CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 388-i
House of COMMONS
MINUTES OF EVIDENCE
TAKEN BEFORE
ENERGY AND CLIMATE CHANGE COMMITTEE
THE FUTURE OF BRITAIN'S ELECTRICITY NETWORKS
Wednesday
1 April 2009
DR MICHAEL POLLITT, PROFESSOR GORAN STRBAC and DR JIM
WATSON
Evidence heard in Public Questions 1 - 65
USE OF THE TRANSCRIPT
1. This is a corrected transcript of
evidence taken in public and reported to the House. The transcript has been placed on the
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printed in due course.
Oral Evidence
Taken before the Energy and Climate Change
Committee
on Wednesday 1 April 2009
Members present
Mr Elliot Morley, in the Chair
Colin Challen
Nadine Dorries
Charles Hendry
Anne Main
Judy Mallaber
Sir Robert Smith
Paddy Tipping
Dr Desmond Turner
Mr Mike Weir
Dr Alan Whitehead
________________
Examination of Witnesses
Witnesses:
Dr Michael Pollitt,
Electricity Policy Research Group, University of Cambridge, Professor Goran Strbac, Chair in
Electrical Energy Systems, Imperial College and Dr Jim Watson, Sussex Energy Group, gave evidence.
Q1 Chairman:
Good
morning gentlemen and welcome to the Committee.
It might be useful for the record if you could say a brief word about
your backgrounds. Perhaps we can start
with you, Dr Pollitt?
Dr Pollitt: I am Michael Pollitt; I am a
University Reader in Business Economics at the Judge Business
School. I am also Assistant Director of the
Electricity Policy Research Group at Cambridge
University and I am an
external economic adviser to Ofgem.
Professor Strbac: My name is Goran Strbac and I am Professor of
Electrical Energy Systems at Imperial
College. Also I am a Director of the Centre for
Sustainable Electricity and Distributed Generation, supported by the
government.
Dr Watson: I am Jim Watson; I am
Director of the Sussex Energy Group at the University of Sussex
and I am also Deputy Leader of the Tyndall Centre's Climate change and Energy
Programme.
Q2 Chairman:
Thank
you for that; they are well known to us.
Welcome gentlemen; if I can start off on general terms? I was very interested in a comment from
yourself, Dr Watson, in your submission where you said that what will need to
change is not just the layout of cables but rather the overall system
infrastructure that connects generation supply and you went on to say that this
transformation will not just be a technical challenge and that the government's
vision also needs to have economic, institutional and regulatory
components. I do notice from reading
through all your submissions that this is a huge, complex and technical area
which perhaps has not had the attention it deserves, although our Committee is
putting that right at the moment. Would
you just like to expand on that, Dr Watson?
That is a very sweeping statement.
Dr Watson: It is. Thank you very much for picking that up. It is a very important area; it is not a very
interesting area - grids are not seen to be that exciting but are actually
pretty vital at allowing energy systems to work, whether it is a system we have
or a low carbon system which delivers 80 per cent reductions. I guess the point I was making is from an
observation of history partly, which is that if you look at the history of
electricity systems they not only grew technically in terms of getting bigger
generating sets, interconnection of systems and standardisation, but at the
same time you had growth of finance, growth of institutions - Thomas Edison
founding General Electric for example - and you had the growth of
regulation. So in this country as we got
towards the centralised system we have today there was, for example, post-war
a battle between local authorities and
national government about who had control as part of that scaling up, so it was
not just a technical matter. My point is
that looking forward those issues are going to go together again in terms of having
to change the system to something very different - generation where we do not
have it currently, at scales we are not really used to, and again the rules and
regulations we have are designed for the incumbent system and they have served
us well but they will probably have to change fairly radically along with the
pipes and wires.
Q3 Chairman:
That
is absolutely right. Again, from looking
at the submissions it is clear that the scale of the changes is really quite
dramatic, although there is some positive comment from the Government's
Electricity Networks Strategy Group. In
their report Our electricity transmission
network: a vision for 2020 they talk about the level of investment and
timescales but they did say and the conclusion was that "provided the identified
reinforcements are taken forward in a timely manner and the planning consent
process facilities network development ..." - and that is an issue in itself
which you might want to touch upon - "... the reinforcements can be delivered to
the required timescales". Looking at the
scale of the challenge that seems quite an optimistic statement. I do not know whether any of you might care
to comment on that? Can this upgrade be
done within those kinds of timescales, do you think?
Dr Watson: I will start and I will pass
on to others. The example of the Beauly-Denny
line gives a good example of how slow planning can be, so I think there is a
certain amount of optimism around those statements. Again it illustrates this point that it is
not just identifying where the lines go and that report is very useful in
identifying that. Some of the, if you
like, no regrets measures could be taken under several scenarios but actually
delivery is dependent on planning, it is dependent on changes of regulation and
financing models, agreements between the industry who pays and all of those
kinds of things.
Professor Strbac: If I could perhaps add to that that in terms
of the last transmission line which was put in service - I may not be 100 per
cent correct in the numbers, but I think it was planned by the former CEGB in
1988 and in 2004 was put in service; so it took quite a long time to get that
in. It is important to recognise that
this ENSG report and this transmission reinforcement of the position is the
biggest since World War II; it is the biggest development of transmission, so
it is obviously of massive significance in that respect. But also I think that we still need to see as
to whether all of that is actually required, what are the alternatives to this,
and I think it is a major issue for consideration now given that this plan was
broadly speaking put forward with respect to the present way in which we design
and operate the system and these principles were established in 1948, so quite
a long time ago, and certainly our work would suggest that the existing system
could potentially take much more than what the present thinking is and we are
currently working with the National Grid on the review of these standards. So I am not entirely sure whether all of this
would be required for the delivery of the generation connections. In time, hopefully in the next year or so, we
would have significantly more information about the details as to what of these
proposed schemes are really necessary and what we can get away without.
Q4 Chairman:
Are
you talking about another year to put these details in place or are you saying
that there is not a formulated strategy in place at the present time?
Professor Strbac: We operate in a market-based environment so
strategy would be a word if somebody actually knew what was going to happen in
20 years' time.
Q5 Chairman:
It is
always helpful!
Professor Strbac: It would be helpful, yes, if that was
possible. So how I see this report is
trying to identify what we would need to do to meet 2020 renewable energy
strategy targets and accommodating offshore wind power in Scotland in order to connect
offshore wind. This at the moment is just a proposition, it is just a project
which I do not think sets out exactly what we are going to do - that is a much
more involved process. Certainly there
are two major reviews currently, which is a review of security standards to
determine how we run and plan the system; the second is a transmission access
review and these two will have a major impact on what happens with this plan.
Q6 Charles
Hendry: Dr Watson, picking up on some of your comments
I think you have a book being launched today - if launch is the appropriate
word for a book - where you are going to be arguing for greater government
engagement in these areas. Do you think
that the current system as it stands can evolve or do you think that we have to
start again with a new structure for electricity networks which are more
appropriate for the 21st Century?
Dr Watson: I think it can evolve but you
may perhaps have to leave behind more than people want to. This is the phenomenon that people often
refer to as lock-in, where you have a set of systems, rules and
regulations. The point Goran just made
about strategy being too strong a word has been a truism for 20 years now, ever
since privatisation. What I am not
advocating is going back to nationalisation but I think in our evidence we say
strongly that there is a need for more coordination and some semblance of a
strategy, a plan of where you are going.
There is certainly going to be uncertainty in this area; nobody can
predict precisely how the 2020, 2050 targets are going to be met. But I think some sense of a roadmap and then
allowing market signals to work to allocate resources towards that roadmap is
required. You can understand why current
players are reticent about going that far but I think that that kind of change
is probably necessary in this area, if you are going to deliver on the kinds of
targets we have.
Q7 Charles
Hendry: Can I ask specifically in relation to
planning? You talked about
Buleigh-Denny, which I think is four years so far without a decision finally
being made; and clearly major new infrastructure projects will be coming
forward. Do you think that the changes being made to the Planning Act will
actually provide the certainty to enable those infrastructure investments to be
made and those decisions to be made in the short term, or do you think that
more remains to be required on top of that, recognising of course that Buleigh-Denny
is a Scottish issue and therefore covered by different regulation of interests.
Dr Watson: I think in principle it may
speed things up to have this new Planning Commission but obviously there is an
issue of accountability that many people have pointed to about that. I think one of the key questions is whether
people in general, local communities, whether it is an extra transmission line,
a wind farm or whatever, are seeing these infrastructures being imposed on
them. Again one of the wider points we
make in the book that are publishing today is this issue of legitimacy and in
other countries you have had a more bottom-up element in energy system
development - the idea of legitimacy in local communities, communities having
stakes in the power plants and so on.
Perhaps if there was more of that around in the UK you would not then get the
process every time some new bit of infrastructure gets renewed, upgraded or
changed because it is seen as less of an imposition, as it were. That is rather a woolly answer, I do
admit. So in principle the Planning
Commission in doing it more top down can help, but whether it would really cure
the problem, which is this sense of things being imposed, I am not sure.
Q8 Paddy
Tipping: Do you think that the government understands
the scale of the challenge? Does anybody
understand it?
Dr Watson: I think they understand it in
the sense that the Climate Change Committee has done some calculations, as have
people in government about how to meet targets and so on, so you can do the
kind of technological mixes, the mixes of what will deliver in 80 per cent and
many of us have been involved in research exercises doing just that. But of course the real challenge certainly in
my view is not just that technical challenge of deciding what the measures are,
it is the policies, the institutions and the regulations and there I think
there has been an underestimation of the extent to which, for example, having a
15 per cent target for renewables by 2020 is actually requiring the system to
change in ways that are not anticipated.
It is not just taking out some types of power plants which are high
carbon and fossil based and plugging in some new ones which happen to be
renewable and low carbon; these renewable low carbon ones are different
because, as Goran said, they are intermittent, but also sometimes they are
deployed at different scales - the city scale, village scale, town scale - and
we have no tradition of any of that in our system. So I think there is an
underestimation about the kind of implications of that.
Dr Pollitt: I would want to start in a
slightly different place, which is to point out that we should not let the
network tail wag the generation dog.
Nobody wants electricity networks; what people want are the services that
are delivered by electricity networks.
