The future of Britain's electricity networks - Energy and Climate Change Contents


Examination of Witnesses (Question Numbers 1-19)

DR MICHAEL POLLITT, PROFESSOR GORAN STRBAC AND DR JIM WATSON

1 APRIL 2009

  Q1  Chairman: Good morning gentlemen and welcome to the Committee. It might be useful for the record if you could say a brief word about your backgrounds. Perhaps we can start with you, Dr Pollitt?

  Dr Pollitt: I am Michael Pollitt; I am a University Reader in Business Economics at the Judge Business School. I am also Assistant Director of the Electricity Policy Research Group at Cambridge University and I am an external economic adviser to Ofgem.

  Professor Strbac: My name is Goran Strbac and I am Professor of Electrical Energy Systems at Imperial College. Also I am a Director of the Centre for Sustainable Electricity and Distributed Generation, supported by the government.

  Dr Watson: I am Jim Watson; I am Director of the Sussex Energy Group at the University of Sussex and I am also Deputy Leader of the Tyndall Centre's Climate change and Energy Programme.

  Q2  Chairman: Thank you for that; they are well known to us. Welcome gentlemen; if I can start off on general terms? I was very interested in a comment from yourself, Dr Watson, in your submission where you said that what will need to change is not just the layout of cables but rather the overall system infrastructure that connects generation supply and you went on to say that this transformation will not just be a technical challenge and that the government's vision also needs to have economic, institutional and regulatory components. I do notice from reading through all your submissions that this is a huge, complex and technical area which perhaps has not had the attention it deserves, although our Committee is putting that right at the moment. Would you just like to expand on that, Dr Watson? That is a very sweeping statement.

  Dr Watson: It is. Thank you very much for picking that up. It is a very important area; it is not a very interesting area—grids are not seen to be that exciting but are actually pretty vital at allowing energy systems to work, whether it is a system we have or a low carbon system which delivers 80 per cent reductions. I guess the point I was making is from an observation of history partly, which is that if you look at the history of electricity systems they not only grew technically in terms of getting bigger generating sets, interconnection of systems and standardisation, but at the same time you had growth of finance, growth of institutions—Thomas Edison founding General Electric for example—and you had the growth of regulation. So in this country as we got towards the centralised system we have today there was, for example, post-war a battle between local authorities and national government about who had control as part of that scaling up, so it was not just a technical matter. My point is that looking forward those issues are going to go together again in terms of having to change the system to something very different—generation where we do not have it currently, at scales we are not really used to, and again the rules and regulations we have are designed for the incumbent system and they have served us well but they will probably have to change fairly radically along with the pipes and wires.

  Q3  Chairman: That is absolutely right. Again, from looking at the submissions it is clear that the scale of the changes is really quite dramatic, although there is some positive comment from the Government's Electricity Networks Strategy Group. In their report Our electricity transmission network: a vision for 2020 they talk about the level of investment and timescales but they did say and the conclusion was that "provided the identified reinforcements are taken forward in a timely manner and the planning consent process facilities network development... "—and that is an issue in itself which you might want to touch upon—"... the reinforcements can be delivered to the required timescales". Looking at the scale of the challenge that seems quite an optimistic statement. I do not know whether any of you might care to comment on that? Can this upgrade be done within those kinds of timescales, do you think?

  Dr Watson: I will start and I will pass on to others. The example of the Beauly-Denny line gives a good example of how slow planning can be, so I think there is a certain amount of optimism around those statements. Again it illustrates this point that it is not just identifying where the lines go and that report is very useful in identifying that. Some of the, if you like, no regrets measures could be taken under several scenarios but actually delivery is dependent on planning, it is dependent on changes of regulation and financing models, agreements between the industry who pays and all of those kinds of things.

