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

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENERGY AND CLIMATE CHANGE COMMITTEE

 

 

THE FUTURE OF BRITAIN'S ELECTRICITY NETWORKS

 

 

WEDNEsday 6 MAY 2009

 

MR DAVID SMITH, MR PHIL JONES and MR STEVE JOHNSON

DR SIMON HARRISON and MR JOHN SCOTT

Evidence heard in Public Questions 225 - 298

 

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 6 May 2009

Members present

Mr Elliot Morley, in the Chair

Mr David Anderson

Colin Challen

Judy Mallaber

John Robertson

Sir Robert Smith

Paddy Tipping

Dr Desmond Turner

Mr Mike Weir

Dr Alan Whitehead

________________

 

Witnesses: Mr David Smith, Chief Executive, Energy Networks Association, Mr Phil Jones, President and Chief Operating Officer, CE Electric UK, and Mr Steve Johnson, Chief Executive, Electricity North West Ltd, gave evidence.

Q225 Chairman: Gentlemen, welcome to the Energy and Climate Change Committee. To start off, perhaps for the record you would give your names and positions.

Mr Johnson: My name is Steve Johnson, chief executive of Electricity North West.

Mr Smith: I am David Smith, chief executive of the Energy Networks Association.

Mr Jones: I am Phil Jones, president of CE Electric UK.

Q226 Chairman: Let us start with the concept of creating a vision for the distribution networks. At present a huge amount of discussion is going on. There are lots of reports. The report of the Electricity Network Strategy Group appears to have been welcomed. The LENS project is looking at different scenarios. I note that the submission of the Energy Networks Association states that the government through DECC should provide strategic direction to the industry to guard against the risk that in the face of great uncertainty markets will fail to deliver what is required in the necessary timescales. That strikes me as quite a serious statement. Do you believe that the markets will not deliver? Do you believe that the government is not giving enough strategic direction? If not, who should be doing it and what form should it take?

Mr Smith: What we are saying is that government through DECC should agree key assumptions with the industry, specifying a range of things from security of supply and how environmental targets should be met and establish a steering group of key industry stakeholders and thinkers to inform its direction. Ofgem should then regulate to ensure the efficient delivery of those targets.

Q227 Chairman: Does not the ENSG provide that kind of group leadership?

Mr Smith: ENSG is looking at transmission issues. Obviously, today we represent the distributors and we are looking at distribution issues. At the moment there is not such a group for that.

Q228 Chairman: There is no equivalence?

Mr Smith: Not at the moment, but in the past we had the distribution working group. That group is currently mothballed.

Mr Jones: I sit on the ENSG, as I did on its predecessor group. It is currently looking at transmission. I take a slightly different line, if that is not bad form. Its terms of reference provide for it to look at distribution and my view is that it should. I am on it because I do not have transmission in my organisation. It can look at distribution and David is right to say that at the moment it does not do so. I do not mean to say that that is an incorrect judgment. The urgent issue is the transmission network and the constraints that basically keep renewables up in Scotland. There is every need to continue to look at distribution issues and to do more detailed work at an underlying level which is the distribution work to which David referred as specific issues are highlighted, like the transmission issue dealt with recently. It would then make sense for companies like mine, Mr Johnson's and others to put experts together to find the relevant answers to specific questions, but ENSG in particular as formed has within its remit distribution and should be directed to look at it.

Q229 Dr Turner: On the face of it, it seems unfortunate to look at transmission and distribution networks in isolation because obviously they are interrelated. If we are to have a genuinely smart and responsive grid they have to interact satisfactorily. Do you think this has been sufficiently planned for?

Mr Jones: I do not think it has, and that is potentially the question I answered a moment ago. One of the classic differentials between the two networks as they have been planned over the past 30 to 40 years is their approach to generators and how generators should respond under what we call fault conditions; in other words, when there is a short circuit on the network. That is a gross simplification. Typically, a transmission system will say to a generator that it needs to have the wherewithal to stay on the system and maintain stability, whereas in the distribution network generally protection schemes have been designed on the basis that as soon as there is a fault they want the generator to get off the system. The differential is relatively arbitrary. It just so happens that the voltage going from transmission into the distribution domain is 132 kV and we own networks that have been designed with one fabric and the transmission with another. You could argue that that is a relatively false or arbitrary distinction and it would be right to have more holistic planning. In my view there should not be a separate group to look at distribution as opposed to transmission. We are looking at the power network overall. The trade-offs between the two are important and will become more so as there are more renewables on the distribution networks.

Mr Johnson: There is a changing role in the relationship between the transmission and distribution companies. Traditionally, because of the type of networks and large generation we have had it is the transmission companies that deal with the problem of matching load and generation. As distribution generation increases and we get more connection onto the distribution networks in a few years' time the network companies will have to undertake some of that balancing and that will necessarily change the relationship between the distributors and the transmission companies.

Q230 Dr Turner: You can see all sorts of opportunities for renewable generators at around 100 MW or less to connect to distribution networks rather than have a 400 KV line built to take them. That will create some different engineering conditions for the whole system, will it not? Has that been properly taken into account?

Mr Jones: As far as it affects the system now and in the foreseeable future, yes. Has it been taken into account in a world post-2020 where there are 50 per cent, 60 per cent and 80 per cent reduction targets? No. But it is a fair way off.

Q231 Dr Turner: Can you see any way in which this can be satisfactorily done? It seems logical that if there are totally changing circumstances coming down the track we should be starting to prepare for them now rather than later. I am not an electrical engineer but it seems to me that in the industry technology has not significantly changed since the war. There has been extraordinarily little R&D in this area. What scope do you see for technical innovation to help with the problems of the future?

Mr Jones: You have probably characterised it quite accurately. As applied the technology has been relatively slow moving; in many ways I see that as an opportunity. Most of the things that will need to change in order for the distribution networks to do the kinds of things to which you have referred already exist; it is not technology that is not already out there, but it is just not applied in the public networks in this country. We do not need to invent things that do not exist but we need to apply them and really understand how they would work. We are talking here about the public electricity supply network which needs to be absolutely safe. We need to understand how it would operate in reality rather than in a laboratory or test case. As to the scope for innovation, it is not limited in the near term by what is invented and available as products because we have not needed to move the networks very far. That development has been going on elsewhere. The commercial frameworks to do that are now in place. They are not perhaps at an embryonic stage; but they are in their infancy. The framework is supposed to apply this new technology and deal with some of the commercial constraints that would otherwise disincentivise companies and customers from wanting to see that happen. At the moment that is probably a bigger issue than the technology.

Q232 Dr Turner: Is nobody working on any sort of breakthrough step changes in technology which can advance things dramatically?

Mr Johnson: If you look at the role of the network companies in any future we will still have large items of generation, be it nuclear, large offshore wind or carbon capture and storage, so our distribution network will still need to cater for that type of load flow. What we are talking about in future is a more flexible and active network management which we have not had in the past. The fundamentals of our network in terms of transformers, cables and overhead lines may not change a great deal and the question is how we control and manage those networks. As Mr Jones said, it is not that the technologies are not there. What we need to do over the next five years, say, is to have some trials in applying that technology.

Q233 Dr Turner: Do you think the government has been sufficiently supportive in dealing with all the transmission and distribution issues that you are considering?

Mr Jones: It is now starting to make those moves. We should bring that comment up to date. In the past seven or eight years when I have had a lot of personal involvement the fact that several government organisations have talked about other bodies that they think are responsible for it has not helped. You have to credit the existing arrangements. Some pretty bold decisions have been taken in the past few weeks. We do not think you would need decisions nearly as bold as the ones we have seen in recent weeks to pave the way for the kind of network development we are talking about.

Q234 John Robertson: I understand from what you say that the technology is out there but you are not using it. It strikes me that the problem is not the technology but, to quote an adage, who pays for it at the end of the day. Who does pay? Does the government pay, do the government and companies pay or do the companies, who will make a profit from selling it on, pay for it?

Mr Johnson: First, the technology is not applied because it has not needed to be applied yet. Second, just like any network development we are putting our investment plans to the regulator as we speak and we shall be talking to them over the next few months. I see this as just an extension of those discussions. This is an investment in the network that we shall make for the future benefit of customers and I see the funding being the same as it is now via the distribution price review.

Q235 John Robertson: You are saying that we will just wait until it is needed?