We actually do have a degree of planning in the way that we plan for
network investments. The five-year price
control reviews that Ofgem conduct for transmission and distribution do plan
investments - there are investments written into the business plans which are
part of the incentives and revenue requirements that are set up over those
five-year periods. So we actually do
have planning of the networks, it is the rest that is the issue. So the problem that we face is: when do we
plan for investments which actually rely on generation which is being supplied
under market incentives? So it is
important not to build transmission and distribution assets too early given
that we are waiting for the generation to appear. So where the government
strategy needs to be right is in having a complete strategy for our energy
sector, not just strategies for bits of it which do not actually add up to a
coordinated strategy. I think it is very
tempting for government to think that this is the one bit of the system where
there is a significant planning element already and we can just plan that bit
and the rest of it will reconfigure around that. I think that is not obviously the case.
Q9 Paddy
Tipping: It takes us back to the discussion we had
earlier on, whether the market is going to deliver or whether we need to be
more interventionist and we are at an age where intervention is more sexy, and
I just wonder whether the government does need to intervene more and send more
forceful signals or a secure framework.
Dr Pollitt: Clearly we are in an age now
where we want the electricity system to change to meet our climate change
targets. That requires government
intervention because that is not going to happen as a result of leaving it to
the market. It requires the correct
signals for low carbon investment, so that does require incentives to be in
place which are consistent and which will deliver those investments and at the
moment we clearly have a set of policies which are not delivering because they
are not credible and they are not strong enough. That is not just the fault of the British
Government, it is the fault of the European Energy Policy system and the fact
that the emissions trading market is not working effectively; so there clearly
are not market signals being delivered which are strong enough to get us to the
targets that we want to achieve.
Q10 Chairman:
I
would like to have a look at the regulatory framework, which of course is
complementary to the idea of a vision and a strategy. As we go into this Robert is going to ask a
few questions, but just to pick up what you were saying about the coordination:
there is clearly a coordinating role here in terms of very large investments and
big shifts from high carbon to low carbon.
Who should be leading on that coordination, do you think?
Dr Pollitt: What happens at the moment is
that there is a discussion that occurs between the companies who produce their
business plans for network investments over five years and with Ofgem and their
advisors, so clearly there is a degree of coordination and justification which
goes on there. The question is whether
that system is capable of coping with these longer term much more ambitious
targets, and what I have argued is that we need to think about a much more
flexible system where we can actually get a negotiation going between
generators, between network providers and between other stakeholders where we
can actually make better informed decisions about when and where network
investments might be necessary.
Q11 Chairman:
I
presume there are market tensions among different companies on some of those
things.
Dr Pollitt: Absolutely, yes.
Q12 Sir
Robert Smith: It is a vicious circle because you have this
monopoly network that is regulated connecting a market generator and a market
consumer and you were talking about the five-year building investment thing,
which in a way is in the history of this period we have been through; that we
started with a gold plated regime that could be sweated, in a sense, and
efficiencies driven in and now we are looking for a completely different
scenario of massive capital incentives.
Is the current regime possible just to roll on to that or do we need to
change Ofgem's remit in the powers that Ofgem has?
Dr Pollitt: I think the system we have
had has actually been quite successful in delivering investment - I do not
think we should underestimate its power to deliver investment because it has
facilitated planning and it has produced very strong incentives to deliver investments. So while it is true that the assets have been
sweated there has also been significant investment. So clearly the system can be made to deliver
more investments going forward but the danger we now run is that we actually
want to be very careful about over investment and making sure that we do not
actually give network incumbent companies a licence to massively increase
capacity which may not be necessary, because if we move to a system where there
is much more local generation then of course we do not need massive
transmission grids. So it is somehow
having a system which can incrementally adjust to emerging market incentives
and making sure that the market incentives around low carbon investments are
actually clear enough, which they are not at the moment.
Dr Watson: If I can come in briefly on
that? While all that is true and I can
understand people's worries about over investing and investing ahead of need,
as the industry often puts it, I think that players are going to have to take a
few more risks as we move forward to what is a radical change in systems. That was great for business as usual,
thinking about reliability of supplies to customers, reducing costs, all of
those kinds of things, but we are now in a world where we are trying to reduce
carbon by 80 per cent and do all those other things as well and I think maybe
some risk will have to be taken and I think there is a case for coordination
and the use of scenarios, some element of a roadmap of where we are going and
more government leadership, perhaps - not any micro managing option and I do
not think you can, but perhaps in the guidance to say that one of Ofgem's key
roles is to actually ensure that its decisions are commensurate with the kind
of pathway being set out under the Climate Change Act, for example. Something of that kind is probably required
as a coordination mechanism.
Q13 Sir
Robert Smith: Ofgem are consulting on the RPI formula; is
that part changing the signals?
Dr Watson: It could be. I am not heavily involved in that particular
review, maybe my colleagues are; but certainly that has been a fundamental part
of the regulatory regime, this idea that you squeeze out costs at RPI-X over
each five-year period and from the industry and the fundamental question is
whether that model is still fit for purpose after 20 years of having it. But maybe the others want to add to that.
Dr Pollitt: I have been involved in this
review process. Yes, RPI-X 20 is
fundamentally aimed at addressing the issue of shifting from an Opex-focused
operating cost reduction focused regime to one where we are trying to manage
large companies' investments; so, absolutely, it is about trying to get
efficient investment signals into the system.
Some of the new ideas that are going to be discussed as a result of that
process will I think be very helpful to us making the right investments going
forward.
Q14 Sir
Robert Smith: Dr Pollitt, you made the point that Europe should be sending better signals about carbon
reduction and you have made in your evidence that we could do a lot more with
energy savings and with renewables on the existing grids. Do you mean by that distributed renewables
because presumably the major renewables need transmission investment.
Dr Pollitt: Yes.
Q15 Sir
Robert Smith: As consumers I suppose you are taking a bit of
a gamble because if the EU do not consider those signals and if the history
turns out to be right that all of us espouse energy conservation it seems to be
one of the most difficult things to deliver in practice it will be too late
then to build the networks. So we need
some fairly clear decisions which levers
are going to be used otherwise we will not have a network in place to keep the
lights on if we fail to deliver on the other side of the argument.
Dr Pollitt: I think we will always have a
network that will keep the lights on. I
think the issue is whether we achieve our targets, which are very, very
ambitious for de-carbonisation of the electricity sector, and I think if we
accept that Europe is not going to provide strong enough signals we need to
provide strong signals in the UK but those signals need to be market-based
because we do not know what the right answer is and we have a long history of
delivering very expensive solutions to problems which did not really exist in
our UK energy system. So I think it may
be necessary for us as the UK to have much stronger signals, given that Europe
is not going to provide them, and to have much higher prices of carbon in the
UK than are coming from the European Emissions Trading System.
Q16 Dr
Turner: I would like to come to the transmissions
arrangements for managing the network.
There are those who would say that BETTA was not really! In fact it does in fact seem to be a system of
regulating the transmission network, which is ideally designed for fossil
carbon major generators in the traditional network and definitely not fit for
the 21st Century. What are
your views on these arrangements?
Professor Strbac: I can talk about the impact on transmission
network requirements. BETTA has been
designed to facilitate competition in fossil fuel but fundamentally it is
energy on the market. Where our analysis
suggested that BETTA is failing, in addition to whether it can deliver - which
is a bigger question - capital intensive low marginal cost generation such as
nuclear and, say, wind, can it facilitate the competition of such plant, we are
still working on that question. What in
my view is undisputable in the shorter term, in the context of accommodating
wind effectively in the transmission network, we think that BETTA design will
deliver or will require bigger transmission that we would otherwise need if we
had a different arrangement? The reason
for that - and I am sorry I only made my evidence available yesterday - is when
you plan transmissions you would normally see what are the short term costs
which the network incurs in terms of constraints. We have north to south power flows in the UK and
we need to manage that quite tightly because we are restricted in that
area. So if we want to reduce the power
flows on that system the only way to do that is to increase power in the plants
in England and reduce power
from generators in Scotland
- that is the only way to manage the transmission network. So what you do then, you are burning more
coal in Drax and less coal in Longannet and the price differential is what
costs money and you compare that with cost of reinforcing transmission. What
BETTA does in contrast to what CEGB did is that in this management of
transmission you will see not only fuel costs of these generators appearing but
also the investment costs appearing. Our
analysis addressed it that the constraint costs, which are now a major concern
of Ofgem currently - they are consulting on that - on the Scotland/England boundary
would be in the order of ten to 20 million and now it is about 200 million, so
it is a massively different number which would suggest we need more
transmission because the BETTA market happens to tell us that, but we do not
think that is what the CEGB or the central panel would do. So we think that the market signals are
inappropriate for transmission investment currently.
Q17 Dr
Turner: One of the central features of BETTA of course
is locational prices for transmission, which clearly disadvantages far flung
generators because the most intensive natural resources available, say off the
northwest coast of Scotland
and the centre of consumption is in southern England. By locational transmission charges you sent a
very adverse investment signal to renewable generators just at a time when we
want to increase renewable generation.
So do you think that there is a case for abandoning locational
transmission charges and going to a flat rate - if you like, a postage stamp
model?
Professor Strbac: Can I start with this because we have done
quite a lot of work in this area quite recently about these issues. In fact BETTA is not a locational model; we
do not respect location when we trade energy in the UK now. But we have suggested that we actually need to
move into this regime and this is simply because the amount of transmission
which the present regime would require is that every generator on the system
should be able to run simultaneously, broadly at the full output. That is the standard against which we have
built transmission. For the incumbent
system with lots of coal and gas it is not too bad because we want to make sure
that these generators can access demand and make sure that we have a reasonable
security of supply. If you now put on
that system a significant amount of wind power which has a very limited
capacity value - and you cannot retire coal fire power stations because you put
wind on because what do you do when the wind does not blow, so the capacity broadly
would have to stay on the system. It is
in our view blindingly obvious that building a transmission system that would
accommodate simultaneous output of all wind plant and conventional plant is not
a good idea because it would require massive over investment, and we have
suggested within the Energy Review and Energy White Paper that transmission
arrangements should change to allow conventional plant and renewable plant to
share access because if you build less than say 100 gigawatts because you only
have 60 gigawatts of demand then conventional plant and wind plant power would
need to share access, which makes sense - on windy days you allow wind to use
the capacity and on non-windy days Longannet, Cockenzie and Peterhead can get
on with accessing the network. We are
currently in the process - this is the whole point about the Transmission
Access Review - to deliver that, but we have a major concern about the details
of that implementation which we think potentially would completely undermine
this idea of the economic efficient transmission by allowing conventional plant
and renewable plant to share access.
