Examination of Witnesses (Question Numbers
20-39)
DR MICHAEL
POLLITT, PROFESSOR
GORAN STRBAC
AND DR
JIM WATSON
1 APRIL 2009
Q20 Chairman: Can I just clarify
a point here because there is clearly an issue in terms of north
of the border and distances there that we have been exploring.
This might be a bit of a naïve question but you were saying
that part of the logic would be to operate a grid whereby where
you have windy periods you bring in your wind capacity and then
when you do not you bring in other forms of base load. But these
are all owned by different companies so where is the incentive
for existing generators and conventional generators to switch
off their power to let the renewables go down the grid? What is
in it for them? Where does the market work on this?
Dr Pollitt: This of course is
where things get very interesting.
Q21 Chairman: Yes, they do.
Dr Pollitt: Once renewable generators
stop arguing about whether they are going to get effectively a
subsidy by getting cheap access to the grid then of course they
might move to negotiating sensible contractual arrangements with
conventional generation. So if I had a wind park that was using
the same wires as Longannet I would of course negotiate directly
with Longannet to share access and come to a contractual arrangement
which would be mutually beneficial. So what we do say is that
already these sorts or arrangements are arising in the system
where wind operators do contract with conventional generation
to back off the conventional generation when the wind is blowing.
So we would expect there to be mutually beneficial trades that
are possible. I remind Goran of something he once said to methere
are other exciting possibilities which are of course links between
the heat system and the electricity system. As we know in Scotland
there are lots of heat requirements so of course when it is a
windy day in the winter it is quite possible that one could imagine
contractual arrangements to dump electric energy into heat in
Scotland rather than require us to have massive transmission capacity
north-south.
Professor Strbac: On windy days
if you have the right arrangements the prices are not going to
be very attractive for expensive fossil fuel power to run anyway.
What it would mean prices in Scotland on a windy day are going
to drop, which means that the demand will now have the chance,
as Michael was saying, rather than burning gas we could use electricity
and in that arrangement we can see that demand could compete with
building transmission and unfortunately these TAR arrangements
have excluded demand from the picture, which we think is a major
missed opportunity and it will also lead to inefficient transmission
investment because we may not need it. There is a very interesting
example in Denmark. You may be aware that Denmark is to some extent
leading Europe in wind development but also in CHPIn Denmark
every village has a little CHP engine. Obviously the size of Denmark
is ten times smaller than the UK so in terms of volumes it is
much less, but given the big interest in wind a few years ago
they faced exactly that problem. They had a CHP plant running
whenever the heat was required; wind was running when it was a
windy day, so on very windy days when the electricity demand was
not very big there was too much electricity on the Denmark system.
They are linked with Norway so Norway was taking from them zero
Euros per megawatt hour electricity, thank you very much, reducing
the output from their hydro plant and two days later selling them
their energy at 40 or 50 Euros per megawatt hour back to Denmark.
But at the same time Denmark, given that it did not have the signals,
was burning gas and paying this CHB plant, if you like a feeding
like tariff, without having the understanding that you are now
burning gas to produce electricity which is of no value. So they
have introduced a simple scheme which has now passed the information
about the electricity prices to CHP plants so since November 2007
the prices in Denmark have not gone below 20 Euros a megawatt
hour on a very windy day because demand has reacted to changing
behaviour on windy days; we could potentially learn from that.
Q22 Chairman: Is that price driven
though?
Professor Strbac: Price driven,
only price driven.
Q23 Chairman: That is interesting.
Professor Strbac: Just giving
them the price, which was all they got.
Q24 Mr Weir: It seems to me that
your answers so far illustrate a collision between targets for
renewable energy and markets and how they work. If you are saying
that there should not be a postage system as suggested for renewables
how are we going to meet our targets given that much of the renewables
are in remote areas like the north of Scotland and tidal and wave
perhaps off the coast of Scotland. How is that going to be met
without some system of encouraging the building of these and building
the network to serve them?
