Select Committee on Innovation, Universities, Science and Skills Written Evidence

Memorandum 44

Submission from Ofgem

  1. Ofgem welcomes the Science and Technology Committee's inquiry into renewable energy-generation technologies, particularly given our own commitment to promoting sustainable development in the energy sector. This memorandum sets out Ofgem's role and our response to those questions in the call for evidence which relate to our work and expertise.


  2.  Ofgem is the regulator of the gas and electricity industries in Britain. Our principal objective is to protect the interests of present and future gas and electricity consumers.

We do this by promoting competition, wherever appropriate, and regulating the monopoly companies which run the gas and electricity networks. Other priorities include helping to secure Britain's energy supplies and contributing to the drive to combat climate change. Our work on sustainability includes helping the gas and electricity sectors to achieve environmental improvements as efficiently as possible, and taking account of the needs of vulnerable customers: particularly older people, those with disabilities and those on low incomes.


  3.  Our first task in promoting renewables is to create a stable regulatory regime that gives investors the confidence to deploy capital into the sector.

    —  Markets: Both the wholesale and retail markets are fully open up to competition. This means investors are able to choose openly which technologies they wish to support. The Government provides incentives to invest in renewable technologies through the Renewables Obligation. Our role is to administer these arrangements.

    —  Networks: The electricity networks, in particular, have a large role to play in making sure that renewable technologies are able to get their power to market. Our regulation of these networks means we have a low cost of capital combined with a strong growth in capital expenditure—so customers get a modern reliable system at a competitive price. Ofgem has sought to be innovative on research and development whilst at the same time providing continuity and stability for those both participating and investing in the utility networks business. Since 1990, the regulatory structures, based on incentives and comparability, resulted in impressive efficiency gains while also raising the quality of service.

  4.  The remainder of this response focuses on our role in network regulation because of its importance in the transition to a lower carbon economy.


  5.  The need to renew Britain's energy networks in order to connect more renewable generation and maintain the reliability of the networks represents an ongoing challenge. Ofgem has shown its determination to meet the challenge by increasing capital expenditure by 50 per cent in the 2004 electricity distribution networks review and by 100 per cent for transmission networks in 2006.

6. In December 2004 Ofgem approved some £560m of investment in the Scottish transmission system to connect renewable generation in response to growing demand for connections driven by the Government's renewables policies. In the 2007-2012 transmission price control review we approved nearly £5 billion of investment to renew Britain's electricity and gas infrastructure to meet new demands from gas imports and renewables connections.

  7.  Our goal has been to enable timely efficient investment and to ensure that lack of investment does not present a barrier to new connections. As we know, planning issues have presented a major block to bringing new projects on stream and we particularly welcome the measures in the Government's Energy White Paper to address the planning regime. As well as enabling significant network investment, we are also leading work to review access to the transmission system with specific measures in train to manage the effects of the `BETTA queue'. A longer term strategy for reform of the access regime is due for presentation to the Ofgem Authority and the Secretary of State in May 2008.

  8.  In setting the electricity distribution price control two years ago for the period 2005-2010, we also allowed a major investment of £5.7 billion, an increase of 48 per cent, in the development of local electricity networks. In addition we put in place the DGI, IFI and RPZs described below, all of which were designed to reward generation connections at the distribution level—principally renewables—and to encourage innovation in network development.

  9.  Building on the price reviews work we led with the DTI the Distributed Generation review and are now leading work to deliver the four stage package of measures agreed, including a review of the licensing and market arrangements as they apply to distributed generation.


  10.  During the 1990s there was a decline in R&D activity in the energy sector. This was perhaps not to be unexpected as the networks did not face such fundamental technical challenges in the early years following privatisation. This situation has changed recently, prompted by increasing asset renewal and the challenging requirement for networks to accommodate low carbon energy sources.

  11.  Ofgem has introduced new regulatory incentives to encourage the companies in innovation with a particular emphasis on sustainability. In setting the electricity distribution price control for 2005-2010 we initiated new incentives (Distributed Generation Incentive, Registered Power Zones and the Innovation Funding Incentive for distribution companies to reward generation connections—principally renewables—and to encourage innovation in network development). In addition, we significantly strengthened incentives to reduce distribution losses, partly due to consideration of the carbon benefits of loss reduction, and committed to an additional mechanism to provide funding for selected network undergrounding in areas of outstanding natural beauty.

  12.  With some two years experience, the effectiveness of the IFI has been marked and R&D expenditure has already returned to greater than 1990 levels. In the 2006 transmission price reviews we continued this approach to IFI and gave support to some major state-of-the-art capital projects eg the Dewar Place substation development in the heart of Edinburgh. In addition, RPZs have brought forward a number of imaginative new technology projects in the field for facilitating the connection of distributed generation from low-carbon sources. Furthermore, the local gas network price review of 2007 has also asked for consultation on this topic. By adopting this approach Ofgem has been able to introduce more innovation without losing the credibility that has accompanied the RPI-X methodology.

  13.  We are happy to provide any further information that the Committee may find helpful in the course of its inquiry.

July 2007

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