Examination of Witnesses (Question Numbers
40-59)
DR MICHAEL
POLLITT, PROFESSOR
GORAN STRBAC
AND DR
JIM WATSON
1 APRIL 2009
Q40 Colin Challen: It poses a question,
in my mind, at least, that the cost has been put at £40 billion
(or eurosI forget which) over ten years. Spread over the
European Union, over that period of time, it is not a huge amount
of money.
Dr Watson: No.
Q41 Colin Challen: However, should
it be delivered in the current conditionsthere are problems
with liberalisation of the markets in Europe and we have heard
a great deal this morning about the total dysfunctionality, in
my opinion, of our own way of doing thingsthis does call
for more of a socialisation, does it not? If you were to approach
it on a Europe-wide scale, possibly backed up with directives,
then you are going to sweep away some of this "Cannot see
the wood for the trees" approach.
Dr Watson: If you wanted something
like a solar array in the desert to supply lots of electricity
to the EU, you would have to have something that was not a liberalised
market to create the right incentives for that kind of very large
investment to go in. Investors are going to have to have security
of where the electricity is going and who they are selling it
to, and all of that, but, as I say, I am not entirely convinced
it is the number one on that list of priorities for the Energy
Commissioner sitting in Brussels. Maybe other colleagues want
to comment on this.
Dr Pollitt: I think that European
grids have other priorities. I would like to see complete integration
of the European gas grid, for starters, and effective gas trading,
and that is the number one priority for the European Commission
in terms of its grid policy. I was at a conference last week about
energy security, and if you think that energy security problems
of the gas system are bad, well, think about the energy security
problems of importing electricity from North Africa. I think the
record on disruption of electricity grids is much worse than their
record on disruption of gas grids. There are serious geopolitical
issues associated with some of the more optimistic scenarios for
solar from Africa that really would demand very serious consideration,
not to mention the fact that the electricity transmission grids
are very weak in Italy or Spain or any of the places where we
would be landing the electricity and then wanting to strengthen
it and bring it up to northern Europe. I think this is a long
way off and requires certain fundamental changes in geopolitics
before we would want to be relying on large quantities of African
solar energy.
Professor Strbac: I could perhaps
comment on the case of connecting the UK with the rest of Europe.
We have done some analysis, in particular angled to see whether
we will be able to manage this intermittency of wind better if
we connect with our neighbours. This shows that the benefits of
doing that will be rather limited because weather fronts are,
in fact, bigger than countries. Fundamentally, when we have too
much wind there will be a similar situation on the continent.
So there will be rather limited opportunities to do that interconnection,
and we would think that there would be better opportunities or
more cost-effective ways of managing intermittency by integrating
the demand side of the UK and moving towards a system where, particularly
if you look at the longer-term, 2050 time horizons, when we anticipate
a start to integrate transport, potentially, and the heat systems
into electricity, there will be massive opportunities to manage
the system if we get access to these resources, because these
are all, if you like, storage resourcesheat and then transport.
Both providing storage. Opportunities there, in our view, are
incredible and would have to be exploited. That is what we think.
If anything, the UK should be moving into the area of integrating
demand and generation in our system rather than having a vision
as to where we need to put the wires.
Q42 Dr Whitehead: Could I take you
to the other end of the scale? To what extent does the talk and
discussion about the strengthening of investment in the transmission
network, as it were, ossify the system in future into a one-way
transmission based system, whereby the transmission system supplies
the DNOs and the customers in a one-way street at a time when,
obviously, there is a great deal of discussion and potential in
distributed energy going back the other way up the street and,
therefore, requiring, particularly, DNOs to look at the local
transmission systems and, perhaps, change the nature of how those
systems work within the overall transmission system? Do you think
there is a serious danger that the sort of investment that is
suggested is going to shut the door on effective grid import of
distributed systems?