Q18 Dr
Turner: Are you then arguing in support of provisions
to the German Renewable Energy Act and of the EU Renewable Energy Directive
that provide for priority of access to the grid for renewables?
Professor Strbac: My personal view is that the UK has this right. If you want to support a particular outcome
such as renewables you do that outside of the market - you do not interfere
with the market rules that make the system work in an efficient way. So you give them money outside the market but
you do not change the market rules because the market is there to deliver the
most efficient solution in the short term and also to deliver the least cost
development. So you do not want to change
the market as to favour a particular outcome.
That is my view. My understanding
is that Europeans are rethinking and certainly Americans are because they are
embarking on a big renewable programme - whether they are going to adopt the
European model or more of the UK
model. In my view the UK model is fundamentally more
appropriate for what we want to achieve.
Dr Pollitt: I agree with what Goran has
said. I think that the postage stamp
model is a discredited one. It is the
case that transmission costs are a legitimate part of the total cost of energy
supply and they should be reflected in the costs of buying electricity from
remote locations. It is important to
remember that with the rise of offshore wind we now have a lot more
opportunities on where we locate our renewable generation and some of the maps
that I have seen of where the Crown Estates might end up having wind parks
suggest that those will be connected into much more favourable locations on the
transmission grid which pose much less problems than just connecting everything
in the north of Scotland. It is
important that our transmission pricing arrangements reflect the benefits of
those potential schemes and encourage more efficient location of connection. So
I think we do need the right locational pricing on our transmission grid and we
should resist what I would call politically driven attempts to socialise
transmission costs and to reduce the correct market signals.
Q19 Dr
Turner: That logic taken to its ultimate conclusion
would mean that the most markedly efficient location for new generation
capacity would be about 20 miles north of Birmingham,
which is totally inconsistent with what everybody wants in any direction. There is a Transmission Access Review going
on to address the enormous queue of already permitted generators and wind
generators waiting to join the grid.
What are your expectations about the outcome and what would you like to
see?
Professor Strbac: I can perhaps start. When BETTA was introduced the Scottish system
was separate, and the Scottish generators had only limited access to the England and Wales energy market, which was
limited to about two gigawatts. With
having now the entire GB system a decision was made that all these generators
in Scotland would be given firm access to the market and there was also an
administrative decision made that all generators who applied by a particular
date would also be granted access, without actually having the underlying
physical assets available to deliver this.
That has created these queues and the consent costs are going up and all
of that. Now we have the Transmission
Access Review in process and we have recently seen Ofgem's concern. A month ago they wrote an open letter about
the constraint costs increasing in Scotland and also asked the National Grid to
review the way in which we allocate access and the way in which these
constraint costs are allocated to users, to perhaps facilitate a more efficient
usage - this is coming from what Michael was saying - a more efficient utilisation
of the assets fundamentally. Some of
these constraint costs which were in the past socialised, the proposition is
that they will now be allocated to parties who cause these constraint costs,
i.e. Scottish generators, which should facilitate to some extent this idea that
on windy days we do not want all generators in Scotland to run, we only want
wind to run, and so if these costs are passed to the generators hopefully that
might encourage conventional plant in Scotland not to run on windy days. So we welcome this action of Ofgem - this is
on the positive side - but there are a number of other issues associated with
TAR with which we are concerned, which may completely undermine this process,
one of which is transmission charges associated with the usage of transmission
network, which in our view are not sufficiently efficient in terms of
delivering signals. So we might end up
actually building more transmission than we need given the transmission access
arrangements - if I can just explain where we are moving towards developing
more market-based arrangements in transmission - where users of the network
would have a choice as to whether they want to have firm access to transmission
or whether they are happy to use the existing transmission network. This choice
would be based on costs obviously and so with a firm access choice you would
fund investment in new transmission; and for non firm access you just use
whenever it is available. That arrangement should facilitate the outcome of
facilitating the sharing of access.
However, the present situation is such that the long term firm access is
made in our view artificially at a low cost while the non firm access, which
leaves you with uncertainty whether you will be able to run or not is
incredibly expensive. That is why nobody
among the players likes a short term, non firm access - everybody wants firm
access, which means that we are not going to succeed in the entire
process. If everybody chooses non firm
access that means that we are going to build transmission that can accommodate
everybody's simultaneous maximum outputs, which is not efficient. So we think that there is a massive area in
there to make that choice right so that both choices have efficient costs
attached to them, otherwise users will make a wrong decision.
Q20 Chairman:
Can I
just clarify a point here because there is clearly an issue in terms of north
of the border and distances there that we have been exploring. This might be a bit of a naïve question but
you were saying that part of the logic would be to operate a grid whereby where
you have windy periods you bring in your wind capacity and then when you do not
you bring in other forms of base load.
But these are all owned by different companies so where is the incentive
for existing generators and conventional generators to switch off their power
to let the renewables go down the grid?
What is in it for them? Where
does the market work on this?
Dr Pollitt: This of course is where
things get very interesting.
Q21 Chairman:
Yes,
they do.
Dr Pollitt: Once renewable generators
stop arguing about whether they are going to get effectively a subsidy by
getting cheap access to the grid then of course they might move to negotiating
sensible contractual arrangements with conventional generation. So if I had a wind park that was using the
same wires as Longannet I would of course negotiate directly with Longannet to
share access and come to a contractual arrangement which would be mutually
beneficial. So what we do say is that
already these sorts or arrangements are arising in the system where wind
operators do contract with conventional generation to back off the conventional
generation when the wind is blowing. So
we would expect there to be mutually beneficial trades that are possible. I remind Goran of something he once said to
me - there are other exciting possibilities which are of course links between
the heat system and the electricity system.
As we know in Scotland there are lots of heat requirements so of course
when it is a windy day in the winter it is quite possible that one could
imagine contractual arrangements to dump electric energy into heat in Scotland
rather than require us to have massive transmission capacity north-south.
Professor Strbac: On windy days if you have the right
arrangements the prices are not going to be very attractive for expensive
fossil fuel power to run anyway. What it
would mean prices in Scotland on a windy day are going to drop, which means
that the demand will now have the chance, as Michael was saying, rather than
burning gas we could use electricity and in that arrangement we can see that
demand could compete with building transmission and unfortunately these TAR
arrangements have excluded demand from the picture, which we think is a major
missed opportunity and it will also lead to inefficient transmission investment
because we may not need it. There is a
very interesting example in Denmark. You may be aware that Denmark is to some extent leading Europe in wind
development but also in CHP - In Denmark every village has a little
CHP engine. Obviously the size of Denmark is ten times smaller than the UK so
in terms of volumes it is much less, but given the big interest in wind a few
years ago they faced exactly that problem.
They had a CHP plant running whenever the heat was required; wind was
running when it was a windy day, so on very windy days when the electricity
demand was not very big there was too much electricity on the Denmark
system. They are linked with Norway so
Norway was taking from them zero Euros per megawatt hour electricity, thank you
very much, reducing the output from their hydro plant and two days later
selling them their energy at 40 or 50 Euros per megawatt hour back to
Denmark. But at the same time Denmark,
given that it did not have the signals, was burning gas and paying this CHB
plant, if you like a feeding like tariff, without having the understanding that
you are now burning gas to produce electricity which is of no value. So they have introduced a simple scheme which
has now passed the information about the electricity prices to CHP plants so
since November 2007 the prices in Denmark have not gone below 20 Euros a
megawatt hour on a very windy day because demand has reacted to changing
behaviour on windy days; we could potentially learn from that.
Q22 Chairman:
Is
that price driven though?
Professor Strbac: Price driven, only price driven.
Q23 Chairman:
That
is interesting.
Professor Strbac: Just giving them the price, which was all they
got.
Q24 Mr
Weir: It seems to me that your answers so far
illustrate a collision between targets for renewable energy and markets and how
they work. If you are saying that there
should not be a postage system as suggested for renewables how are we going to
meet our targets given that much of the renewables are in remote areas like the
north of Scotland and tidal
and wave perhaps off the coast of Scotland. How is that going to be met without some
system of encouraging the building of these and building the network to serve
them?
Dr Watson: Can I pick that up because I
actually disagree with my colleagues; I think that having some form of priority
access to renewables is probably right and my rationale for that is this issue
of lock-in that I mentioned earlier; that it is new, it is different, the
system is not used to doing it. A level
playing field does not give everybody equal opportunities; it is not an equal
opportunity shop, it is not a level playing field - it means that what it does
is favour a set of rules and regulations which are designed to, if you like,
favour fossil plants, the things we have and they have served us well, as I
said earlier. I think if you are really
trying to push renewables as fast and as far as we are trying to in the UK to
meet that target, which might mean 30 per cent electricity, then you are going
to have to think more radically on that.
By the same token on this issue of location, which a couple of you have
mentioned, I do not think it is enough to give locational signals which are
just about efficiency and the cost that a new generator imposes on the system
as it is because this system as it is has been designed with history in mind to
serve today's needs but not tomorrow's - tomorrow's needs are probably served
by different architecture. So you have to
combine some sense of efficiency - I would not say that you abandon some sort
of idea of efficiency - so as one of my colleagues was saying, if you are
choosing between two offshore wind farms and one is in a much more economically
efficient location than in another you would want the system and the incentives
to say go to the economically efficient location. My worry about having efficiency as your main
driver is that you are not getting over this barrier that you are really
thinking about transformation of the system and building grids where are none,
and by definition that is expensive - you cannot get away from that. So I think the regulatory framework must take
that into account.
Professor Strbac: Onshore wind is a very profitable business and
transmission costs in terms of make or break of onshore wind in Scotland
is not the issue. There is no question
about the probability of wind onshore; that is number one, so it is not going
to change. My worry about this argument
is that in fact this is going to be not very helpful because you will have to
build in more transmission which is not only going to be more costly but it is
also going to introduce further delays.