  Professor Strbac: If I could perhaps add to that that in terms of the last transmission line which was put in service—I may not be 100 per cent correct in the numbers, but I think it was planned by the former CEGB in 1988 and in 2004 was put in service; so it took quite a long time to get that in. It is important to recognise that this ENSG report and this transmission reinforcement of the position is the biggest since World War II; it is the biggest development of transmission, so it is obviously of massive significance in that respect. But also I think that we still need to see as to whether all of that is actually required, what are the alternatives to this, and I think it is a major issue for consideration now given that this plan was broadly speaking put forward with respect to the present way in which we design and operate the system and these principles were established in 1948, so quite a long time ago, and certainly our work would suggest that the existing system could potentially take much more than what the present thinking is and we are currently working with the National Grid on the review of these standards. So I am not entirely sure whether all of this would be required for the delivery of the generation connections. In time, hopefully in the next year or so, we would have significantly more information about the details as to what of these proposed schemes are really necessary and what we can get away without.

  Q4  Chairman: Are you talking about another year to put these details in place or are you saying that there is not a formulated strategy in place at the present time?

  Professor Strbac: We operate in a market-based environment so strategy would be a word if somebody actually knew what was going to happen in 20 years' time.

  Q5  Chairman: It is always helpful!

  Professor Strbac: It would be helpful, yes, if that was possible. So how I see this report is trying to identify what we would need to do to meet 2020 renewable energy strategy targets and accommodating offshore wind power in Scotland in order to connect offshore wind. This at the moment is just a proposition, it is just a project which I do not think sets out exactly what we are going to do—that is a much more involved process. Certainly there are two major reviews currently, which is a review of security standards to determine how we run and plan the system; the second is a transmission access review and these two will have a major impact on what happens with this plan.

  Q6  Charles Hendry: Dr Watson, picking up on some of your comments I think you have a book being launched today—if launch is the appropriate word for a book—where you are going to be arguing for greater government engagement in these areas. Do you think that the current system as it stands can evolve or do you think that we have to start again with a new structure for electricity networks which are more appropriate for the 21st Century?

  Dr Watson: I think it can evolve but you may perhaps have to leave behind more than people want to. This is the phenomenon that people often refer to as lock-in, where you have a set of systems, rules and regulations. The point Goran just made about strategy being too strong a word has been a truism for 20 years now, ever since privatisation. What I am not advocating is going back to nationalisation but I think in our evidence we say strongly that there is a need for more coordination and some semblance of a strategy, a plan of where you are going. There is certainly going to be uncertainty in this area; nobody can predict precisely how the 2020, 2050 targets are going to be met. But I think some sense of a roadmap and then allowing market signals to work to allocate resources towards that roadmap is required. You can understand why current players are reticent about going that far but I think that that kind of change is probably necessary in this area, if you are going to deliver on the kinds of targets we have.

  Q7  Charles Hendry: Can I ask specifically in relation to planning? You talked about Buleigh-Denny, which I think is four years so far without a decision finally being made; and clearly major new infrastructure projects will be coming forward. Do you think that the changes being made to the Planning Act will actually provide the certainty to enable those infrastructure investments to be made and those decisions to be made in the short term, or do you think that more remains to be required on top of that, recognising of course that Buleigh-Denny is a Scottish issue and therefore covered by different regulation of interests.

  Dr Watson: I think in principle it may speed things up to have this new Planning Commission but obviously there is an issue of accountability that many people have pointed to about that. I think one of the key questions is whether people in general, local communities, whether it is an extra transmission line, a wind farm or whatever, are seeing these infrastructures being imposed on them. Again one of the wider points we make in the book that are publishing today is this issue of legitimacy and in other countries you have had a more bottom-up element in energy system development—the idea of legitimacy in local communities, communities having stakes in the power plants and so on. Perhaps if there was more of that around in the UK you would not then get the process every time some new bit of infrastructure gets renewed, upgraded or changed because it is seen as less of an imposition, as it were. That is rather a woolly answer, I do admit. So in principle the Planning Commission in doing it more top down can help, but whether it would really cure the problem, which is this sense of things being imposed, I am not sure.