Dr Watson: Can I pick that up
because I actually disagree with my colleagues; I think that having
some form of priority access to renewables is probably right and
my rationale for that is this issue of lock-in that I mentioned
earlier; that it is new, it is different, the system is not used
to doing it. A level playing field does not give everybody equal
opportunities; it is not an equal opportunity shop, it is not
a level playing fieldit means that what it does is favour
a set of rules and regulations which are designed to, if you like,
favour fossil plants, the things we have and they have served
us well, as I said earlier. I think if you are really trying to
push renewables as fast and as far as we are trying to in the
UK to meet that target, which might mean 30 per cent electricity,
then you are going to have to think more radically on that. By
the same token on this issue of location, which a couple of you
have mentioned, I do not think it is enough to give locational
signals which are just about efficiency and the cost that a new
generator imposes on the system as it is because this system as
it is has been designed with history in mind to serve today's
needs but not tomorrow'stomorrow's needs are probably served
by different architecture. So you have to combine some sense of
efficiencyI would not say that you abandon some sort of
idea of efficiencyso as one of my colleagues was saying,
if you are choosing between two offshore wind farms and one is
in a much more economically efficient location than in another
you would want the system and the incentives to say go to the
economically efficient location. My worry about having efficiency
as your main driver is that you are not getting over this barrier
that you are really thinking about transformation of the system
and building grids where are none, and by definition that is expensiveyou
cannot get away from that. So I think the regulatory framework
must take that into account.
Professor Strbac: Onshore wind
is a very profitable business and transmission costs in terms
of make or break of onshore wind in Scotland is not the issue.
There is no question about the probability of wind onshore; that
is number one, so it is not going to change. My worry about this
argument is that in fact this is going to be not very helpful
because you will have to build in more transmission which is not
only going to be more costly but it is also going to introduce
further delays. So efficiency in transmission in my view is absolutely
vital for delivering targets in the right timescales because we
do not have them we are going to end up building stuff which we
potentially do not need and it is just going to delay further
and further connections of wind power and we are going to miss
the targets. Offshore wind and tidal are completely different
technologiestidal, if you like, is still on a demonstration
phase, there are not very many commercial companies running into
connecting tidal, but we know how to deal with offshore wind.
Offshore wind currently in the present climate is very marginal
and we are very worried that when you look at the sums involved
and the costs of offshoreand you can see that people are
pulling out of offshore developmentthat is a very worrying
activity.
Q25 Mr Weir: But is one of the reasons
for that because of the current connection regime that means that
those developing offshore have to pay the costs of connecting
into the grid, ie the substance cable. So is that not a cost barrier
to developing offshore wind and meeting our renewable targets?
Dr Watson: I think it is. This
is a target set by government on behalf of a social goal, which
is reducing carbon emissions and we have decided with our European
partners that pushing renewables to 20 per cent across the EU
is part of that goal. So in a sense to load all the costs of that
social goal on to a set of private actors you expect to help to
deliver that goal does not seem to me to make sense. You have
to find some way of sharing those costs between the actual investors,
so that you send some sort of signal about efficiency and about
location, but sharing that between them and socialising across
all energy consumers because in the end we are the people who
are both using the energy services that electricity is providing
but also we elected the governments who have decided to implement
those social goals. So in a sense it is a shared responsibility.
Chairman: We want to explore this issue
of the offshore wind connection because it is quite a serious
one.
Q26 Mr Weir: You mentioned the question
of the interaction between traditional fossil fuels and wind in
particular but one of the difficulties is that in Scotland the
electricity companies are vertically integrated and Scottish Power
and Scottish Southern are also involved in wind. If you go into
that system are you not giving a commercial advantage to those
already established companies rather than allowing new companies
into the market? Because if Scottish Power, for example, are running
Longannet and are also running Whitelee, for example, a large
wind farm, then they have a inbuilt advantage in dealing with
that where other companies trying to develop in the north would
find it very difficult to break into that market.