So efficiency in transmission in my view is absolutely vital for
delivering targets in the right timescales because we do not have them we are
going to end up building stuff which we potentially do not need and it is just
going to delay further and further connections of wind power and we are going
to miss the targets. Offshore wind and tidal
are completely different technologies - tidal, if you like, is still on a
demonstration phase, there are not very many commercial companies running into
connecting tidal, but we know how to deal with offshore wind. Offshore wind currently in the present
climate is very marginal and we are very worried that when you look at the sums
involved and the costs of offshore - and you can see that people are pulling
out of offshore development - that is a very worrying activity.
Q25 Mr
Weir: But is one of the reasons for that because of
the current connection regime that means that those developing offshore have to
pay the costs of connecting into the grid, i.e. the substance cable. So is that not a cost barrier to developing
offshore wind and meeting our renewable targets?
Dr Watson: I think it is. This is a target set by government on behalf
of a social goal, which is reducing carbon emissions and we have decided with
our European partners that pushing renewables to 20 per cent across the EU is
part of that goal. So in a sense to load all the costs of that social goal on
to a set of private actors you expect to help to deliver that goal does not
seem to me to make sense. You have to
find some way of sharing those costs between the actual investors, so that you
send some sort of signal about efficiency and about location, but sharing that
between them and socialising across all energy consumers because in the end we
are the people who are both using the energy services that electricity is
providing but also we elected the governments who have decided to implement
those social goals. So in a sense it is
a shared responsibility.
Chairman: We want to explore this issue
of the offshore wind connection because it is quite a serious one.
Q26 Mr
Weir: You mentioned the question of the interaction
between traditional fossil fuels and wind in particular but one of the
difficulties is that in Scotland
the electricity companies are vertically integrated and Scottish Power and
Scottish Southern are also involved in wind.
If you go into that system are you not giving a commercial advantage to
those already established companies rather than allowing new companies into the
market? Because if Scottish Power, for example, are running Longannet and are
also running Whitelee, for example, a large wind farm, then they have a inbuilt
advantage in dealing with that where other companies trying to develop in the
north would find it very difficult to break into that market.
Dr Pollitt: This relates to the issue of
ownership and unbundling of transmission assets. I have certainly argued strongly and I
thought it was the general position of the British Government that we were very
much in favour of ownership unbundling of transmission assets and that has been
a very successful ownership form in England with the National Grid Company
being completely separate from the rest of the electricity system and being
separate from generation. I think there is an issue about why we continue with
this form of integration in Scotland
and why we do not move to regularise the distribution of ownership of
transmission assets away from generation in Scotland
in the same way that it is in England,
because I think it is potentially problematic. It seems to me that the
evidence, although fairly anecdotal, is quite strong that in countries that
have independent transmission companies do better and have more competitive and
more successful electricity systems than ones that continue with integration of
generation and transmission.
Q27 Sir
Robert Smith: Going back to what Jim Watson said about the
public buy-in. The whole of the north of
Scotland
got its electricity system in a sense by that hydroelectric developing with the
community buying-in to that whole system going there because they got the
benefit as well as the impact.
Dr Pollitt: We had a successful Central
Electricity Generating Board which had transmission and generation integrated
and it did successfully integrate what was previously a very disparate system
and it did successfully scale up and meet electricity demands during a period
of electrification. But we are now in a
different world and I think that the standard argument is about vertical
integration being a good thing in the early stages of the development of an
industry, but once it has matured then we can think about whether vertical
separation is a more efficient way of organising an industry.
Chairman: Let us explore this position
of offshore wind because I also understand that there is a queue of capacity
that wants to connect and there are real timescale problems in some of
this. If I could bring Anne Main in on
this.
Q28 Anne
Main: Do you think there are enough companies in the
market for an auctioneering process to work?
Professor Strbac: This is currently in process. I have not in fact followed this very closely
but I know that there are concerns about whether there will be a sufficient
number of companies wanting to do offshore transmission grids and that in terms
of the revenues and the certainty of income for them I understand that there
quite a significant number of concerns associated with that. But this process is still going on and it is
very difficult to say. I know that a
number of companies are talking to the regulator about the details of these
arrangements - is there enough for them to do the job? That is what is currently happening and so I
think it will be premature to say at the moment whether it is going to be
successful or not. There are certainly
concerns being raised whether people will be interested in doing that.
Q29 Anne
Main: Is it the vagaries over what is in it for them
in terms that they are not actually sure what the costs are going to be; they
are not sure what their eligibility is going to be for connecting in, for
example. So is it because there is not
enough certainty at the moment in this process that is causing this concern?
Dr Pollitt: I think that the emerging
offshore regime is extremely exciting because what we have the prospect of is a
competitive transmission regime which we do not have onshore. I think the prospect, at least initially, is
that there will be a significant number of bidders. There are a lot of companies in Europe that are interested in transmission and there are
potentially American companies as well. What seems likely to happen is that
there will be point to point connections so rather than some fancy integrated
offshore grid we are just going to be talking about a line straight out from
the nearest point on the coast to the wind park. So it is going to be a very standard
investment that is going to occur. I
think all the signs are that this has the potential to be a competitive auction
because of the standardisation that will be involved. There will be a lot of learning from the
first few auctions and we do need to worry, as in all auction processes,
whether over time the number of bidders is going to decline. But the experience of the UK in the private finance initiative generally
has been that we benefit by doing this first of course because everybody wants
to be involved in the UK
auction process because it might happen elsewhere.
Q30 Anne
Main: Can I just move on from that? You said about private finance and when we
have had evidence at another Committee from the smaller gas fields there were
some concerns about accessing the funding.
Do you believe in today's economic climate that to push this forward in
a timescale that is acceptable that there will be the funding in place with
people who are prepared to invest in what is, as you say, an exciting time -
but exciting times are not always good times economically.
Dr Pollitt: That is a different form of
excitement.
Q31 Anne
Main: It is a serious issue. It is all very well people wanting to buy
into the excitement if there is not the funding to help this move forward.
Dr Pollitt: The way that it is going to
be funded at the moment is that it is going to become part of the general
transmission charging regime, so actually the funding regime for people who
operate these transmission assets is going to be guaranteed that you will bid
your auction price and that revenue will be guaranteed for 20 years; and it
will not be subject to any actual energy risk, so as long as you provide the
capacity you will receive the payment. So actually this looks like a very safe
investment from an investor point of view, and I think that the prospects are
that there will be significant interest from the investment community relative
to other investments in current conditions of financial uncertainty.
Q32 Anne
Main: My colleagues might want to explore that
further but I would like to bring in Dr Watson.
In your evidence you note that the process of developing modifications
to the offshore regime has been slow; it is already over six years since the
DTI published its strategy for offshore wind.
And quite a few of you referred to delays in the evidence you are giving
us now. Given that the final government
consultation on an offshore regime will be in late March 2009 and the first
competitive tenders running from summer 2009 and the fully established regime
by June 2010, a very short timescale given the six years that you referred
to. Would you like to comment on the
deliverability of that particular short timescale?
Dr Watson: I think it is difficult and
the issue of timescales is not just a network issue, it is a generic issue in
the way that government goes about its policy making. Often there are endless consultations as opposed
to decisions and action. I am all for
consultation but as somebody who is asked to respond to them a lot, having to
respond on the same issue two or three times over a period of years in the
absence of a decision is onerous for me and for all the other people. But the more serious point is I think
sometimes it is a reason for delay because government does not want to stick
its neck out and make a decision. I
cannot comment on the detail of that one in particular; my comment was more a
general one that here is another example of an announcement being made of grand
strategy but the implementation can be incredibly long. So I think that government does need to be
quicker because there are other things which are going to delay this, such as
the issues we have already mentioned of public financing and all of these other
things. Government inserting its own
delays is not that helpful.
Q33 Anne
Main: Your concern then is that historically this
has not happened? Historically there
have been a lot of delays and numerous rounds of consultations.
Dr Watson: Yes.
Q34 Anne
Main: Do you have confidence then that there is
going to be a change of attitude?
Dr Watson: I cannot see a big change in
the way that government goes about its business but then if we are going to
successfully, for example, live within the five-year carbon budgets under the
Climate Change Act then I think some sort of faster system of translating
targets and wishes into action is going to have to be implemented.
Q35 Anne
Main: It has been a concern about how we are going
to get to what has been now an extended target in terms of our reduction in
carbon. By pushing it further forward some
people have said that that has just made the decision to go further ahead
Dr Watson: You have got to remember that
there is, also, a very serious discussion about the 2020 target, which could be
up to a 42 per cent reduction in all greenhouse gas emissions, which goes along
with the 15 per cent on renewable energy as a whole. So the need for urgent action does not go
away with all the focus on 2050; I think the Government and the Climate Change
Act are absolutely right to insert that milestone, otherwise, as in the US
debate, you can say something very radical on a long-term timescale, as Obama
has done, but in the short term there is a real unwillingness to engage with
anything that moves towards that.
Q36 Dr
Whitehead: Could I ask about the question of actually
getting connected up to the transmission network? You have mentioned already the something like
61 gigawatt queue of generators seeking connection to the transmission system -
17 gigawatts renewables, some offshore and some onshore. At present it appears that the position is
rather similar to people booking rooms in hotels before they have found out
whether they can get time off work.
Therefore, the first-come-first-served market system, as it were, may be
guilty of providing a number of blockages to those schemes that are more likely
to come on stream but cannot get connected.
What is your view of the way in which that system might be ameliorated,
particularly through the transmission review?
Dr Watson: Shall I start, briefly, at
least? This key issue is picked up in
the Transmission Access Review document about investment ahead of need
(so-called), which is that you would have some strategic investment where,
perhaps, it is anticipated it is quite likely you are going to have assets,
whether they be offshore wind, onshore wind, or whatever they happen to
be. There is an increasing recognition,
which I support, within Ofgem, that we need a regime which is going to do that,
otherwise you do get these problems of plants buying rights and then being
delayed and then somebody who is ready not getting in. You do need to have some spare capacity,
which runs all the risks that Goran referred to earlier about investing too
much. I think, perhaps, we need to let
go a little bit of our anxiety about investing too much because, otherwise, the
alternative, to me, seems to be this present status quo. So investment ahead of need is required, and
if you look at the Energy Network Strategy Group report, which came up with
this £4.7 billion figure that the Chairman referred to earlier, it does segment
that by different types of investment, and some of it is identified as being
likely to be required under many different scenarios. If you like, there is a series of less-regret
- not no-regret - measures that could be made, and that is where I think this
investment ahead of need could be put into operation first. There are more uncertain investments where
you are really not sure whether they will be required, and there it is more
difficult, and I recognise the dilemma that regulators are in about that.
