater levels of local energy capacity in the future is one of the primary reasons why operators have begun to think about different approaches to running their distribution networks, which transport electricity from the national grid and supply it to customers. As noted already, the existing structure is based on the assumption that "energy [is] poured in at the top … and simply flows through an ever-branching system until it gets to the final end user".[206] However, local energy systems turn households and communities into producers as well as consumers of electricity. As such, there will be times when local generation exceeds local demand and the surplus is exported back into the distribution network. This prospect of power, at different times, flowing either way poses a challenge for networks that have, to date, been based on the assumption of electricity moving in only one direction.

140. Because the number of local energy installations is still very small relative to the total level of generating capacity, distribution network operators have been able to accommodate the installations with little difficulty.[207] Concern arises with regard to the possibility of far more local energy systems connecting to the grid in the future. The Energy Saving Trust's recent analysis of the potential of microgeneration has sought to determine the ability of the distribution networks to cope with much higher levels of penetration.[208] It investigated a number of possible areas in which technical difficulties could arise, such as through voltage variation or reverse power flow. The Trust found, however, that while the response to these challenges would require network modifications, there were recognised solutions to all of the issues. In other words, there is no fundamental technical barrier to the expansion of local energy capacity—a view endorsed by Ofgem.[209]

141. Adapting the distribution networks could still come at a cost, though, depending on the level of expansion. For example, the Energy Saving Trust's work estimates that for households installing up to 0.5 kilowatts of generating capacity, it is unlikely that substantial network reinforcement will be required. Above that level, some costs may be incurred, but, it argues, these are much lower than the cost of the actual equipment purchased by the household.[210] These costs will also vary depending on local circumstances. The Energy Networks Association note that where new housing developments are built with local energy systems ready-fitted, their electricity networks can be specifically designed to address any technical issues. Difficulties and costs would mainly arise where there is a high level of local energy take-up in existing buildings where the networks have not been designed for bi-directional power flow.[211]

142. The majority of costs that distribution network operators would incur in accommodating greater levels of local energy relate to increasing their capacity to manage their systems intelligently and more actively in order to balance supply and demand.[212] Since any growth in local energy capacity is likely to be incremental, at least in the short to medium term, this provides scope for the network operators to incorporate active management processes gradually.[213] This should enable companies to experiment with innovative approaches, while also reducing the risk of large investments being stranded because the energy mix has evolved in a way that was not expected. In the 2005 Distribution Price Control Review, Ofgem introduced a number of incentives, which were aimed at encouraging network operators to innovate, and also at facilitating the development of more localised generation. However, take-up of these has to date been slow.[214] This is likely to change, though, if an increasing number of households and communities seek to install local energy systems, and network operators are forced to respond.

143. The distribution networks have been designed as passive systems, taking electricity from the transmission network and supplying it to customers. Local energy technologies go against this traditional approach because they have the potential to export electricity back into the system. Yet, even for significant levels of market penetration, the evidence suggests there are no technical barriers, with regard to the distribution networks, to the expansion of local energy capacity. However, to accommodate such a change in the energy mix, network operators must invest in new technology to develop more active network management. This will require a significant change in how the distribution networks operate, but the expected incremental growth in any local energy capacity should give the network owners time to respond effectively.

Implications for the transmission network

144. Consideration of the long-term potential of local energy has led some commentators to speculate about the implications it would have for the transmission network. At face value, an energy system in which all electricity needs were sourced locally would suggest a diminished role for a transmission network for transporting large quantities of electricity over distances. However, as National Grid note this would only be the case were there no need to exchange power between local networks (i.e. they were self-sufficient in all situations) and if there were minimal differences in the cost of producing electricity in each area.[215] This is not likely to be the case even with a very large expansion of local energy capacity. We have seen already in Chapter 2 that particular types of technology are only suited to certain locations. As Dr Jim Watson told us: "even if everybody in the country had a CHP boiler and a PV roof they are not always going to generate at times you want the energy".[216] Combined with the intermittency of some renewable sources and the need for large-scale back-up capacity, this means there will still be a need for a transmission network for balancing demand and supply across the system.

