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 areagrids 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 institutionsThomas Edison founding
General Electric for exampleand 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
differentgeneration 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 serviceI 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 dothat 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
todayif launch is the appropriate word for a bookwhere
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 developmentthe 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 scalesthe city
scale, village scale, town scaleand 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 investmentsthere 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 investmentI
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, perhapsnot 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 deliverwhich
is a bigger questioncapital 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 thatand I am sorry I only made
my evidence available yesterdayis 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 Scotlandthat 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 currentlythey are consulting on thaton
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 rateif 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 valueand
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 senseon 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 processthis is the whole
point about the Transmission Access Reviewto 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 marketyou
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 programmewhether
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 usagethis is coming
from what Michael was sayinga 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 Ofgemthis is on the positive sidebut 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 arrangementsif
I can just explain where we are moving towards developing more
market-based arrangements in transmissionwhere 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 accesseverybody 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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