Mr Johnson: The different point I make is that we can see that the role of the distribution network will be very different in five, 10, 15 or 20 years' time. Over the next five years we may not see a great change, but it is right that in that time we undertake some trials of these technologies. We should isolate part of the network, try the techniques and technology and look at the commercial arrangements so we are absolutely ready to develop the networks as we need to in the next five, 10 or 15 years.

Q236 Sir Robert Smith: I want to pin down exactly how the government provides the strategic direction for which you are looking. Does it say that within the existing framework thou shalt produce so much embedded generation in 20 years' time, or do you want government to change the levers or signals they put into the market?

Mr Johnson: There are formats for decisions to be taken now in terms of signals to industry and regulators in terms of what the energy networks will look like in future. It is difficult to be very prescriptive about what that might look like. Government does have a role in working with the different interested parties in the energy sector and considering emerging technologies and distributor generation and where best to apply that. Having made some of those decisions, the flexibility that the regulator currently has should allow that development to take place.

Q237 Sir Robert Smith: Obviously, it has the ROCs, emission trading and it is trying to send big signals to the market. A government minister just saying that he would like to do something is not really enough.

Mr Jones: I agree with Mr Johnson. I do not believe there are any levers or instruments of government that do not now exist and will need to be created. To put it plainly, personally - I do not speak necessarily on behalf of the entire industry - I would not be in favour of somebody dreaming up yet another agency to tell us how we should do our job. It is now necessary to have an informed government that is able to make the kinds of choices that only it can make. I do not mean ROCs or LECs; that is about what drives the generation portfolio on to the network, but in the end there will have to be some investment. It is largely dominated by what we have to do anyway to maintain the quality of the networks as they stand in terms of costs, but there are incremental costs that are classically an externality; in other words, everybody wants somebody else to pay. You will never find a person who says, "I really think we should save the planet and I am prepared to cut a cheque for it now."

Q238 Mr Anderson: The customer will pay eventually?

Mr Jones: That is right, but somebody must represent that view. I believe that for the long-term decision and the huge scale of the change being talked about, in the end it is the role of government to make just the few choices that perhaps will never be made by any of the other participants. To sit and wait for them to make them is unrealistic. We have seen good examples where government has made choices, for example that certain kinds of generators will be placed on certain sites and the industry will just have to get on with it. Nobody else would have been able to make those choices. Where there are such examples in networks they are not many in number and they are certainly not as big as the kinds of things to which I have just referred. Those choices need to be made. One example is: what kind of role do you want the distribution company to take? The guiding mind over the past 20 years, rightly, is that distribution companies need to get out of the way, be in the background and just provide neutral access to all generators so they can compete with one another so that basically wholesale competition will drive down the end price. That has been the guiding instruction to the industry. We think we have done a good job. We have moved into the background and become very low key; we have driven down our costs on the distribution networks by 60 per cent since we started and provided a relatively level playing field for access to generators. But in a world where you want the distribution companies to be much more active in balancing demand locally with generation the terms on which we trade must change. You are right that a minister simply saying "it would be nice if people thought about something" will never change the fabric of the industry. Maybe it is just a question of guidance given statutorily to Ofgem in terms of, "This is what we mean by your environmental obligations." Once we get past some fairly big specifics Ofgem ought to have the vires to go off and do that job effectively in conjunction with industry, supervised by the customer's ultimate representative on an issue like this which is its elected government.

Chairman: Let us look in a little more detail at the significant investment in these changes which you have already flagged up in your evidence.

Q239 Paddy Tipping: I think it is right that £9 billion of investment has been spent under the current price round. On what has that been spent?

Mr Johnson: The £9 billion investment over the next period is almost "business as normal"; it is about renewing assets that become age-expired. We know that in the 1950s and 1960s massive investment was made in the electricity network. Those assets are coming to the end of their natural lives so significant investment is required over the next five years and beyond. Within that £9 billion is also a forecast of new load growth. There is not a great deal of that £9 billion for the kind of investment in the different types of networks about which we have just been talking.

Q240 Paddy Tipping: Therefore, if we want to get to where we want to be in 2020 what will be the extra cost?

Mr Johnson: It is difficult to say at this stage. The debate becomes quite complex because it depends on the type of generation we see in terms of distributed generation, where it is connected and the changing behaviour of some of our customers. When smart meters are rolled out and customers begin to understand how they can influence their load demand and what that means for cost, what does it mean for our networks and the relationship with generation? All of that will have to be taken into consideration when we look at new investment. If you look at the average cost a customer pays our portion of the bill is about £60 per year. The £9 billion investment we are looking at in the next period on average will mean about £1 a month for our customers. I cannot see that the investment we must make in the new technologies given that they are control technologies, not new assets, will be at that level; it may be over 20 years. That gives you an idea of the type of investment we have in mind.

Q241 Paddy Tipping: Traditionally, you have worked with the Ofgem funding mechanism which has been about pushing down prices. Mr Johnson said a moment ago that he thought that process could deliver the money in future. Is that right or do we need to look at a different funding mechanism?

Mr Johnson: There must be flexibility but Ofgem now has that in its remit. In particular, when we look to the future it is not just about investment in today's customer; perhaps we need to start looking at investment in tomorrow's customer. Certainly, from the discussions we have been having Ofgem is very mindful of that. When we talk to them about our investment plans they ask whether any of this will be sunk costs. If the work changes the networks change. Is there a risk of investing now when we do not need to? We do not believe that that is the case, but it indicates that Ofgem is beginning to think about future customers, not just the next five years. There will continue to be challenging debate, as there should be, but at the moment we see signals that the right discussions are taking place. Clearly, we need to see a demonstration of that over the next few months.

Mr Jones: Ofgem will speak for itself before this Committee. I am sure it will say that it has not been afraid where necessary to make decisions that push additional costs onto customers. That is the world we are now entering. After 20 years of radical reductions the price cannot keep going down and those investments and operating costs need to come forward now.

Q242 Colin Challen: It is very worrying to hear, is it not, that the £9 billion in 2010 for the next five years is more or less business as usual, with perhaps renewables and so on, when by 2020 35 per cent of our electricity is meant to come from renewables? Much of it will be embedded generation coming in at the distribution level. How will you make up the difference? If you say that maybe you will start in 2015 it is just not long enough, is it?

Mr Jones: You need not worry on that score. The £9 billion we are talking about is effectively the renewal of the base assets. That money will also take you towards the 2020 target. It is not like-for-like replacement in the sense that we do not buy an antique that matches what we installed in 1950. The equipment has a much higher specification and it grants us the opportunity to build bigger capacity on the network at the same time at relatively low marginal costs. Mr Johnson is right to say that we are not building a mega-active network for that £9 billion, but it is not a zero contribution to the capacity of the network. The 2020 target is about generation coming forward to connect to our network. That is relevant to an earlier question. For the distribution companies to get to 2020 is largely a matter of connecting what generators come along. That is a far bigger question you should be concerned about in the context of the 2020 target than whether the networks can accommodate them. If they come along I think the networks will find a way to accommodate them within the £9 billion plus the mechanisms that exist basically for generators to pay their share of that connection cost. Most of what we concern ourselves with is what happens beyond 2020 when the networks need to become much more active. You should not assume that we are sitting on our hands waiting for somebody to come along and kick us and tell us to get on with it. Providing that base asset, keeping it in good shape and growing capacity at the appropriate points in the network will maintain a certain amount of existing capacity for those distribution connections. They have not been limited by the networks at the minute; they are being limited by the number of generators that come along with planning permission and finance in place ready to go.

Mr Johnson: To make clear one point, when we refer to £9 billion across the industry as being business as usual certainly for my own company in the current period we have connected 500 MW of distributed generation and as part of our investment planning we forecast 1,000 MW of distributed generation in our network. Therefore, "business as usual" means that we connect distributed generation.

Q243 Colin Challen: Is the £9 billion or any extra investment that may be needed threatened by the recession? Does that have an impact on your investment plans?

Mr Johnson: When we look at load growth we have reforecast our plans in our latest submission to Ofgem. Clearly, over the past year or 18 months all of us have seen a significant downturn in the development of our networks. That has certainly been built into our plans recently. It remains to be seen how quickly that sector starts to recover over the next 18 months to two years. We forecast recovery in two years' time to start to return to levels that we saw a few years ago. There is some reflection of that in our plans.

