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


Examination of Witnesses (Question Numbers 80-99)

MS ALISON KAY, MR MIKE BARLOW AND MR RUPERT STEELE

22 APRIL 2009

  Q80  Dr Turner: Do you think the present arrangements, British Electricity Trading and Transmission Arrangements, are rather rigid? Many aspects of it would seem to be disincentivising renewables generation and very much weighted in favour of traditional fossil fuel generators or nuclear generators. Are you satisfied with BETTA?

  Mr Steele: We are probably the UK's largest current generator of wind power. Obviously we have Europe's largest wind farm at Whitelee near Glasgow. I do not know whether it is running today but it has certainly been a huge success for us. We think that in broad terms—and I am going to come back to one exception in a moment—BETTA is about right. The reason for that is that, although we are a very strong developer of wind, the intermittency does have a cost and it has a cost which requires backup from other plant. It really is very important that that is recognised in the system, otherwise there is a risk that the other plant will not be funded to be there to cover and provide that backup. The principle that costs of intermittency are exposed and available I think is a right one. The area where I am most concerned about BETTA is whether it will bring forward the backup that will be needed as we move to much higher levels of wind—almost the converse of the problem that you raise—because that will depend on a plant that is not running very often being able to charge very high prices in those times when it is running, to cover its capital costs for the large periods of time when it is not. The concern that developers of that kind of plant will have is that when somebody charges high prices in periods of shortage there is a tremendous tendency in political and sometimes regulatory circles to use words like "profiteering". The fear that people might use those kinds of words will put people off investing, and then there is a risk that the plant will not be there. We are asking the regulator and DECC and people to think about whether there should be capacity payments to try to even out the situation, so that we do not get into that kind of spiky situation. That is rather a long answer, but there are some important points.

  Q81  Dr Turner: It is a complex question, so that is fair enough. There seems to be an obvious incompatibility between British or UK arrangements through BETTA and the draft EU Directive on Renewable Energy. How do you see that being resolved if the draft directive translates into a real directive? To throw in transmission charges: What is your view on locational transmission charges?

  Mr Steele: I think I need to understand a bit more specifically on the directive point what you think the incompatibility is.

  Q82  Dr Turner: I think the priority access for renewable energy is the obvious outstanding point of difficulty.

  Mr Steele: We think renewable energy will effectively have priority access in any event, because the RO mechanism will give people every incentive to run when they are available.

  Q83  Dr Turner: But you will not be incentivised to allow them on. If they are not on call, it does not matter if they are running; they just have to dump it.

  Mr Steele: No, the way BETTA works is that generators can dispatch themselves. There is no requirement to be called. They may offer services to the grid where they voluntarily reduce output in return for a fee, but there is no dispatching of plant. Since 2001, when NETA came in, we have had a self-dispatch system.

  Q84  Dr Turner: Locational?

  Mr Steele: This is a tricky situation, I think. There is a system which tries to signal where plant should be built. We would say that it is not cost reflective. We think what it essentially tries to do is to measure how much wire, on average, an incremental bit of electricity produced might use. The calculation is probably done very well but I think it is probably calculating the wrong thing, because all the plant in Britain depends on the grid being there. The plant in the south a lot of the time could not generate because it would be completely overloaded if plant in the north was not feeding power down, so I do not really buy the proposition that plant in the south is not benefiting from the grid and should be paid by the grid to be connected, whereas plant in the north should be paying. It seems to me a very accurate calculation of precisely the wrong thing.

  Q85  Dr Turner: The difficulty is, of course, that it loads the costs of remote energy sources. The Pentland Firth is an obvious example. Fantastic: many gigawatts of tidal stream power there to be tapped, and they will be tapped eventually, but they will fall foul of the current transmission charging regime.

  Mr Steele: Yes. I think my view is that we know where these resources are; they will still have to be developed there. These costs probably slow it down and probably do not achieve an awful lot, to be honest.

  Q86  Dr Turner: Do you wish to see a change in the transmission charging system?

  Mr Steele: We would certainly welcome a less extreme system closer to the European norms.

  Q87  Chairman: Perhaps I could ask Alison to come in on this.

