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


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 me—there 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 CHP—In 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 field—it 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's—tomorrow's needs are probably served by different architecture. So you have to combine some sense of efficiency—I would not say that you abandon some sort of idea of efficiency—so 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 expensive—you 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 technologies—tidal, 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 offshore—and you can see that people are pulling out of offshore development—that 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 arrangements—is 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 time—but 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 system—17 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-regret—not no-regret—measures 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 expansion—and 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 transmission—because 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 expansion—something which nowhere else in the world is looking at, 33 gigawatts of offshore wind—then 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 competitive—not 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 interconnected—this is only 10 gigawatts of it, or thereabouts—there 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 costs—they 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 supply—is it charging electric cars when the sun is out? Maybe—you 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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