CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 388-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENERGY AND CLIMATE CHANGE committee

 

the future of britain'S electricity networks

 

 

Wednesday 22 April 2009

MS ALISON KAY, MR MIKE BARLOW and MR RUPERT STEELE

MR TIM BALCON

Evidence heard in Public Questions 66 - 143

 

 

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 internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

2. The transcript is an approved formal record of these proceedings. It will be printed in due course.

 

Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 22 April 2009

Members present

Mr Elliot Morley, in the Chair

Mr David Anderson

Colin Challen

Nadine Dorries

Charles Hendry

Anne Main

Judy Mallaber

Sir Robert Smith

Paddy Tipping

Dr Desmond Turner

Mike Weir

Dr Alan Whitehead

________________

 

Examination of Witnesses

Witnesses: Ms Alison Kay, Commercial Director, Transmission, National Grid, Mr Mike Barlow, Head of Systems Management, Scottish and Southern Electricity, Mr Rupert Steele, Director of Regulation, Scottish Power, gave evidence.

Q66 Chairman: Good morning, ladies and gentlemen, and welcome to the Committee. It might be useful for the record if you would start by saying a little bit about yourself and the organisation you represent.

Ms Kay: Good morning. I am Alison Kay, I am the Commercial Director for transmission at National Grid. We own the high voltage electricity system in England and Wales and operate it in Scotland as well.

Mr Barlow: Good morning. I am Mike Barlow. I am head of Systems Management for Scottish and Southern Energy, the transmission part of Scottish and Southern Energy, based in Perth, and the Scottish and Southern Energy transmission business owns the transmission assets in the North of Scotland.

Mr Steele: Good morning. I am Rupert Steele. I am Director of Regulation for Scottish Power. We own the transmission system in the central belt of Scotland, as well as numerous other generation and distribution assets. Because I am in a corporate role, I can speak across the whole business.

Q67 Chairman: Thank you very much. You will be aware that we have had some representations recently in terms of policy and strategy in relation to grids. I understand the Electricity Network Strategy Group recently published our electricity transmission network originally for 2020, which of course includes a number of players within the sector. I wonder if you would like to say a word about what you see as the key elements of that vision towards 2020 for the transmission network which that group set out.

Mr Barlow: We were asked by Ofgem and DECC to work as three transmissions businesses to have a look at what grid developments might be required in order to meet the targets for 2020. We came forward with some renewable scenarios for Scotland, England and Wales. We have identified a scenario of reinforcements that would be required in grid developments on the mainland to accommodate that. Part of the approach has been to maximise the use of the existing system that we have on the mainland, and then to go forward with that to look at other reinforcements that would be necessary around the country. Some of those, extending towards 2020, are starting to see some subsea cable links, in parallel with the onshore system but still as part of an integrated mainland system. There is just one further point. In order to try to deal with the uncertainty of how that generation might appear, and where and when it might appear, we have identified reinforcements in two phases, really: a series of reinforcements which would be required with a certain amount of certainty by 2015 and a second set of reinforcements that might be required by 2020 should the full volume of renewables appear to that time scale. To try to deal with the uncertainty of it, we have identified reinforcements in two phases.

Q68 Chairman: Are you saying that you are trying to develop a priority list in relation to where the investment should go as short, medium, long term?

Mr Barlow: We have taken a view on where we think the renewables would develop and also a view on generation backgrounds and sitings of nuclear as well, but it is predominantly a renewables view. We have worked with currently existing views of that and we have then focused on developing the grid developments that would be required to accommodate it. You ask about a priority list. It is more a phasing of the developments that would be required. By doing the phasing in these two phases, we are trying to deal with the uncertainty but also avoid the risk of stranding or over-investing too early.

Q69 Chairman: Sure. By the implication of renewables, I assume that within that you are talking about reinforcements of the grid from Scotland to South of the Border where there is an issue of transmission.

Mr Barlow: That is one of the areas for reinforcement. It certainly is one of the key areas. The report also identified Wales as an area for reinforcement, with the potential of integrating both the onshore wind and the offshore wind, because we were looking at 34 gigawatts of wind in total contributing to this. Other areas were the east coast of England, the Dogger Bank type areas. They were probably the three main areas, I would say: Wales; Scotland to the North of England, part of that Scotland one; and some east coast reinforcements down the east coast of England.

Q70 Mr Anderson: Could I ask you to be a bit more specific on what you mean by reinforcements on a practical level. Is it more pylons? Is it more underground cables?

Mr Barlow: In the case of the North of Scotland, if I could start there, in the background to the studies we have made a working assumption that the Beauly-Denny project would be in place as part of the plans that we have for that. That is a significant rebuild of an existing line. Thereafter, however, maximising the routes and the assets that we have, in the North of Scotland, Beauly-Denny effectively having been rebuilt unlocks the potential to develop the rest of the system without rebuilding on existing routes. It is really a case of doing something less than that, not replacing the towers but replacing the conductors and changing the voltages. In the South of Scotland and the interconnectors to England, there is no rebuilding of circuits but we have been looking at placing some devices on to the system, which are called series compensators, which are more like sub-station devices, rather than changes to lines. Part of the first phase of the reinforcements to 2015 would be a proposal to put a high voltage direct current subsea cable from Deeside, Liverpool, up to the Ayrshire coast around Hunterston, so that would avoid the need to put a third major pylon line in that area. Inevitably, I think, in the East of England the approach has been taken to reinforce circuits that we have, but into the future I think there are, potentially, some lines there which may be required, depending on the outcome of the offshore developments around Dogger Bank.

Q71 Mr Anderson: The estimated cost that we read in our brief is £4.7 billion. That sounds low to me. Would you like to comment on that?

Mr Barlow: The project looks at the reinforcements on the mainland system. Included in that £4.7 billion are the costs of these two potential HV DC subsea cables, one on the east coast, as I have described, going from Deeside to Hunterston, and one which would be a second potentially required by 2020, which would go to the east coast, perhaps from the Newcastle area to Peterhead, thus reinforcing the Scotland to England system. What it excludes, then, are some of the costs for the offshore links. It does not include the links of the offshore wind farms to that main interconnecting land-based system. That is our cost estimate of it at this point.

Q72 Mr Anderson: Given the fact that a lot of these things might or might not happen - you know, how much offshore will we go for, who will do it, who will invest? - how confident are you that the strategy that you are putting forward will succeed?

Mr Barlow: I think that is the ----

Q73 Mr Anderson: £4.7 billion question?

Mr Barlow: Well clearly there is uncertainty, and we have tried to address that uncertainty by two things. One is the phasing of these reinforcements. We are relatively certain that we need to go ahead with the first phase by 2015, and then we recognise that there is a second phase to follow, should generation appear in places we anticipate and to the volumes. The second part of that is the fact that we are progressing with the preconstruction works for most of the first phase. The preconstruction works is work that we can get on with now, without making a firm commitment to construct. Therefore, as we do this pre-construction work, effectively in parallel with the generators themselves being developed and materialised, then we can move in to a construction period on individual projects as the next stage, perhaps in two or three years' time.

Mr Steele: I really do wonder whether this uncertainty issue is as big a problem for the immediately identified upgrades as some people have suggested. We know what the locations for nuclear stations will be. The Government has very kindly published a list. We know where the wind is blowing: mainly in Scotland. We know that there is currently significantly less capacity to get power out of Scotland than is needed, and that substantial upgrades are needed as a matter of urgency. The history of this has been of the funding being provided about five to ten years too late to have stuff available on time, bearing in mind how long the planning takes. I think the people who have worked on this group have come up with a really excellent phased plan, and our plea is: "Let's just get on with it."

Ms Kay: They are strategic investments and, I think, unlike anything that the three transmission owners have done in the past. They are dependent on clusters of generation coming forward. None of the strategic investment identified by ENSG is dependent on an individual generation project coming forward. It has some more certainty built in it, in that you are relying on a cluster, and if one falls out the work that ENSG did is not sensitive to just one falling by the wayside.

Chairman: That is helpful.

Q74 Colin Challen: From what I have heard so far, it seems to me at least that there will be a kind of inbuilt bias towards reinforcing the existing structure, partly because of predictability of where nuclear, if it happens, will go, and the unpredictability of renewables. Yes, it is true that we know there is a lot of wind in Scotland, but the Severn Barrage, for example, still has a very uncertain future. Taking the point that over-investment is not a very wise thing to do: that all points in one direction, which is away from us meeting the generation of 35 per cent of our electricity to meet the 2020 European Directive package. Is there an inbuilt bias? I am not saying it is a conscious function; it is just simply trying to change the course of this huge tanker.

Mr Steele: There has been historically a degree of caution about putting in this infrastructure against the possibility that it might not be needed, and that caution has led to the certainty that there is not enough of it. I am hugely encouraged by the ENSG report, in that I think everybody got together and produced a plan that will lead to a level of infrastructure that will make hitting these targets at least a possibility as far as the infrastructure is concerned.