Q244 Colin Challen: What sort of level of investment might we anticipate after 2015? Will it be very much greater?

Mr Jones: On the distribution networks we see it increasing again but not in a mammoth step that would be unmanageable. One number that I bandy around as being relevant for our company is that there has been a shift of about 30 per cent in the investment level from the period just ending to the one that will commence in a year's time. The same kind of step as we shift up through the gears is probably to be expected in five years' time.

Chairman: Obviously, some of that investment needs to go into innovation and such things as smart grids which are coming on stream. One comment from Ofgem acknowledged that the traditional RPI-X approach has led to a serious decline in R&D expenditure by network companies. I also note from some of your own evidence that the registered power zones and the innovation funding incentive have not been quite as successful as they may have been. Perhaps Dr Turner would like to start.

Q245 Dr Turner: Do you believe that existing initiatives have been enough to generate change here? Is Ofgem playing a sufficient smart role in producing a new smart grid?

Mr Jones: The existing arrangements have been a limited success. That is not intended to be mean or uncharitable. It was a huge change four years ago when the authority approved any form of mechanism for innovation. Up until then it had been very heavily focused on a statutory cost-reduction framework. A lot of water has flowed under the bridge since then, but at that time there were mixed views and great caution among some senior members of the authority. Some people were very hawkish, asking why they should be doing it; others could see that R&D in the sector had dropped, if not vanished completely. From memory, the 0.5 per cent of turnover chosen was at the lower end of any reasonable range of R&D penetration as viewed in Europe. Therefore, that benchmark got everyone started. The reality is that, first, there was not an endless supply of research capacity out there to do the work because they had not kept busy since no one had asked them to do anything. It largely declined and the student and research base shifted elsewhere. That needs to be increased and there has been limited success in that regard. Second and more significantly, some quite narrow and strict rules were applied to what we could innovate. My view is that that was in response to some of the more hawkish people who had to approve it; in other words, it forces us to innovate around pieces of equipment that go onto the network. I can understand why that was done but, looking forward now - it is water under the bridge - the big question is: how will these companies operate? What will the commercial innovations be? Those would not be provided for under that scheme, so you could not come forward with a new trading model, for example to operate local demand and supply balance. If you came up with a piece of kit that helped you to do it that would go through the mechanism, but the significant thinking and development required to create that different set of arrangements would be forbidden from the scheme at the moment. My view is that the rules should be relaxed going into the next period because they stand in the way of quite a lot of the development.

Q246 Dr Turner: Do you think the current distribution price control or the transmission access review should give more explicit consideration to the role of demand side management, thus mitigating the need for larger investment in transmission?

Mr Jones: For sure it will do eventually. I shall speak about distribution and take advantage of the fact that today I can afford to plead the fifth on transmission access. I do not think it needs to be a big piece of DPCR5, the price review that we are now negotiating. The reality is that most of the forecasts we have talked about and the lead times for the projects on which we are working are to do with reinforcements and replacements that are already necessary. It is impossible to see that much demand side management coming into play in the next 12 to 18 months to unseat the need for some of those projects, but the innovation processes need to look at how that can be dealt with. How can we trade with people to give them those benefits whilst avoiding some of the potentially quite crushing risks of the mega-complex energy trading arrangements that now exist? In other words, we need to isolate some of the unwanted effects if some customers are to try to operate in the market in this new commercial way.

Q247 Dr Turner: That is a very useful answer because it leads directly to my next question: what sort of price control mechanism would you like to see replace the current RPI-X so it facilitates innovation, smart grid development and transition to a low carbon economy? It is not currently fit for that purpose. How would you modify it, or would you start again?

Mr Jones: I would not start again or throw it out because it was not fit for purpose and was good only for driving down prices. Fundamentally, RPI-X is about agreeing a set of measures and then capping the price to incentivise companies to find the cheapest and most efficient way to get it done. If we overrun our shareholders take a bath; if we beat the target we are incentivised to do so and for a limited period we keep the gains. I think we should keep that incentive in play. I do not think there is a better way to incentivise companies to get a good outcome. To its credit, in this review Ofgem is paying more attention to the required outputs and the actual specification. Previously, it has just been a pot of money that has been signed off without any real specification for what is to be delivered. That needs to change. The innovation measures are very small in the scheme of things in financial terms compared with what we spend to keep the business running. I believe they need to be relaxed. We do not need to move radically away from setting a set of targets to a set of management teams and rely on them to be best placed to find out how to get to the objective within the price control period.

Mr Johnson: I agree with Mr Jones. To go back to your original point about demand side management, this is something about which we are talking to Ofgem. My company is undertaking some trials in demand side management and talking to Ofgem about the type of regulatory regime we have, how it incentivises either capex or opex and how to remove the disincentive facing our companies in looking at demand side management trials. The flexibility that Ofgem currently has around innovation funding needs to be expanded and the discussion we are now holding with them about how we target our expenditure and are held to account for that expenditure addresses a lot of the issues we have been talking about.

Q248 Paddy Tipping: If we talk about demand side management, have I missed a trick? Smart metering is part of this. The department promised to make some announcement and my impression is that it is overdue. What is the state of play?

Mr Johnson: We are waiting for an announcement on smart metering particularly in terms of how it will be rolled out. We believe that there is a big part for network companies to play in it. The ultimate demand side management is for the end customer to understand what his low profile is and actively manage that. Because we have not got to that point yet at the moment when we talk about demand side management we have to talk to medium and large size industrial and commercial users who clearly do have a view of their own demand. When we know how smart metering is to be rolled out it will eventually lead to a position where the end customer can have a far greater say in the management of their own demand.

Q249 Paddy Tipping: Tell me about the roll out. Some of the big six generators do not support the notion of a regional roll out. What is your view? As distribution companies you are well placed to do this.

Mr Johnson: We can talk only from a network perspective, which is why we are here. We believe that we are very well placed. Clearly, we have an enduring relationship with every end customer. We also have the workforce and skills already on the ground, and for a roll out of this kind surely the most efficient way to do it is for one company to go down one street and do it all at the same time rather than have six different companies managing the process.

Q250 Mr Anderson: Do you have any idea what smart metering will cost the customer?

Mr Jones: It depends on how smart the meter is. It may be £30 to £50 per meter. It is not a particularly complicated task to install it; it is screwed to the wall and connected up. I guess that it would be in the range of £50 to £100.

Q251 Mr Anderson: It would be £30, £50 or £100?

Mr Jones: A man has to drive to the location. The trade union will want him to be paid the appropriate and fair wage to do it. Probably the top end for installation would be £100. For our 3.8 million customers you can do the math, but that would be spread over a long time. You will not necessarily charge that upfront. Three-quarter of our outgoings are recovered over a 20-year period.

Q252 Chairman: Presumably, you have a replacement programme anyway?

Mr Jones: Absolutely, and we would seek to synchronise that activity with it.

Q253 Sir Robert Smith: Mr Johnson, you talked about your relationship with the customer. Is not your customer the generator and retailer? Mentally, we all think we have a relationship. Hydro Electric who send me a bill happen to be a distribution company, but I could go to anyone; it would still be the same the person who mended the wire in my house?

Mr Johnson: You are quite right. I have many customers, including the generators who want to connect and the supply businesses whose energy I transport, but clearly we provide a service to the end customer because it is our wires that provide continuity of supply and it is that physical relationship with every property that I am talking about.

Q254 Dr Whitehead: You quoted the upper end cost of smart metering, both capital and installation. This seems to be totally at odds with the estimate of £300 per unit put forward by, I think, the Energy Services Association which seems to have informed the overall estimates of the roll out and the total capital cost involved in that. Do you say that the estimate of £300 per unit is wildly out?

Mr Jones: I will certainly check it and come back to you. I make two comments off the bat: first, I am not familiar with their estimate; second, they may be looking at electricity and gas. A lot of the discussion is around smart metering for energy for the home. In giving that estimate I am talking simply about the estimated cost of replacing the electricity meter in a property.

Q255 Colin Challen: I was elected eight years ago when all the talk was about smart grids and all those wonderful innovations. Now all the talk is about smart grids and other innovations. How long will this go on? Does it not tell us that in the face of the climate change directive and all the other things that we know are coming there is a lack of integration in the business and too much isolationism? Too many people live in silos. I do not call for nationalisation of the industry perhaps on the British Rail model, but surely there is too much competition between different parts of the system which protect their own interests. All that talk a few years ago of energy service companies doing an integrated job for the customer seems to have disappeared as well. Surely, there needs to be some strategic grip on this which is not there at the moment.