Professor Strbac: There is also development in
the regulation of networks. That may be
a part of RPI-X@20 but certainly it is being discussed now, which are the ideas
that the network company such as National Grid would be allowed to, if you
like, go and develop for speculative strategic projects. If they expect that there will be a
requirement for that system, the risk profile of that investment would need to
change, given the uncertainty of the future, but if they get it right they
might look to a larger rate of return.
For example, there is now an example in Wales where there is currently a
200 megawatt wind farm which wants to connect to the system, and for that they
will need to build a (to use technical language) 132-kilowatt transmission, but
if there is a potential maybe for 1,000 megawatts to come, and if that
materialises, we will need to then build two or three times the same thing,
which is not a good idea. So National
Grid is talking to all these developers of this scheme, hoping that they will
build a bigger system which will then turn out to be useful and they would make
a larger rate of return. So there are
developments within the regulation concepts which would allow more of this
strategic investment to take place in the networks. You are probably closer to that.
Dr Pollitt: I think we need to recognise that there is a default development
path, which is the sort of big transmission and distribution investment path
with large-scale renewable generation being connected to the system, but that
is not the only path. We need to be open
to the possibility of a cheaper, different option emerging, or some combination
of a more localised large-scale outcome.
The danger is we may make a lot of strategic investments up front in
increasing the size of the transmission system which, when we realise the costs
of connecting all the renewables to that system (because it is not going to be
least-cost), we will actually not make use of it. Of course, we can do transmission first and
then find that the generation does not actually materialise. I think we need to be cautious about making
large investments up front ahead of established need. That is why I have argued for making more use
of negotiated settlements in trying to tease out whether there is going to be
demand if we expand the transmission system, and have some basis for this
expansion - and to give reasonable opportunities to more local solutions and to
demand-side management measures and interactions between heat and
electricity. Otherwise, I think, the
danger is we will make large investments up front which we actually would not
be able to follow through on.
Q37 Charles
Hendry: Can I got back to what you were saying, Dr
Pollitt, about the offshore connections and the preference of point-to-point
connections? The companies seem to be
queuing up to say why they are pulling out of offshore: we have seen Shell
taken out of London Array, we have seen Centrica putting some of their plans on
hold, and Eclipse being sold; we have seen Masdar coming in and then saying
they are not sure the finances stack up at the moment. One of the points which they seem to
highlight is the costs of that point-to-point connection, and a preference to
have a bootlace structure that the National Grid talks about, which would link
up a number of the offshore facilities and bring them to coast on a few key
points where demand is going to be greatest.
Why do you seem to have ruled that out in your preference for a
point-to-point structure?
Dr Pollitt: I am not ruling it out. I
think one always needs to be cautious when people who are making generation
investments point to transmission costs as to the reason why they are pulling
out of investment, because actually what often is the subtext of those sorts of
comments is: "If you subsidise my transmission investment then my investment in
generation makes sense". That is a
dangerous logic to go down. The reason,
I assume, why people are pulling out of these investments is because, actually,
the generation costs do not add up, and that is an even better reason for not
subsidising the transmission - because what we are really finding is the
generation incentives are not there.
Q38 Charles
Hendry: Do you not think that the bootlace concept is
worth investigating further? They are
not saying they are pulling out because of the transmission costs but they are
saying that that is the more expensive way of doing it, in going for a
point-to-point system. If we are looking
for this huge expansion - something which nowhere else in the world is looking
at, 33 gigawatts of offshore wind - then is there a case for greater government
intervention and engagement in saying: "We will help to pay for the connections
between those different offshore facilities"?
Dr Pollitt: Goran can probably comment on the technical benefits of creating
grid offshore, but it seems quite clear that the competitive benefits of making
the investment simple and point-to-point are potentially quite
substantial. It remains to be seen what
bids actually materialise for some of these point-to-point connections. The anecdotal evidence that I have heard is
that even the threat of this process has disciplined some of the incumbents who
are making island connections already into reducing what they say they will be
able to do them for, so there are actually, potentially, quite significant
savings from standardising the investments, and making the auction process very
competitive - not to mention the technical benefits of just connecting straight
DC connections into the grid, but Goran can comment on that.
Professor Strbac: We did work which was used to
develop offshore network design standards for round 2 offshore. The costs of offshore transmission, when you
compare it with onshore transmission, is significantly higher and designs do
not justify having an interconnected offshore system. On the benefits of having interconnected -
this is only 10 gigawatts of it, or thereabouts - there is not a business case
for connecting offshore wind farms and building interconnection because the
costs are significantly higher than the benefits which you get from them. So it is a simple technical and economic
argument that tells you to do point-to-point for these sorts of amounts. There is no business case for that. It is too expensive. Offshore in networks are not cheap. I completely agree with Michael that concern
is about generation costs - they do not add up.
Our concern regarding the point of regulation is that offshore
regulation in terms of compensation arrangements for generators in case the
network is not available are discriminatory, which is completely unhelpful, in
my view. You may be aware, for example,
that when generators comply to the grid connection onshore they get
compensation if the grid is not there to take out their energy. That does not happen offshore. This is a major discrimination and we have
been pointing out for sometime now to the regulator that there is absolutely no
justification for why wind farms which comply to the standards of offshore
grids are exposed to costs associated with unavailability of the network. Offshore systems are much more difficult to
manage than onshore; for example, if a transformer failed on this platform it
takes six months, on average, repair time.
Imagine, you are building a wind farm and you might be, if a transformer
fails, which you cannot do very much about, six months without any revenue, and
if this happens to you twice in the first five or ten years you are bust, while
onshore you get complete security against unavailability of the network. We think that is very unhelpful, given what
the cost structure currently is offshore.
We need any help which we can get rather than discriminating against
offshore developments.
Chairman: Can we have a look at some
other aspects on grids, particularly the potential for interconnection into Europe, and the idea of a "supergrid", which has been
floated by the European Commission, in particular?
Q39 Colin
Challen: From what I have heard so far, it sounds to me
like there is not really a business case to tackle climate change; the model is
not capable of delivering what politicians want from it. Discussion is now taking place in Europe and in the Commission about a European
"supergrid". Are there advantages to us
in actually buying into greater connectivity with European countries and
pursuing this goal of a "supergrid", which some people call a "solar
supergrid", tapping into Saharan solar power, for example? Would you take us through that and where it
might lead us?
Dr Watson: There may be advantages of it
and if you look at cases like, say, Denmark, which Goran has already referred
to, Denmark has been able to be fairly ahead of the game on wind and on
combined heat and power because of its interconnections with neighbours. So the advantages there are clear of being
able to do more radical things, possibly, with your grids and energy systems if
you have more interconnections. Maybe
Goran might want to come in on this.
There are, potentially, advantages in connecting up systems where the
wind might blow in different places at different times, but there may also be
limits to that. Then, on the Saharan
example, it is often talked about but, again, I think there is a technical
challenge: the sun is not out all the time.
So how far that can be brought into the European system and what kind of
demand it will actually supply - is it charging electric cars when the sun is
out? Maybe - you could do. It is an incredibly major investment for the
kind of capacity people are talking about, and, of course, extremely costly,
probably. Of course, the regulations,
the institutions and all those other things to pay for it, would need to be
there. So I do wonder whether those
very, very big solutions are the kind of first port of call. That is one possible advantage of interconnecting
grids more generally than they are at the moment.
Q40 Colin
Challen: It poses a question, in my mind, at least,
that the cost has been put at £40 billion (or euros - I forget which) over ten
years. Spread over the European Union,
over that period of time, it is not a huge amount of money.
Dr Watson: No.
Q41 Colin
Challen: However, should it be delivered in the current
conditions - there are problems with liberalisation of the markets in Europe
and we have heard a great deal this morning about the total dysfunctionality,
in my opinion, of our own way of doing things - this does call for more of a
socialisation, does it not? If you were
to approach it on a Europe-wide scale, possibly backed up with directives, then
you are going to sweep away some of this "Cannot see the wood for the trees"
approach.
Dr Watson: If you wanted something like
a solar array in the desert to supply lots of electricity to the EU, you would
have to have something that was not a liberalised market to create the right
incentives for that kind of very large investment to go in. Investors are going to have to have security
of where the electricity is going and who they are selling it to, and all of
that, but, as I say, I am not entirely convinced it is the number one on that
list of priorities for the Energy Commissioner sitting in Brussels.
Maybe other colleagues want to comment on this.
Dr Pollitt: I think that European grids have other priorities. I would like to see complete integration of
the European gas grid, for starters, and effective gas trading, and that is the
number one priority for the European Commission in terms of its grid
policy. I was at a conference last week
about energy security, and if you think that energy security problems of the
gas system are bad, well, think about the energy security problems of importing
electricity from North Africa. I think the record on disruption of
electricity grids is much worse than their record on disruption of gas
grids. There are serious geopolitical
issues associated with some of the more optimistic scenarios for solar from
Africa that really would demand very serious consideration, not to mention the
fact that the electricity transmission grids are very weak in Italy or Spain or
any of the places where we would be landing the electricity and then wanting to
strengthen it and bring it up to northern Europe. I think this is a long way off and requires
certain fundamental changes in geopolitics before we would want to be relying
on large quantities of African solar energy.
Professor Strbac: I could perhaps comment on
the case of connecting the UK
with the rest of Europe. We have done some
analysis, in particular angled to see whether we will be able to manage this
intermittency of wind better if we connect with our neighbours. This shows that the benefits of doing that
will be rather limited because weather fronts are, in fact, bigger than
countries. Fundamentally, when we have
too much wind there will be a similar situation on the continent. So there will be rather limited opportunities
to do that interconnection, and we would think that there would be better
opportunities or more cost-effective ways of managing intermittency by
integrating the demand side of the UK and moving towards a system where,
particularly if you look at the longer-term, 2050 time horizons, when we
anticipate a start to integrate transport, potentially, and the heat systems
into electricity, there will be massive opportunities to manage the system if
we get access to these resources, because these are all, if you like, storage
resources - heat and then transport. Both
providing storage. Opportunities there,
in our view, are incredible and would have to be exploited. That is what we think. If anything, the UK should be moving into the area
of integrating demand and generation in our system rather than having a vision
as to where we need to put the wires.