Dr Watson: It is a risk. You talk
about "shutting doors"I think the door is already
shut and has been shut for sometime. In a sense, what a distributed
generator of energy has to do is to open it. As I said much earlier
on, we have had a tradition of distributed energy in Britain but
you have to look pre-World War 2 for it. We are a very centralised
system, so there is a risk of concentrating on the large at the
expense of the small, and my partial reaction, on second thoughts,
to the solar array in the Sahara is to say that there is a lot
you can do with renewables embedded into distribution grids in
local areas, whether it be in public buildings or private homes,
heat and power systems in local towns and villages, and so on.
There are huge opportunities. Actually, on the illustrative mix
from the UK, from DECC, about how they might meet their renewables
target, if you look at the pie chart they have got in the consultation
document, lots of that pie chart is big stuff like offshore wind,
but there is a lot of it which is local at various scales, whether
it is house-local, village-local or town-local. Again, to meet
these targets I think you have to open the system up to allow
the possibility of local generation and integration with demand
(going back to what my colleagues have also said), and to do that
it is probably a bigger ask, in a sense, to change the way that
distribution networks operate. As you know, they have been passive
hitherto for a long time, and now we are asking them, if they
do connect to a lot of distributed resources, to be active, to
manage that actively, with lots of different generators of different
sizes and types, which implies new control systems and implies
integration with demand, and so on. In a sense, that is probably
a bigger change, I sense, for them than, say, connecting offshore
wind is for a transmission company. Perhaps it needs more attention.
In a sense, I am agreeing with the premise of your question that
there is a risk if you over-emphasise the issues of transmission
access for big renewables at the expense of the smaller-scale
technologies.
Dr Pollitt: I think this is potentially
very important and very exciting. It plays to actually engaging
with the public on issues of climate change and getting public
acceptability for adjusting our energy, and I think it is an under-exploited
opportunity at the moment to move more into local energy service
company provision and to engage people with smaller companies
and smaller investments, and to look to exploit local energy resources.
Longer term, these are the sorts of experiments that we should
be doing now because they may pay off very, very substantially
later on. They are difficultno one pretends it is easyand
if you talk to any of the incumbents they will probably tell you
that this is all terribly difficult, and any interactions that
we have had with small energy service companies raise questions
about their competence and: "We think we can do it better".
But I think this is an area where we do need much more experimentation
and where we have got the chance to actually get public support
for doing something about climate change, because people can see
and be engaged with it locally and engage with changing their
behaviour because they are engaging with a local company. If it
is a big national company telling you what to do you are very
unlikely to do it. Also, I think, it offers the prospect of lots
of innovation because different things will happen in different
places; different technologies will be trialled, supply and demand
will be traded off much more effectively; new ownership forms
may come forward, so we may see customer-owned assets or private/private
partnerships, which may all be necessary to achieve these very
ambitious targets.
Professor Strbac: The research
which we conducted in terms of comparison of distributed and centralised
systems is that in terms of integration there potentially would
be significant benefits in a system which current regulation prevents
them from accessing. For example, if the wholesale electricity
market price, let us suppose, is £40 per megawatt hour, if
you can take the full 400,000 volts (very few people can do that),
if you want to buy at the end of the system, it costs 10-12p per
kilowatt hour£100 per megawatt hourour current
regulatory system means that (although the UK is leading the world,
by the way, in terms of changing the regulatory regime around
electricity generation, in my view) we are still far from making
a level playing field for similar generators to compete on the
same footing, if you like, with the commercial company. Asking
electricity providers to produce at 4p per kilowatt hour without
recognising their benefits in terms of networks is difficult.
So if we were able to make changes in the regulatory framework,
which I think is going to be probably dealt with, that would enable
these distributors to merge and compete properly with centralised
solutions.