Mr Johnson: I think that was the question which started this particular session which we call the guiding mind. Clearly, it does not mean nationalisation; it means someone having a view and direction for the industry and creating the forum for those discussions. I agree that that is the direction in which we should go.

Q256 Colin Challen: Let us take one example that may sound a bit far-fetched: the government's recent announcement to support electric vehicles to the tune of £250 million. I do not believe that money will be spent but let us assume that it is and take up is great. People have talked about a vehicle-to-grid protocol so that at night if there is spare capacity in car batteries it can be plugged into the base load, if you like. Where would the integration in the industry come from to sort out such a protocol? How would it happen? When an innovation like that comes along who bangs heads together and says that they have two years to sort it out and they should go away and bring back ideas? Who is doing that kind of work?

Mr Johnson: I am not sure there is anyone at the moment.

Mr Jones: As an application it is perhaps some way off, but let us imagine it happens now. In a world where you look to distribution companies to do the local balancing that we talked about I do not think you have an integration problem. It is relatively straightforward provided you are in a position where the distribution company has the data flows it needs, ie smart metering is working and it can see who has what when. It can be bi-directional so that if someone is exporting they can be paid for that and if someone is importing they can pay for it. The other challenge is to balance that local part of the power system. If that becomes part of the distribution company's obligation and there is enough of it going on it may affect the interface with the national grid. I do not believe that is a good example of an integration issue because you just lump it on the distribution companies. It is not a service that we now offer; nobody is asking us to do it either, but it is something that we suggest follows as night follows day in a more dynamic energy environment where potentially every home is able to interact as both generator and consumer. Someone will need to be the aggregator and balancer of it, because one thing that will not change is the level of interest that people are prepared to pay to it. They will always be more interested in soap operas than in exactly how the power system is being balanced. To a certain extent those services will need to be provided, so they can do that trade very easily without it being the topic of conversation all evening in the home. We believe that we are the people best placed to do that by a mile.

Q257 Colin Challen: It sounds to me as though you are not working to help innovation. You look to maintain a system, the top spec of the day, but where do you encourage innovation yourselves?

Mr Johnson: Mr Jones touched on this earlier in terms of the incentivisation that Ofgem put in. From my company's perspective we have been a great supporter of that. Innovation comes in many forms. Certainly, the projects in which we have been involved over the past few years have looked at both improving the end customer service today, that is, quality of supply, but also recently looking at how better to ease the connection of distributed generation. We do not work just on our own; we work in partnership with other network companies to develop the bigger schemes. I would return to what Mr Jones said. In the past four years we have seen the start and groundswell of innovation in the companies. We now have the processes and people in place and are extremely well placed to develop that still further and there are some very good examples of where we have had success.

Chairman: We want to look at some of the network charge issues for distributed generation.

Q258 Mr Weir: In this inquiry we have heard a lot about current transmission charges and also about embedded charges. Do you believe that distributed generators should continue to enjoy "embedded benefits" or do you support Ofgem's proposal to move to gross charging?

Mr Johnson: From the distribution, not the transmission, perspective you should look at a number of factors: first, there is the cost to the network of connecting generation; second, you should look also at the benefits network companies can gain from connecting generation. It may avoid the need for network reinforcement. I think the charging mechanism should clearly reflect both the cost and benefit we might get. It needs to be very transparent. There are also environmental benefits which we see through the ROCs and we do not see a need for that to change. From the distribution point of view it comes back to the need to be clear and cost-reflective but also to recognise the benefit.

Q259 Mr Weir: Various models have been put forward. For example, Scottish Renewables put forward a gross/net model whereby generators pay for the amount of transmission they actually use rather than the gross model; others look at different models. What form do you think an enduring charging model should take given its impact on the transmission system and the fact that the level of distributed generation is likely to increase significantly? Do you have a preference for a model, or are you standing on the sidelines to see what Ofgem comes up with?

Mr Johnson: To a degree. As long as it is clear, sends out the right signals and is cost-reflective but also recognises the benefits that the network can have we are fairly agnostic in terms of how it will work.

Mr Jones: We are not on the sidelines about our charges. We are talking about the distribution network. I stay well clear of transmission and I am well aware that that is where the heartache is at the moment in that respect. To the extent that the distribution charges are caught up in this debate it is because they reflect the same debate. It is much more aggressive on the transmission side at the moment. In that sense we do not sit on the sidelines; they are our charges and we have obligations of which Ofgem continually remind us to improve them to better reflect the appropriate balance of risk, costs, benefits and so on. It would not be helpful to confuse that aspect of the role of distribution companies, by which I mean that we have become programmed to be the neutral facilitator. That has been the way we have facilitated the change in the electricity industry for the past 18 years. We have sought to say that we do not have an axe to grind here; we will just make sure that if a generator can find the right place to place his plant he will benefit from having made that choice. My instinct is that to the extent we can continue to send those signals we should do so. I can understand why people say that this is bad for them because they have picked a generator spot and got permission and they want to put it on the network and then they see how much they are to be charged to connect. That might be bad news for one individual case but over a 20 or 30-year period economists say - and the evidence seems to support them - that to do other than that means the country will end up paying a lot more to connect whatever comes on if we insulate all the generators from the implications of their decisions. We cannot change the fact that as a network company the laws of physics are what they are. If a generator says he wants to put so much power into the network from a certain point, largely our hands are tied about the way we must deal with it. If the arrangements meant that all the other generators who had been more sensible about where might they position themselves after subsidising the marginal cost driven by one group, then the economists and Ofgem would say that was bad because over time it would end up costing everybody more. We believe that to make those signals clear and transparent has been a good move generally. It is a complicated business and there are all sorts of issues about who has what rights going back when and so on that must be dealt with, but at the core transparency and the appropriate sending of marginal signals is the right thing to do.

Q260 Dr Whitehead: Going back to the conversation about the guiding mind for innovation and various other things, is it not the case that a number of the proposals by Ofgem, if they simply operated by people who are neutral in carrying out the task, will effectively shape negatively the role of distributed generation? It is not just a question of apparent charges for very theoretical access to a transmission network which in practice is not likely to happen. Therefore, one is loading theoretical charges on practical generation but also changing the system of deep connection charges where distributed generators have already paid deep connection charges and will now pay an ongoing charge on top of it in order to continue with their connection. Are those not shaping arrangements that will greatly disadvantage the future of the distribution network?

Mr Jones: Obviously, it is an extremely complicated set of arrangements. There are commercial vested interests all over the place and Ofgem does not have any. In that sense, to be fair to Ofgem it is not trying to advantage one company over another but trying to find the most efficient way to get to the ultimate objective. I want to separate the two issues. Are there issues around original rights and when a transition was made? Yes. Leaving aside the issue about having paid deep charges and now there being an obligation to pay an ongoing amount, if the reality is that lots of renewables in Scotland, for example, are a very expensive way from a network perspective of getting connected then the sensible thing to do is to show what that is. It simply begs the question. If as a country we value that incremental renewable generation we should pay for it through whatever incentive is there currently - at the moment ROCs incentivise that sort of generation - not hide it somewhere in the network costs and avoid it. Fundamentally, it is more expensive to do than to keep burning coal and that is why we incentivise it. If there is a similar aspect to do with where it is positioned and what it does to the network those incremental costs should be understood. We should not ignore them and put our head in the sand. If that means the incentives are not strong enough then government has to say the reality is that this costs so much per tonne of carbon abated and if we want to pay for it that is what it will cost, but let us not be ignorant of it.

Q261 Dr Whitehead: But that suggests there is a real cost of leakage into the transmission system of distributed connections. The use of the phrase "hide it" suggests that therefore there is a real cost and similarly that charging effectively distributed generator double for capital cost and future revenue cost is somehow a real charge. Does not that statement about hiding things in a sense hide the real debate about the nature of the costs of distributed energy which we know will be a substantially larger factor than the network system itself in the system as a whole?