Q42 Dr
Whitehead: Could I take you to the other end of the
scale? To what extent does the talk and
discussion about the strengthening of investment in the transmission network,
as it were, ossify the system in future into a one-way transmission based
system, whereby the transmission system supplies the DNOs and the customers in
a one-way street at a time when, obviously, there is a great deal of discussion
and potential in distributed energy going back the other way up the street and,
therefore, requiring, particularly, DNOs to look at the local transmission
systems and, perhaps, change the nature of how those systems work within the
overall transmission system? Do you
think there is a serious danger that the sort of investment that is suggested
is going to shut the door on effective grid import of distributed systems?
Dr Watson: It is a risk. You talk about "shutting doors" - I think the
door is already shut and has been shut for sometime. In a sense, what a distributed generator of
energy has to do is to open it. As I
said much earlier on, we have had a tradition of distributed energy in Britain
but you have to look pre-World War 2 for it.
We are a very centralised system, so there is a risk of concentrating on
the large at the expense of the small, and my partial reaction, on second
thoughts, to the solar array in the Sahara is to say that there is a lot you
can do with renewables embedded into distribution grids in local areas, whether
it be in public buildings or private homes, heat and power systems in local
towns and villages, and so on. There are
huge opportunities. Actually, on the
illustrative mix from the UK, from DECC, about how they might meet their
renewables target, if you look at the pie chart they have got in the
consultation document, lots of that pie chart is big stuff like offshore wind,
but there is a lot of it which is local at various scales, whether it is
house-local, village-local or town-local.
Again, to meet these targets I think you have to open the system up to
allow the possibility of local generation and integration with demand (going
back to what my colleagues have also said), and to do that it is probably a
bigger ask, in a sense, to change the way that distribution networks
operate. As you know, they have been
passive hitherto for a long time, and now we are asking them, if they do
connect to a lot of distributed resources, to be active, to manage that
actively, with lots of different generators of different sizes and types, which
implies new control systems and implies integration with demand, and so
on. In a sense, that is probably a
bigger change, I sense, for them than, say, connecting offshore wind is for a
transmission company. Perhaps it needs
more attention. In a sense, I am
agreeing with the premise of your question that there is a risk if you
over-emphasise the issues of transmission access for big renewables at the
expense of the smaller-scale technologies.
Dr Pollitt: I think this is potentially very important and very exciting. It plays to actually engaging with the public
on issues of climate change and getting public acceptability for adjusting our
energy, and I think it is an under-exploited opportunity at the moment to move
more into local energy service company provision and to engage people with
smaller companies and smaller investments, and to look to exploit local energy
resources. Longer term, these are the
sorts of experiments that we should be doing now because they may pay off very,
very substantially later on. They are
difficult - no one pretends it is easy - and if you talk to any of the incumbents
they will probably tell you that this is all terribly difficult, and any
interactions that we have had with small energy service companies raise
questions about their competence and: "We think we can do it better". But I
think this is an area where we do need much more experimentation and where we
have got the chance to actually get public support for doing something about
climate change, because people can see and be engaged with it locally and
engage with changing their behaviour because they are engaging with a local
company. If it is a big national company
telling you what to do you are very unlikely to do it. Also, I think, it offers the prospect of lots
of innovation because different things will happen in different places;
different technologies will be trialled, supply and demand will be traded off
much more effectively; new ownership forms may come forward, so we may see
customer-owned assets or private/private partnerships, which may all be
necessary to achieve these very ambitious targets.
Professor Strbac: The research which we
conducted in terms of comparison of distributed and centralised systems is that
in terms of integration there potentially would be significant benefits in a
system which current regulation prevents them from accessing. For example, if the wholesale electricity
market price, let us suppose, is £40 per megawatt hour, if you can take the
full 400,000 volts (very few people can do that), if you want to buy at the end
of the system, it costs 10-12p per kilowatt hour - £100 per megawatt hour - our
current regulatory system means that (although the UK is leading the world, by
the way, in terms of changing the regulatory regime around electricity
generation, in my view) we are still far from making a level playing field for
similar generators to compete on the same footing, if you like, with the
commercial company. Asking electricity
providers to produce at 4p per kilowatt hour without recognising their benefits
in terms of networks is difficult. So if
we were able to make changes in the regulatory framework, which I think is
going to be probably dealt with, that would enable these distributors to merge
and compete properly with centralised solutions.
Q43 Dr
Whitehead: You said they are exciting and you have said
that, yes, some changes need to be made, but I think the central question
remains: how do you deal with the DNOs in terms of how reasonably
market-ordered access is provided? To
put it the other way round: at what stage of penetration of the market, for
example, would it be considered necessary to make the serious changes? At what point of penetration does the
existing DNO arrangement simply break down, particularly in terms of, perhaps,
an uneven demand for penetration in different areas, according to how the DNOs
are working? Do you consider that there
are, actually, as it were, regime changes which need to be undertaken, perhaps
which look rather different from some of the larger concerns on the
transmission network, in order to accommodate that new world?
Dr Watson: I think you can go quite a
long way before the system has to operate that differently, depending on the
concentration of distributive generation - say, people generating electricity
in their home through solar panels. You
would have to have a very large concentration in a particular area to start
causing problems, but if that is spread out around an area - studies have been
done which show you can go quite a long way.
Although, as Goran said, we are leading the world in regulatory change,
the irony is we are way behind most countries in deployment of this stuff. We are very good at regulatory change but,
actually, delivery is appalling bad, I think.
Q44 Sir
Robert Smith: There is a disconnect there?
Dr Watson: A little bit, yes. The upshot of that is that you can actually
go a fair way before you start getting to some of the real crunch problems
where the regulatory system would have to change. In the meantime, I think Michael is quite
right, there is a need for innovation, and government regulators through
different schemes could do a lot more to incentivise the distribution companies
and newcomers to trial and demonstrate some of the really new concepts, not
just of technologies like PV but how they all connect together and connect
together with demand in new ways. So
then there has to be a lot of learning done, so that when the time comes where
you do get this crunch and where you do have to do things differently, at least
there is some knowledge there to build on rather than waiting till you get
there and then sort of saying: "How do you do it?" - which, by the way, is what
the Danes have done and they have done it quite successfully. It is not the only way but we have time to
anticipate this, at the moment.
Chairman: Can we have a look at this
innovation a bit more?
Q45 Dr
Turner: We have established fairly well this morning
that the management of the grid is firmly rooted in the first half of the 20th
Century. Sadly, so is most of the
technology. There is an unfortunate
history of lack of investment for many decades in research and development in
transmission technology. Can you give us
your views on the current state of investment and actual work going on to
develop technology? Clearly, there are
several outstanding areas where we could use advances in technology, in terms
of tackling transmission losses, facilitating smarter grids and, particularly,
the immense cost of under-sea cabling and DC transmission. Just how much work has been going on in these
areas?
Dr Watson: Along with most of the energy
industry, a corner has been turned, probably, in the last few years, because of
the availability of money from governments but, also, commensurate anticipatory
investment by companies, whether it be utilities or whether it be equipment
suppliers like ABB - people who have geared up their investments in
R&D. One of the consequences of
privatising the industry in the UK,
particularly for the distribution grid, was a real run-down of what little
R&D they did to the point where they did virtually none at all. One of the issues has been, from a grid
perspective, with the regulatory regime, that there have been efforts to
incentivise innovation and demonstration of new concepts, but because they are
starting from such a low base they have not been that successful. They have brought forward some projects and
some activity, but not on the scale that I believe is required. I have questions about whether you can rely
on the regulatory system, with some adjustments, so that people can get a
greater rate of return by investing in innovation during a regulatory period; I
have questions whether that, in itself, is enough and whether actually, as I
said in answer to the previous question, government itself needs to not only
support new types of PV cells, and so on, but a series of area-based demonstrations
of smart grid concepts in practice, which is being done in many other
countries. There is a very big
demonstration in Boulder, Colorado, which I think is $100 million, by
the local utility on a smart grid, and there are many examples in other, European
countries. Those kinds of investments do
need to be made so that people have a better understanding of how all these
things work together. Until we do that
we are not going to have it. We do have
a problem with the current system in investment.
Q46 Dr
Turner: Are we missing out on a considerable green
industrial opportunity here by not investing in up-to-date transmission
technology? Can you see any useful
policy instruments that the Government could deploy, whether it is direct
government investment or by Ofgem pricing mechanisms, to not only increase the,
frankly, pathetic level of R&D investment in relation to turnover from its
present 0.5 per cent level, which is derisory, and, also, achieve some
intelligent direction of the R&D effort?
Dr Watson: I think there is an
opportunity here, in the sense that government centrally could fund things
under its current programmes, or you could see it channelled through bodies
like the Energy Technologies Institute, which already has a programme of work
on distributed generation, although it is relatively small. The other thing you might consider, if you
think about it slightly differently, is perhaps whether you might build on some
of the exceptions, if you like, that have occurred in the UK, such as Woking, which
everybody talks about, where innovative things have been done through
investment, and think about: is there a case for creating or granting more
powers to, say, local authorities, or thinking of new ways to bring in newcomer
energy service companies of the kind that Michael mentioned earlier, so that
they would be the ones that are actually experimenting with some of these new
concepts? Another interesting lesson
from history is that it is often the outsiders and not the incumbents who are
the ones that really innovate; do the new stuff and actually bring on more
radical change which is not incremental.
Q47 Dr
Turner: What worries me is that I am hearing a
deafening silence from the three of you on whether there has been any
significant technological advance in transmission technology itself - any
advance in DC cabling, for instance, that could make it much cheaper and more
flexibly applicable, because there are so many applications where it would be
extremely useful if we had such advances.
Is there anything happening there?