  Q8  Paddy Tipping: Do you think that the government understands the scale of the challenge? Does anybody understand it?

  Dr Watson: I think they understand it in the sense that the Climate Change Committee has done some calculations, as have people in government about how to meet targets and so on, so you can do the kind of technological mixes, the mixes of what will deliver in 80 per cent and many of us have been involved in research exercises doing just that. But of course the real challenge certainly in my view is not just that technical challenge of deciding what the measures are, it is the policies, the institutions and the regulations and there I think there has been an underestimation of the extent to which, for example, having a 15 per cent target for renewables by 2020 is actually requiring the system to change in ways that are not anticipated. It is not just taking out some types of power plants which are high carbon and fossil based and plugging in some new ones which happen to be renewable and low carbon; these renewable low carbon ones are different because, as Goran said, they are intermittent, but also sometimes they are deployed at different scales—the city scale, village scale, town scale—and we have no tradition of any of that in our system. So I think there is an underestimation about the kind of implications of that.

  Dr Pollitt: I would want to start in a slightly different place, which is to point out that we should not let the network tail wag the generation dog. Nobody wants electricity networks; what people want are the services that are delivered by electricity networks. We actually do have a degree of planning in the way that we plan for network investments. The five-year price control reviews that Ofgem conduct for transmission and distribution do plan investments—there are investments written into the business plans which are part of the incentives and revenue requirements that are set up over those five-year periods. So we actually do have planning of the networks, it is the rest that is the issue. So the problem that we face is: when do we plan for investments which actually rely on generation which is being supplied under market incentives? So it is important not to build transmission and distribution assets too early given that we are waiting for the generation to appear. So where the government strategy needs to be right is in having a complete strategy for our energy sector, not just strategies for bits of it which do not actually add up to a coordinated strategy. I think it is very tempting for government to think that this is the one bit of the system where there is a significant planning element already and we can just plan that bit and the rest of it will reconfigure around that. I think that is not obviously the case.

  Q9  Paddy Tipping: It takes us back to the discussion we had earlier on, whether the market is going to deliver or whether we need to be more interventionist and we are at an age where intervention is more sexy, and I just wonder whether the government does need to intervene more and send more forceful signals or a secure framework.

  Dr Pollitt: Clearly we are in an age now where we want the electricity system to change to meet our climate change targets. That requires government intervention because that is not going to happen as a result of leaving it to the market. It requires the correct signals for low carbon investment, so that does require incentives to be in place which are consistent and which will deliver those investments and at the moment we clearly have a set of policies which are not delivering because they are not credible and they are not strong enough. That is not just the fault of the British Government, it is the fault of the European Energy Policy system and the fact that the emissions trading market is not working effectively; so there clearly are not market signals being delivered which are strong enough to get us to the targets that we want to achieve.

  Q10  Chairman: I would like to have a look at the regulatory framework, which of course is complementary to the idea of a vision and a strategy. As we go into this Robert is going to ask a few questions, but just to pick up what you were saying about the coordination: there is clearly a coordinating role here in terms of very large investments and big shifts from high carbon to low carbon. Who should be leading on that coordination, do you think?

  Dr Pollitt: What happens at the moment is that there is a discussion that occurs between the companies who produce their business plans for network investments over five years and with Ofgem and their advisors, so clearly there is a degree of coordination and justification which goes on there. The question is whether that system is capable of coping with these longer term much more ambitious targets, and what I have argued is that we need to think about a much more flexible system where we can actually get a negotiation going between generators, between network providers and between other stakeholders where we can actually make better informed decisions about when and where network investments might be necessary.

  Q11  Chairman: I presume there are market tensions among different companies on some of those things.

  Dr Pollitt: Absolutely, yes.

  Q12  Sir Robert Smith: It is a vicious circle because you have this monopoly network that is regulated connecting a market generator and a market consumer and you were talking about the five-year building investment thing, which in a way is in the history of this period we have been through; that we started with a gold plated regime that could be sweated, in a sense, and efficiencies driven in and now we are looking for a completely different scenario of massive capital incentives. Is the current regime possible just to roll on to that or do we need to change Ofgem's remit in the powers that Ofgem has?

