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Memorandum submitted by the Department of Energy and Climate Change (FBEN 34)
This Memorandum responds to the Committee's call for evidence.
- Section 1 sets out an overview of the government's vision of the electricity networks needed to meet our 2020 renewables target, security of energy supply and climate change goals.
- Section 2 addresses current policy priorities and in particular the steps being taken to accelerate investment and put in place the right regulatory framework for offshore and onshore network development in order to support our objectives for 2020.
- Section 3 covers the offshore transmission regime.
- Section 4 covers longer term challenges to 2030 including the role of 'smart grids'.
Introduction
1. As set out in the 2007 Energy White Paper we face two principal long term challenges in energy policy:
· tackling climate change and reducing carbon dioxide
emissions within the
· ensuring secure, clean and affordable energy as we become increasingly dependent on imported fuel.
2. Adequate and reliable electricity networks are critical to a modern economy. Those networks need to adapt to meet future challenges and to ensure they fully support a low carbon future.
3. If we are to meet our climate change targets and ensure security of supply, we need to be able to connect large amounts of renewable generation to our electricity networks as well as the other essential generation that will be needed to replace the existing nuclear and fossil fuel plant that will close over the next decade. Towards the end of the next decade new nuclear plant will have an increasing role to play and grid connections will need to be reinforced to handle the extra power from this plant. Renewable generation requires substantial investment because the best resource is often in areas that do not have significant transmission infrastructure.
4. Looking further ahead our networks are likely to have an increasingly important role in enabling consumers to play an active part in low carbon energy use and generation and potentially in integrating networks across the EU and beyond.
5. This memorandum summarises DECC's views on the vision of the electricity networks needed to meet our security of energy supply and climate change goals in 2020 and beyond.
Section 1: Overview of the Government's Vision for the Electricity Networks
6.
The
7.
The
8. Electricity networks are a key enabler to these investments. We need to be sure that both the physical network and the right regulatory, commercial and technical framework are in place.
9. In the short to medium term our priorities are to (i) speed up new grid connections, (ii) ensure faster investment in the network, and (iii) deliver a new regime for licensing offshore transmission.
10. In the longer term the electricity network will need to evolve to ensure security of supply and help us meet carbon targets in 2020 and beyond. The way we source, use and store energy will change in this time so the framework for future networks must be able to facilitate and adapt to such changes. More intermittent renewable generation such as wind will require technical solutions, and a mix of generation types, for smarter system balancing. We must also ensure that the network is fit for purpose with a changing pattern of generation and demand. Smart grids, greater interconnection, more distributed generation, use of electric vehicles, a switch to electric heating and a possible European "super-grid" may all have important parts to play in the future. We, therefore, need to ensure that our policy framework is flexible and supports innovation in network development and operation.
Section 2: Current policy priorities and steps to accelerate investment and put in place the right regulatory framework for offshore and onshore network development.
11.
National Grid Electricity Transmission (NGET) owns the
12. There are 14 electricity distribution networks owned and operated by seven different companies - distribution network operators (DNOs).
13.
All electricity networks in
14.
The system operator for Northern Ireland (SONI) manages the electricity
system and flows within
15. There is a high level of interest in investment in new generation. The Government has recognised that uncertainty around grid access may delay or stop these investments. Increasing amounts of variable renewable generation (wind) supported by back up generation will mean that by 2020 there may be around 105GW of generating capacity[1] for current levels of demands compared to 80GW today. There is an opportunity therefore to share network access more efficiently.
16. At present, there is a 61GW 'queue' of generators seeking connection to the transmission network, including around 17GW of renewables, with some projects receiving connection offers as late as 2023. However, the 'queue' does not give a good indication of which projects will actually connect. A broad guide is that perhaps 50% of generation projects will get consented, financed and built. The 'queue' is currently managed on a first come first served basis and, as a consequence, less viable projects can block those that are further advanced or could be developed earlier. Capacity can be booked in the queue where there is no realistic prospect of a plant being connected by the contracted date. The current arrangements lead to considerable uncertainty and restrict entry into the energy market.
17. These connection delays are partly a result
of the difficulties in achieving planning consent for new infrastructure (as
with the proposed Beauly-Denny upgrade). In most cases major transmission
investment takes longer to deliver than the generation that will connect to it,
which is particularly the case when there are delays in the planning process.