Dr Pollitt: This relates to the
issue of ownership and unbundling of transmission assets. I have
certainly argued strongly and I thought it was the general position
of the British Government that we were very much in favour of
ownership unbundling of transmission assets and that has been
a very successful ownership form in England with the National
Grid Company being completely separate from the rest of the electricity
system and being separate from generation. I think there is an
issue about why we continue with this form of integration in Scotland
and why we do not move to regularise the distribution of ownership
of transmission assets away from generation in Scotland in the
same way that it is in England, because I think it is potentially
problematic. It seems to me that the evidence, although fairly
anecdotal, is quite strong that in countries that have independent
transmission companies do better and have more competitive and
more successful electricity systems than ones that continue with
integration of generation and transmission.
Q27 Sir Robert Smith: Going back
to what Jim Watson said about the public buy-in. The whole of
the north of Scotland got its electricity system in a sense by
that hydroelectric developing with the community buying-in to
that whole system going there because they got the benefit as
well as the impact.
Dr Pollitt: We had a successful
Central Electricity Generating Board which had transmission and
generation integrated and it did successfully integrate what was
previously a very disparate system and it did successfully scale
up and meet electricity demands during a period of electrification.
But we are now in a different world and I think that the standard
argument is about vertical integration being a good thing in the
early stages of the development of an industry, but once it has
matured then we can think about whether vertical separation is
a more efficient way of organising an industry.
Chairman: Let us explore this position
of offshore wind because I also understand that there is a queue
of capacity that wants to connect and there are real timescale
problems in some of this. If I could bring Anne Main in on this.
Q28 Anne Main: Do you think there
are enough companies in the market for an auctioneering process
to work?
Professor Strbac: This is currently
in process. I have not in fact followed this very closely but
I know that there are concerns about whether there will be a sufficient
number of companies wanting to do offshore transmission grids
and that in terms of the revenues and the certainty of income
for them I understand that there quite a significant number of
concerns associated with that. But this process is still going
on and it is very difficult to say. I know that a number of companies
are talking to the regulator about the details of these arrangementsis
there enough for them to do the job? That is what is currently
happening and so I think it will be premature to say at the moment
whether it is going to be successful or not. There are certainly
concerns being raised whether people will be interested in doing
that.
Q29 Anne Main: Is it the vagaries
over what is in it for them in terms that they are not actually
sure what the costs are going to be; they are not sure what their
eligibility is going to be for connecting in, for example. So
is it because there is not enough certainty at the moment in this
process that is causing this concern?
Dr Pollitt: I think that the emerging
offshore regime is extremely exciting because what we have the
prospect of is a competitive transmission regime which we do not
have onshore. I think the prospect, at least initially, is that
there will be a significant number of bidders. There are a lot
of companies in Europe that are interested in transmission and
there are potentially American companies as well. What seems likely
to happen is that there will be point to point connections so
rather than some fancy integrated offshore grid we are just going
to be talking about a line straight out from the nearest point
on the coast to the wind park. So it is going to be a very standard
investment that is going to occur. I think all the signs are that
this has the potential to be a competitive auction because of
the standardisation that will be involved. There will be a lot
of learning from the first few auctions and we do need to worry,
as in all auction processes, whether over time the number of bidders
is going to decline. But the experience of the UK in the private
finance initiative generally has been that we benefit by doing
this first of course because everybody wants to be involved in
the UK auction process because it might happen elsewhere.
Q30 Anne Main: Can I just move on
from that? You said about private finance and when we have had
evidence at another Committee from the smaller gas fields there
were some concerns about accessing the funding. Do you believe
in today's economic climate that to push this forward in a timescale
that is acceptable that there will be the funding in place with
people who are prepared to invest in what is, as you say, an exciting
timebut exciting times are not always good times economically.
Dr Pollitt: That is a different
form of excitement.
Q31 Anne Main: It is a serious issue.
It is all very well people wanting to buy into the excitement
if there is not the funding to help this move forward.
Dr Pollitt: The way that it is
going to be funded at the moment is that it is going to become
part of the general transmission charging regime, so actually
the funding regime for people who operate these transmission assets
is going to be guaranteed that you will bid your auction price
and that revenue will be guaranteed for 20 years; and it will
not be subject to any actual energy risk, so as long as you provide
the capacity you will receive the payment. So actually this looks
like a very safe investment from an investor point of view, and
I think that the prospects are that there will be significant
interest from the investment community relative to other investments
in current conditions of financial uncertainty.
