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Memorandum submitted by ARUP (FBEN 7)
1 Overview/ 1.1 Introduction 1 Arup welcomes the opportunity to respond to the call for written
evidence by the House of Commons Select Committee for Energy and Climate Change[1]. In preparing our response we have consulted 2 Arup is a global firm of designers, engineers, planners and business consultants with nearly 10,000 staff in 37 countries, providing a diverse range of professional services to clients around the world. Arup has four main market areas - Energy, Resources and Industry; Property; Social Infrastructure and Transport. Further details are available via our website www.arup.com . 3 Arup recognise that electricity networks are key to the essential
reduction in green house gas emissions from the
1.2 Executive Summary 4 Significant network changes are required to meet future renewables targets and achieve climate change goals. System stability, potential large instantaneous losses of generation (with consequent frequency excursions) and reliance on ageing assets are major challenges. To economically overcome these, innovation will be required, including more intelligent networks and consumer characteristics. Arup foresee a greater role for demand side management in system balancing and reserve provision. 5 Many studies are predicting increased volatility in market prices and security. This may prompt a radical shift in the relationship between consumers and electricity production/transmission. Instead of the current arrangement, where the generated supply has to match the load, load may need to be controlled to match the electricity production (or network capacity) for significant periods in any day. However, before this could emerge, research into consumer attitudes and understanding of their electricity supply would be required. 6 A key concern is the availability of appropriate skills within the industry to deliver such changes and innovations. In addition, changing networks will alter overall resilience and security
2 Arup Response to Call for Evidence
2.1 What should the
Government's vision be for 7 The significant changes required to meet future renewables targets and achieve climate change goals require significant changes and additions to the electricity networks. Acceptable security of supply performance and affordability need also to be delivered. The networks must also be capable of facilitating energy substitutions, especially in the transport sector, from oil based energy to lower carbon electricity. 8 Arup welcomes the report of the ENSG[3]. Many studies (EMO[4], All
Island Grid Study[5])
indicate that increasing proportions of variable renewables within the
generation mix are likely to increase volatility in market prices and
security. In order to manage these,
there is a requirement to embrace new technologies such as demand side
management (DSM), dynamic system ratings and active system management, in order
to deliver best value to consumers. This
will also require greater interconnection within
2.2 How do we ensure the regulatory framework is flexible enough to cope with uncertainty over the future generation mix? 9 A key advantage of the 10 However unlike in state owned times, the assumption that consents and/or construction timescales for network reinforcement would be quicker than consents for the generation development, is no longer valid. Arup welcomes the indication from Ofgem that funding for early transmission scheme development and consenting will be forthcoming[7]. Early consenting will significantly reduce the perceived risk of delayed grid connection for new low carbon generation developments. However, this will need to be carefully communicated to the public, as there is a risk of planning blight with schemes being proposed and consented, but perhaps not implemented.
2.3 What are the technical, commercial and regulatory barriers that need to be overcome to ensure sufficient network capacity is in place to connect a large increase in onshore renewables, particularly wind power, as well as new nuclear build in the future? For example issues may include the use of locational pricing, or the availability of skills. 11 The potential technical barriers to large increases in renewables and new nuclear units include system stability, potential large instantaneous losses of generation (with consequent frequency excursions) and reliance on ageing assets. To economically overcome these, innovation will be required, including more intelligent networks and consumer characteristics (e.g. smartgrids with self healing properties). Demand side management should be incentivised to play a greater role in system balancing and reserve provision. 12 In future, if we are to rely on wind and other similar resources to
the extent implied by European targets, then the 13 From a commercial/economic perspective, it is sensible to maintain and increase cost reflective pricing. Locational pricing should therefore be strengthened and consumers should be given the opportunity to participate to a greater degree in the market, via dynamic pricing (using smart meter capabilities) and more effective tariff offerings (especially to improve the current ultimate solution of rota cuts to manage energy shortages, when it would be technically feasible to discriminate between core/essential uses and discriminatory uses, so that in time of shortage only the latter is curtailed). 14 As greater intelligence is built into generation, networks and consumer equipment, the skills of staff within the industry and supporting organisations (e.g. consumer equipment installation and repair) will need to be enhanced. Crucially the industry will require staff who appreciate the full ramifications of the many changes that will be implemented. The current market tends to foster 'silos' that pose barriers to key staff understanding the full picture. To overcome this, concerted effort may be required to develop broad skills. 15 To acerbate this, the age profile of the existing skills base in the electricity industry exhibits a high proportion in the 50+ band[8]. Therefore in addition to considerable recruitment of 'raw' talent, there will need to be considerable skill development of existing industry staff.