For example, the last major upgrade to the grid was the
18. The Government set out, with Ofgem, in the Transmission Access Review (TAR)[2] in June 2008 a programme of reform that when taken together will remove or significantly reduce the grid access barrier. We are now in the implementation phase of the TAR, and Ofgem is overseeing this process. There are three priorities for improving grid access:
· grid access reform to make the most from the infrastructure we have; · interim measures to connect projects before longer term grid access reforms can be implemented; · setting out a vision for the network in 2020 and taking a strategic approach to delivering major transmission infrastructure.
19.
As at present there is very little electricity network infrastructure
installed offshore, DECC is working closely with
Grid access reform
20. Getting the right regulatory framework for grid access (i.e. who gets a connection, when and on what terms) is a critical part of our strategy. In order to achieve better use of the current network and speed up access, industry working groups have been developing options for reform of the current access regime. Industry proposals have now been put to Ofgem who will need to approve any changes following a detailed impact assessment. Ofgem expect to make decisions in July.
21. The options being considered fall into three broad categories:
· Evolutionary change which seeks to improve the allocation of existing capacity by allowing greater flexibility and sharing of capacity; · Connect and manage, whereby generators would receive a fixed connection date, and would be entitled to use the system or receive compensation if the works required to connect the generator were not completed on time, and · A form of auction whereby either all rights would be reset and reallocated by auction. Alternatively an auction could be limited to future access rights with grand-fathered rights for existing generators.
22. The different ways of creating and allocating rights to connection each have different impacts on a number of variables such as:
· How quickly new generators will connect; · What rights 'incumbent' projects already connected have vs. rights for 'new entrant' projects in the connection queue or who will join the queue in the future; · Costs to consumers in terms of the likely system balancing costs that arise from using the new rules; · The certainty of when connection dates will be offered and for how much capacity; and · The complexity of each option and how quickly they may be implemented.
23. The Government considers timely and effective reforms to be essential. That is why the Government took powers in the Energy Act 2008 to intervene if necessary. We are considering the outcomes of the industry process and what steps if any need to be taken to ensure a satisfactory outcome. Key consideration for us will be the extent to which the proposals add certainty for developers, speed up connections and ensure the efficient operation of existing plant.
Charging
24. Transmission charging is an important part of grid access arrangements. The Government supports a charging system that treats generators and consumers fairly and reflects the costs that network users impose on the network. Ultimately it is for National Grid and Ofgem to decide on the most effective charging methodology and ensure that the detailed arrangements are fair.
25. The higher cost of transporting electricity across longer distances (e.g. from the north to centres of demand further south) mean that generators further from demand pay higher charges. Equally consumers close to generation pay lower charges (via their supplier). The majority of the costs of the network are, however, met by consumers in the south. There is no evidence that cost reflective transmission charges are harming the development of renewable generation in areas that are further from end consumers.
26. Any proposals to reduce charges for generators further from demand need to be very clear as to who is to meet the shortfall in cost recovery and why that would be a fair outcome.
Interim measures
27. In the meantime we are taking urgent steps, with National Grid and Ofgem, to make sure that those projects that already have consent can connect at the earliest possible date. National Grid has already offered earlier connection dates to 450MW of renewable generation and is considering what further projects could be offered earlier connection.
Strategic investment in new infrastructure
28. Significant investment will be needed to support our energy security and climate change objectives. We will need major onshore and offshore network reinforcements and extensions in the period from now up to 2020 and beyond. The cost of this has been estimated at up to £4.7bn[3], in addition to current refurbishment and expansion plans of some £4-5bn which have already been approved by Ofgem.
29. In general, major electricity transmission infrastructure takes longer to consent and build than new power stations, primarily because of the longer lead time for receiving planning consent. Current arrangements do not allow transmission companies to anticipate projects and develop the network until there is a clear need case from potential generation connection. This approach has served to keep the level of stranded assets on GB at a very low level.
30. We do not think this approach is sustainable, given the likely profile of generation development and that a strategic approach to investment is needed. The Government and Ofgem therefore asked the Electricity Networks Strategy Group (a senior industry group chaired by DECC and Ofgem) to develop a vision for the transmission system for 2020 and beyond. The first phase was published on 4 March 2009 and sets out an ambitious programme for network development. This will be followed up by studies looking ahead to 2025 and 2030. It will be for National Grid and the Scottish network companies to put further detailed proposals, consistent with this strategic vision to Ofgem for consideration. However, the information set out in this report was based on indicative assessments of the costs, and any projects will be presented to Ofgem for a fuller assessment of whether or not the costs are efficient.