Q75 Mr Anderson: How strong a possibility? It does not sound very encouraging.

Mr Barlow: From the work that we have done, the positive side of it now, I think, is that there is a move towards getting on with it without necessarily making a firm commitment to go to construction at this point. The preconstruction work that we are now working on across the first phase of these projects puts us in a good position. It is work that we have to do anyway: we need to do it whether we are committed to construct or not, but it does give us that ability to make sure that it is the right investment to be taking. I think that is where we are and that is exactly what we should be doing at this point in time. Of course, we do have to develop the system in parallel with the generation coming along. We could fall foul of investing too late, which I think is where we have been, and we could fall foul of investing too early at the risk of stranding some assets. I think that the approach we are taking is a good approach, given the circumstances of generation. We are doing our part, really, in bringing the grid developments forward, in parallel, hopefully, with the generation coming forward at the same pace.

Ms Kay: From a network perspective, the work that ENSG has done and has shown to be needed to meet a plausible scenario of meeting the 2020 targets, is entirely doable on behalf of the networks. The key thing, as Mike has just said, is the certainty of ensuring that generators and developers are going to come through to be on the end of those lines.

Q76 Colin Challen: You mentioned interconnectors. Clearly this particular set of proposals, around supergrid, for example, is bubbling up very quickly. To what extent do those proposals become part of your vision? You have mentioned the integrated structure within the UK but what about an integrated European structure, and what are the barriers to creating such a thing or do you think it is even desirable?

Mr Barlow: Perhaps I could say something from the work that has come out of the ENSG first of all. Part of the proposal was to look at the future-proofing of the proposals, if you like, with a particular look towards 2030. We are confident, as confident as we can be, that the grid platform for 2020 will be capable of accommodating interconnectors coming in or more offshore coming in, perhaps in a more integrated form of system offshore. What helps that is basically the very simple nature of reinforcing the core system, but I think we are also establishing some key hub points onshore which would potentially provide us with jumping-off places for starts of sub-sea to large offshore renewable areas or, indeed, to inter-country interconnectors. I think we have a platform. The proposals provide us with a platform for supergrid into the future.

Chairman: Perhaps we could move on to the regulatory framework. This is obviously a crucial part in terms of achieving your objectives and laying out the framework for future investment.

Q77 Sir Robert Smith: How does the current regulatory framework work towards delivering what you have been talking about or not? The five-yearly framework in the reviews was probably very effective for taking what was an over-engineered network and making sure the customer was not paying too much but can it deliver the vision you have been talking about?

Ms Kay: Waiting for a signal from a user to connect, which is what we have to do as transmission owners at the moment, is not going to deliver the strategic investment envisaged by ENSG. We have had very constructive discussions with the regulator. We have recognised that that development is not going to be delivered under the current regulatory regime. We are therefore looking at a form of regulation that would allow us to invest ahead of a user coming along and asking to connect, which will enable us to deliver the type of investment delivered by ENSG. Those discussions are fairly well advanced. As Mike has referred to, we have had the £10 million pre-engineering funding given to us. Throughout the course of this year we will continue to develop that regulatory regime. It absolutely needs to move on. It has, as you have said, been very fit for purpose when you have had one discrete generator coming along asking to connect here and there. With the sort of levels of generation that we are currently envisaging, we do need the change to a more forward-looking form of regulation.

Mr Steele: There was a prototype for this some years back, a scheme called TIRG which was an incentive to upgrade some of the stuff on the Scotland-England interconnector. That is shortly bringing forward another 600 megawatts or so of capacity, and that was not, as it were, linked to particular bits of generation. We have a model to work with. I guess the other thing that we are looking for, as well as a model that detaches the investments from specific generation, is an appropriate rate of return, taking account of the fact that with a credit crunch capital is scarcer and more expensive than it has been in the past. That is a factor both for these investments and for the investments that the distribution companies may be making dependent on their current review. It has been stated that the investment programme proposed by the distribution industry for the next five years could support 9,000 UK jobs in getting that part of the network sorted out, and so there are employment and other benefits in pressing ahead with this.

Q78 Sir Robert Smith: One of our witnesses in the first session, Dr Pollitt, was more cautious about whether we really needed to go down this road, especially if in the long run we are looking at distributed generation. Obviously you have an incentive as network owners probably to see a big network as the solution. Are you sure that the customer will not end up with an over-engineered network again perhaps?

Mr Barlow: I think distributed generation will come as well and will inevitably play its part. I see the distributed generation issue as more of a distribution network issue and how the distribution networks can accommodate that. I see the large wind, onshore and offshore, together with the renewal of the conventional and nuclear plant that we have, as being very much a transmission issue. They interact. Clearly in the amount of generation that we have in total there will be an interaction, but I think that the key thing at the moment, as we see it, is that as three transmission businesses we are responding to the requirement from large generators to connect on to the system. If we were working to our licences, we would be responding to generator developers coming forward to us, seeking for us to develop the network. I think the two, that and distributed generation, go together. Perversely, more distributed generation in Scotland exacerbates the problem, because it just compounds the flow from north to south again.

Mr Steele: At the moment we are talking about a world where a renewable generator in Scotland asking for a connection date is told 2018. The platform is burning. To say that we can put it off around distribution generation just seems to me to be completely wrong. Looking forward, in the long term I think most people would say that the big components of decarbonising the energy sector are going to be CCS, nuclear and probably large scale renewables, particularly offshore. None of those are distributed. They are all going to require a solid transmission backbone. We should not forget that. If those wires are not there, it will not happen.

Ms Kay: It is probably important to say that distributed generation was certainly taken into account in the ENSG scenario that we came up with as the platform for developing the networks that would be needed in 2020. I do not think we see DG delivering a huge amount by 2020, but it is very much there, as is energy efficiency. We have not ignored everything else in looking at what networks would be needed, and I think it very much comes into Rupert's point that this is going to be a supplement to rather than a substitute for the network investment. In all our scenario planning we saw very much these critical strategic investments being needed.

Q79 Sir Robert Smith: In thinking of the way the regulation may change and go forward, who picks up the bill if things do end up being stranded, if you have guessed wrong and the market does not follow the route?

Ms Kay: We are still obviously in discussions with the regulator on what the exact form of the regulation will look like. We will be incenvitised to get it right and, hopefully, if we do get it right and more projects come along and we deliver in a timely manner and connect more generation, we will get a higher rate of return. Similarly, we would expect to take a share of the pain if we get some of these things wrong. In the unlikely event that these things do become stranded, because I think we have lots of checks and balances along the way, there will be a sharing of the pain between consumers and developers and the network operators.

Q80 Dr Turner: Do you think the present arrangements, British Electricity Trading and Transmission Arrangements, are rather rigid? Many aspects of it would seem to be disincentivising renewables generation and very much weighted in favour of traditional fossil fuel generators or nuclear generators. Are you satisfied with BETTA?

Mr Steele: We are probably the UK's largest current generator of wind power. Obviously we have Europe's largest wind farm at Whitelee near Glasgow. I do not know whether it is running today but it has certainly been a huge success for us. We think that in broad terms - and I am going to come back to one exception in a moment - BETTA is about right. The reason for that is that, although we are a very strong developer of wind, the intermittency does have a cost and it has a cost which requires backup from other plant. It really is very important that that is recognised in the system, otherwise there is a risk that the other plant will not be funded to be there to cover and provide that backup. The principle that costs of intermittency are exposed and available I think is a right one. The area where I am most concerned about BETTA is whether it will bring forward the backup that will be needed as we move to much higher levels of wind - almost the converse of the problem that you raise - because that will depend on a plant that is not running very often being able to charge very high prices in those times when it is running, to cover its capital costs for the large periods of time when it is not. The concern that developers of that kind of plant will have is that when somebody charges high prices in periods of shortage there is a tremendous tendency in political and sometimes regulatory circles to use words like "profiteering". The fear that people might use those kinds of words will put people off investing, and then there is a risk that the plant will not be there. We are asking the regulator and DECC and people to think about whether there should be capacity payments to try to even out the situation, so that we do not get into that kind of spiky situation. That is rather a long answer, but there are some important points.

Q81 Dr Turner: It is a complex question, so that is fair enough. There seems to be an obvious incompatibility between British or UK arrangements through BETTA and the draft EU Directive on Renewable Energy. How do you see that being resolved if the draft directive translates into a real directive? To throw in transmission charges: What is your view on locational transmission charges?

Mr Steele: I think I need to understand a bit more specifically on the directive point what you think the incompatibility is.

Q82 Dr Turner: I think the priority access for renewable energy is the obvious outstanding point of difficulty.

Mr Steele: We think renewable energy will effectively have priority access in any event, because the RO mechanism will give people every incentive to run when they are available.