Q43 Dr Whitehead: You said they are
exciting and you have said that, yes, some changes need to be
made, but I think the central question remains: how do you deal
with the DNOs in terms of how reasonably market-ordered access
is provided? To put it the other way round: at what stage of penetration
of the market, for example, would it be considered necessary to
make the serious changes? At what point of penetration does the
existing DNO arrangement simply break down, particularly in terms
of, perhaps, an uneven demand for penetration in different areas,
according to how the DNOs are working? Do you consider that there
are, actually, as it were, regime changes which need to be undertaken,
perhaps which look rather different from some of the larger concerns
on the transmission network, in order to accommodate that new
world?
Dr Watson: I think you can go
quite a long way before the system has to operate that differently,
depending on the concentration of distributive generationsay,
people generating electricity in their home through solar panels.
You would have to have a very large concentration in a particular
area to start causing problems, but if that is spread out around
an areastudies have been done which show you can go quite
a long way. Although, as Goran said, we are leading the world
in regulatory change, the irony is we are way behind most countries
in deployment of this stuff. We are very good at regulatory change
but, actually, delivery is appalling bad, I think.
Q44 Sir Robert Smith: There is a
disconnect there?
Dr Watson: A little bit, yes.
The upshot of that is that you can actually go a fair way before
you start getting to some of the real crunch problems where the
regulatory system would have to change. In the meantime, I think
Michael is quite right, there is a need for innovation, and government
regulators through different schemes could do a lot more to incentivise
the distribution companies and newcomers to trial and demonstrate
some of the really new concepts, not just of technologies like
PV but how they all connect together and connect together with
demand in new ways. So then there has to be a lot of learning
done, so that when the time comes where you do get this crunch
and where you do have to do things differently, at least there
is some knowledge there to build on rather than waiting till you
get there and then sort of saying: "How do you do it?"which,
by the way, is what the Danes have done and they have done it
quite successfully. It is not the only way but we have time to
anticipate this, at the moment.
Chairman: Can we have a look at this
innovation a bit more?
Q45 Dr Turner: We have established
fairly well this morning that the management of the grid is firmly
rooted in the first half of the 20th Century. Sadly, so is most
of the technology. There is an unfortunate history of lack of
investment for many decades in research and development in transmission
technology. Can you give us your views on the current state of
investment and actual work going on to develop technology? Clearly,
there are several outstanding areas where we could use advances
in technology, in terms of tackling transmission losses, facilitating
smarter grids and, particularly, the immense cost of under-sea
cabling and DC transmission. Just how much work has been going
on in these areas?
Dr Watson: Along with most of
the energy industry, a corner has been turned, probably, in the
last few years, because of the availability of money from governments
but, also, commensurate anticipatory investment by companies,
whether it be utilities or whether it be equipment suppliers like
ABBpeople who have geared up their investments in R&D.
One of the consequences of privatising the industry in the UK,
particularly for the distribution grid, was a real run-down of
what little R&D they did to the point where they did virtually
none at all. One of the issues has been, from a grid perspective,
with the regulatory regime, that there have been efforts to incentivise
innovation and demonstration of new concepts, but because they
are starting from such a low base they have not been that successful.
They have brought forward some projects and some activity, but
not on the scale that I believe is required. I have questions
about whether you can rely on the regulatory system, with some
adjustments, so that people can get a greater rate of return by
investing in innovation during a regulatory period; I have questions
whether that, in itself, is enough and whether actually, as I
said in answer to the previous question, government itself needs
to not only support new types of PV cells, and so on, but a series
of area-based demonstrations of smart grid concepts in practice,
which is being done in many other countries. There is a very big
demonstration in Boulder, Colorado, which I think is $100 million,
by the local utility on a smart grid, and there are many examples
in other, European countries. Those kinds of investments do need
to be made so that people have a better understanding of how all
these things work together. Until we do that we are not going
to have it. We do have a problem with the current system in investment.