31. Ofgem are consulting on new incentive arrangements for transmission companies to allow them to start work on specific projects on which money will need to be spent in the next financial year. In addition, Ofgem is also developing proposals to deliver the right framework for successful aniticipatory investment. The immediate priority is to provide certainty that essential (relatively low cost) design and pre-consenting work can be urgently progressed in the next few months and Ofgem has approved up to £43m needed to begin pre-construction work on the projects agreed in the ENSG report.
32. Transmission related costs currently account for around 3%-4% of consumers' electricity bills. National Grid's initial estimate is that the level of investment envisaged in the recent ENSG report of up to £4.7bn could result in around a 1%-1.5% increase in consumer electricity bills, although this figure is currently the subject of more detailed modelling work.Planning reform
33. In order to address some of the problems identified with the current planning system, the Planning Act 2008 sets up an independent Infrastructure Planning Commission (IPC) and a simplified "single consent" regime to streamline the whole process.
34. Ministers will retain responsibility for the policy framework which will be set out in National Policy Statements (NPS). The IPC will have to take decisions on energy consents within the policy framework set by Ministers and set out in the NPSs; in the case of electricity networks infrastructure this means the Overarching Energy NPS and the electricity networks NPS. These will set out the need for the infrastructure and how the IPC should consider impacts.
35. Planning applications for nationally significant infrastructure projects will be improved by requiring consultation on applications before they are submitted to the IPC and guidance will be issued on what constitutes good quality applications. This will mean that the IPC will be able to consider applications with greater efficiency and to set timescales.
Skills
36. The electricity
networks are known, from research by the Sector Skills Council, Energy and
Utility Skills (EU Skills), to have an ageing workforce with increasing losses
to retirement in the coming decade. Skills gaps are also increasing as new
technologies are introduced. The offshore networks will require skills and
experience with high-voltage DC, which are rare in the
37. Current levels of recruitment
and training are too low and will lead to increasing skills shortages.
Moreover, the capacity to train new workers is limited, especially by a
shortage of work placements. Recognising this, employers with EU Skills are
working to increase the inflow of skilled workers; including the development of
a
38. EU skills will give a detailed analysis of the situation in its own submission to the Committee.
Section 3: The Offshore Transmission Regime
39. The
40. An effective licensing regime for offshore wind transmission lines will therefore be vital to the successful delivery of our renewables targets. Following a series of consultations, government concluded that the offshore grid regime should be based on the onshore regime - with licensed grid companies ("OFTOS") responsible for building, owning and maintaining the offshore cables. But rather than have area based monopolies, licences will be awarded by tender as offshore generators seek to connect to the grid. We believe this approach will increase the number of parties able to build the connections and deliver them quickly and at best cost for generators (and ultimately electricity consumers).
41. We took additional powers in the Energy Act 2008 to enable Ofgem to run effective tenders and recover their costs. We are currently preparing the final consultation document for Ministers approval and we expect Ofgem to start running the first tenders to appoint new grid companies this summer. The first tenders will appoint OFTOs to take over the ownership and maintenance of the cables from the developers. Future rounds will appoint OFTOs to also design and build the grid connections.
42. OFTOs will receive a licence from Ofgem and a regulated income stream for 20 years. This approach will require less regulatory oversight than onshore where Ofgem reviews the income the grid companies receive every 5 years. As onshore the generators will pay to use the cables through an annual transmission charge. Also as onshore the electricity consumer will take the risk that cables are built but the generation project fails and the assets are not used. This regulated approach should assist the financing of both offshore wind projects and the offshore cables - by leveraging in lower cost of capital through lower risk.
43. We estimate that up to £15 billion of investment will be needed to connect Rounds 1, 2 and 3 offshore wind. That is more than twice the value of the onshore grid and we believe it is right to give new parties the opportunity to bid to build and finance the cables. Releasing those investment opportunities through staged tenders should help companies to raise the finance - and our discussions with potential investors indicate the stable income stream for 20 years is an attractive investment opportunity.