Q83 Dr Turner: But you will not be incentivised to allow them on. If they are not on call, it does not matter if they are running; they just have to dump it.

Mr Steele: No, the way BETTA works is that generators can dispatch themselves. There is no requirement to be called. They may offer services to the grid where they voluntarily reduce output in return for a fee, but there is no dispatching of plant. Since 2001, when NETA came in, we have had a self-dispatch system.

Q84 Dr Turner: Locational?

Mr Steele: This is a tricky situation, I think. There is a system which tries to signal where plant should be built. We would say that it is not cost reflective. We think what it essentially tries to do is to measure how much wire, on average, an incremental bit of electricity produced might use. The calculation is probably done very well but I think it is probably calculating the wrong thing, because all the plant in Britain depends on the grid being there. The plant in the south a lot of the time could not generate because it would be completely overloaded if plant in the north was not feeding power down, so I do not really buy the proposition that plant in the south is not benefiting from the grid and should be paid by the grid to be connected, whereas plant in the north should be paying. It seems to me a very accurate calculation of precisely the wrong thing.

Q85 Dr Turner: The difficulty is, of course, that it loads the costs of remote energy sources. The Pentland Firth is an obvious example. Fantastic: many gigawatts of tidal stream power there to be tapped, and they will be tapped eventually, but they will fall foul of the current transmission charging regime.

Mr Steele: Yes. I think my view is that we know where these resources are; they will still have to be developed there. These costs probably slow it down and probably do not achieve an awful lot, to be honest.

Q86 Dr Turner: Do you wish to see a change in the transmission charging system?

Mr Steele: We would certainly welcome a less extreme system closer to the European norms.

Q87 Chairman: Perhaps I could ask Alison to come in on this.

Ms Kay: The transmission charges are meant to recompense us for the physical costs of providing the network, the costs of installing and maintaining it. Therefore some element of cost reflectivity, some element of locational pricing, does seem to us to have worked in the past. It has given appropriate signals for where we want generators to connect. It has been very important in building the current electricity system that we have had that locational pricing element in there. That said, we have to recover the costs of installing and maintaining the network in some way, and to a large extent we are very, very happy to discuss ways in which we can move away from the current system of charging to a more postage system set of charges. We are not seeing any evidence, having said that, that renewables, in particular in Scotland, are not coming on, are not wishing to connect to the system, because of the level of transmission charging. We have seen no evidence of people not connecting because of that. It has been planning and stuff that has held people off up to now, charging has not been an issue. But we are running a consultation and we are about to go out to the formal consultation stage within the next few weeks on the proposals raised by the Scottish Government and my two colleagues sitting here with me today about moving to a different system of charging. We are very happy to discuss alternative means. We think that locational charging does send the right message to people wishing to connect to the system.

Q88 Mike Weir: I would like to explore BETTA slightly more. When this was introduced in 2005, the idea was to have a UK-wide wholesale market in energy. There have been complaints from Scottish generators ever since that they are shouldering a greater proportion of charges. I understand there is a new proposal from National Grid and Ofgem to change the balancing cost charges which will impact seriously on Scottish generators. I wonder if you could comment upon that.

Ms Kay: On the basis that we were cited as having raised the proposal, Ofgem have asked us to look at the costs of balancing the system. I think as a result of BETTA we have seen the fact that the physical network is obviously now over-utilised. The role of balancing charges in the market has very much risen in prominence since BETTA was introduced in 2005. Therefore, it is not just the physical assets that are very important in determining a generator's costs; it is also the costs that we incur in operating and balancing the system. Those costs have tripled in the last three years, since BETTA. We have been asked by Ofgem to have a look at whether or not that is sustainable and whether or not there is anything we can do to reduce those costs. That is where we are at. We are having a look at whether or not those balancing of charges should be targeted on a more locational basis, at the people who cause them, rather than spread across the generality of the industry as they are done today. Our consultation on that closed on Tuesday. We are obviously going to take into account the consultation responses, very much so, before we proceed with any change to the methodology, but we do think it is right to have a look at them.

Mr Steele: From our point of view, the principal cause of these high balancing costs is the fact that the network has not been expanded nearly early enough. We, in our Scottish plants, want to generate. We sometimes are asked by the grid if we could not generate, please. We believe that it is entirely reasonable in those circumstances that we are compensated for being unable to generate because the grid is not up to the capacity that it needs to be. This is why I am so concerned that people are thinking that they should be holding back on the next round of investment, when all the evidence is that we now have a problem caused by Ofgem and others just simply not authorising the investment early enough some years ago. From our point of view, we do not see ourselves as a cause of the balancing costs. We are unable to generate as much as we would like because the network is not strong enough, and it is really important that that is fixed as a matter of urgency. We have obviously responded to the consultation in great and elaborate detail and if the Committee would like a copy I would be very happy to provide it, but for now the point I would make is that we have a firm right to export power from our power stations in Scotland. The suggestion that, effectively, that should be downgraded to a non firm right clearly puts a question mark against investments that we have already made. It is one thing, when you are thinking about an investment, being told, "If you are prepared to accept a less firm connection to the network you can have a cheaper connection." It is quite another when you have already made the investment. We have just committed £200 million to environmental upgrades at Longannet, only to be told, "Sorry, the connection that you thought you had is not going to be as good, and if you want any compensation for not running, you have to pay it yourself." That is the nature of the proposition that I am sure National Grid have been prompted by Ofgem to put forward and we are not very keen on it.

Q89 Chairman: Is that true, that National Grid has been prompted on that basis by Ofgem?

Ms Kay: There was an open letter that went to National Grid but copied to the rest of the industry that asked us to look at the escalating costs.

Mike Weir: That is an interesting question we can take up with Ofgem when they come to see us.

Chairman: We can indeed.

Q90 Mike Weir: Mr Steele, you said in answer to a previous question that to decarbonise the energy sector CCS and renewables are obviously two of the very important things. Given that a lot of renewables are in Scotland, CCS obviously you are trying to develop, and at Long Gannet there are proposals for pumping the carbon into empty North Sea oilfields. If these charges go ahead, will that imperil investment in this type of development for the future in your view?

Mr Steele: It certainly makes it a lot more difficult. The combined effects of locational transmission charges, these proposals and all these things is a very big signal to us saying "Close thermal generation in Scotland," and that seems to be completely at odds with two things that I think might be quite important: (1) keeping the lights on in Scotland - because as far as we can see that generation is still needed for that purpose - and (2) developing things like CCS. And, as you say, it is also putting a signal on renewables which is saying, "And, by the way, it is going to cost you a lot more to build renewables in Scotland." It is completely at odds with all the things that need to be done, and we see it as unhelpful for all those reasons.

Mr Barlow: Could I make a linkage back to the grid system reinforcements as well. Alison talked about the balancing costs going high. They are the two components, I think: the balancing costs and the locational charges. The balancing costs are expected to reduce as the grid reinforcements take place, so the faster we get on with reinforcing the grid reinforcements, then that will ease the situation on the balancing costs, there will be fewer constraints on the system. The locational point that was raised using Pentland Firth as an example, is a very clear example of where a resource exists, where the resource cannot be harnessed or developed anywhere else. It cannot move. The renewal of nuclear generators is likely to be on existing sites. Part of the thinking behind the original locational charges was to give an option to generator developers to say that it appears to be cheaper to develop in the South of England. Of course that is not relevant really to the renewable resource that we are trying to see developed. The way in which that links back through the grid is that the nature of the locational charges, and perhaps the uncertainty of the locational charges in the future, is acting as a deterrent to generators, I believe, in terms of giving them uncertainty but perhaps delaying them coming forward. From a transmission perspective, in order for the transmission businesses to get a clear investment signal to invest in the upgrades, the fundamental thing that we need is generators who have clarity about what their intentions are. If they do not have a clear investment signal and are certain, then it undermines the transmission business's ability to have a clear investment signal as well.

Q91 Sir Robert Smith: There are still choices to be made. One of the witnesses put it to us that if you are wanting to get renewable or a CCS project to go ahead, and transmission is a cost barrier, the charging system is wrong. It should be the financial incentive to build the generation that may need to be changed. You still need in some way to work out how you are going to charge the transmission system.

Mr Steele: You do, but it does not seem to me obvious that the current very extreme process gets you to an answer that is sensible. It does not, in my view, take proper account of the benefits that plant in the south gets from essentially having its load supported by plant in the North, and it does not take account of the fact that there is load in the North. It is a very interesting calculation of huge complexity of completely the wrong thing, as far as I can see.

Q92 Mike Weir: Miss Kay mentioned that transmission charges were, in effect, to reflect the costs of maintaining the grid. That may have been well and good initially, but now we are looking at very tight targets of 30 per cent generated from renewables in 2020, and I wonder what changes would be appropriate to balance these targets as against the cost of the grid, because, clearly, if we are going to meet these targets, we need the renewables, much of them in the North of Scotland, and they must enter the grid. How are we going to reflect that without changing the locational charge to perhaps a postage stamp type charge?