2.4 What are the issues the Government and regulator must address to establish a cost-effective offshore transmission regime? 16 Whilst the concept of a competitive offshore transmission owner regime offered potential benefits for consumers, we are concerned that the risk allocation and complexity in the scheme as currently formulated may undermine or eradicate these benefits. 17 Offshore transmission is a relatively new business area where there is very limited experience of costs and risks, a limited equipment supply chain and uncertain maintenance and operator safety considerations. Companies may underestimate such factors and risk insolvency or overestimate, risking prolonged higher costs to consumers than are warranted. 18 Some of these issues are raised in responses to Ofgem consultations[9].
2.5 What are the benefits and risks associated with greater interconnection with other countries, and the proposed 'supergrid'? 19 The principal advantages of greater interconnection are the opportunities for diversity and mutual support. However, for these benefits to be maximised requires free trade of electricity between countries and implicitly similar market structures/products that are exchangeable (spot vs long term etc). 20 The risks associated with interconnection are twofold. Firstly the risks of faults on the interconnectors, which can be minimised by appropriate design and operation and secondly the added system operation complexity and reliance on third parties, which requires better operator understanding and sharing of information.
2.6 What challenges
will higher levels of embedded and distributed generation create for 21 One challenge will be increased unpredictability of net load to be supported by the networks. In addition there may be uncertain behaviours of embedded generation during system difficulties. This was evident in the response of embedded generation to the European system split incident of November 2006, which made re-synchronisation more difficult. 22 One of the potential benefits of embedded generation is the potential of standalone operation and resultant increased user resilience to wider system disturbances, however, safety concerns and resultant operational rules prevent these benefits being fully realised. In combination with active demand management these benefits may be realisable in future. 23 Ostensibly moving towards local distributed generation should reduce the need to transmit power and associated I²R losses. However, in the UK transmission losses are less than 2%, with more ~7% in the local distribution networks, so distributed generation will be more effective (from a losses perspective) if sited close to matching load. Micro CHP units for central heating tend to be programmed to match heat load requirements, rather than electrical requirements. Maximum generation may therefore be a variance with grid system needs. Dynamic pricing may incentivise operation more tailored to grid needs, increasing the economic case for greater thermal storage (e.g. larger domestic hot water tank).
2.7 What are the estimated costs of upgrading our electricity networks, and how will these be met? 24 The recent ENSG study indication that significant (£4.7Bn) additional investment will be required to connect future renewables and new nuclear generation. However, there are already significant costs just to maintain the status quo, mainly associated with the replacement of ageing or obsolete network assets (ref. recent distribution and transmission price control reviews), plus significant investment is required for new international HVDC interconnections. These costs will be met by the consumer over time, but will require financing by shareholders and debt in the short to medium term. Such investment will therefore have to compete with other global investment opportunities and be subject to the vagaries of global markets for finance and equipment. 25 To provide best value for consumers, innovation will be required. In particular as overhead line ratings are a function of the cooling provided by wind, it will be appropriate to consider dynamic circuit ratings, especially where conservative circuit ratings may result in unnecessary constraint costs. 26 Upgrading of networks may also require outages of existing infrastructure. During such outages, risks and costs may temporarily rise and there needs to be effective incentives to minimise both capital expenditure and short term system operation costs. The current separate regulation of system operation (by Ofgem Markets) and network investment (by Ofgem Networks) will require better co-ordination to avoid historic problems[10].
2.8 How can the regulatory framework ensure adequate network investment in light of the current credit crunch and recession? 27 The regulatory price controls will need to ensure an adequate rate of return (via weighted average cost of capital, WACC). The current credit crunch has increased rates for major capital investment. One way in which the cost of capital can be minimised is by reducing risk premiums associated with perceived regulatory risks. Ofgem's current RPI-x@20 review of and their work on longer term electricity network scenarios (LENS) should help in this regard.
2.9 How can the regulatory framework encourage network operators to innovate, and what is the potential of smart grid technologies? 28 The innovation funding incentives[11] (IFI) introduced by Ofgem at DPCR4 and since extended in some form to electricity transmission (and gas) were excellent stimuli. But innovation brings risk which requires commensurate technical competence and operational understanding in both the network companies AND the regulator who is judging their performance. This reinforces the need for appropriate skills to be developed and maintained.