Q46 Dr Turner: Are we missing out
on a considerable green industrial opportunity here by not investing
in up-to-date transmission technology? Can you see any useful
policy instruments that the Government could deploy, whether it
is direct government investment or by Ofgem pricing mechanisms,
to not only increase the, frankly, pathetic level of R&D investment
in relation to turnover from its present 0.5 per cent level, which
is derisory, and, also, achieve some intelligent direction of
the R&D effort?
Dr Watson: I think there is an
opportunity here, in the sense that government centrally could
fund things under its current programmes, or you could see it
channelled through bodies like the Energy Technologies Institute,
which already has a programme of work on distributed generation,
although it is relatively small. The other thing you might consider,
if you think about it slightly differently, is perhaps whether
you might build on some of the exceptions, if you like, that have
occurred in the UK, such as Woking, which everybody talks about,
where innovative things have been done through investment, and
think about: is there a case for creating or granting more powers
to, say, local authorities, or thinking of new ways to bring in
newcomer energy service companies of the kind that Michael mentioned
earlier, so that they would be the ones that are actually experimenting
with some of these new concepts? Another interesting lesson from
history is that it is often the outsiders and not the incumbents
who are the ones that really innovate; do the new stuff and actually
bring on more radical change which is not incremental.
Q47 Dr Turner: What worries me is
that I am hearing a deafening silence from the three of you on
whether there has been any significant technological advance in
transmission technology itselfany advance in DC cabling,
for instance, that could make it much cheaper and more flexibly
applicable, because there are so many applications where it would
be extremely useful if we had such advances. Is there anything
happening there?
Professor Strbac: Regarding the
question as to can engineers make a CO2-free electricity system,
the answer to that is absolutely yes. To remind you, engineers
have sent men to the moon in 1968, which was 40 years ago, and
making a CO2-free power system is much less of a challenge than
flying to the moon. The issue which we have is all about the budget;
what is the budget required to get to the problem? That is where
the issue is. I have lots of, if you like, dumb solutions to how
we can arrive at this but not many clever solutions. That is where,
in our view, there is a massive business case for investing in
alternative ways in which we manage the task. Let me give an example.
There are two key factors of the present system of operation.
One is that the British system needs to balance very tightly.
That has to be done. Also, demand is completely uncontrollable.
When you switch the lights on in here, somewhere generation produces
immediately, or almost immediately, the amount of energy which
you have just demanded. The whole culture and philosophy of the
system was being based on a predict-and-provide mentality. Given
that supply of demand is valuable (blackouts are not very desirable
and we want to make sure we do not have blackouts), the traditional
solution is to then build enough resources, build enough concrete,
steel and copper to be able to meet that big demand, because your
only source of control is in generation. Transmission control
is the only way we can do that, but also by changing generation.
In that respect, nothing has fundamentally changed since 50 years
ago. If we continue with this philosophy, which we obviously can
do, if we build huge amounts of nuclear power stations and huge
amounts of wind, the system is going to work, but we are going
to have to waste energy whenever production exceeds demand, so
there will be no problem maintaining demand supply security. We
have done some analysis, if we have climate change at 2050 targets
we have an all-electric future, so we integrate transport and
heat into this, and you would end up with about a 300-gigawatt
system, which is now 60 gigawattsbig demand. So a five-fold
increase in capacity but only an increase in energy of about two
times. Your utilisation of the investment, which is already quite
poor, generates 40 per cent with wind, and networks about 30 per
cent, so if you continue with this philosophy of just provide
on demand, the utilisation of the investment will be incredibly
low; it will be below 25 per cent. The alternative to that is
to become cleverer in the way we organise ourselves. One extreme
would be that if we go to this electric-transport future, when
people come home everybody plugs their car in and then they are
getting it recharged, versus when the car gets plugged in it sends
information about what is the status of the charge of the battery,
and when we want to use this car the next time we can reduce the
investment from 300 gigawatts to 150 gigawatts supply. A massive
savings in investment efficiency. That is, in our view, a major
opportunity for research and investment. In terms of individual
technologies, they are all available, but what is not available,
what is not understood, is how we get all this together, which
Jim has pointed out. Given that the UK is not very linked in terms
of infrastructure with Europe, we are going to hit first the problem
of inefficient investment, and we could turn this potential problem
into a massive opportunity. Obama talks about smart gridsthat
is not an unknown phenomenonbut what we could do, in the
UK, given that we would need to have this in our own patch in
order to make the system work efficiently, is we could start leading
the world in this area and exporting that technology, which is
really all about service provision, and which is all about integration,
and sell this to other countries. There is a massive opportunity
for us.