Ms Kay: I think the key thing is giving the right signals to generators to come along. Thus mechanisms like ROCs (renewable obligation certificates) and the like are very important in encouraging generators to come along and connect. I think the system of transmission charging has to be clearly set out and absolutely transparent. It has been, but we have been going through a period where there have been lots of different balls in the air in terms of Transmission Access Review. Once we have that certainty, as I mentioned in one of my earlier answers, it is not National Grid's view that that system of locational charging is going to be a barrier to new generation connecting in the North of Scotland or, indeed, elsewhere.

Chairman: We must move on. I want to look at the issue of access to the transmission network, which we have touched on a little bit, but, also, offshore and the planning regimes and the potential Marine Bill implications on this.

Q93 Mike Weir: How do you think the short-term measures arising from the Transmission Access Review have an impact on the current queue for generators seeking grid access?

Ms Kay: If we separate out here the short-term access measures, we are doing a lot with the two Scottish companies in terms of short-term measures to get access to the system. There is the longer Transmission Access Review which has been going on now for some 18 months and is still not at a close. We have lots of short-term measures working very collaboratively with the Scots to look at advancing generation projects, particularly in Scotland where we have identified 450 megawatts that can come forward, because they have planning permission and are ready to proceed. We have now had a letter from Ofgem which signals that they will let those plants on, subject to certain critieria being met, so that is going to advance. In England and Wales the Ofgem letter signalled an extension of that regime into England and Wales as well. We also currently have powers to knock out of the queue (if I can use those words) the people who we do not think have any realistic chance of connecting, so we are able to create spaces in the queue for those generators who are ready, willing and able to connect. I think over the last 12-18 months the Scottish companies and the National Grid have taken a far more proactive stance in connecting generation.

Q94 Mike Weir: In how much of this are we getting into a chicken and egg situation? Much of the renewables generation in the North of Scotland requires to be connected to the grid. It has already been said that a lot of what the review group was talking about was Beauly-Denny being there. It is not there yet; we do not know when it is going to be there. There are large gaps in the grid in the North of Scotland that need to be connected up and there is going to have to be a lot of investment in that group before these renewables can be brought onstream. How much of the transmission access to the scheme is going to be irrelevant before the investment is made in the grid in the first instance?

Mr Barlow: To build on Alison's point, I think that the short term measures - as I see it, the 450 megawatts - is really about making the best use of the existing system. It is really about using spare capacity, almost spare capacity that has not been getting used at the moment, particularly from a North of Scotland perspective. I think that is the broad challenge that I see, which is how do you make the best use of the system that you have at any one point in time, making sure that is getting best use, but always looking for the next stage of the reinforcements that will be required? I think the question about the short-term measures address the first part of that, which is about making the best use of the existing system, if you like, but you do not get away from having to do the second part of the exercise, which is to do the grid developments. For sure, the grid developments that will need to follow Beauly-Denny will provide a capacity in the North of Scotland for about 5.5 gigawatts of generation to get on. The first phase of that is relatively easy, the reconductoring of existing circuits, but, for instance, the Pentland Firth is likely to require a subsea cable from that point southwards, and we are looking at that as the second phase in that 2015/2020 type timescale.

Q95 Mike Weir: What is your preferred option then for the longer term? You still have the problem of transmission charges and how that is going. What is your preferred outcome for the long-term transmission access?

Mr Steele: From our point of view, I think we would say that the absolute priority is the infrastructure itself. One of my complaints throughout all of this discussion with the Transmission Access Review has been that at least 80 per cent of the solution is going to be around sorting out the infrastructure and at least 80 per cent of the talk has been around the access regime. That is why I am so thrilled that ENSG has produced a result. That is the first point to make. The second is that we absolutely welcome the 450 megawatts and sharing the cost of any constraints that arise equally, and that is all fine and that will be really, really helpful. Is anything long term needed to change the access regime beyond, as it were, the short-term package, things like connect and manage? In our view, probably not. There is a huge enthusiasm in the regulator for auction arrangements of various kinds. We think that they may add more complexity than they actually achieve in getting more plant on the system, and we question whether putting doubt on people's ability to export power will bring forward generation. If our company was thinking of investing in a nuclear power station, indeed we are in the consortium doing just that, it is a lot of money. And to be told, "Well, we don't know how many of the 60 operational years you will be able to export the power for. You might have to re-bid for it halfway through" is not very attractive, and the same goes for a big renewables project. I think our answer to the long term is: Build the wires and leave it at that.

Q96 Dr Turner: Geography is not necessarily helpful, as we have already discussed, in terms of where raw resources are - they cannot move - and where the wires are. If there are difficulties enough with offshore wind farm locations, if we are to explore the very large potential of tidal stream power, the disparity between the presence of wires and the presence of the resource gets even starker, especially along the North West coast of Scotland where the grid is at its weakest and some of the power sources are at their strongest. Do you have a long-term strategy for dealing with that?

Mr Barlow: It refers back to the point that I made earlier on about the development of some hub positions on the network. I think we foresee that the Hunterston landing point for a cable, which links Hunterston down to Deeside to transfer power north to south, is a good place for us engineers to think about where we might connect a large offshore volume of wind on that site, and, similarly, Peterhead or Newcastle on the east side. Wherever the offshore is coming in, the geography is that the offshore is in the water and it is a difficult place to work, but there are places on the system where that offshore can be harvested. Further to the north and west of Hunterston, there is a challenge of bringing subsea cable either to the main system in the North of Scotland or to a hub point like Hunterston.

Q97 Dr Turner: Are some of these areas creating a situation where the traditional high voltage AC transmission that we have worked on since the war kind of breaks down and the alternative DC solutions start to become more attractive?

Mr Barlow: Absolutely. We are bringing proposals forward to make links to the Western Isles and to Shetland for generation development proposals that are being proposed there. Our proposals are to connect both of those island groups HV DC subsea cables back on to this strengthened mainland system. That is likely to be the first place where they appear and then we will see them on the North/South straps around the interconnector circuits. I think we will see them for large concentrated volumes of offshore.

Q98 Charles Hendry: Picking up on that point, Mr Barlow, you have talked about the case for the offshore subsea cables. It is something which I know the National Grid has been keen on as well. In our last evidence session we heard from some academics, and two professors were absolutely adamant in talking to us that the most technically feasible and economically feasible solution is a point-to-point connection for offshore wind, but you are suggesting that the best solution would be the cables. What gives you the basis for arguing that?

Mr Barlow: I think the point-to-point solution is the most economic from a wind developer's perspective. These are considerable points in this question, I think. In terms of large wind farm developments offshore, they have a choice, basically: Do they want to pay for one cable or two cables to a point on shore? We find that they are generally happy with the security that one cable provides, so we do get a single cable going from point to point. That is looking at it from offshore, looking onto shore, if you like, where a generator says, "I need to get a connection." But I think the challenge going forward is more about how we develop the integrated transmission system in a way that allows those connections to be made economically. There is an interplay between the connection from an individual wind farm to its connection on to an integrated grid system, and the point here is to what extent should that integrated grid system be able to be developed off shore and reaching out to offshore developments. There is a danger, I think, that we end up with single radial circuits occupying spikes going out from the mainland to all the offshore locations and we miss an opportunity to build perhaps a more efficient system offshore, which integrates nicely with the mainland system but is an integrated system offshore - perhaps starting to look a bit more like a mesh system - which would also play into a strong basis for connecting between countries, and it starts to become a supergrid. A supergrid will evolve. We will not just lay it down; it will grow from these places.

Ms Kay: Supplementing Mike's points there, I think that point-to-point connections are if you have got lots of individual connections coming in from offshore. First, there will be a question with how do you get the critical mass to go out and get cable supplies in a very, very tight market but, more importantly, building a whole host of individual cables, I think really gives us a concern about how they are all going to be there to really help us meet the 2020 targets. We have 21 gigawatts for offshore wind in the ENSG forecast. It is just not going to be there in time if we have point-to-point connections. As many of you will know, we have been advocating for a long time that we should extend the onshore grid offshore, but some sort of zonal connection or regional connection from clusters of wind farms into the system, from an economic point of view, from the point of being able to get into manufacturers' books, from the point of view of ease of build does seem to be a very sensible way forward and will help us achieve those 2020 targets.

Q99 Charles Hendry: We have spoken earlier as well about the inherent variability of offshore wind and wind generally and the need potentially in the capacity payment to have some back-up capacity in the system. Is that the only way you think this can be addressed, or to what extent can that process be taken account of through storage, perhaps batteries, high definition compressed air, or, indeed, are there other ways in which it can be done through a smart grid so that you can manage demand more effectively?