  Ms Kay: The transmission charges are meant to recompense us for the physical costs of providing the network, the costs of installing and maintaining it. Therefore some element of cost reflectivity, some element of locational pricing, does seem to us to have worked in the past. It has given appropriate signals for where we want generators to connect. It has been very important in building the current electricity system that we have had that locational pricing element in there. That said, we have to recover the costs of installing and maintaining the network in some way, and to a large extent we are very, very happy to discuss ways in which we can move away from the current system of charging to a more postage system set of charges. We are not seeing any evidence, having said that, that renewables, in particular in Scotland, are not coming on, are not wishing to connect to the system, because of the level of transmission charging. We have seen no evidence of people not connecting because of that. It has been planning and stuff that has held people off up to now, charging has not been an issue. But we are running a consultation and we are about to go out to the formal consultation stage within the next few weeks on the proposals raised by the Scottish Government and my two colleagues sitting here with me today about moving to a different system of charging. We are very happy to discuss alternative means. We think that locational charging does send the right message to people wishing to connect to the system.

  Q88  Mike Weir: I would like to explore BETTA slightly more. When this was introduced in 2005, the idea was to have a UK-wide wholesale market in energy. There have been complaints from Scottish generators ever since that they are shouldering a greater proportion of charges. I understand there is a new proposal from National Grid and Ofgem to change the balancing cost charges which will impact seriously on Scottish generators. I wonder if you could comment upon that.

  Ms Kay: On the basis that we were cited as having raised the proposal, Ofgem have asked us to look at the costs of balancing the system. I think as a result of BETTA we have seen the fact that the physical network is obviously now over-utilised. The role of balancing charges in the market has very much risen in prominence since BETTA was introduced in 2005. Therefore, it is not just the physical assets that are very important in determining a generator's costs; it is also the costs that we incur in operating and balancing the system. Those costs have tripled in the last three years, since BETTA. We have been asked by Ofgem to have a look at whether or not that is sustainable and whether or not there is anything we can do to reduce those costs. That is where we are at. We are having a look at whether or not those balancing of charges should be targeted on a more locational basis, at the people who cause them, rather than spread across the generality of the industry as they are done today. Our consultation on that closed on Tuesday. We are obviously going to take into account the consultation responses, very much so, before we proceed with any change to the methodology, but we do think it is right to have a look at them.

  Mr Steele: From our point of view, the principal cause of these high balancing costs is the fact that the network has not been expanded nearly early enough. We, in our Scottish plants, want to generate. We sometimes are asked by the grid if we could not generate, please. We believe that it is entirely reasonable in those circumstances that we are compensated for being unable to generate because the grid is not up to the capacity that it needs to be. This is why I am so concerned that people are thinking that they should be holding back on the next round of investment, when all the evidence is that we now have a problem caused by Ofgem and others just simply not authorising the investment early enough some years ago. From our point of view, we do not see ourselves as a cause of the balancing costs. We are unable to generate as much as we would like because the network is not strong enough, and it is really important that that is fixed as a matter of urgency. We have obviously responded to the consultation in great and elaborate detail and if the Committee would like a copy I would be very happy to provide it, but for now the point I would make is that we have a firm right to export power from our power stations in Scotland. The suggestion that, effectively, that should be downgraded to a non firm right clearly puts a question mark against investments that we have already made. It is one thing, when you are thinking about an investment, being told, "If you are prepared to accept a less firm connection to the network you can have a cheaper connection." It is quite another when you have already made the investment. We have just committed £200 million to environmental upgrades at Longannet, only to be told, "Sorry, the connection that you thought you had is not going to be as good, and if you want any compensation for not running, you have to pay it yourself." That is the nature of the proposition that I am sure National Grid have been prompted by Ofgem to put forward and we are not very keen on it.

  Q89  Chairman: Is that true, that National Grid has been prompted on that basis by Ofgem?

  Ms Kay: There was an open letter that went to National Grid but copied to the rest of the industry that asked us to look at the escalating costs.

  Mike Weir: That is an interesting question we can take up with Ofgem when they come to see us.

  Chairman: We can indeed.

  Q90  Mike Weir: Mr Steele, you said in answer to a previous question that to decarbonise the energy sector CCS and renewables are obviously two of the very important things. Given that a lot of renewables are in Scotland, CCS obviously you are trying to develop, and at Long Gannet there are proposals for pumping the carbon into empty North Sea oilfields. If these charges go ahead, will that imperil investment in this type of development for the future in your view?

  Mr Steele: It certainly makes it a lot more difficult. The combined effects of locational transmission charges, these proposals and all these things is a very big signal to us saying "Close thermal generation in Scotland," and that seems to be completely at odds with two things that I think might be quite important: (1) keeping the lights on in Scotland—because as far as we can see that generation is still needed for that purpose—and (2) developing things like CCS. And, as you say, it is also putting a signal on renewables which is saying, "And, by the way, it is going to cost you a lot more to build renewables in Scotland." It is completely at odds with all the things that need to be done, and we see it as unhelpful for all those reasons.