Mr Jones: My instinct is that it does not hide it. It is an extremely sensitive and complicated issue around the point in the process at which Ofgem, or whoever is charged with making that decision, says that it will have to "levelise" it. The reason it wants to do it clearly is to have some kind of level of playing field so that all generators going forward are in the same position as opposed to having people with an extremely long-running advantage who say they have already bought and paid for it and do not need to be involved in it. That is an extremely delicate matter in which we must participate, but we do not have the same vested interest as some other companies. I can see why it is a particularly sensitive issue. I do not see that it in any way affects the point I made previously, namely that if there are real costs - in other words, if a network company has had to build something because the next piece of generation that comes along is located in another place - I advocate that that should be clear and understood, not buried in some way or, in the worst case, lost by cross-subsidy in demand from exit to entry charge so that the normal consumers pay for what should be loaded onto a generation project over here. As to how you sort out the very delicate issue of access rights and who possesses them, that comes down to what a given generator company thinks its contract says. If it thinks it can take a company to court and enforce those rights I am sure it will try to do so.

Chairman: Let us move on to supply chain and skills which with these changes will be a major issue.

Q262 Judy Mallaber: We were told in previous evidence that there is a significant gap in skills across the power industry. Can you tell us what you see as the size of the skill gaps that you will face in the networks industry?

Mr Smith: If the current DPCR5 proposals that the companies have put forward are accepted it means that over the next five years there will be 9,000 new jobs in the distribution sector, probably 3,000 in contractors and 6,000 direct employees. This ensures that we are standing still. We have an aging worker profile. Some companies say that they will lose up to 40 per cent over the next five to 10 years, so initially there will be a burst of new people coming on; there will be some engineers, network planners and managers. We will see a significant number coming in.

Q263 Judy Mallaber: Can you tell us why the industry has allowed itself to have an aging workforce? I have just been to an engineering company - it is nothing to do with this industry - which has ensured that it develops apprenticeships precisely to avoid the problem of an aging workforce. How has it happened?

Mr Jones: I do not think we said it was problem; we just said that we had managed our business efficiently. We are not sitting here panicking. Ours is one of the companies that can put that kind of number in its forecast. To get those sorts of people in 10 years is a very manageable renewal of the workforce. To do it 10 years sooner would mean we would have to ask the regulator to charge the customers a lot more for a number of people for whom we do not have any work.

Mr Johnson: It does not mean that we have not been recruiting. My company has been recruiting for many years but the industry as a whole since privatisation has become more and more efficient. A lot of the efficiencies have been in changing work practices which means fewer people. Quite naturally, as people leave, whether through a voluntary severance programme or retirement, you do not necessarily replace them like for like with younger people. We are now getting to the stage where the workforce is aging and we have increased workload coming up over the next five, 10 or 15 years. It is right to start to recruit at a greater rate than we have been. What we are doing here is to highlight what the need will be because it is significant, but it does not mean we have not been doing anything; we just need to ramp up but fairly significantly.

Q264 Judy Mallaber: Does that mean you do not need to have particular incentives or mechanisms in the price control to persuade companies to invest in training and you will do it anyway?

Mr Johnson: I am sure Mr Jones would say the same. One of the most enjoyable parts of my job is to go out there and recruit young people. As part of the price review we have submitted the cost of our operations which over the next five years will include a level of recruitment. It comes down to what type of structure we get from Ofgem and how much they push the companies. Over the past 20 years or so we have continually driven the efficiency of the business by the RPI-X mechanism. We are now at the stage where there is not an awful lot more to come out. We are not out-performing our base costs this time; we are slightly above them. We will put in very sensible operating cost plans for the next period which include the recruitment needs of our businesses.

Q265 Judy Mallaber: Do you anticipate that in future there will be substantially more jobs in the industry or the same number?

Mr Johnson: Mr Jones talked about the increase in our investment needs over the next period and beyond. That means that naturally more people will be coming into our industry. They may not be direct employees of the companies; they may be working in our supply chain, but certainly within the sector there will be absolutely more people.

Q266 Judy Mallaber: What are the main skills that are needed? What levels and types of skills will you require?

Mr Johnson: It is the full range and they will be what we have been recruiting in recent years: it is everything from graduate to apprentice. Many of the companies including mine are already engaging with universities and schools. Thirty years ago when I joined the industry as a trainee I was probably one of 30 or 40 in my year. As the demand from the industry dropped off naturally the supply dried up a bit. We need to get young people really interested in engineering skills again, so we go into schools to talk to them before they make their GCE choices about the industry and get them excited so they can make choices.

Q267 Judy Mallaber: What response have you had? Engineering can still be seen as a dirty word and there is a particular issue about the range of people entering the field, particularly girls. You say that it is one of the most exciting parts of your job. Do you find it quite easy, because when I talk to people I understand that it is not necessarily easy to get people interested.

Mr Johnson: It is not easy. Interestingly, if I look at the young people in my organisation some of the best graduates over recent years have been girls. They have that engagement and we have been able to go out and recruit graduates from a cross-section of different people. To come back to what you say, this industry perhaps does not have the profile it should have. We want to be able to talk to people about how exciting engineering is and raise the profile. If you look at the kinds of things we have been referring to - the impact on the environment and the low carbon economy that we can have - that is an exciting thing to talk about to young people nowadays. We have a lot of work to do. We are engaging with them, but clearly there may be a role also for government to support us in that.

Q268 Judy Mallaber: Are you content with bodies such as the National Skills Academy for Power, new engineering apprenticeships and such measures? Are there other things that you look for specifically to help encourage new entrants and the development of skills?

Mr Jones: The truism is that it is tougher the further up the value chain you go; in other words, we need the full range of skills. I do not think we need very much more in relation to the craft skills. If our company put out an advertisement today particularly in the environment we have experienced for the past year or two we would be inundated with good people who want to do those kinds of apprenticeships. The competition for the really higher fliers is where it gets a lot tougher and in that regard we are probably not sitting here comfortably and saying that is fine and we have the right kind of inflow of good quality power engineers. Mr Scott who is to come later will tell you about that. There are probably fewer such power engineers in the entire country studying right now than there are in this room. That is probably where extra government input would be welcome.

Q269 John Robertson: We have had discussions in the past about skill shortages. We know that particularly in the nuclear industry one of the fears is that with new build coming along a lot of the jobs will be filled by foreign workers, yet I know that they have been doing a lot of work with universities. How do you combat that? Will you try to negotiate with the companies that already have connections with the universities to get those higher skilled people? It strikes me that we have two different sides here: one is the skill shortage that Mr Jones is talking about and the other one is that, as Mr Johnson said, it is great to see young people coming through for jobs. There is a conflict there. Is there a skill shortage? If so, what will you do to try to combat it? I am pleased to hear what you say about going into schools. Perhaps you can give us more details in further written evidence because it is a matter about which I feel strongly. I want to see what the companies are doing.

Mr Smith: As to the universities, we have a proactive programme. As ENA we are working with the companies. We work very closely with EU Skills, the Sector Skills Council and the National Skills Academy for Power. We now talk to the universities; we bring together a forum so we can have discussions and debates on it, but I shall send you something on that.

Q270 Mr Anderson: I want to touch on the supply chain and skills. You said that you needed government input to get high fliers. What are you looking for?

Mr Jones: The profile of the industry is one factor. It has not been seen as the place to be. Intellectually, it is one of the most challenging academic subjects there is and there is no reason it should not be pitched in that sense. I think that the ability to link it with "save the planet" and the very important climate change agenda can only be a good thing. Basically, we are looking for support through DECC, the Skills Academy we are working with and the power academy that we set up a few years ago to get graduates in place to provide additional profile and, where necessary, to allow us to provide additional incentives to students. The best students were always recruited by the industries that could offer the best kind of sponsorships and those kinds of things. It is not a big ticket financial item; it is about classic joined-up collaboration across government. We are not educationists; that is not what we do, so we need help from those kinds of people who can have influence in those areas to help us get the best people.

Chairman: The last issue we would like to cover is planning and access to land which we have heard has been problematic.

Q271 Paddy Tipping: How far have planning problems been an issue for you? It is an issue for people building new plants and transmission systems. Does it impinge on your companies as well?

Mr Jones: In a very similar way. If you are talking about just distribution networks obviously it is not as intractable a problem as the second Yorkshire line would be for National Grid or that Beauly-Denny is proving to be right now, but make no mistake: those local issues are largely ones for us and the generators. If we are talking about generators they have to get their permission first. People are used to seeing our assets; they are a lot less used to seeing the generation assets.