2.10 Is there sufficient investment in R&D and innovation for transmission and distribution technologies? 29 There has been a marked improvement in R&D and innovation in recent years. Such improvements will need to be continued to cope with the new challenges facing the industry. Smartgrids and related technology offer new opportunities for consumers. For these to be fully realised, further research into consumer attitudes and understanding, plus the development of user friendly interfaces will be required.
2.11 What can the 30 The work of the all island grid study5 for 31 As the 32 Regulation needs to balance the needs of government, consumers and
equity investors. We note that
imbalances have recently acted against network unbundling within a western
European state, dissuading potential investors from pursuing this acquisition
opportunity. No regulator is perfect,
but the
2.12 Other issues 33 In addition to our responses to the specific questions listed in the call for evidence, we would like to mention the following: Security/resilience 34 Electricity is likely to become an even more significant enabler of modern life in future. Therefore resilience to external events needs to be appropriately increased. There has already been considerable progress on increasing resilience to adverse weather - e.g. winds and flooding. Certain key infrastructure is also protected from malicious attack in accordance with critical national infrastructure designations. Equipment spares holdings and contingency plans have been reviewed in recent years (by E3 - joint government, regulator and industry emergency planning) and will need to be continually developed. 35 However, competitive markets rightly require considerable information transparency, but it should be recognised that this can also reveal potential weaknesses to those with malicious intent. In addition, considerable extra information is available to staff and contractors working in the industry. Some of these require a degree of security clearance, but not all and there is the added dimension of work, such as software development, which may be contracted overseas. 36 In the future, with more generation from renewables, the scene will become more diverse, both in geography and in generating technology. A geographically diverse grid may be more resilient in terms of networking round a damaged section, but this will only be true if the grid network is engineered with 'redundant' capacity. This is not always warranted on engineering reliability grounds (ref Offshore Transmission Security Standards), however, it might be more vunerable to 'non-engineering' interruptions. 37 It also seems that more reliance on renewables will create demand for a mix of standby 'traditional' generation and energy storage. If so, the links to the storage sites might become unusually significant to the security of supply and provide new targets. 38 We would also raise the question of whether the changing scene in generation and distribution is also changing the vulnerability of the system, and whether the fragmentation of multiple organisations could lead to gaps in the industry's security strategy. 39 If events occur that require unplanned responses, the industry
requires innovative people with a deep understanding of the system to find
temporary solutions, plus rapid regulatory and government support to allow
solutions that might otherwise be precluded.
Some of the measures adopted to overcome the 1998 40 The government may also have to balance compliance with some legislative requirements with minimising interruptions of supply. For example, in an emergency, would generation that is unable to operate FGD equipment be allowed to continue generating. We note that Defra has already clarified that plants operating under National Grid's instruction during an emergency will not count as opted out LCPD hours. Climate Change 41 We note and welcome the reports prepared by the Met Office specifically for the industry that highlight potential impacts of climate change on networks, such as seasonal shifts in demand and soil moisture changes affecting underground cable ratings. Further work is to be encouraged, as the assumptions that underly many of the design standards and guidance used in networks are called into question by climate changes.
March 2009 [1] http://www.parliament.uk/parliamentary_committees/ecc/ecc_pn4___06_02_09.cfm [2] Arup report available on www.berr.gov.uk/files/file48653.pdf [3] www.ensg.gov.uk/assets/1696-01-ensg_vision2020.pdf [4] http://www.berr.gov.uk/energy/energymarketsoutlook/page41839.html [5] http://www.dcenr.gov.ie/Energy/North-South+Co-operation+in+the+Energy+Sector/All+Island+Electricity+Grid+Study.htm [6] www.ofgem.gov.uk/Networks/Trans/ElecTransPolicy/lens/Pages/lens.aspx [7]www.ofgem.gov.uk/Networks/Trans/ElecTransPolicy/tar/Documents1/081219_TOincentives_consultation_FINAL.pdf [8] http://www.euskills.co.uk/electricity/index.php?pageID=25 [9] E.g. www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=81&refer=Networks/offtrans/pdc/cdr/cons2008 [10]www.ofgem.gov.uk/Markets/WhlMkts/EffSystemOps/SystOpIncent/Documents1/20090217Managing%20constraints.pdf [11] http://www.ofgem.gov.uk/Networks/Techn/NetwrkSupp/Innovat/Pages/Innvtion.aspx |