  Mr Barlow: Could I make a linkage back to the grid system reinforcements as well. Alison talked about the balancing costs going high. They are the two components, I think: the balancing costs and the locational charges. The balancing costs are expected to reduce as the grid reinforcements take place, so the faster we get on with reinforcing the grid reinforcements, then that will ease the situation on the balancing costs, there will be fewer constraints on the system. The locational point that was raised using Pentland Firth as an example, is a very clear example of where a resource exists, where the resource cannot be harnessed or developed anywhere else. It cannot move. The renewal of nuclear generators is likely to be on existing sites. Part of the thinking behind the original locational charges was to give an option to generator developers to say that it appears to be cheaper to develop in the South of England. Of course that is not relevant really to the renewable resource that we are trying to see developed. The way in which that links back through the grid is that the nature of the locational charges, and perhaps the uncertainty of the locational charges in the future, is acting as a deterrent to generators, I believe, in terms of giving them uncertainty but perhaps delaying them coming forward. From a transmission perspective, in order for the transmission businesses to get a clear investment signal to invest in the upgrades, the fundamental thing that we need is generators who have clarity about what their intentions are. If they do not have a clear investment signal and are certain, then it undermines the transmission business's ability to have a clear investment signal as well.

  Q91  Sir Robert Smith: There are still choices to be made. One of the witnesses put it to us that if you are wanting to get renewable or a CCS project to go ahead, and transmission is a cost barrier, the charging system is wrong. It should be the financial incentive to build the generation that may need to be changed. You still need in some way to work out how you are going to charge the transmission system.

  Mr Steele: You do, but it does not seem to me obvious that the current very extreme process gets you to an answer that is sensible. It does not, in my view, take proper account of the benefits that plant in the south gets from essentially having its load supported by plant in the North, and it does not take account of the fact that there is load in the North. It is a very interesting calculation of huge complexity of completely the wrong thing, as far as I can see.

  Q92  Mike Weir: Miss Kay mentioned that transmission charges were, in effect, to reflect the costs of maintaining the grid. That may have been well and good initially, but now we are looking at very tight targets of 30 per cent generated from renewables in 2020, and I wonder what changes would be appropriate to balance these targets as against the cost of the grid, because, clearly, if we are going to meet these targets, we need the renewables, much of them in the North of Scotland, and they must enter the grid. How are we going to reflect that without changing the locational charge to perhaps a postage stamp type charge?

  Ms Kay: I think the key thing is giving the right signals to generators to come along. Thus mechanisms like ROCs (renewable obligation certificates) and the like are very important in encouraging generators to come along and connect. I think the system of transmission charging has to be clearly set out and absolutely transparent. It has been, but we have been going through a period where there have been lots of different balls in the air in terms of Transmission Access Review. Once we have that certainty, as I mentioned in one of my earlier answers, it is not National Grid's view that that system of locational charging is going to be a barrier to new generation connecting in the North of Scotland or, indeed, elsewhere.

  Chairman: We must move on. I want to look at the issue of access to the transmission network, which we have touched on a little bit, but, also, offshore and the planning regimes and the potential Marine Bill implications on this.

  Q93  Mike Weir: How do you think the short-term measures arising from the Transmission Access Review have an impact on the current queue for generators seeking grid access?

  Ms Kay: If we separate out here the short-term access measures, we are doing a lot with the two Scottish companies in terms of short-term measures to get access to the system. There is the longer Transmission Access Review which has been going on now for some 18 months and is still not at a close. We have lots of short-term measures working very collaboratively with the Scots to look at advancing generation projects, particularly in Scotland where we have identified 450 megawatts that can come forward, because they have planning permission and are ready to proceed. We have now had a letter from Ofgem which signals that they will let those plants on, subject to certain critieria being met, so that is going to advance. In England and Wales the Ofgem letter signalled an extension of that regime into England and Wales as well. We also currently have powers to knock out of the queue (if I can use those words) the people who we do not think have any realistic chance of connecting, so we are able to create spaces in the queue for those generators who are ready, willing and able to connect. I think over the last 12-18 months the Scottish companies and the National Grid have taken a far more proactive stance in connecting generation.

  Q94  Mike Weir: In how much of this are we getting into a chicken and egg situation? Much of the renewables generation in the North of Scotland requires to be connected to the grid. It has already been said that a lot of what the review group was talking about was Beauly-Denny being there. It is not there yet; we do not know when it is going to be there. There are large gaps in the grid in the North of Scotland that need to be connected up and there is going to have to be a lot of investment in that group before these renewables can be brought onstream. How much of the transmission access to the scheme is going to be irrelevant before the investment is made in the grid in the first instance?