Q272 Paddy Tipping: Presumably, the new IPC will not apply to you; you must still negotiate on a local basis with local authorities?

Mr Johnson: That is right. Very rarely there may be schemes covered under IPC. Clearly, we have been down that route, but by and large the vast majority will be through the mechanisms we have always used.

Q273 Dr Whitehead: You have said: "Reform of the planning system as established in the recently passed Planning Act is essential if we are to connect up new, remote renewables generation in time to meet the 2020 targets." Yet all the evidence suggests that most of that connection because it is linear will continue to be dealt with by local authority planning regimes and not the IPC. Why do you make that statement as far as concerns the connection of renewables?

Mr Smith: What we are saying in terms of connection is that for some things sometimes we would like to opt into IPC because they are significant issues for us; there are things that will be reserved for DECC consents; and there are still things which are stuck in planning. Take Scottish Power as an example. I believe that its proposal to connect about 60,000 houses by a 20km poll-mounted cable has been stuck in planning since 2003. We need to get these things moved through the system and sorted out. What we are saying in that piece is that in dealing with them we need flexibility to look at different solutions. Some will be big and some we will want to go into IPC; some will go for DECC consents. We are talking to DECC very actively on this. In terms of local authorities what we cannot have is a situation where for one bit we have yes, no, yes and it becomes an issue for us.

Q274 Dr Whitehead: That suggests an opt-in regime whereby you can opt into IPC if you wish, but all the suggestions are that that is not how it will work. On the basis of national policy statements IPC will deal with more or less a specified number of known large projects per year. It will not say that because you will have problems with a certain corridor of access therefore it will bring you within IPC. We may well still be stuck with the so-called Swale problem of a district council deciding to hold up the London Array for a year and a half or two years because it does not like the hut into which the landing gear goes. Are you making active representations on that issue?

Mr Smith: Yes, we are.

Q275 Dr Whitehead: Do you have a view on how matters might be changed, perhaps through the Marine Bill, in order to clarify some of those issues?

Mr Smith: I am not overly-familiar with all the details of the Marine Bill but we are making representations for an opt-in position because we believe that some of the issues are significant and do require that. In terms of the national planning statements, it would be nice to get them out at some stage. We are still waiting for them, particularly the one on networks which we believe will help us speed up some of the process. As to the whole process, some situations require a solution that is different from others. We are saying that there needs to be some flexibility. If you put in place a very rigid system it will cause problems. We want flexibility. Sometimes we want to opt in; sometimes it can be done through consents. Once we get the planning statements through we will be able to work closely with the local authorities.

Chairman: We must stop here. Thank you very much for your evidence and for being very direct in your answers.

 

Witnesses: Dr Simon Harrison, Chairman of the Energy Sector Panel for the Institution of Engineering and Technology and Director of Energy, Mott MacDonald, and Mr John Scott, Director, Network Innovation for KEMA Consulting, and member of the Energy Sector Panel, Institution of Engineering and Technology, gave evidence.

Q276 Chairman: Welcome to the second session of evidence from the Institution of Engineering and Technology. Perhaps you would begin by giving your names and backgrounds just for the record.

Mr Scott: I am John Scott and I am here with my colleague representing what we hope is an independent view from the Institution of Engineering and Technology. At the moment I work for KEMA Ltd, a Netherlands-based consultancy company. My background is as a power system engineer involved in distribution and transmission and recently I spent five or six years with Ofgem as their Technical Director.

Dr Harrison: I am Simon Harrison and I chair the energy sector panel of the IET which has about 150,000 members worldwide and focuses on many aspects of engineering but especially electrical power and networks. My day job is also with a consultancy, Mott MacDonald, where I am a director of its energy business. My interests essentially are around the engineering aspects of electricity systems and I work all over the world on those issues. I believe that both of us bring a wide international perspective to what we can say to you today.

Chairman: Picking up from our previous session which was the creation of a vision for the distribution networks, we seem to be moving away from a system which in the past has been largely passive to one that will have to be a lot more responsive in terms of the range of generation it will have to accommodate. I ask Sir Robert Smith to start.

Q277 Sir Robert Smith: At the beginning of the previous evidence session there was talk of signals, greater direction and the government providing stronger leadership. First, do you agree that there needs to be greater clarity about the goals for the system given the options? Second, how do you think that clarity should be delivered?

Dr Harrison: We would agree that there needs to be greater coherence in the vision and one that incorporates the full range of possibilities that will assist in delivering a low carbon economy. To us that means greater integration with things like the transport sector and the built environment and greater integration across the electricity and energy industry to create a vision and momentum behind it that will deliver those objectives. As an example, electric vehicles were mentioned earlier. They offer a whole range of possibilities once you have a substantially low carbon electricity system to power them for de-carbonising the economy. Some of the more interesting ones are around the use of the electric vehicle as an active participant in the electricity system. It can charge when appropriate capacity is available; it can even generate, if that is of overall benefit, but the key is the integration of a system that can control electric vehicles in that way. It also needs to empower and engage owners of electric vehicles and electricity customers to accept and buy into that as a vision. It is much bigger than a network company, or even the electricity industry; it is something that has a whole range of wider implications that need to be integrated. A vision needs to be set out and stakeholders need to buy into that vision. Ordinary people need to be encouraged to develop an interest in this as something in which they need to engage themselves. To me that is something government is best placed to look at.

Q278 Sir Robert Smith: Having come up with a grand vision do you want the government to work out how it is delivered, or do you still want to have a market with some key signals sent to it and the regulator trying to maximise the efficiency of the market?

Dr Harrison: We remain of the firm belief that the market is an efficient vehicle for the delivery of the objectives that have been set. We do not suggest that we return to a strong system of top down national control, if you like, emanating from government. It is about setting a vision and getting the stakeholder community to buy in to deliver that vision.

Mr Scott: One can see internationally that there is an emerging vision. The term "smart grids" is bandied around a lot, but it is beginning to take shape. I think the issue with which we are really grappling is the fact that there are a number of significant hurdles to implementation. When you stand back and see the processes ahead there are all sorts of time lags. For example, bringing any new piece of network equipment onto the networks probably takes a minimum of three years. That is not because people are not applying themselves but because new equipment must be tested and new standards developed and that takes time. Unlike, say, the mobile phone network that has been implemented or the internet, everything for smart grids must be integrated with the existing network. There must be no disruption to end customers. In addition, this morning we have already heard about changes to industry processes, regulatory frameworks or incentives. All of them have a time constant as well. You can change a grid code or these companies' licences but that is part of a long queue of other issues. One of the interesting lessons from how effective the GSM world was in bringing forward tremendous volumes of mobile phones very quickly is that if you speak to the people involved they will tell you that they had a great deal of help from regulators and governments sorting out frequency allocations, spectrum issues and things like that. All of those things can be changed but how do you get the issues high enough up the agendas?

Q279 Sir Robert Smith: Do you think Ofgem begins to see the need to put these things higher up the agenda?

Mr Scott: If I am really honest and look also at international comparisons, I think there are some corners into which a bright light needs to be shone. The evidence is not very convincing when you look at the UK. There is no vision document showing a joined-up transmission-distribution-end-user picture. There is a European document, there are such documents for other countries, but not for the UK. If there is a long lead time for new equipment it is important to have what are called demonstrator or pilot projects. That does not mean they will be dispensed with when they are finished, but they are the prototypes to prove the case. You may have to operate a pilot for one or two years before you have really bedded it in. There is a scant level of demonstration projects on the UK network.

Q280 Sir Robert Smith: The previous witnesses seemed to be quite optimistic that a lot of the technologies and equipment were there and just the management and control of it had to be changed.

Mr Scott: I wanted to chip in this morning but I was not able to. The technology does not need fundamental primary research but only the elements of the technology are there. They must still be applied on the UK's networks and that might be different from the German network, Dutch network and so on.

Dr Harrison: There are also physical differences and the nature of the UK industry into which all this must be applied. The UK industry is very unusual. We were among the first to liberalise and have done so to a much greater degree than most other people. That has brought a whole range of economic benefits but also a lot of fragmentation. That is why the effort required to drive this through in the UK will require different treatment and potentially will be rather more difficult than in some other places. Recently I met someone who described his role as "Chief Engineer China". Would it not be fantastic if somebody could say, "This needs to be done. Do it"? We cannot do that here; there is a much more complex process involved and it takes time. It means that if we are to deliver this vision on the timescale required to de‑carbonise the economy there is a high degree of urgency to get things going and not have a linear process whereby we all think about it for a long time and very slowly it emerges into the implementation mode.