Mr Steele: We think that there are definitely opportunities for demand management. You have to work them through, starting from the application. For example, you could envisage a fridge that could be signalled to switch off for an hour or so at a time to deal with a large peak and the food would not be damaged, but it is not much good if it comes off for 24 hours. There are similar issues with things like plug-in hybrids, hot water, all sorts of things which we can demand side manage for short periods of time. Aluminium smelters can turn down for a bit, but not for long enough for their vats to solidify, because otherwise they are kind of broken. There is an issue about how long demand side management works. Most of the applications that have been identified to date tend to be short-term intra-day solutions, and if you have got an anticyclone and there is no wind blowing for three or four days, that is not much help. So our assessment at the moment is that, whilst the demand side stuff is really valuable and particularly valuable in places like the distribution network where short-term peaks can be managed without the need to build extra wires, it is probably not going to be enough. You do need the back-up, regrettably almost a gigawatt of back-up for a gigawatt of wind, and we do need to make sure there is a way of financing it.

Q100 Dr Whitehead: Can I return to the question of offshore connections? Miss Kay, in the submission from National Grid you suggested that the Transmission Design Authority develop a strategic plan and then roll it out. How might that be financed, bearing in mind the proposals at the moment suggest, essentially, that a point-to-point system is financed as each development takes place and that, in order to prepare a grid system, presumably you would have, potentially, some speculative or redundant capacity in it which would have to be pre-financed regardless of any particular development coming on stream?

Ms Kay: I think it is an extension of what we do to plan the onshore network to the offshore network to make sure that we have got the most economically efficient way of connecting into shore. It is not a huge piece of work. We would be waiting very much until we had signals, until we knew where the clusters of offshore generation were going to be coming along, and then, working in conjunction with the Scottish operators, we would be ensuring that we have got the most sensible physical, and the most economic, connection onto shore. I think it is an extension of our existing duties, as it were, onshore and, therefore, we would see it being funded through the normal regulatory mechanism.

Q101 Dr Whitehead: Do you see that as having to be accompanied by perhaps an equalisation of the compensation arrangements that are presently available for onshore wind but not available for offshore wind, so that if you had a grid in development but the connection could not be linked up, then compensation would be equally available to offshore?

Ms Kay: I do not think we see the level of compensation for offshore generation being equivalent to that for onshore generation. At the moment what is envisaged is that offshore generators will have a lower connection and lower security standards that will apply offshore than would apply onshore. Therefore, it seems to us that you would not expect the same level of compensation if a fault occurs offshore as you would onshore. We have got to go through the detail of it, but intrinsically it does not seem to us to be reasonable that the level of compensation would be the same. Clearly, if it is an onshore fault that is preventing the transmission of that offshore generation onto shore, we would then expect the compensation levels to be the same, but not actually in the offshore regime.

Mr Barlow: I think it is the difference, again, between the connection between a wind farm and the integrated system. The integrated system itself, if you could picture the integrated system starting to expand and develop offshore a little bit, halfway towards offshore sites, the situation then becomes, as it is on the mainland, that the generator is making a choice about the security that he wants from that connection. Does he want one circuit, or two, to interconnect to the system? That is largely a decision for him. When we see and judge the reliability of the cables, the generators are tending to opt for a single cable, and we are satisfied with that reliability. When it comes to the integrated network, it is more a matter for the transmission licensees to make a decision as to whether they should be over-investing or under-investing and to what extent should they invest and to what extent should they have constraints on the system. An integrated system that currently exists onshore, potentially expanded offshore, may be an area where you would see concentrated payment-type issues coming in, because there is a decision being made there as to what the right level of security is on the integrated network.

Q102 Paddy Tipping: All this discussion is taking place against a different planning regime, a Planning Act and Marine and Coastal Access Bill. Just talk to us about the IPC. Is that going to make a difference?

Mr Steele: I hope it will.

Q103 Paddy Tipping: We all hope that.

Mr Steele: Obviously, it will not make a difference to what we are doing in Scotland, because it is not going to apply there. In our distribution network we do tend to build wires in England and Wales, and it really is tough under the current regime. We have been trying to build a 20 km wooden pole line between Lostock and Carrington. We put in our application in 2003. After the usual consultation process - it was on the minister's desk for about four years - the ministers have now said that they are minded to consent subject to Wayleave, so we are now going through some Wayleave hearings. We might possibly get consent in 2010, so that is seven years after the application, and this is for a tiddley little line on wooden poles supporting security of supply for about 60,000 customers. That is the sort of thing that we are up against at the moment, and it really is very depressing. I would say that the IPC, hopefully, will make this kind of thing much, much better. If there is going to be any future tinkering with the IPC regime or changes to it that bring ministers back into the system, we really do need to make sure we do not get back to the sort of experience we have just had on that line.

Q104 Paddy Tipping: Alison, what is your view?

Ms Kay: I would echo Rupert's sentiments entirely there. I think that it is an extremely important step forward. We at Grid see it as being fundamental to taking development forward. I think it will add a bit at the front end of the process because, quite rightly, there is an obligation on us now, which hopefully we have been doing all along, but a formal obligation for us to consult with stakeholders and local communities. That adds to the process but is more than outweighed when you get to IPC, where there is great certainty in the regime, which we have not got at the moment. You hear local and national planning issues all together. You may well hear our application alongside a generator application and other discrete applications, and there is no question about that being held up for any reason other than proper investigation. So we see it as being hugely important.

Q105 Paddy Tipping: Mr Barlow, you have got some interesting evidence about the relationship between the IPC and the MMO and how they are going to operate. Can you explain how you think they are going to operate? Who is going to make the decisions first?

Mr Barlow: I cannot answer the question really, but I think the concern we have is that they do operate in a co-ordinated way. I think that it is necessary for the marine planning part and the IPC and, indeed, the Scottish dimension to this, from which I think there are some useful lessons, to work together in a co-ordinated way. Clearly, when it comes to bringing offshore into onshore, there is a need for integration. The couple of DC links that we have talked about, the subsea links that we have talked about north to south, there will be a substation in Scotland, there will be a substation in England, both on land and there will be a subsea cable across Scottish and UK waters; so the need for co-ordination, I think, is important. The National Planning Framework, which has been put in place in Scotland, has been a very useful exercise, I think. Of course, this was post the Beauly-Denny public inquiry process that we have gone through, but the National Planning Framework aligns very well, dovetails very well, with the proposals that have come out through the ENSG work and it is very useful to have that co-ordination visible between National Planning Framework projects and the projects that we are trying to promote as a good example of the two parties working.

Chairman: If we just look at the issue of innovation, we have been hearing in our evidence that there were concerns about the way that the current system works, and it is not necessarily an encouraging situation. Alan?

Q106 Dr Whitehead: The criticism of the present regulatory framework is that it does, indeed, discourage innovation. On the other hand, we have got a great deal of discussion on smart technologies, and some of those have already been mentioned, including demand side management. How do you see the bringing forward of innovation coming into present regulatory arrangements, or do you think that, indeed, they do represent a barrier to those forms of innovation?

Mr Barlow: Let me pick up that point. I think there has been a period when we have taken our foot off the gas a little bit in terms of innovation, but over recent times, the past five years, I think innovation has stepped up in pace for us. My point would be that it needs to become more "business as usual" in our relationship with the regulator. Clearly innovation by nature, R&D by nature, is not always successful, and, again, there is some uncertainty in that area. I think what we would be looking for is understanding the right relationship with Ofgem so that successes and failures are appropriately recognised in a programme of innovation. I think innovation spreads quite wide from an operational sense. HVDC subsea cables are on us but it is not a brand new technology, it is a case of deploying them. The only question about energy storage fitting with the intricacies of renewables is that energy storage, as distinct from demand side management, is in its quite early stages, I think. Energy storage is quite new, certainly in the sort of volumes that you would need to address locally. There are different stages but the key for me is to get the relationship right with the regulator.

Ms Kay: The introduction of the IFI is certainly a very welcome step forward, and 0.5 per cent of our income now we can put towards R&D. That is definitely a welcome step forward. What is the problem with it? I think the problem is that there is not enough funding. In fact 0.5 per cent falls well below the Government's benchmark, BERR's benchmark, of 2.5 per cent and, as Mike has touched upon, I do not think the scope of that IFI is wide enough. I think we have huge challenges, as we have touched upon this morning, in terms of offshore technology, in terms of developing smart technology. It has to be related to our licence activities at the moment, so it is, therefore, not covered. Clearly, for us to be able to really have an holistic view of how we are going to meet these climate change targets, we need to be looking far wider. I think the current system of regulation was a big step forward, and the IFI is a good initiative; it just needs to be wider and lots more.

Q107 Dr Whitehead: Do you think there is perhaps a wider flaw, or problem, with the present value chain arrangements on Grid, particularly taking as an example the introduction of smart meters, that the functionality, as a minimum, in smart meters could be seen by those developing them as potentially not value-efficient for a long time because of their possible redundancy or the anticipation of what may happen in the future, and 20 million per year on IFI is perhaps not going to rectify those sorts of problems?