44. To ensure co-ordination of the onshore and offshore grid we are extending National Grid's role as GB System Operator. Analysis undertaken for us indicated that the majority of Round 1 and 2 offshore wind farms will connect to shore via direct "point to point" links. However, as Round 3 may require a more "zonal" approach - offshore developers will have the option of seeking a grid connection for the whole zone. The government and Ofgem have been working closely with The Crown Estate to ensure that the approach to the development of offshore renewables and associated grid infrastructure is compatible and delivers the most economic and efficient network infrastructure from offshore renewable generation. The Government believes that our proposals are sufficiently flexible to accommodate existing and future projects. Under our proposals NGET will be able to make connection offers based on a single project; a phased project; and a group of separate projects. We have further proposed that generators will have the choice of which OFTO tender window to enter following their onshore connection application/offer. This should help ensure that the grid can be developed in a co-ordinated way, based on the needs of generators. The Crown Estate published in December 2008 the study undertaken by Senergy Econnect and National Grid looking at the potential for offshore grid connections for Round 3 wind farms. Following publication of the report The Crown Estate said that it believed the co-ordination and planning to achieve offshore transmission infrastructure can be accommodated within the offshore transmission licensing regime.
45. The final government consultation on the offshore regime will be in late March 2009 with the aim of the first competitive tenders for eligible existing projects being run from summer 2009, with the regime being fully established in June 2010.
Section 4: The challenges for 2030 including role of 'Smart Grids'
Embedded and Distributed Generation
46. The Energy White Paper in 2007 made it clear that Government sees potential advantages from more use of distributed energy, alongside the traditional centralised system. Through the Energy Act 2008, we introduced powers to allow for the implementation of feed-in tariffs to provide financial support to small scale low carbon electricity generation. Feed-in tariffs will provide price certainty over a fixed period for renewable technologies up to a maximum capacity of 5 megawatts (50 kilowatts for gas fired CHP). We believe this will encourage individual households, communities, businesses, schools, hospitals, universities and a host of other organisations to consider installing small-scale low carbon electricity generation technologies.
47. Evidence indicates that in the short to medium term (2030) the networks could cope with increased levels of distributed generation at small extra cost and that a significant capacity of micro-generation, 3.5GW across GB, could be connected without the need to reinforce distribution networks (assuming a relatively even distribution of these new generators).[4]
48.
The Review of Distributed Generation, published alongside the Energy
White Paper 2007, highlighted concerns that the current charging regime for
using the distribution network did not properly reflect the benefits that small
scale distributed generation can bring. Ofgem are leading work through
the Distribution Price Control and Distribution
Charging Project
EU networks, Interconnection and the 'Supergrid'
49. The electricity grid in
most of mainland Europe is well-connected and integrated, although some parts
are still poorly connected, for example the Baltic states and
50. The GB system already has inter-connector
links with
51. In addition to the
land-based European grid, the concept of a
European "Supergrid " has been widely discussed. This may
be designed to link European electricity markets with new renewable sources of
electricity which are currently at the boundaries of the system such as
offshore wind projects in the North Sea and
52. The Government believes
that the costs and benefits of a European Supergrid relative to the alternatives
are not well-understood. We consider that for the moment, it is cheaper and
quicker to link offshore renewable energy installations with their nearest
mainland grid and for electricity to flow between Member States through
relatively short inter-connection links, such as already exist between the GB
and Europe. Officials are currently in discussions with the European Commission
on their concept of an offshore grid in the North and
53. This type of project involves many difficult cross-border regulatory and jurisdictional issues which will require significant effort to resolve and will take time to do so. Given the need to make rapid progress we do not want to see the development of a wider vision for a 'supergrid' delaying the deployment of offshore wind. Indeed, continued development of offshore wind and the sub-sea links that have been considered in the work of the ENSG will provide a real test of the technologies that might be deployed in a wider 'supergrid'.
Developing Network Technology - 'Smart Grids'
54. The active engagement of consumers in managing their own energy needs will play an important part in delivering a low carbon future. This is likely to include micro and community level generation and more demand-side management to enhance security of supply and maximise reduced carbon emissions. Smart electricity networks are likely to have an important part to play in supporting these changes.