Q281 Dr Turner: We are reaching something like a consensus that something needs to be done about regulation in order to deliver what we need in future. What changes would you make to the regulatory system in order to achieve that?

Dr Harrison: As the previous witnesses said, the regulatory system is fine for delivering a set of goals once those goals have been established. The real issue is about establishing those goals and setting up a vision that drives towards what we want with a clear idea of timescale and, without forcing the steps, an understanding of what the steps are likely to be whereby we go from where we are to some sort of achievement of the vision, essentially telling the regulator that that is its remit and it should go away and deliver it. That sort of vision should not be set top down by a set of officials somewhere; it is something that should be built up from a wide consensus of stakeholders.

Q282 Dr Turner: But in practice we have to live with a top-down system to a large extent which is full of what appear to be inconsistencies. We have an aspiration to increase renewable energy. A lot of our renewable energy is in inaccessible and remote places, yet we have a localised transmission charging system which financially disincentivises developments in remote places. Do you consider that regulatory circumstance is flexible and likely to produce what we need?

Mr Scott: The previous witnesses made the point that there is a good principle that we should not hide costs in the long run; let the costs lie where they fall and then decide whether they should be borne by those parties or supported through a clear subsidy mechanism. That was why we said earlier that a liberalised market had a lot of benefits if you had a structure. However, when it comes to issues like innovation and new thinking there are some subtle barriers at work in the regulatory processes. Just to take the issue of skills discussed a little earlier, one of the network companies said to me recently it could do more innovation projects but it did not have enough "good people". What it meant was that you have to put your best professional engineers on an innovation project. They have to be people who understand the underlying physics of the networks and why they are designed like they are so you can intelligently think about how you might change them. The people you can send into a meeting at a university need to be those with professional qualifications. Such people are in the network companies but they are in short supply and very heavily loaded with day job tasks in many cases. There is a subtle skills issue. A move towards demand side management requires the companies to spend time on communications and working with customers and that has an operating cost; it is not a capital investment cost. The companies are still under a strong RPI-X incentive to bring down their operating costs and there are benchmarked on these things.

Dr Harrison: If we move to the issue of major network change to accommodate renewables in remote places and so on, the incentive mechanism there is all around the provision of just enough infrastructure. After all, that is economically efficient, but it means that in a world where the amount of generation that might connect is uncertain the timescales for connected generation and building generation are quite long and the timescales for building networks can be even longer. You can easily end up in a situation where the network becomes a barrier. As we move towards greater discontinuous generation with more wind and so on and greater uncertainty in terms of when new generation will come - whether or not we shall see a lot more embedded generation - the network needs enough capacity to be able to buffer the uncertainties of that if we are to see the electricity system emerge in a sensible way and network barriers not be too serious. That means that the concept of investing in a network that might end up getting underused, or not being used enough for a while, needs to move more to the heart of the thinking. Unless you do that you will always be waiting for certainty of generation projects, which is really hard to get, before you end up with commitments to build network. Building network takes a long time, not so much in terms of its physical construction as the time required to get consents. There needs to be a greater degree of freedom in the whole equation to allow the network to act effectively as a facilitator for the major changes around renewables and other new generation.

Q283 Dr Turner: Are you saying that the change to the regulatory framework is the introduction of more flexibility so it can achieve sustainable goals?

Mr Scott: Yes. One issue is that today's well-tuned commercial system leads either to just enough capacity or perhaps a fraction less. That is the nature of the competitive pressures, whereas in an uncertain world you probably want a bit of a margin. The other issue is that by definition innovation carries more risk than the normal business. In a portfolio of innovation projects some will fail. How will they be treated by the regulator?

Q284 Dr Turner: You and previous witnesses have said that you feel there is sufficient technology out there ready to be used and is now not necessarily being used in the most appropriate way or at all, but it would be a very unusual sector if there were not scope for some very basic innovation that potentially could lead to enormous breakthroughs and have a great impact on costs, for instance. Can you see any scope for really exciting innovation in the distribution and transmission field? It would be a unique area if there was not.

Mr Scott: The answer is yes in spades. There is massive potential for new technologies. You have made reference to Ofgem's existing innovation incentives. I should declare an interest in that I was quite involved in those when I was with Ofgem. The innovation funding incentive has bought the level of R&D activity up from less than £1 million a year across all the companies to almost £12 million. It is still relatively small beer but it is a huge change. The range of projects out there and the little communities of activity are really very encouraging. There are research projects in universities; start up companies coming through and things appearing on networks. The timescale to bring things through is three to four years. There are only four registered power zones; they are all extremely high quality and are world-class developments. One company has implemented dynamic ratings for lines and another implemented an active network on a Scottish island, and so on. They are developments of which the UK can be proud, but we need 10 times more.

Chairman: We must move to some of the new technologies and changes, in particular offshore wind in which the UK has taken the world lead.

Q285 Mr Weir: Obviously, the government has signalled that it wants more offshore wind. Can you tell us what the technical challenges are for the connection of offshore wind? Do you think they are well enough understood?

Dr Harrison: There is a set of technical challenges. The first part of the set is what happens offshore. We are trying to build a quite sophisticated network offshore mainly because when you send power for large distances under the sea for technical reasons you must move to direct current rather than alternating current like the rest of the network. Direct current in subsea transmission is quite well understood; there is plenty of experience around the world, but installation of rather sophisticated electronic and other equipment offshore is new and that is something that will be pioneered in UK waters. It is new in much the same way that putting a wind turbine offshore is new and there will be a teething trouble phase, as there always is. That will be a development issue that will be overcome in time but it has challenges. If you are to build complex high voltage DC networks offshore with multiple terminal points rather than just point to point connectors and a wind farm onshore, that has technical challenges because international experience of multi-terminal HVDC is low at the moment. All the theory says it is workable but it must be proven. Once you have got onshore you have the challenge of integrating large amounts of wind power into the national grid. We know that electricity per se cannot really be stored, so when you turn on the light and consume an extra 60 watts somewhere a generator has to produce immediately another 60 watts. When you have large amounts of offshore or onshore wind envisaged in 2020 - it does not matter for small amounts of the total - you have to deal with the issue of intermittency. Intermittency can be managed within the network flexibility for a penetration of wind of around 10 per cent, but when we get up to 30 per cent or so there will be some interesting challenges. One way to do it is to keep back-up plant that is controllable, which typically means relatively high carbon thermal power available to manage the intermittency problem. Another way to do it is to use the demand end to manage it. In practice you probably need both. But to use the demand end offers some very attractive possibilities of much lower cost management of wind intermittency and its full integration holistically across the system. To do that, things like smart grids are necessary enablers. We need to be able to control what is happening demandwise and match it with what is available generationwise, for example the idea of the plug-in electric vehicle not charging for a while because the wind is a bit light. The idea may be that when the wind is very light we are using the vehicle to generate power during what would otherwise be its charging phase at night. There are all sorts of possibilities around that that can be enabled by the smart grid.

Q286 Mr Weir: A lot of that is a problem associated with wind power generally, not specifically offshore power. You talked about the necessity for a direct current grid for offshore wind power. Are there any other technical difficulties that are yet to be fully understood or overcome to enable offshore wind to form part of our energy supply?

Dr Harrison: The question goes slightly wider and relates to the offshore wind equipment itself rather than the connections. We are still in a learning phase. The amount of deployed offshore wind is quite small. Some of the early projects had significant technical troubles with the level of marinisation of the wind turbines, the gearboxes and so on. The issues are really as much around access as anything else; in other words, if an onshore wind turbine fails you can send somebody out. Next day the person climbs a ladder, fixes it and you are back on again. If it happens offshore in the winter you may have to wait for a long period of time until you can get to the turbine to repair it. The implication is that you have to re-engineer your turbine system to have oil industry levels of reliability. There is no reason why you cannot do it, but it takes time to learn and the offshore wind industry has not quite got there yet. That is part of the overall risk equation that investors take into account when looking at offshore wind. Going further offshore than where we are at the moment and into really deep water takes us into new classes of turbine foundation. That is an area where a lot of R&D activity is going on at the moment. Whilst I believe the technical solutions are achievable they are not necessarily obvious or solved by now. You cannot have deep piled foundations at very deep seawater depths. Do you move to jacket-type structures of the sort used for oil rigs?