  Dr Pollitt: I think the system we have had has actually been quite successful in delivering investment—I do not think we should underestimate its power to deliver investment because it has facilitated planning and it has produced very strong incentives to deliver investments. So while it is true that the assets have been sweated there has also been significant investment. So clearly the system can be made to deliver more investments going forward but the danger we now run is that we actually want to be very careful about over investment and making sure that we do not actually give network incumbent companies a licence to massively increase capacity which may not be necessary, because if we move to a system where there is much more local generation then of course we do not need massive transmission grids. So it is somehow having a system which can incrementally adjust to emerging market incentives and making sure that the market incentives around low carbon investments are actually clear enough, which they are not at the moment.

  Dr Watson: If I can come in briefly on that? While all that is true and I can understand people's worries about over investing and investing ahead of need, as the industry often puts it, I think that players are going to have to take a few more risks as we move forward to what is a radical change in systems. That was great for business as usual, thinking about reliability of supplies to customers, reducing costs, all of those kinds of things, but we are now in a world where we are trying to reduce carbon by 80 per cent and do all those other things as well and I think maybe some risk will have to be taken and I think there is a case for coordination and the use of scenarios, some element of a roadmap of where we are going and more government leadership, perhaps—not any micro managing option and I do not think you can, but perhaps in the guidance to say that one of Ofgem's key roles is to actually ensure that its decisions are commensurate with the kind of pathway being set out under the Climate Change Act, for example. Something of that kind is probably required as a coordination mechanism.

  Q13  Sir Robert Smith: Ofgem are consulting on the RPI formula; is that part changing the signals?

  Dr Watson: It could be. I am not heavily involved in that particular review, maybe my colleagues are; but certainly that has been a fundamental part of the regulatory regime, this idea that you squeeze out costs at RPI-X over each five-year period and from the industry and the fundamental question is whether that model is still fit for purpose after 20 years of having it. But maybe the others want to add to that.

  Dr Pollitt: I have been involved in this review process. Yes, RPI-X 20 is fundamentally aimed at addressing the issue of shifting from an Opex-focused operating cost reduction focused regime to one where we are trying to manage large companies' investments; so, absolutely, it is about trying to get efficient investment signals into the system. Some of the new ideas that are going to be discussed as a result of that process will I think be very helpful to us making the right investments going forward.

  Q14  Sir Robert Smith: Dr Pollitt, you made the point that Europe should be sending better signals about carbon reduction and you have made in your evidence that we could do a lot more with energy savings and with renewables on the existing grids. Do you mean by that distributed renewables because presumably the major renewables need transmission investment.

  Dr Pollitt: Yes.

  Q15  Sir Robert Smith: As consumers I suppose you are taking a bit of a gamble because if the EU do not consider those signals and if the history turns out to be right that all of us espouse energy conservation it seems to be one of the most difficult things to deliver in practice it will be too late then to build the networks. So we need some fairly clear decisions which levers are going to be used otherwise we will not have a network in place to keep the lights on if we fail to deliver on the other side of the argument.

  Dr Pollitt: I think we will always have a network that will keep the lights on. I think the issue is whether we achieve our targets, which are very, very ambitious for de-carbonisation of the electricity sector, and I think if we accept that Europe is not going to provide strong enough signals we need to provide strong signals in the UK but those signals need to be market-based because we do not know what the right answer is and we have a long history of delivering very expensive solutions to problems which did not really exist in our UK energy system. So I think it may be necessary for us as the UK to have much stronger signals, given that Europe is not going to provide them, and to have much higher prices of carbon in the UK than are coming from the European Emissions Trading System.

  Q16  Dr Turner: I would like to come to the transmissions arrangements for managing the network. There are those who would say that BETTA was not really! In fact it does in fact seem to be a system of regulating the transmission network, which is ideally designed for fossil carbon major generators in the traditional network and definitely not fit for the 21st Century. What are your views on these arrangements?