Ms Kay: No, I think that is absolutely right. As we are talking about smart metering and getting the functionality right and allowing for them to become much more intra-operable with other parts of the DNO network and, indeed, our network, that is going to be key, and we do not want to be sinking money into funding a meter that is going to be redundant in a few years' time. We have got to future-proof it when we do roll out smart. Funding to ensure that we are doing as much research in that area is absolutely key.

Mr Steele: We have been very clear that the network opportunities need to be taken fully into account in the development of the specification of smart meters, so that when they are rolled out they will do everything that we need them to do. We do not want to do this one twice.

Chairman: Can we conclude on a couple of issues on ownership unbundling?

Q108 Charles Hendry: May I also ask, more generally, a question on costs? You have talked about the urgency with which it needs to be done, you have talked about the scale of it. We have got a figure earlier on approaching £5 billion. In the current economic climate, how can that be financed? Are you confident that the money can be sourced and that the capital can be made?

Mr Steele: From our point of view, it would come down to an acceptable rate of return. Clearly, like any company, our parent Iberdrola has to raise money on the capital markets and it will have a number of things that it could spend that money on. So they will be looking for a reasonable return that makes an investment that is worth doing. On the scale of the sorts of companies that are involved here, I think the sums of money are manageable, particularly if the returns are there.

Mr Barlow: A similar position, I think. We need to be clear about the return but we need to get on with it. I am sure that it is something that we should be investing in. I think the focus is for us to have the dialogue with Ofgem now to see how that funding is arranged and any incentives that sit around that. So, I think, along with all this pre-construction work that is taking place at the moment, there is a need (and Alison touched on it earlier actually) to drive along with Ofgem on the funding, which in our case, the north of Scotland, is a significant amount of funding relative to the size of the transmission business. It is almost the size of the existing transmission business; so it is a big issue for us relative to our current size. The key is this discussion with Ofgem.

Q109 Charles Hendry: Given the competing pressures, therefore, and competing demands and some of you are looking to invest in nuclear power, some have made a lot of investment in renewables, obviously there is a great improvement, but is there money to do all of those or will you have to make choices between them?

Mr Steele: I think it will depend a bit on the long-term credit environment. I think we would all like the credit environment to be a little less tight than it is now. It will depend on the returns available for the various things on which we can spend our money. In principle, investors will find ways to fund good projects that have acceptable returns and acceptable risk. Now is not necessarily the absolutely ideal time to come up with a very long list of them, but we see that as fundamentally a temporary phenomenon.

Q110 Paddy Tipping: Can I ask you about the situation in Scotland. Scottish Power and Scottish and Southern are both vertically integrated companies, but you run a transmission system as well, and there are purists who would argue that the transmission system ought to be taken away from you and there would be better returns for the customer if that happened. What is your view on that?

Mr Barlow: You may be aware that the businesses are run as very separated businesses, and Ofgem, obviously, have oversight of that as well, but I am in the transmission business for the north of Scotland and that is what I do. That has all been looked at in this country and the move to a BETTA inter-government climate has been a step in the direction of providing a single GB market which has helped enormously with one single GB system operator for that. We believe we are consistent with the EU Directive. We are in the situation of waiting to hear that is indeed the case; that the UK is compliant with that.

Q111 Paddy Tipping: Would it be fair, Alison, to ask what your views are?

Ms Kay: I was hoping I was not going to be asked that! In all seriousness, we would say that full ownership unbundling is better, but sitting where I am sitting you would say that. I think there is always a perception, whilst it remains vertically integrated, that the actions taken by a transmission owner are going to be furthering the interests of a generator. Whether that is the reality or a perception, it is out there. I think, nonetheless, the key thing (and it comes back to the Directive really) is certainty. We have got to get a state of play that complies with the Third Package. Once we have got that, there are adequate means by which Ofgem can check that the separations are in place, and I think the key thing in order for us to go ahead and achieve the climate change targets is to get some certainty in the field.

Mr Steele: From our perspective, I guess we would say that the ownership unbundling is a fairly sterile debate in the context of the really big issues that we have to face. I do not think that anybody has actually alleged that there is a real problem with the way that the current arrangements are run in Scotland in terms of a kind of perception of bias or misuse of information, and I certainly would not be doing my job properly in Scottish Power if any of those things were allowed to run within the organisation. Clearly, having three network owners gives Ofgem the opportunity to ask questions of us as to why we are not being as cunning as the guy down the road, or lady down the road, in doing something, and it may be in the public interest to have that diversity. It certainly keeps people on their toes within our organisation and, no doubt, colleagues as well. The Directive says that there is no need to unbundle if the result is at least as good, at least as independent, as what, essentially, the French and the Germans will be forced to do under the independent transmission operator model. I would be astonished if we cannot pass that test.

Chairman: Okay. I must call an end there because we have another witness, as you know. Thank you very much for your attendance and thank you for your response.

 

 

Examination of Witness

Witness: Mr Tim Balcon, Chief Executive, Energy and Utility Skills, gave evidence.

Q112 Chairman: Good morning, Mr Balcon, and welcome to the Committee. I wonder if I could invite you to say your name and your organisation for the record, please?

Mr Balcon: Thank you. Tim Balcon; Energy and Utility Skills.

Q113 Chairman: Thank you very much. It is clear, Mr Balcon, that skills are essential in relation to the provision of network structures within this country. We have just heard that in terms of investment there is the potential for many thousands of jobs. Of course, to fill those jobs you do need the skilled workers to be available. I wonder if you could outline the work of Energy and Utility Skills and, in particular, the role played by the Power Sector Skills Strategy Group, and what is your assessment of the skill availability at the present time?

Mr Balcon: Energy and Utility Skills is licensed by government to, I suppose, address the skills issue. We are one of 25 Sector Skill Councils and, collectively, we address 85 per cent of UK skills. The intent there is to make the UK more productive and increase our economic performance in this approach. In terms of Energy and Utility Skills, we specifically cover electricity, gas, water and waste management sectors. In doing that, the mission of Energy and Utility Skills is to make sure that those sectors have the skills that they need to fall on both now and in the future. That is the mission statement. The way we do that is to ensure that employers collaborate to address their skills issues. One of the things that we have learned is that many of the companies that we represent have very sophisticated skills processes internally. However, what they have not got is the ability to pull all that together and look at the skills issues as a sector. I think that is one of the main advantages and opportunities that we can bring to that particular party. What we have done, therefore, is created the Power Sector Skills Strategy Group to do that, and that includes generators, it includes contractors, it includes networks and transmission; it includes a broad section, I suppose, of the power industry. We decided that we need to know the extent of the issue, if, indeed, there is one, and we developed what we call a "workforce planning tool", which is an online tool we have developed which identifies the kind of skills that the power industry requires, and that has probably a longer outlook but at least a 15-year outlook, determined by the regulatory framework and time cycles associated to that. We invited the companies to submit their data in terms of how many people they would required to meet the capital programme going forward for those 15 years, and we have at this moment in time some early indications of the extent of the issues. Some of the early figures, I suppose, are associated to the networks, the generators or the contractors. It does not at this point include the transmission companies. That will come shortly. What I am saying is that over the next five years there will be a need for 9,000 people to undergo learning in the power sector. Just let me separate two items, if I can. We believe that there will be need to be between 3,000 to 4,000 new people in the associated network.

Q114 Chairman: That is additional jobs.

Mr Balcon: Additional jobs. The rest are made up from people who are currently in the networks or associated supply chains to the networks that will need to upskill their current skills. If we take 9,000 people, that is 51 per cent of the current workforce, so it is a significant amount of people that is required to undergo training who will be recruited into the sector.

Q115 Anne Main: I heard the list of gas, water, electricity. Was nuclear in your list of power as well?

Mr Balcon: Nuclear is done by Cogent. We have links with Cogent, we speak to them, and so we make sure that there is a clear link between the two.

Q116 Anne Main: Are the figures you are referring to separate figures to anything to do with nuclear power?

Mr Balcon: Correct.

Q117 Anne Main: When we had the Minister before us, I specifically asked him about investment in education and skills training to ensure that there are the courses in place and the encouragement in place so that young people are coming into the industry. I do not think we had a particularly concrete answer, because, of course, it is a Treasury thing and interdepartmental, but given that Scottish Power have said in their memorandum that they are facing a dilemma with many people facing the end of their careers with the necessary skills, do we have the teachers in place, do we have the courses coming online that you expect to happen, or apprenticeships, and are you hopeful that there will be the encouragement to get people into the industry and the availability of courses growing before they get to a position to do what you need?