Q287 Mr Weir: Surely, they are the sorts of problems that the North Sea oil industry also experience and there must be a crossover in skills.

Dr Harrison: There is, and that crossover is just beginning to happen. It has taken quite a long time.

Q288 Judy Mallaber: You said in your evidence that there was a limited field of skilled firms worldwide. When you talked about networks you also referred to the pressures on people with skills. To what extent do you feel that the lack of skilled people, if that is the case, is a blockage in terms of the developments we are talking about here?

Dr Harrison: It is definitely an issue and one in which the Institution has been playing a very active part to try to alleviate it both in schools programmes and also to facilitate the Power Academy which works with industry and the universities to make power engineering more attractive to potential undergraduates. That is working and is delivering a significant increase in the number of graduate power engineers, but we are still talking about quite small numbers. There is a need for a big ramping up of the skills capacity.

Q289 Judy Mallaber: What order of magnitude are we talking about in terms of current power engineers compared with what is needed?

Dr Harrison: It is not my best area of expertise.

Q290 Judy Mallaber: We will not hold you to it.

Dr Harrison: I think that at the moment the output of UK power engineering courses is something like 150 students a year. My guess is that to deliver these kinds of transformational things we should be putting out more like five times that number.

Q291 Judy Mallaber: From your experience of the profession how do we compare with other countries?

Dr Harrison: There are major problems of a comparable nature in America and many European countries. If you go to Asia power engineering is a prestigious occupation and Indian and Chinese universities turn out capable power engineers in their thousands.

Q292 Judy Mallaber: Do you also notice skills blockages lower down the line, for example craft and tradesmen and people you might be working with?

Dr Harrison: Yes. There is an overall aging of the UK construction workforce. Once you get to that level the skills become a little less specialist power sector skills and you are talking about general construction and engineering crafts skills across the sector. It is a much bigger question than just electricity but it is definitely an issue right across the piece.

Q293 Judy Mallaber: Do you have any particular items on your wish list for what help can be given? Is the Institution engaged in trying to promote the status and image of power engineering?

Mr Scott: I think that for today's business and looking ahead to the next few years there are some very interesting initiatives which have been mentioned this morning that just need encouragement, but if we address the themes here for 2020 and beyond one of the characteristics we identify internationally is that the smarter grids require the merging of disciplines. You start to bring people with new knowledge of materials or power electronics into areas like distribution systems that have not had them. How do you really get end customers to engage with the energy system? How do you get electric vehicle owners to give permission for the intelligent control to manage their charging? The evidence in recent years indicates great consumer hostility in other countries to the smarter initiatives. We probably need people experienced in the social sciences, psychology and things like that. At the risk of overstating my case, these things take time. An industry working group with those people will take six, 12 or 18 months to get going.

Dr Harrison: Maybe it also comes back to the multi-sectoral aspect. My firm is involved in the world's first zero carbon city, in the Gulf. That will have smart grids, but the challenge there is to integrate transport specialists, environment specialists, water and waste water people, IT people and all the necessary electrical and renewable energy people to make that vision a reality. It is really tough and complicated and it is a question of getting all those skill sets working together and starting now so we can work out the path.

Mr Scott: It is not happening at the moment in the UK.

Chairman: To come to the last couple of points, one is issue of interconnection with other countries which appears likely to increase and the other is the concept of a European supergrid.

Q294 Dr Turner: What do you see as the benefits and risks of greater interconnection with other countries?

Mr Scott: Having had a background in National Grid a few years ago, in general I am in favour of interconnection. It makes technical and economic sense. However, there is a question of scale with a European supergrid. There are some interesting and provocative pieces around at the moment about the cost and scale of a whole European grid backbone. My short answer is that it is a bold idea; lots of good things start with a bold idea. Let us flesh it out and think about some costs and see how it can be modelled, but if I had limited resources, whether people or money, I would start to look at the offshore interconnections, integrating offshore wind farms with continental interconnections - something a little more local - rather than try immediately to roll out a connection to North Africa.

Q295 Dr Turner: What about technical and regulatory issues?

Dr Harrison: I very much support what my colleague said. Let us design what we are doing now with that ultimate vision in mind so that it can all form part of it later, but the technical and regulatory issues are quite complicated. If we assume for now - tell me if I am not reading your mind, as it were - that the purpose of the European supergrid is to integrate large-scale bulk renewables, perhaps offshore wind but also big solar power in North Africa and maybe the Grand Inga hydro scheme in Congo, into the European supply system there is a whole raft of issues, starting with security, to get your head around. Let us say that we build enough solar in North Africa to supply 20 per cent of the UK and 20 per cent of all the rest of the EU. We then have an emerging problem akin to what we currently see with Russian gas problem because we are depending on the states in North Africa to remain interested in selling us the output from these solar sources, except that we do not have the buffer storage that you get with gas or maybe the opportunity to buy the gas from somewhere else. Therefore, there is a significant security issue of that sort to resolve. There is also the issue that in the UK we are at the end of the pipe. Therefore, you build a European supergrid and there is a shortage of generation. How will you ensure that the UK gets the energy it has contracted for rather than it being diverted to other European states that may also have a pressing need? There is a whole raft of issues like that to think through. Technically, this is a huge-scale project. To do a few back-of-the-envelope sums, if it is to make a significant difference to the UK and European countries, the interconnection will have a capacity of something like 200 GW which is really big. The biggest scheme in China at the moment is 6.5 GW. Technically, equipmentwise there is no reason why you cannot put a whole load of them next to each other and make 200 GW from 6.5 GW blocks, as it were, but in practice you will want to mesh the network together; you will want to build a DC supergrid that looks a bit like a large version of a national transmission system; in other words, you have lots of points of interconnection and redundancy to get the resilience and robustness on which you need to rely for electricity supply. Meshed DC networks are new; nobody has done them. In theory they are probably doable, but rather than hang your hat on it at this stage you would really need to look further into it to establish its feasibility.

Chairman: I want to finish with connecting embedded and distributed generation.

Q296 Mr Weir: We heard a lot from the previous witnesses about the problems of embedded and distributed generation. What challenges does the current level of growth in these types of generation pose for distribution network operators?

Mr Scott: One of the practical issues that rather obscures development here is that today's networks can absorb a certain level of distributed generation, so you can think of a distributed generator as a kind of negative load. As long as it is hidden in the noise of load movement it is not a technical challenge for the network companies, but as more distributed generation comes on you reach a level where that headroom is exhausted. Some studies that Ofgem collected at the last price control showed very low costs for each extra kilowatt of distributed generation until you reach that ceiling and then the costs really run away. The best idea is to get the smarter grid capabilities in place before you reach that knee point. The issues are well understood by engineers: voltage control, inrush currents to faults, and that kind of thing. The technologies are coming forward. Some of the RPZs and innovation incentive projects are encouraging companies to look at these things and one or two new projects are shortly coming live on the grid.

Q297 Mr Weir: Do you think that the distribution companies are acting fast enough to make the technological changes to deal with distributed energy?

Mr Scott: One of the risks is the difference between demonstration and roll out. There are various places in the world where you can see some interesting demonstrators, but I ask: are the right precursors coming along to enable roll out of that technology? Unless you get innovation rolled out it does not really make a big impact for end users. The kind of precursors you would expect are: development of international standards which are just one-offs and protocols that enable plug and play so companies are not locked into one manufacturer. You would expect to see really effective industry working groups, which is how GSM got to where it is; that sector knows that it must collaborate strongly at the pre-commercial phase and it is that area where we really need to put some heat under the issue.

Dr Harrison: If we leave it and just treat it as a small part of business as usual for quite a long time we will get to Mr Scott's 'knee point' and then think: what do we do now? The urgency is there to get things moving in parallel with everything else that is going on so that we move through those phases and by the time we get to the knee point we are able to start to rely on smart grids to deliver low carbon benefits as we move to de-carbonising the sector. Then we will be ready and will not have to start thinking of a massive national roll out programme, for example.

Q298 Chairman: This has been a fascinating session. This is a huge area that raises a lot of issues, but it is very important in terms of the future of low carbon energy. Thank you very much for your attendance and your contributions.

Dr Harrison: If there are any aspects about which you wish to ask further questions please contact the IET; it will be very pleased to help.