  Professor Strbac: I can talk about the impact on transmission network requirements. BETTA has been designed to facilitate competition in fossil fuel but fundamentally it is energy on the market. Where our analysis suggested that BETTA is failing, in addition to whether it can deliver—which is a bigger question—capital intensive low marginal cost generation such as nuclear and, say, wind, can it facilitate the competition of such plant, we are still working on that question. What in my view is undisputable in the shorter term, in the context of accommodating wind effectively in the transmission network, we think that BETTA design will deliver or will require bigger transmission that we would otherwise need if we had a different arrangement? The reason for that—and I am sorry I only made my evidence available yesterday—is when you plan transmissions you would normally see what are the short term costs which the network incurs in terms of constraints. We have north to south power flows in the UK and we need to manage that quite tightly because we are restricted in that area. So if we want to reduce the power flows on that system the only way to do that is to increase power in the plants in England and reduce power from generators in Scotland—that is the only way to manage the transmission network. So what you do then, you are burning more coal in Drax and less coal in Longannet and the price differential is what costs money and you compare that with cost of reinforcing transmission. What BETTA does in contrast to what CEGB did is that in this management of transmission you will see not only fuel costs of these generators appearing but also the investment costs appearing. Our analysis addressed it that the constraint costs, which are now a major concern of Ofgem currently—they are consulting on that—on the Scotland/England boundary would be in the order of ten to 20 million and now it is about 200 million, so it is a massively different number which would suggest we need more transmission because the BETTA market happens to tell us that, but we do not think that is what the CEGB or the central panel would do. So we think that the market signals are inappropriate for transmission investment currently.

  Q17  Dr Turner: One of the central features of BETTA of course is locational prices for transmission, which clearly disadvantages far flung generators because the most intensive natural resources available, say off the northwest coast of Scotland and the centre of consumption is in southern England. By locational transmission charges you sent a very adverse investment signal to renewable generators just at a time when we want to increase renewable generation. So do you think that there is a case for abandoning locational transmission charges and going to a flat rate—if you like, a postage stamp model?

  Professor Strbac: Can I start with this because we have done quite a lot of work in this area quite recently about these issues. In fact BETTA is not a locational model; we do not respect location when we trade energy in the UK now. But we have suggested that we actually need to move into this regime and this is simply because the amount of transmission which the present regime would require is that every generator on the system should be able to run simultaneously, broadly at the full output. That is the standard against which we have built transmission. For the incumbent system with lots of coal and gas it is not too bad because we want to make sure that these generators can access demand and make sure that we have a reasonable security of supply. If you now put on that system a significant amount of wind power which has a very limited capacity value—and you cannot retire coal fire power stations because you put wind on because what do you do when the wind does not blow, so the capacity broadly would have to stay on the system. It is in our view blindingly obvious that building a transmission system that would accommodate simultaneous output of all wind plant and conventional plant is not a good idea because it would require massive over investment, and we have suggested within the Energy Review and Energy White Paper that transmission arrangements should change to allow conventional plant and renewable plant to share access because if you build less than say 100 gigawatts because you only have 60 gigawatts of demand then conventional plant and wind plant power would need to share access, which makes sense—on windy days you allow wind to use the capacity and on non-windy days Longannet, Cockenzie and Peterhead can get on with accessing the network. We are currently in the process—this is the whole point about the Transmission Access Review—to deliver that, but we have a major concern about the details of that implementation which we think potentially would completely undermine this idea of the economic efficient transmission by allowing conventional plant and renewable plant to share access.

  Q18  Dr Turner: Are you then arguing in support of provisions to the German Renewable Energy Act and of the EU Renewable Energy Directive that provide for priority of access to the grid for renewables?