Mr Balcon: Can I take you through the steps of the process before I get to the answer, if I may. What we have with the data I have just explained is the extent of the problem. In a sense, it is the first time that the industry has collaborated to understand what the problem is. Those numbers could be considered quite alarming. It is probably good news, the fact that we now have the understanding of what needs to be done. When you marry that to the training infrastructure, and I use that in the broadest sense, which will include the supply of students from schools, universities, to FE colleges, to universities and to the kind of trades that employers are already doing, there is a clear mismatch. As of today, there is not the capability to do that. However, one of the solutions that the P3SG has developed, it has submitted a bid to DIUS for a National Skills Academy for Power, which was accepted and established, supported by DIUS and the LSE. That business plan is being developed and we should have a business plan proposal by June. The idea behind the National Skills Academy for Power is, indeed, to correct the kind of things that you are saying. First and foremost, it is about getting people trained, and the large bulk of those numbers are around craft level two and level three - technician level. There is clearly work to be done on people who will come through a higher education route and, therefore, there is a collaborative arrangement required for universities, but also there is an issue that needs to be addressed with schools and FE colleges to make sure the students are being supplied into the sector. If you take those three issues in terms of the upskilling of the training infrastructure - the schools, the attractiveness of the sector currently and the current performance of the HE sector - they are the three main areas that need to be addressed if we are going to meet those numbers.

Q118 Anne Main: Do you believe at school level there should be an additional look at the curriculum to see whether there is encouragement to move forward into energy and perhaps into green energy?

Mr Balcon: Yes. One of the things that we do know is there are not enough supply students coming through science or mathematics courses.

Q119 Anne Main: Are our science courses up to the job, as they are now?

Mr Balcon: Again, what employers will say is that once they get students, they then have to correct some of the things that they have previously been learning, either to make them better or just to reacquaint them with the context of the electricity sector. The only way that we can correct that is for there to be a partnership between the education system and employers. I will say, at this point in time, that their employers are up for that. We need now to encourage the schools to make sure that they also promote this arrangement.

Q120 Anne Main: So science qualifications at a school level that can be grown into the sort of things you need?

Mr Balcon: Yes. I think that is what most definitely needs to be done.

Q121 Judy Mallaber: You have emphasised very much in your submission the fact that it is a skilled workforce that you have but an ageing workforce, and there are new skills. I come from very much an engineering area around Derby, and Rolls Royce will take people on and train them in-house, some of my local companies will take them on and train them in-house - they have apprenticeships in-house - but along with the local college. What are you anticipating being the balance between wanting to make sure that the right skills and courses are available within colleges for people to come to, or preferring to take people into the sector and training them on the job but with back-up from the colleges that you are working with?

Mr Balcon: I think, in fairness, all of those routes need to be addressed. I do not think one single route can solve the issues that we have just been describing. In terms of what that balance will look like and the ratio, I probably could not tell you today what that would be, but I can say that the National Skills Academy for Power would, indeed, look at that particular issue. Part of its remit is to look at where partnerships can be made with learning institutions, but also from other sectors that have people with skills that may be redundant skills or associated skills, and, therefore, there will be a quicker more efficient supply of people with skills into the sector, and I am sure that the academy can do that.

Q122 Judy Mallaber: What is the difference between the kind of skills that you have available now and the type of skills that need to be developed for the future?

Mr Balcon: If you take those numbers that I described, 50 per cent of those would need to be around level two. There is an additional third that would need to be at level three and above. So you can see there is a huge emphasis on apprenticeships and craft apprenticeships, but there is also a significant number that needs to be higher than that as well, and there is also a portion that would need to be round the level one, if you like the entry level kind of skills. Again, if I may revert to the planning tool that we had, what that will do is give you some specific data to precisely answer the question.

Q123 Judy Mallaber: How far are you looking at graduates, engineering graduates, or whatever, and are the courses that are currently provided ones that are appropriate, or are you going to need to develop more specialist courses at colleges and universities?

Mr Balcon: To confuse names, there is also a Power Academy currently operating, and that is a good initiative and it is providing a good service to the industry. I think what we are saying, though, is that we need to increase the number of students coming through HE, and so, absolutely, they will need to increase that network of HE institutions. The better the fit we can make that is dependent on how much effort the employers put into saying what they would want out of the end of that learning process. Again, these are all objectives that would fit within the National Skills Academy for Power.

Q124 Judy Mallaber: What is the current track record of companies in doing training? Do they have the capacity to do on-the-work training and supervision of apprenticeships, extra skills, and so on, as people are in the workforce, or is that capacity not there at the moment?

Mr Balcon: The capacity is not there at the moment. I think what you can say with this sector is that there is a good history and track record of exemplar training. It has always had a high regard for training, and quality training too, and it has not stopped doing that, but since privatisation the extent of that training has obviously dipped. If we are going to meet the requirements going forward, we now need to increase that, so again current capacity is probably not there. I know some companies, National Grid for example, have put huge investment in their training infrastructure; I know that other network companies, for example, are doing a similar kind of thing. All I can say at this moment is there is indeed a clear recognition that the current capacity would not suffice, but there is more room to be able to correct that. I think these numbers are widely accepted by the industry now, and the option of doing nothing is not available.

Q125 Nadine Dorries: In terms of other European countries and the skillsets that they have compared to ours and their own targets, are we disadvantaged or are we about equal to where they are?

Mr Balcon: It is a difficult one to answer precisely. We know that the skill shortages in the UK are replicated in Europe and also America and Australia, et cetera. So there is a real global movement of the skilled workforce. We know that UK students are highly regarded and, therefore, they are sought after. We know, equally, that those other countries have an increasing capital investment programme. So I suppose the competition for skills is bigger now than it has ever been, and it is also a global competition.

Q126 Nadine Dorries: I know you are not responsible for nuclear, but when nuclear comes on board here, which we hope it will do, do you perceive that what we are going to be doing is taking our skills from France or the countries which are way ahead of us in the nuclear industry or is there not the opportunity that we can skill up our own workforce now?

Mr Balcon: Again, if I can sidetrack slightly, one of the things that we need most is the numbers. In terms of balancing those numbers, the companies give us their recruitment plans, and what they have said is that they will go out to the market and get the engineers that are there. When we have aggregated all of those numbers, we realise that the pool of labour just is not around to be able to do that. The only solution, and it something we have been saying for a long time now, is for UK to grow its own engineers. Therefore, the infrastructure that we have put in to supply the engineers at all levels has to be a prime objective. Again, I do feel that that point is understood.

Chairman: Moving on to investing in the workforce, which is clearly an issue, I was very interested in the idea of setting up an Academy for Power. I think that is quite interesting.

Q127 Sir Robert Smith: You have already mentioned some of the history of how, before privatisation, there was a long-term plan for training. You say they are beginning to pick up already. Do there need to be any changes in the way the regulator rewards companies that would help encourage, or would not hinder that improvement in training?

Mr Balcon: Yes, I think there is a feast and famine approach to training. It is not because of the regulator, but no doubt the pressures of the regulatory system have created that feast and famine. It has also meant that the contractors in the supply chain have shorter-term contracts that fit within that five-year regulatory framework, which means that their ability to invest in long-term skills is not as apparent as perhaps it ought to be. What we have tried to do is to encourage Ofgem to understand the longer picture and to say, "Look, we are going to have to address the needs", and, again, the "do nothing" option is not available to us: we have to find a way of breaking this five-year stranglehold on skills development.

Q128 Sir Robert Smith: The companies, in a sense, need to have a longer-term plan where they can look at the wider market and say, "We are going to be needed. We have to take a risk. We should train because, if we do not have the skills, we will not be able to deliver."

Mr Balcon: I entirely agree. I was careful not to say it is because of the regulator that we have this issue. Employers in the end have their own options, and, again, I think it would be folly for employers just say there is a five-year funding cycle and, therefore, I will fit my skills investment within that five-year cycle. However, there needs to be an understanding of how that regulatory framework can be more helpful to a long-term skills investment and the cost of that investment as well, and maybe, if there is an understanding of that ten to 15-year requirement, we will probably get some better solutions coming out of the regulatory framework.

Q129 Sir Robert Smith: Are there any specific areas of strategic skills that are more apparently at risk from the parts of the industry that are most challenged?

Mr Balcon: I think it is a difficult one. Again, the work with the aggregation, I suppose. We pull all of the employers' data together, and I think what they are saying is that the current emphasis has to be around the apprenticeships, around level twos and level threes, but, equally, you cannot ignore the need for high-level skilled engineers. The difficulty in addressing that is when you look at individual companies. Their requirement for skilled engineers, for example, is relatively small numbers. They may require five or six or seven and, when they go out to find a solution at universities, there is not that kind of demand to create the interest to do something about it. When you aggregate all this data together and say, "Actually, we need a significant number of people trained to be engineers", then you have the market potential to do something.

Q130 Sir Robert Smith: That is the National Skills Academy for Power.

Mr Balcon: Yes.