Q32 Anne Main: My colleagues might
want to explore that further but I would like to bring in Dr Watson.
In your evidence you note that the process of developing modifications
to the offshore regime has been slow; it is already over six years
since the DTI published its strategy for offshore wind. And quite
a few of you referred to delays in the evidence you are giving
us now. Given that the final government consultation on an offshore
regime will be in late March 2009 and the first competitive tenders
running from summer 2009 and the fully established regime by June
2010, a very short timescale given the six years that you referred
to. Would you like to comment on the deliverability of that particular
short timescale?
Dr Watson: I think it is difficult
and the issue of timescales is not just a network issue, it is
a generic issue in the way that government goes about its policy
making. Often there are endless consultations as opposed to decisions
and action. I am all for consultation but as somebody who is asked
to respond to them a lot, having to respond on the same issue
two or three times over a period of years in the absence of a
decision is onerous for me and for all the other people. But the
more serious point is I think sometimes it is a reason for delay
because government does not want to stick its neck out and make
a decision. I cannot comment on the detail of that one in particular;
my comment was more a general one that here is another example
of an announcement being made of grand strategy but the implementation
can be incredibly long. So I think that government does need to
be quicker because there are other things which are going to delay
this, such as the issues we have already mentioned of public financing
and all of these other things. Government inserting its own delays
is not that helpful.
Q33 Anne Main: Your concern then
is that historically this has not happened? Historically there
have been a lot of delays and numerous rounds of consultations.
Dr Watson: Yes.
Q34 Anne Main: Do you have confidence
then that there is going to be a change of attitude?
Dr Watson: I cannot see a big
change in the way that government goes about its business but
then if we are going to successfully, for example, live within
the five-year carbon budgets under the Climate Change Act then
I think some sort of faster system of translating targets and
wishes into action is going to have to be implemented.
Q35 Anne Main: It has been a concern
about how we are going to get to what has been now an extended
target in terms of our reduction in carbon. By pushing it further
forward some people have said that that has just made the decision
to go further ahead
Dr Watson: You have got to remember
that there is, also, a very serious discussion about the 2020
target, which could be up to a 42 per cent reduction in all greenhouse
gas emissions, which goes along with the 15 per cent on renewable
energy as a whole. So the need for urgent action does not go away
with all the focus on 2050; I think the Government and the Climate
Change Act are absolutely right to insert that milestone, otherwise,
as in the US debate, you can say something very radical on a long-term
timescale, as Obama has done, but in the short term there is a
real unwillingness to engage with anything that moves towards
that.
Q36 Dr Whitehead: Could I ask about
the question of actually getting connected up to the transmission
network? You have mentioned already the something like 61 gigawatt
queue of generators seeking connection to the transmission system17
gigawatts renewables, some offshore and some onshore. At present
it appears that the position is rather similar to people booking
rooms in hotels before they have found out whether they can get
time off work. Therefore, the first-come-first-served market system,
as it were, may be guilty of providing a number of blockages to
those schemes that are more likely to come on stream but cannot
get connected. What is your view of the way in which that system
might be ameliorated, particularly through the transmission review?
Dr Watson: Shall I start, briefly,
at least? This key issue is picked up in the Transmission Access
Review document about investment ahead of need (so-called), which
is that you would have some strategic investment where, perhaps,
it is anticipated it is quite likely you are going to have assets,
whether they be offshore wind, onshore wind, or whatever they
happen to be. There is an increasing recognition, which I support,
within Ofgem, that we need a regime which is going to do that,
otherwise you do get these problems of plants buying rights and
then being delayed and then somebody who is ready not getting
in. You do need to have some spare capacity, which runs all the
risks that Goran referred to earlier about investing too much.