  Professor Strbac: My personal view is that the UK has this right. If you want to support a particular outcome such as renewables you do that outside of the market—you do not interfere with the market rules that make the system work in an efficient way. So you give them money outside the market but you do not change the market rules because the market is there to deliver the most efficient solution in the short term and also to deliver the least cost development. So you do not want to change the market as to favour a particular outcome. That is my view. My understanding is that Europeans are rethinking and certainly Americans are because they are embarking on a big renewable programme—whether they are going to adopt the European model or more of the UK model. In my view the UK model is fundamentally more appropriate for what we want to achieve.

  Dr Pollitt: I agree with what Goran has said. I think that the postage stamp model is a discredited one. It is the case that transmission costs are a legitimate part of the total cost of energy supply and they should be reflected in the costs of buying electricity from remote locations. It is important to remember that with the rise of offshore wind we now have a lot more opportunities on where we locate our renewable generation and some of the maps that I have seen of where the Crown Estates might end up having wind parks suggest that those will be connected into much more favourable locations on the transmission grid which pose much less problems than just connecting everything in the north of Scotland. It is important that our transmission pricing arrangements reflect the benefits of those potential schemes and encourage more efficient location of connection. So I think we do need the right locational pricing on our transmission grid and we should resist what I would call politically driven attempts to socialise transmission costs and to reduce the correct market signals.

  Q19  Dr Turner: That logic taken to its ultimate conclusion would mean that the most markedly efficient location for new generation capacity would be about 20 miles north of Birmingham, which is totally inconsistent with what everybody wants in any direction. There is a Transmission Access Review going on to address the enormous queue of already permitted generators and wind generators waiting to join the grid. What are your expectations about the outcome and what would you like to see?

  Professor Strbac: I can perhaps start. When BETTA was introduced the Scottish system was separate, and the Scottish generators had only limited access to the England and Wales energy market, which was limited to about two gigawatts. With having now the entire GB system a decision was made that all these generators in Scotland would be given firm access to the market and there was also an administrative decision made that all generators who applied by a particular date would also be granted access, without actually having the underlying physical assets available to deliver this. That has created these queues and the consent costs are going up and all of that. Now we have the Transmission Access Review in process and we have recently seen Ofgem's concern. A month ago they wrote an open letter about the constraint costs increasing in Scotland and also asked the National Grid to review the way in which we allocate access and the way in which these constraint costs are allocated to users, to perhaps facilitate a more efficient usage—this is coming from what Michael was saying—a more efficient utilisation of the assets fundamentally. Some of these constraint costs which were in the past socialised, the proposition is that they will now be allocated to parties who cause these constraint costs, ie Scottish generators, which should facilitate to some extent this idea that on windy days we do not want all generators in Scotland to run, we only want wind to run, and so if these costs are passed to the generators hopefully that might encourage conventional plant in Scotland not to run on windy days. So we welcome this action of Ofgem—this is on the positive side—but there are a number of other issues associated with TAR with which we are concerned, which may completely undermine this process, one of which is transmission charges associated with the usage of transmission network, which in our view are not sufficiently efficient in terms of delivering signals. So we might end up actually building more transmission than we need given the transmission access arrangements—if I can just explain where we are moving towards developing more market-based arrangements in transmission—where users of the network would have a choice as to whether they want to have firm access to transmission or whether they are happy to use the existing transmission network. This choice would be based on costs obviously and so with a firm access choice you would fund investment in new transmission; and for non firm access you just use whenever it is available. That arrangement should facilitate the outcome of facilitating the sharing of access. However, the present situation is such that the long term firm access is made in our view artificially at a low cost while the non firm access, which leaves you with uncertainty whether you will be able to run or not is incredibly expensive. That is why nobody among the players likes a short term, non firm access—everybody wants firm access, which means that we are not going to succeed in the entire process. If everybody chooses non firm access that means that we are going to build transmission that can accommodate everybody's simultaneous maximum outputs, which is not efficient. So we think that there is a massive area in there to make that choice right so that both choices have efficient costs attached to them, otherwise users will make a wrong decision.


 
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