Q131 Sir Robert Smith: The business plan is not going to be this summer but will start operation in October. What will happen in October?

Mr Balcon: What is currently happening is now we have clear data to work with, the employers who are investing in the National Skills Academy for Power are determining precisely what they would want to focus on and how they will do that. Again, it is work in trade, and my guess will be that it will be focusing on the apprenticeships, it will be going for not only the early ones to get some kind of infrastructure up and running and performing but also the long-term view as well, which clearly needs to be there.

Q132 Sir Robert Smith: Do you work across the sectors? In my constituency is located the oil and gas university. Do you exchange best practice between different sectors?

Mr Balcon: Yes, the Academy for Nuclear, they are part of the National Skills Council for Power, so there is a really close relationship between Energy and Utility Skills, Cogent and ECITB as well (Engineering Construction), and we have formed an energy alliance to do precisely that.

Q133 Judy Mallaber: You have talked about the need for more skills but you talked about it slightly in the traditional way that we might have said we needed to get more people into apprenticeships, more into higher qualifications and universities. I am still a bit unclear as to whether they are actually different skills that we need in the future or whether it is just an adjustment of the type of courses we have got at the moment. Is it something completely new we are embarking on for the future or just a development of engineering and craft skills?

Mr Balcon: I would suspect it is not a clean sheet of paper that we need to start with. I think there is some good practice that we currently have, and we just need to increase its volume. The part of the question I ought to pick up on is how new technologies will impact on this, because the numbers I am stating here are on what we know as of today. I cannot give you any numbers associated with the discussion you had previously about renewable energy technologies and the impact that will have - smart metering, for example - and that is part of the foresight work that we can apply into NSAP, the National Skills Academy for Power. It is work in progress, but I would suspect that if you take the previous comments I have made that the education system is not supplying the students with the skills that employers need, there will need to be at least some corrections and probably some radical rethink on how we can get more people going for maths and science and how we can involve the FE colleges, who traditionally have not played a large part, if any part, with trade in this sector because they have a more traditional mindset in the way that they do training. So we need to encourage them to put some investment into dealing with that.

Q134 Judy Mallaber: One of the problems is that colleges are going to put on courses that they can attract students to. They had a conference, a big exhibition at the QE2 Centre, a few weeks ago, encouraging schools to come and to look at going into science and engineering, but we know that there is a real problem of looking at the whole sector - manufacturing, engineering, science. Do you have any thoughts about how that can be made more attractive or what we need to do to say this is a good sector to go into?

Mr Balcon: We have done some research, again it is part of the development of the NSAP, but we have also supplemented that with some research in Scotland, trying to understand why students are not considering power to be an attractive sector. What we have at the moment is some base data to work with. We do not have the solutions as of yet, but really it is the obvious stuff where students are saying that the power sector appears to be dirty. What they have heard on the news is about the pressure on prices and the need to produce people to be more efficient, and they have taken some risks and accepted the risks associated to that. The other thing is that the advice and guidance that students get on leaving school is not associated with an engineering concept either. If we just left it to the schools to do, I do not think we would get the solution. Employers need to step up and address this issue, but there has to be a partnership with the schools and universities to say, "Look, I think students need to have better advice than they are currently getting." Whatever advice they currently have does not reflect the power sector as of today and needs to move forward. So we need to supply the teachers with the right messages. The employers need to give them access to what they can do, the exciting opportunities that there will be around developing new technologies, developing the new engineers of the future. Those messages need to be part of the education system rather than leaving it as it currently is.

Q135 Judy Mallaber: I was struck with this exhibition locally. One of the schools sent a group down from my area, and it was quite a mixed group of boys and girls, which encouraged me, but I also went into a local engineering company recently that has taken on, over the last four or five years, 20 new apprentices out of school, all boys, no women on that at all. Tell me something about the steps that you might take for greater diversity, both in terms of gender, race, et cetera, and whether there is any hope of having a more diverse workforce?

Mr Balcon: There is always hope, I suppose. I think when you lose hope, you give in. It is a key objective of the National Schools Academy for Power. I think one of the things that the sector realises is it cannot continue to fish in the same white male pool that it has been doing. There needs to be more innovation in how it attracts different or more diverse groups. It is not only gender, it is race, and it is also age as well. We use the term "diversity", but we must use that in its widest sense. At this point what we would have to say is there is nothing that is not open to us. The other point to that is actually quite a hard thing to do as well. There is an enormous amount of effort, particularly from this sector and other sectors, engineering perhaps, that is trying to do this, and you have to say probably unsuccessfully at this point, but it is an objective of the National Skills Academy for Power and it is something that we have to create, we have to find a solution to.

Q136 Judy Mallaber: You have not got any brilliant new ideas?

Mr Balcon: Unfortunately, I cannot give you the magic potion as of today. In all fairness, I do think it is one those issues. It is a bit like the education system and how to attract students. There is no quick fix to this. I think it is a consistent message from employers, from education providers, from advisers, from community leaders who have access to these diverse groups, and I think we need to supply them with consistent messages, and the messages are always: there is a 50-year programme of work that we need to do here. This is an exciting agenda. Energy is a global issue that we need address and no longer can we continue to maintain the pipes and wires. We have to develop the new engineers of the future, the new heroes in engineering. I think that is the long-term plan, and I really think that is the only way to do it.

Q137 Sir Robert Smith: One of the real challenges, certainly in the north-east of Scotland, which is always a challenge for the oil and gas industries, is that it is the primary schools where a lot of the perceptions and choices are laid down. By the time they reach the secondary schools, it is almost too late to go in there and try and promote the industry.

Mr Balcon: Yes.

Q138 Sir Robert Smith: It may be that across all science-based engineering there needs to be quite an engagement, giving primary teachers the resources to show what their learning can be related to.

Mr Balcon: I think that is absolutely right. Let us not wait until the education system spits people out at the end to pick them up. I really think this is a long-term partnership, and the advantage that the power sector has is that it does speak to primary schools predominantly around safety, around playing with footballs around power lines and playing with kites around power lines; so there is already an entry route into that area. If we can get those consistent messages saying, "This is also quite an exciting sector as well", we might chose when you want to give those messages.

Q139 Sir Robert Smith: What about engaging in the Green agenda which links into power?

Mr Balcon: I do think the opportunities are there. I think the messages are there. I think what we need to do with the messages is bottle them and give them back to students in language that makes it more attractive, and at that point we can counter the messages or perhaps pick up on those kind of more negative messages. I do think there are opportunities there, I really do, and I think in one sense it is probably a bit of an excuse to say that engineering is not a sexy sector to work for. Personally, I think it is; I just think we need to explain it better.

Q140 Judy Mallaber: Have there been any link-ups so far? There are various organisations and research projects and government inspired programmes about getting women into science and engineering and about girls' education, and so on. Have there been any links made with those groups at all? Is the potential there, as well as (I agree with Robert) linking it into the environmental agenda, which does grab children at an early age and could be used?

Mr Balcon: Absolutely. Might I finish dealing with the previous question? I think one of the things we really want to encourage is for employers to be part of the curriculum development so there is some ownership of the education system from other players as well, and I think in that way you can have a really strong relationship. I am sorry, can I return to the question?

Q141 Judy Mallaber: I was saying, there are programmes about trying to encourage a greater group of people, girls and women, to go into science and engineering?

Mr Balcon: Absolutely. All I can say at this point is as part of the business plan development there has been some discussion as to how to do that. The answer is, absolutely, we must engage with those partners, particularly ones that are successful. There is no point in reinventing something. So, again, the intention is absolutely there; it will happen as part of the business plan going forward.

Q142 Judy Mallaber: Is the new engineering diploma helpful? We get given different views about the new qualifications, and so on. Is that a good diploma from your point of view, in terms of giving a base for training?

Mr Balcon: I think it is excellent. Clearly, it needs to be developed. It is brand new. So we need to have a look at what works well and what does not work well and develop that forward. My frustration with the engineering diploma, I believe, is it is challenging the education system because it is fundamentally very different from what the schools have been doing previously, and all I hear are negative messages around, "It will not work, it cannot be done." The engineering diploma has been over-subscribed, so there is a desire to do it. There is an opportunity for students going through the diploma to get some proper work placements so they can understand the context of their learning much stronger than they can with the education system. What I feel they need to do now is to stop the people with the negative messages, those people like the experts in the education system, saying, "I know best." I am sorry; I do not think they do. We need the education system to supply students that are going to impact on the core activity of the power sector. Therefore, it is an economic objective as well as a learning objective. You can see, I am quite passionate about this one. We have to make this work. I do not think there is an option, we just have to make this work, but if it can be done better, we will do that, clearly.

Q143 Chairman: A note of passion is a good spot to end, I think, Mr Balcon. Thank you very much for your evidence. We much appreciate it.

Mr Balcon: Thank you very much.