I think, perhaps, we need to let go a little bit of our anxiety
about investing too much because, otherwise, the alternative,
to me, seems to be this present status quo. So investment ahead
of need is required, and if you look at the Energy Network Strategy
Group report, which came up with this £4.7 billion figure
that the Chairman referred to earlier, it does segment that by
different types of investment, and some of it is identified as
being likely to be required under many different scenarios. If
you like, there is a series of less-regretnot no-regretmeasures
that could be made, and that is where I think this investment
ahead of need could be put into operation first. There are more
uncertain investments where you are really not sure whether they
will be required, and there it is more difficult, and I recognise
the dilemma that regulators are in about that.
Professor Strbac: There is also
development in the regulation of networks. That may be a part
of RPI-X@20 but certainly it is being discussed now, which are
the ideas that the network company such as National Grid would
be allowed to, if you like, go and develop for speculative strategic
projects. If they expect that there will be a requirement for
that system, the risk profile of that investment would need to
change, given the uncertainty of the future, but if they get it
right they might look to a larger rate of return. For example,
there is now an example in Wales where there is currently a 200
megawatt wind farm which wants to connect to the system, and for
that they will need to build a (to use technical language) 132-kilowatt
transmission, but if there is a potential maybe for 1,000 megawatts
to come, and if that materialises, we will need to then build
two or three times the same thing, which is not a good idea. So
National Grid is talking to all these developers of this scheme,
hoping that they will build a bigger system which will then turn
out to be useful and they would make a larger rate of return.
So there are developments within the regulation concepts which
would allow more of this strategic investment to take place in
the networks. You are probably closer to that.
Dr Pollitt: I think we need to
recognise that there is a default development path, which is the
sort of big transmission and distribution investment path with
large-scale renewable generation being connected to the system,
but that is not the only path. We need to be open to the possibility
of a cheaper, different option emerging, or some combination of
a more localised large-scale outcome. The danger is we may make
a lot of strategic investments up front in increasing the size
of the transmission system which, when we realise the costs of
connecting all the renewables to that system (because it is not
going to be least-cost), we will actually not make use of it.
Of course, we can do transmission first and then find that the
generation does not actually materialise. I think we need to be
cautious about making large investments up front ahead of established
need. That is why I have argued for making more use of negotiated
settlements in trying to tease out whether there is going to be
demand if we expand the transmission system, and have some basis
for this expansionand to give reasonable opportunities
to more local solutions and to demand-side management measures
and interactions between heat and electricity. Otherwise, I think,
the danger is we will make large investments up front which we
actually would not be able to follow through on.
Q37 Charles Hendry: Can I got back
to what you were saying, Dr Pollitt, about the offshore connections
and the preference of point-to-point connections? The companies
seem to be queuing up to say why they are pulling out of offshore:
we have seen Shell taken out of London Array, we have seen Centrica
putting some of their plans on hold, and Eclipse being sold; we
have seen Masdar coming in and then saying they are not sure the
finances stack up at the moment. One of the points which they
seem to highlight is the costs of that point-to-point connection,
and a preference to have a bootlace structure that the National
Grid talks about, which would link up a number of the offshore
facilities and bring them to coast on a few key points where demand
is going to be greatest. Why do you seem to have ruled that out
in your preference for a point-to-point structure?
Dr Pollitt: I am not ruling it
out. I think one always needs to be cautious when people who are
making generation investments point to transmission costs as to
the reason why they are pulling out of investment, because actually
what often is the subtext of those sorts of comments is: "If
you subsidise my transmission investment then my investment in
generation makes sense". That is a dangerous logic to go
down. The reason, I assume, why people are pulling out of these
investments is because, actually, the generation costs do not
add up, and that is an even better reason for not subsidising
the transmissionbecause what we are really finding is the
generation incentives are not there.
Q38 Charles Hendry: Do you not think
that the bootlace concept is worth investigating further? They
are not saying they are pulling out because of the transmission
costs but they are saying that that is the more expensive way
of doing it, in going for a point-to-point system. If we are looking
for this huge expansionsomething which nowhere else in
the world is looking at, 33 gigawatts of offshore windthen
is there a case for greater government intervention and engagement
in saying: "We will help to pay for the connections between
those different offshore facilities"?