Q48 Charles Hendry: In addition to
the issues of managing demand, can I ask about managing supply
as well? One of the issues about wind is its inherent variability.
What about the technology of electricity storage? Is it viable
to be investing in batteries, in hydrogen-compressed air, water
storagethose technologies? Is this also an area where you
think we could be carving out an opportunity for UK plc? Or are
we in a situation where, simply, the costs of those technologies
would never be justified by the return which it would make?
Professor Strbac: Certainly several
years ago, there was an argument being built that for every megawatt
of wind farm you put out you need one megawatt of some sort of
storage. That would be a complete disaster for wind because the
cost of storage is twice the wind cost, which is already quite
expensive. Also, when you put the energy into storage you only
get 75 per cent back, if you are lucky, because storage wastes
a lot of energy. So you need to be quite desperate to go into
building dedicated storage for this. If we move into a world of
having, let us say, heat pumps in cars, the storage will have
been bought for you because the buildings have got the storage
already inherent in them, and also people who drive the cars would
have to have the batteries, so somebody else has paid for them
anyway. All you need to do is make use of it in a way that integrates
the system. I am not saying there is not mileage in building new
technologiesthere would be definitelybut I would
suggest that we first try to make sure we can exploit significantly
cheaper options and become significantly more sophisticated in
how we manage the system. I think that is where the massive potential
gain is. It is just getting more organised and it requires investment
because what you need to do is merge information and communication
infrastructure with energy infrastructure. Making energy cleverer
is where, in our view, the massive gain is, and that is where
the UK potentially could lead the world. It is very clear that
this is required, and, as I say, a bit of the technology existswe
have mobile `phones and we know how to communicatebut how
you make this system work coherently and how you make the regulations
facilitate that development is where we need to spend our time.
Q49 Colin Challen: It confuses me
a bit when we have heard a lot about the markets producing efficiency
and yet smart grids, which are all about efficiency, are struggling.
I have seen many manufacturers of things that you can put in freezers,
or put on industrial plant and all sorts of things, that can reduce
electricity consumption tremendously. Is anybody at all driving
a coherent policy on thisOfgem, the Government, the EU?
Where could we look to find a coherent policy on smart grids and
the associated technologies?
Dr Watson: At the technology level,
obviously, European research is funding technology platforms,
but I think what you are getting at is what is the incentive for
people to actually deploy these technologiesin the fridge
and in appliances in the home? Then you have to look at the wider
business model and drivers of the utilities which dominate the
energy market, which (basically put) are: the more they sell the
more they earn; the more units they sell the more money they get.
There has been some rhetoric and talk within government about
thinking about how they might be transformed into energy service
companiesthere have been ministerial speeches going back,
I think, three years now, on thatand the idea of giving
them different drivers. Actually, what they are trying to do is
to manage the service, and that would lead you into all sorts
of things, including local generation, and so on. My reading of
recent consultations that came out in February is that DECC has
really pulled back from this idea of trying to regulate companies
differently so that they behave as energy service companies. The
favoured solution was to put a cap on the emissions from the electricity
and gas supplied by companies, and to reduce that over time, so
that eventually the companies would then have to either invest
in demand-side measures in people's homes or in low-carbon generation.
Analysis has been done which shows that that is all terribly expensive,
so they have pulled back from it. I suspect there is the economic
analysis behind it, but also there is a pushback from industry
because it would need a very serious change in their business
model. Those kinds of changes are required if you are going to
get energy service companies on-stream.