Professor Strbac: Regarding the question as to
can engineers make a CO2-free electricity system, the answer to that is
absolutely yes. To remind you, engineers
have sent men to the moon in 1968, which was 40 years ago, and making a CO2-free
power system is much less of a challenge than flying to the moon. The issue which we have is all about the
budget; what is the budget required to get to the problem? That is where the issue is. I have lots of, if you like, dumb solutions
to how we can arrive at this but not many clever solutions. That is where, in our view, there is a
massive business case for investing in alternative ways in which we manage the
task. Let me give an example. There are two key factors of the present
system of operation. One is that the
British system needs to balance very tightly.
That has to be done. Also, demand
is completely uncontrollable. When you
switch the lights on in here, somewhere generation produces immediately, or
almost immediately, the amount of energy which you have just demanded. The whole culture and philosophy of the
system was being based on a predict-and-provide mentality. Given that supply of demand is valuable
(blackouts are not very desirable and we want to make sure we do not have
blackouts), the traditional solution is
to then build enough resources, build enough concrete, steel and copper to be
able to meet that big demand, because your only source of control is in
generation. Transmission control is the
only way we can do that, but also by changing generation. In that respect, nothing has fundamentally
changed since 50 years ago. If we
continue with this philosophy, which we obviously can do, if we build huge
amounts of nuclear power stations and huge amounts of wind, the system is going
to work, but we are going to have to waste energy whenever production exceeds
demand, so there will be no problem maintaining demand supply security. We have done some analysis, if we have
climate change at 2050 targets we have an all-electric future, so we integrate
transport and heat into this, and you would end up with about a 300-gigawatt
system, which is now 60 gigawatts - big demand.
So a five-fold increase in capacity but only an increase in energy of
about two times. Your utilisation of the
investment, which is already quite poor, generates 40 per cent with wind, and
networks about 30 per cent, so if you continue with this philosophy of just
provide on demand, the utilisation of the investment will be incredibly low; it
will be below 25 per cent. The
alternative to that is to become cleverer in the way we organise
ourselves. One extreme would be that if
we go to this electric-transport future, when people come home everybody plugs
their car in and then they are getting it recharged, versus when the car gets
plugged in it sends information about what is the status of the charge of the
battery, and when we want to use this car the next time we can reduce the
investment from 300 gigawatts to 150 gigawatts supply. A massive savings in investment efficiency. That is, in our view, a major opportunity for
research and investment. In terms of
individual technologies, they are all available, but what is not available,
what is not understood, is how we get all this together, which Jim has pointed
out. Given that the UK is not very linked in terms of infrastructure
with Europe, we are going to hit first the
problem of inefficient investment, and we could turn this potential problem
into a massive opportunity. Obama talks
about smart grids - that is not an unknown phenomenon - but what we could do,
in the UK, given that we would need to have this in our own patch in order to
make the system work efficiently, is we could start leading the world in this
area and exporting that technology, which is really all about service
provision, and which is all about integration, and sell this to other
countries. There is a massive
opportunity for us.
Q48 Charles
Hendry: In addition to the issues of managing demand,
can I ask about managing supply as well?
One of the issues about wind is its inherent variability. What about the technology of electricity
storage? Is it viable to be investing in
batteries, in hydrogen-compressed air, water storage - those technologies? Is this also an area where you think we could
be carving out an opportunity for UK plc?
Or are we in a situation where, simply, the costs of those technologies
would never be justified by the return which it would make?
Professor Strbac: Certainly several years ago,
there was an argument being built that for every megawatt of wind farm you put
out you need one megawatt of some sort of storage. That would be a complete disaster for wind
because the cost of storage is twice the wind cost, which is already quite
expensive. Also, when you put the energy
into storage you only get 75 per cent back, if you are lucky, because storage
wastes a lot of energy. So you need to
be quite desperate to go into building dedicated storage for this. If we move into a world of having, let us
say, heat pumps in cars, the storage will have been bought for you because the
buildings have got the storage already inherent in them, and also people who
drive the cars would have to have the batteries, so somebody else has paid for
them anyway. All you need to do is make
use of it in a way that integrates the system.
I am not saying there is not mileage in building new technologies -
there would be definitely - but I would suggest that we first try to make sure
we can exploit significantly cheaper options and become significantly more
sophisticated in how we manage the system.
I think that is where the massive potential gain is. It is just getting more organised and it
requires investment because what you need to do is merge information and
communication infrastructure with energy infrastructure. Making energy cleverer is where, in our
view, the massive gain is, and that is where the UK potentially could lead the
world. It is very clear that this is
required, and, as I say, a bit of the technology exists - we have mobile
'phones and we know how to communicate - but how you make this system work
coherently and how you make the regulations facilitate that development is
where we need to spend our time.
Q49 Colin
Challen: It confuses me a bit when we have heard a lot
about the markets producing efficiency and yet smart grids, which are all about
efficiency, are struggling. I have seen
many manufacturers of things that you can put in freezers, or put on industrial
plant and all sorts of things, that can reduce electricity consumption
tremendously. Is anybody at all driving
a coherent policy on this - Ofgem, the Government, the EU? Where could we look to find a coherent policy
on smart grids and the associated technologies?
Dr Watson: At the technology level,
obviously, European research is funding technology platforms, but I think what
you are getting at is what is the incentive for people to actually deploy these
technologies - in the fridge and in appliances in the home? Then you have to look at the wider business
model and drivers of the utilities which dominate the energy market, which
(basically put) are: the more they sell the more they earn; the more units they
sell the more money they get. There has
been some rhetoric and talk within government about thinking about how they
might be transformed into energy service companies - there have been
ministerial speeches going back, I think, three years now, on that - and the
idea of giving them different drivers.
Actually, what they are trying to do is to manage the service, and that
would lead you into all sorts of things, including local generation, and so
on. My reading of recent consultations
that came out in February is that DECC has really pulled back from this idea of
trying to regulate companies differently so that they behave as energy service
companies. The favoured solution was to
put a cap on the emissions from the electricity and gas supplied by companies,
and to reduce that over time, so that eventually the companies would then have
to either invest in demand-side measures in people's homes or in low-carbon
generation. Analysis has been done which
shows that that is all terribly expensive, so they have pulled back from
it. I suspect there is the economic
analysis behind it, but also there is a pushback from industry because it would
need a very serious change in their business model. Those kinds of changes are required if you
are going to get energy service companies on-stream.
Q50 Colin
Challen: That is the generation industry you are
talking about?
Dr Watson: Yes, but obviously these same
companies are the supply companies - the retail companies; they are not
different companies, they are the same.
Q51 Colin
Challen: One driver is price, of course. If the Government is not prepared to
legislate and regulate for smart technologies in a sort of direct,
interventionist fashion, if they simply change the pricing structure so that,
as an industry now, you do have banding and all sorts of approaches to pricing
every half-hour and that kind of thing, would it change the attitude to
technology if we introduced variable pricing so that the more you use the more
you pay per kilowatt hour?
Dr Watson: Again, those things may help
but I think there is an infrastructure investment issue here - the kinds of
things that Goran was talking about, about the ICT revolution having an effect
on energy systems. That can only happen
if you made a set of infrastructure investments; smart meters - not just the
box in the cupboard but smarter, and that can give you information, but it is
actually the IT system that lies behind that so that that information is
available; real-time pricing, information about what you are using and the
carbon emissions from it. My view is
that that does require some sort of programme of co-ordinated investment just
like the investment that gives us the pipes and wires we use now as required.
Dr Pollitt: I think the Government has substantially interfered with the market
for smart meters. It was the case,
about, say, three years ago, where the companies were expecting to roll out
smart meters to about 30 per cent of their customers, simply on a private
business case, but that has been delayed as a result of the Government's
investigation of a policy on a ten-year roll out, which of course is in line
with European directives. I think this
area is quite a good example of government interfering in the emergence of what
would have been quite strong market pressures to introduce some of these
technologies. There is a case for (a)
the Government getting out of the way of incentivising these things and (b)
making sure that if they are going to go ahead with these policies they go
ahead with them quite quickly and introduce some clarity into how the market is
going to evolve over time. I do know
that there are technology companies out there - British ones - who are very,
very interested in this; they see smart appliances as the next big thing to
mobile 'phones, and there is a lot of read-across from, say, mobile 'phone
technology into smart appliances, and there are companies that are willing to
invest, as long as we can get the incentives set up.
Q52 Colin
Challen: Does something have to happen to Ofgem,
really, to transform this? Do we need to
change Ofgem's functions?
Dr Pollitt: My interest has been declared.
Clearly, the pushback on smart meters came from outside Ofgem, and Ofgem
were letting the market emerge for smart meters, and it was about to emerge
when wider government policy got in the way.
Professor Strbac: In terms of wires, currently
companies get a rate of return on copper, aluminium and steel, not on making
better use of that which we have. That
is just a fact.
Q53 Anne
Main: Very briefly, on the government interference,
as you said, on smart meters. Having met
the smart meter companies very recently, part of it was not only government
interference but they actually believed there has been a lack of clarity on
what is expected of them - just smart meter technology as a whole. Is this going to be a big problem if we just
do not know what we want of the industries that we are expecting to deliver
this?
Dr Pollitt: Yes.
Q54 Sir
Robert Smith: Just to reinforce what Professor Strbac was
saying just now about the companies and copper, and so on, surely what Dr
Watson was saying, which the Government, rather sadly, seems to be turned
against, is that turning the providers into providers of heat, light and
mechanical power in your home would automatically build into them the
incentives to make best use of the whole system, and to deliver this smart
technology.
Dr Watson: That is why I am particularly
disappointed to see that being dropped at the first sign of, possibly, lobbying
behind the scenes.
Q55 Sir
Robert Smith: Some of the companies are quite up for it, are
they not?
Dr Watson: Yes, they were.
Q56 Chairman:
I had
the impression the companies were keen.
Dr Watson: I have seen Vincent de Rivaz
give speeches where he said: "I can see a time when we won't make money just by
selling units". (That is a slight
paraphrase.) It is not like they were
not up for it at the time, and I am slightly puzzled as to what has happened to
that.
Chairman: Let us have a look at this in
terms of rounding up on these things.
You have talked about technology, innovation and regulation. Of course, the big issue is the costs of all
this, which seem to be huge.