Dr Pollitt: Goran can probably
comment on the technical benefits of creating grid offshore, but
it seems quite clear that the competitive benefits of making the
investment simple and point-to-point are potentially quite substantial.
It remains to be seen what bids actually materialise for some
of these point-to-point connections. The anecdotal evidence that
I have heard is that even the threat of this process has disciplined
some of the incumbents who are making island connections already
into reducing what they say they will be able to do them for,
so there are actually, potentially, quite significant savings
from standardising the investments, and making the auction process
very competitivenot to mention the technical benefits of
just connecting straight DC connections into the grid, but Goran
can comment on that.
Professor Strbac: We did work
which was used to develop offshore network design standards for
round 2 offshore. The costs of offshore transmission, when you
compare it with onshore transmission, is significantly higher
and designs do not justify having an interconnected offshore system.
On the benefits of having interconnectedthis is only 10
gigawatts of it, or thereaboutsthere is not a business
case for connecting offshore wind farms and building interconnection
because the costs are significantly higher than the benefits which
you get from them. So it is a simple technical and economic argument
that tells you to do point-to-point for these sorts of amounts.
There is no business case for that. It is too expensive. Offshore
in networks are not cheap. I completely agree with Michael that
concern is about generation coststhey do not add up. Our
concern regarding the point of regulation is that offshore regulation
in terms of compensation arrangements for generators in case the
network is not available are discriminatory, which is completely
unhelpful, in my view. You may be aware, for example, that when
generators comply to the grid connection onshore they get compensation
if the grid is not there to take out their energy. That does not
happen offshore. This is a major discrimination and we have been
pointing out for sometime now to the regulator that there is absolutely
no justification for why wind farms which comply to the standards
of offshore grids are exposed to costs associated with unavailability
of the network. Offshore systems are much more difficult to manage
than onshore; for example, if a transformer failed on this platform
it takes six months, on average, repair time. Imagine, you are
building a wind farm and you might be, if a transformer fails,
which you cannot do very much about, six months without any revenue,
and if this happens to you twice in the first five or ten years
you are bust, while onshore you get complete security against
unavailability of the network. We think that is very unhelpful,
given what the cost structure currently is offshore. We need any
help which we can get rather than discriminating against offshore
developments.
Chairman: Can we have a look at some
other aspects on grids, particularly the potential for interconnection
into Europe, and the idea of a "supergrid", which has
been floated by the European Commission, in particular?
Q39 Colin Challen: From what I have
heard so far, it sounds to me like there is not really a business
case to tackle climate change; the model is not capable of delivering
what politicians want from it. Discussion is now taking place
in Europe and in the Commission about a European "supergrid".
Are there advantages to us in actually buying into greater connectivity
with European countries and pursuing this goal of a "supergrid",
which some people call a "solar supergrid", tapping
into Saharan solar power, for example? Would you take us through
that and where it might lead us?
Dr Watson: There may be advantages
of it and if you look at cases like, say, Denmark, which Goran
has already referred to, Denmark has been able to be fairly ahead
of the game on wind and on combined heat and power because of
its interconnections with neighbours. So the advantages there
are clear of being able to do more radical things, possibly, with
your grids and energy systems if you have more interconnections.
Maybe Goran might want to come in on this. There are, potentially,
advantages in connecting up systems where the wind might blow
in different places at different times, but there may also be
limits to that. Then, on the Saharan example, it is often talked
about but, again, I think there is a technical challenge: the
sun is not out all the time. So how far that can be brought into
the European system and what kind of demand it will actually supplyis
it charging electric cars when the sun is out? Maybeyou
could do. It is an incredibly major investment for the kind of
capacity people are talking about, and, of course, extremely costly,
probably. Of course, the regulations, the institutions and all
those other things to pay for it, would need to be there. So I
do wonder whether those very, very big solutions are the kind
of first port of call. That is one possible advantage of interconnecting
grids more generally than they are at the moment.
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