Q50 Colin Challen: That is the generation
industry you are talking about?
Dr Watson: Yes, but obviously
these same companies are the supply companiesthe retail
companies; they are not different companies, they are the same.
Q51 Colin Challen: One driver is
price, of course. If the Government is not prepared to legislate
and regulate for smart technologies in a sort of direct, interventionist
fashion, if they simply change the pricing structure so that,
as an industry now, you do have banding and all sorts of approaches
to pricing every half-hour and that kind of thing, would it change
the attitude to technology if we introduced variable pricing so
that the more you use the more you pay per kilowatt hour?
Dr Watson: Again, those things
may help but I think there is an infrastructure investment issue
herethe kinds of things that Goran was talking about, about
the ICT revolution having an effect on energy systems. That can
only happen if you made a set of infrastructure investments; smart
metersnot just the box in the cupboard but smarter, and
that can give you information, but it is actually the IT system
that lies behind that so that that information is available; real-time
pricing, information about what you are using and the carbon emissions
from it. My view is that that does require some sort of programme
of co-ordinated investment just like the investment that gives
us the pipes and wires we use now as required.
Dr Pollitt: I think the Government
has substantially interfered with the market for smart meters.
It was the case, about, say, three years ago, where the companies
were expecting to roll out smart meters to about 30 per cent of
their customers, simply on a private business case, but that has
been delayed as a result of the Government's investigation of
a policy on a ten-year roll out, which of course is in line with
European directives. I think this area is quite a good example
of government interfering in the emergence of what would have
been quite strong market pressures to introduce some of these
technologies. There is a case for (a) the Government getting out
of the way of incentivising these things and (b) making sure that
if they are going to go ahead with these policies they go ahead
with them quite quickly and introduce some clarity into how the
market is going to evolve over time. I do know that there are
technology companies out thereBritish oneswho are
very, very interested in this; they see smart appliances as the
next big thing to mobile `phones, and there is a lot of read-across
from, say, mobile `phone technology into smart appliances, and
there are companies that are willing to invest, as long as we
can get the incentives set up.
Q52 Colin Challen: Does something
have to happen to Ofgem, really, to transform this? Do we need
to change Ofgem's functions?
Dr Pollitt: My interest has been
declared. Clearly, the pushback on smart meters came from outside
Ofgem, and Ofgem were letting the market emerge for smart meters,
and it was about to emerge when wider government policy got in
the way.
Professor Strbac: In terms of
wires, currently companies get a rate of return on copper, aluminium
and steel, not on making better use of that which we have. That
is just a fact.
Q53 Anne Main: Very briefly, on the
government interference, as you said, on smart meters. Having
met the smart meter companies very recently, part of it was not
only government interference but they actually believed there
has been a lack of clarity on what is expected of themjust
smart meter technology as a whole. Is this going to be a big problem
if we just do not know what we want of the industries that we
are expecting to deliver this?
Dr Pollitt: Yes.
Q54 Sir Robert Smith: Just to reinforce
what Professor Strbac was saying just now about the companies
and copper, and so on, surely what Dr Watson was saying, which
the Government, rather sadly, seems to be turned against, is that
turning the providers into providers of heat, light and mechanical
power in your home would automatically build into them the incentives
to make best use of the whole system, and to deliver this smart
technology.
Dr Watson: That is why I am particularly
disappointed to see that being dropped at the first sign of, possibly,
lobbying behind the scenes.
Q55 Sir Robert Smith: Some of the
companies are quite up for it, are they not?
Dr Watson: Yes, they were.
Q56 Chairman: I had the impression
the companies were keen.
Dr Watson: I have seen Vincent
de Rivaz give speeches where he said: "I can see a time when
we won't make money just by selling units". (That is a slight
paraphrase.) It is not like they were not up for it at the time,
and I am slightly puzzled as to what has happened to that.