55. Today's electricity networks carry power
from large, mostly centralised generation, across the high voltage transmission
system and down through largely passive distribution networks to our
56. A ' smart grid' typically encompasses a number of different technologies such as smart meters, appliances that can respond to price and other network signals, energy storage, and sophisticated network control and communication technologies that allow more active network management including easier control of the direction of flow of electricity. The introduction of these 'smart' technologies over time will enable a radical change in our energy system where consumers are also producers and households can respond dynamically to changing generation and demand, playing a direct part in keeping the system balanced and in the efficient and cost-effective use of our energy. 57. The replacement of a significant proportion of network assets over the next 5 years provides the opportunity to make decisions that "future proof" the networks, so ensuring that we retain the flexibility to incorporate new technologies as they become available should they prove to be an attractive option. Ofgem has therefore invited industry to identify options that can be applied during this intensive period of investment, which could make the networks more flexible to future changes. This should help us to improve our understanding of the potential for the introduction of new technologies into our networks as opposed to like-for like replacement of infrastructure at the end of its lifetime and so accelerate the move towards a smarter network. 58. The introduction of smart meters and supporting communications systems will provide the platform for the transition towards the smart grid of the future. Smart meters will allow the efficient real time sharing of demand and supply information, which will be important to facilitating a 'smarter' use of the network, more informed energy consumers, as well as supporting greater 'end to end' management of our energy system. 59. We have therefore already taken
the decision to require the provision of advanced metering to larger non-domestic
sites when meters are replaced, and in all cases by April 2014. This process will begin in April 2009. We
have also announced our intention to mandate smart meters for all households in
60. The costs and benefits of a 'smart grid' will depend on the combinations of technologies that are brought together - some are well-understood, but others are at an early stage of development. Going forward we will need to be clear about our objectives, make the right choices and be sure that the networks are ready in time to both facilitate and support these changes while avoiding solutions that are inefficient in the longer term.
61. We are well placed, working with the Energy Technology Institute, National Grid, Ofgem and Industry to ensure that we explore opportunities for developing the understanding, technologies and solutions to the network challenges of the future.
62. National Grid is currently taking forward a study that will look at future operation of the grid, and is due to consult on this in Spring this year. The Government is also participating in a Poyry study with a number of energy companies on the market impacts of intermittency which will provide scenarios to asses the likely demands on grid balancing and the costs.
R&D
63. We are already supporting a number of initiatives that are exploring the potential for 'smarter' networks and will inform the future development of our networks - these include:
· The Energy Technologies Institute - a public/private sector partnership which aims to invest up to £110 million per year for at least the next 10 years in the development of low carbon energy technologies, including electricity network technologies and solutions. It is also developing a Networks Programme that could include R&D into storage technologies.
· The Technology Strategy Board is currently providing around £1.2 million to support ongoing research projects into new energy storage technologies such as batteries, flow cells and fuel cells.
64. In the recent transmission price control review, Ofgem identified R&D as being critical to addressing the fundamental challenges that the network companies are facing, and recognised that the incentives for network operators to take innovative approaches - or invest in innovative technologies - were limited. Ofgem therefore created the Innovation Funding Incentive (IFI) specifically supporting R&D and innovation by network operators. The IFI allows, subject to meeting certain criteria, up to 0.5% of regulated revenue to be spent on innovative projects each year, and in 2007-08 National Grid spent £3.0m on innovative projects, out of a total allowable IFI spend of some £5.4m.
65. The distribution companies (lower voltage networks that transfer power from the high voltage grid to end consumers) also have provision for IFI in their price controls, again allowing for a maximum of 0.5% of each company's revenue, subject to meeting certain criteria, to be spent on innovation. In total distribution companies invested some £12.1 million in IFI projects in 2007/8, which represents 0.33% of their total revenue. Distribution companies also have provision for Registered Power Zones, which provide appropriate funding for connecting additional distributed generation in specific areas, and encourages technical innovation.
March 2009 [1] SKM Report 'Growth Scenarios for UK Renewables Generation and Implications for Future Developments and Operation of Electricity Networks' June 2008 http://www.berr.gov.uk/files/file46772.pdf [2] [3] 'Our Electricity Transmission Network: A Vision for 2020 A Report by the Electricity Networks Strategy Group' March 2009 http://www.berr.gov.uk/files/file50333.pdf
[4] Econnect Consulting report 'Accommodating Distributed Generation' May 2006 http://www.berr.gov.uk/files/file31648.pdf |