Q57 Mr
Weir: We all struggle with the problem of how we
balance the cost to the consumer of energy with the investment needed. Obviously, as we have been discussing, huge
investment is probably needed in our transmission networks to meet our targets
for renewables into the future. Do you
think the consumer should pay the full cost of the network upgrades arising
from, essentially, public policy objectives?
Or do you think that in the future there will be support needed from the
taxpayer?
Dr Pollitt: Of course, there is the "polluter pays" principle; clearly, if
consumers are consuming "dirty" energy, of course, they should pay, and it is
costly to decarbonise the electricity sector.
The first port of call must be the consumers, and we clearly want to
incentivise people to reduce their consumption when they are faced with the
true cost of their electricity, which includes the cost of its carbon. I think consumers must pay more, and it would
be very wrong if we blunted the incentives which higher prices will give to
more efficient use of energy. That said,
of course, there is a serious fuel poverty concern, and I think the case for
taxpayer intervention is to help the fuel-poor.
What I think we need to maintain is the principle that somebody pays and
that prices for individual units of energy do reflect their true cost, but
there is clearly a case for us directing any subsidies that we want to put into
this towards the poor customers. There
is a lot of potential there because many poor customers, of course, are quite
price sensitive and would welcome direct subsidies either to reduce demand or
to help them to respond better to price signals. So if we are thinking about rolling out
energy service companies, it is quite interesting to observe that the sort of
local authority energy service companies which we already have (the Woking
example and, also, Aberdeen and Southampton), have been created specifically to
target low-income customers, mainly operating around council housing stocks. So there is a principle there that is already
established that if we do want to raise the cost of energy we can direct our
subsidies towards helping poorer people.
That is a legitimate use, I think, of taxpayers' money because it
maintains the efficiency incentives of everybody facing the correct price but
it gets to the equity problems of: "We don't want to raise prices on the
poorest customers".
Mr Weir: You are faced with a problem:
every time the price of energy goes up the number of fuel poor goes up as
well. It is a very difficult cycle to
break.
Q58 Dr
Whitehead: Talking about the issue of somebody has to pay
and how that may be structured, do you think the present system of five-yearly
reviews of network access payments is likely to be in the immediate future up
to the task of accommodating what is an unprecedentedly large investment
proposal, not just in terms of the vision for 2020 costs - the £4.7 billion -
but, obviously, the offshore connection costs as well?
Dr Pollitt: I think this is something, of course, that Ofgem is consulting on,
at the moment. There is an issue about
whether you would maintain, basically, a five-year review but you would have
more re-openers around it. So it is
clearly the case with the offshore regime that that will be a rolling process,
and as new investment and new proposed investments come forward then there
would be an auction process for connection.
That will not be a five-year cycle.
However, there will need to be some network planning of the five-year
type because we need to make investments which anticipate future demand as well
as just responding to demands as they arise.
I think we need both strategies.
We do need to maintain at least a five-year planning horizon within the
price controls, and we need to have the prospect of more frequent re-openers or
renegotiations as new investment proposals come forward, but in order for that
to be feasible, of course, we need a more streamlined process so that these
things can be properly assessed but quickly.
Q59 Chairman:
Is
there a longer-term indicative programme in relation to the costs you have been
talking about? There is the five-year
pricing plan, which is a reasonable kind of a period for the pricing, but is
there a longer indicative programme? In
the water industry, for example, the water companies are now required to have a
25-year investment indicative programme.
Is there anything like that within the energy sector?
Dr Pollitt: No, not to my knowledge. My
reaction to that is that with water much less technological progress is
expected over 25 years than would be the case in energy. So it is not clear that there is a parallel
to be drawn there, but it is interesting.
Q60 Anne
Main: Can I take you back to the consumer paying
more, particularly if they use "dirtier" fuel?
Can I ask you to address the problems that many people in rural
communities express about their choice of what fuels they can use? Also, can you just touch on the billing
system? Do you think the billing system
should make clearer as to exactly what you are paying for; whether it is green
initiatives, whether it is investment or whether it is subsidies, even? I would like to have your views on this. If you are going to ask people to pay more I
would like to know how you are going to sell it to them that they are going to
pay more.
Dr Watson: I can certainly answer the
second part. The point is there are
going to be costs, whatever way the system goes - there is not a cheap route
and an expensive route to the long-term targets. I definitely think there is a case for very
clear information about what people are paying for. A lot of industrial consumers have this; so
how much of their bill is the renewables obligation; how much of it is the EU
Emissions Trading Scheme and what are they paying for in terms of the Carbon
Emissions Reduction Target? Companies
claim they are making all these investments in energy efficiency and most
people do not know they are actually forced to by regulation, so it is the
consumers that are paying, not the companies.
I think it is very clear that we must have that information as well as
any other further information about, for example, allowing people to know that
they are actually on a green tariff (if that is what they are on), and clarity
around that. I think that is a
pre-requisite for an open debate in society about the costs and how we meet
these targets, yes.
Q61 Anne
Main: Rural communities. Is somebody going to address that?
Dr Pollitt: One would not want to
necessarily differentiate between rural and urban communities, because, as we
know, there are more urban poor than there are rural poor.
Q62 Anne
Main: I was not talking about poor; I was talking
about choice of provider. Also, the
connectivity in going out to rural communities can often be far greater. If you talk to other providers, such as Calor
Gas, they are very unhappy that they are the product of choice for a rural
community but they are being squeezed out.
If you are going to go down a certain route, how would you justify the
consumer in a rural community, for example, having to pay a lot more if they
have not got any choice?
Dr Pollitt: I want to question whether they would have to pay a lot more. There is certainly an issue, which, as you
know, Ofgem has been investigating, about people who are off the gas grid being
charged higher prices for electricity.
Ofgem have brought forward some proposals to reduce the price
discrimination against those customers.
Of course, in a low-carbon world people who are in rural communities may
actually have much more opportunity to access cheap, low-carbon energy than
people in urban communities, so they may have options for own-generation or
access to locally produced energy, which if we move towards this efficient
low-carbon world, they would be able to access much more cheaply than people in
cities. So it may be the case that in
the future people who are in rural areas will be much more advantaged by the
system than they are at present.
Chairman: In the last point today we
touch upon some other countries and what we can learn from them, in terms of Denmark,
for example. They are not always
strictly comparable, as we noted.
Q63 Dr
Turner: We have already brushed with this. There are clearly lessons to be learned from
other countries. In particular, I think,
it is probably fair to say that other countries have got further in achieving
the social objectives which we have for our energy networks. So would you like to comment on what lessons
we can particularly learn from other countries and how we should deploy them in
the UK
context?
Dr Watson: I think we can learn
lessons. Some of those lessons are about
networks and network investment; for example, in some other countries this
issue of socialisation of costs is just taken as read, and has been for a long
time. They did not, for example, in Germany have
the debate we had a few years ago about new wind farms and whether they would
pay the cost of the line to the network, as well as all the cost of the network
reinforcement. When I talked to German
research colleagues at the time it was happening in the UK they did not understand what I
was talking about, and I had to explain it.
Actually, it was just taken as read that you pay for the line and the
investment and the system takes care of itself.
There are pros and cons to that but, certainly, what that has done is
presented less barriers to progress in terms of renewables deployment. Of course, there is the age-old discussion
between feed-in tariffs versus the renewables obligation that we have had, and
saying the feed-in tariff is less risky has, again, led to more
deployment. So I guess there has been a
tendency towards accepting that once the social goal is set you do it and you
worry less, perhaps, than you do in the UK policy environment about the
costs and about issues like efficiency.
Costs and efficiency are there as important issues in the mix, but they
are lower down the order of priorities.
For Denmark,
I think the interesting thing is that they have sort of gone for deployment of
wind, and then dealt with the problems when they have arisen. When they have reached a point where they
have got a lot of wind and they are really relying on the neighbours a lot, the
company there - Energinet.dk - is actually investing in a lot of technical
solutions to think about how do we reduce that and manage that? However, they have waited until the problems
have arisen, so, again, it is a rather more pragmatic, shall we say, approach
of getting on with it and solving the problems, whereas my view on the UK is
you anticipate the problems, worry about them, but actually, in the meantime,
what progress are we making towards the target?
So it is the other way round, but other colleagues may have different
views.
Dr Pollitt: I think this is a strong
argument for having much more experimentation and waiting and seeing, because
it is obvious, when we look around the world, that the UK has much more ambitious targets
than almost anyone else, and there are not really any good precedents. The only precedent that there is for the sort
of decarbonisation that we are aiming at in global history is the French
nuclear power programme, and that was the only thing that has decarbonised a
whole large economy on the same trajectory that we are trying to achieve over
the same period that we are trying to achieve it. Of course, that only did the first 20 per
cent; it did not take them to an 80 per cent reduction in CO2. We need to recognise that there are lots of
interesting little things going on around the world, but there is nothing on
the scale that we are envisaging. There
are areas which I think are worthy of more study; we do need to look more
carefully at the Scandinavian experience, in particular the diversity of
companies that they have and the success of what has happened in places like
Norway and Sweden in terms of their electricity markets, relative to ours,
where they have followed a very different model to us but which seems to have
been equally successful. I think we
might need to look carefully at the experience of the United States and some of
the demand-side management programmes that they have in the United States,
particularly in places like California where they have strongly incentivised
local utilities, as we have heard, to demand-side management, albeit, of course,
from a very high demand usage base.
Q64 Sir
Robert Smith: When we were talking about locational pricing
transmission, the generators obviously lobby us hard that those from the North
lose out because they have to pay more, but the regulator comes up with the
converse, and I wonder if you could confirm your understanding. Of course, the consumer in Scotland should be benefiting under
the current regime.
Professor Strbac: It will not, because it is
excluded, unfortunately. Fundamentally,
it will not.
Q65 Sir
Robert Smith: The consumer does not benefit from the
locational ----
Professor Strbac: How I see the TAR is all
about generation; demand is not discussed.
Demand is not part of the picture at all - it has been excluded. It is a massive missed opportunity.
Chairman: Thank you very much,
gentlemen. That was an excellent
discussion, although you seem to have raised more questions than we thought at
the very beginning. It has been a very,
very helpful input to our Committee.
Thank you very much.
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