Chairman: Let us have a look at this
in terms of rounding up on these things. You have talked about
technology, innovation and regulation. Of course, the big issue
is the costs of all this, which seem to be huge.
Q57 Mr Weir: We all struggle with
the problem of how we balance the cost to the consumer of energy
with the investment needed. Obviously, as we have been discussing,
huge investment is probably needed in our transmission networks
to meet our targets for renewables into the future. Do you think
the consumer should pay the full cost of the network upgrades
arising from, essentially, public policy objectives? Or do you
think that in the future there will be support needed from the
taxpayer?
Dr Pollitt: Of course, there is
the "polluter pays" principle; clearly, if consumers
are consuming "dirty" energy, of course, they should
pay, and it is costly to decarbonise the electricity sector. The
first port of call must be the consumers, and we clearly want
to incentivise people to reduce their consumption when they are
faced with the true cost of their electricity, which includes
the cost of its carbon. I think consumers must pay more, and it
would be very wrong if we blunted the incentives which higher
prices will give to more efficient use of energy. That said, of
course, there is a serious fuel poverty concern, and I think the
case for taxpayer intervention is to help the fuel-poor. What
I think we need to maintain is the principle that somebody pays
and that prices for individual units of energy do reflect their
true cost, but there is clearly a case for us directing any subsidies
that we want to put into this towards the poor customers. There
is a lot of potential there because many poor customers, of course,
are quite price sensitive and would welcome direct subsidies either
to reduce demand or to help them to respond better to price signals.
So if we are thinking about rolling out energy service companies,
it is quite interesting to observe that the sort of local authority
energy service companies which we already have (the Woking example
and, also, Aberdeen and Southampton), have been created specifically
to target low-income customers, mainly operating around council
housing stocks. So there is a principle there that is already
established that if we do want to raise the cost of energy we
can direct our subsidies towards helping poorer people. That is
a legitimate use, I think, of taxpayers' money because it maintains
the efficiency incentives of everybody facing the correct price
but it gets to the equity problems of: "We don't want to
raise prices on the poorest customers".
Mr Weir: You are faced with a problem:
every time the price of energy goes up the number of fuel poor
goes up as well. It is a very difficult cycle to break.
Q58 Dr Whitehead: Talking about the
issue of somebody has to pay and how that may be structured, do
you think the present system of five-yearly reviews of network
access payments is likely to be in the immediate future up to
the task of accommodating what is an unprecedentedly large investment
proposal, not just in terms of the vision for 2020 coststhe
£4.7 billionbut, obviously, the offshore connection
costs as well?
Dr Pollitt: I think this is something,
of course, that Ofgem is consulting on, at the moment. There is
an issue about whether you would maintain, basically, a five-year
review but you would have more re-openers around it. So it is
clearly the case with the offshore regime that that will be a
rolling process, and as new investment and new proposed investments
come forward then there would be an auction process for connection.
That will not be a five-year cycle. However, there will need to
be some network planning of the five-year type because we need
to make investments which anticipate future demand as well as
just responding to demands as they arise. I think we need both
strategies. We do need to maintain at least a five-year planning
horizon within the price controls, and we need to have the prospect
of more frequent re-openers or renegotiations as new investment
proposals come forward, but in order for that to be feasible,
of course, we need a more streamlined process so that these things
can be properly assessed but quickly.
Q59 Chairman: Is there a longer-term
indicative programme in relation to the costs you have been talking
about? There is the five-year pricing plan, which is a reasonable
kind of a period for the pricing, but is there a longer indicative
programme? In the water industry, for example, the water companies
are now required to have a 25-year investment indicative programme.
Is there anything like that within the energy sector?
Dr Pollitt: No, not to my knowledge.
My reaction to that is that with water much less technological
progress is expected over 25 years than would be the case in energy.
So it is not clear that there is a parallel to be drawn there,
but it is interesting.
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