145. National Grid's conclusion is based on analysis of the potential energy systems the UK would need to have in place by 2050 if it were to meet the Royal Commission on Environmental Pollution's target to reduce carbon dioxide emissions by 60%. In its report, the Commission outlined four possible scenarios for meeting the target. In each of these it assumed a major renewables programme, including a significant role for PV panels, and domestic and district-CHP. For all four scenarios, National Grid found that the transmission network remained as necessary as it is today, if not even more so. This conclusion has significant implications. Some of the debate over energy policy in the past year has focused on the apparent choice the UK faces between adopting a centralised or decentralised energy system. National Grid's finding suggests that, in fact, these two approaches are not mutually exclusive. As the Energy Saving Trust said to us: "it is too simplistic to have an either/or".[217] In other words, new large-scale power stations would not preclude the possibility of a big expansion in local energy capacity at the same time.

146. The continued importance of the transmission network reflects the fact that, although cost reductions for local energy systems may in the future negate the economies of scale for larger power stations, the network is still required to provide economies of system. It enables the diversity between different generation sources to be exploited, and minimises the need for flexible back-up capacity.[218] This is not to say that a large expansion of local energy would not have any impact on the transmission network. For example, National Grid suggests that within-day flows of electricity between the transmission and distribution systems might change from their current pattern, thus requiring the operator to perform its role in a different way from at present. Also, in Chapter 2 we noted that there was some potential for savings from the reduced need for network investment, estimated at £35 million a year by 2020, were local energy to contribute around 10% of the UK's electricity supply by then.[219]

147. The UK will still require a transmission network even if there is very large growth in the level of local energy capacity. This is because local energy supply is rarely likely to match local demand exactly. Hence there will be a continued need for a transmission network that can balance electricity flows across regions and maintain security of supply. The capacity needs of the network will depend on the sources of electricity, although some research suggests local energy can make a small contribution to reducing the cost of maintaining and operating the network.

Planning for the long-term

148. The scale of investment required to replace the large proportion of the infrastructure currently coming to the end of its design life suggests to us the importance of long-term planning to ensure sensible and timely investment. The Energy Networks Association told us that Ofgem needed to place greater emphasis on long-term thinking, and that the structure of the current distribution and transmission price control reviews, every five years, was not necessarily conducive to encouraging companies to look beyond the short-term.[220] In its evidence, Ofgem told us that it did produce 20 to 25-year forward-looking studies at the time of its price control reviews, which it took into consideration in the latter, but admitted that it did not always make it clear that it had done so.[221] The industry has welcomed Ofgem's commitment in the 2006 Energy Review to publish long-term scenarios of the network implications of different types of generating capacity, including new nuclear build and local energy.[222]

149. Developing an understanding of the long-term implications for the network infrastructure of different energy technologies, including local energy, is important for ensuring timely and cost-effective investment. This is particularly the case given the potentially long lead times for new grid capacity. We welcome Ofgem's commitment to publish long-term scenarios of network development, and hope the industry will make use of these in planning its investment programme.

150. The argument made by some lobby groups, however, that local energy production either renders investment in renewing the grid unnecessary, or will be frustrated by such investment, is not one we accept. Local energy has a potentially important role to play in meeting the UK's carbon dioxide reduction targets and enhancing security of energy supply, but it will take many years to fulfil its potential.

200 CE Electric UK, Central Networks, EDF Energy, Scottish and Southern Energy, Scottish Power, United Utilities, and Western Power Distribution. Back

201 Qq 5 (Sussex Energy Group) and 181 (Institution of Engineering and Technology) Back

202 Q 5 (Sussex Energy Group) Back

203 Department of Trade and Industry, Our Energy Challenge: Securing clean, Affordable energy for the long-term, January 2006 Back

204 Appendix 59 (Energy Networks Association) Back

205 Appendices 1 (ABB) and 59 (Energy Networks Association) Back

206 Q 193 (Institution of Engineering and Technology) Back

207 Q 298 (Energy Networks Association) Back

208 Energy Saving Trust, Potential for Microgeneration Study and Analysis, November 2005 Back

209 Q 505 (Ofgem) in Trade and Industry Committee, Fourth Report of Session 2005-06, New Nuclear? Examining the issues, HC 1122; Appendix 42 (Ofgem) Back

210 Appendix 61 (Energy Saving Trust) Back

211 Q 308 (Energy Networks Association) and Appendix 59 (Energy Networks Association) Back