  Mr Barlow: To build on Alison's point, I think that the short term measures—as I see it, the 450 megawatts—is really about making the best use of the existing system. It is really about using spare capacity, almost spare capacity that has not been getting used at the moment, particularly from a North of Scotland perspective. I think that is the broad challenge that I see, which is how do you make the best use of the system that you have at any one point in time, making sure that is getting best use, but always looking for the next stage of the reinforcements that will be required? I think the question about the short-term measures address the first part of that, which is about making the best use of the existing system, if you like, but you do not get away from having to do the second part of the exercise, which is to do the grid developments. For sure, the grid developments that will need to follow Beauly-Denny will provide a capacity in the North of Scotland for about 5.5 gigawatts of generation to get on. The first phase of that is relatively easy, the reconductoring of existing circuits, but, for instance, the Pentland Firth is likely to require a subsea cable from that point southwards, and we are looking at that as the second phase in that 2015/2020 type timescale.

  Q95  Mike Weir: What is your preferred option then for the longer term? You still have the problem of transmission charges and how that is going. What is your preferred outcome for the long-term transmission access?

  Mr Steele: From our point of view, I think we would say that the absolute priority is the infrastructure itself. One of my complaints throughout all of this discussion with the Transmission Access Review has been that at least 80 per cent of the solution is going to be around sorting out the infrastructure and at least 80 per cent of the talk has been around the access regime. That is why I am so thrilled that ENSG has produced a result. That is the first point to make. The second is that we absolutely welcome the 450 megawatts and sharing the cost of any constraints that arise equally, and that is all fine and that will be really, really helpful. Is anything long term needed to change the access regime beyond, as it were, the short-term package, things like connect and manage? In our view, probably not. There is a huge enthusiasm in the regulator for auction arrangements of various kinds. We think that they may add more complexity than they actually achieve in getting more plant on the system, and we question whether putting doubt on people's ability to export power will bring forward generation. If our company was thinking of investing in a nuclear power station, indeed we are in the consortium doing just that, it is a lot of money. And to be told, "Well, we don't know how many of the 60 operational years you will be able to export the power for. You might have to re-bid for it halfway through" is not very attractive, and the same goes for a big renewables project. I think our answer to the long term is: Build the wires and leave it at that.

  Q96  Dr Turner: Geography is not necessarily helpful, as we have already discussed, in terms of where raw resources are—they cannot move—and where the wires are. If there are difficulties enough with offshore wind farm locations, if we are to explore the very large potential of tidal stream power, the disparity between the presence of wires and the presence of the resource gets even starker, especially along the North West coast of Scotland where the grid is at its weakest and some of the power sources are at their strongest. Do you have a long-term strategy for dealing with that?

  Mr Barlow: It refers back to the point that I made earlier on about the development of some hub positions on the network. I think we foresee that the Hunterston landing point for a cable, which links Hunterston down to Deeside to transfer power north to south, is a good place for us engineers to think about where we might connect a large offshore volume of wind on that site, and, similarly, Peterhead or Newcastle on the east side. Wherever the offshore is coming in, the geography is that the offshore is in the water and it is a difficult place to work, but there are places on the system where that offshore can be harvested. Further to the north and west of Hunterston, there is a challenge of bringing subsea cable either to the main system in the North of Scotland or to a hub point like Hunterston.

  Q97  Dr Turner: Are some of these areas creating a situation where the traditional high voltage AC transmission that we have worked on since the war kind of breaks down and the alternative DC solutions start to become more attractive?

  Mr Barlow: Absolutely. We are bringing proposals forward to make links to the Western Isles and to Shetland for generation development proposals that are being proposed there. Our proposals are to connect both of those island groups HV DC subsea cables back on to this strengthened mainland system. That is likely to be the first place where they appear and then we will see them on the North/South straps around the interconnector circuits. I think we will see them for large concentrated volumes of offshore.

  Q98  Charles Hendry: Picking up on that point, Mr Barlow, you have talked about the case for the offshore subsea cables. It is something which I know the National Grid has been keen on as well. In our last evidence session we heard from some academics, and two professors were absolutely adamant in talking to us that the most technically feasible and economically feasible solution is a point-to-point connection for offshore wind, but you are suggesting that the best solution would be the cables. What gives you the basis for arguing that?

  Mr Barlow: I think the point-to-point solution is the most economic from a wind developer's perspective. These are considerable points in this question, I think. In terms of large wind farm developments offshore, they have a choice, basically: Do they want to pay for one cable or two cables to a point on shore? We find that they are generally happy with the security that one cable provides, so we do get a single cable going from point to point. That is looking at it from offshore, looking onto shore, if you like, where a generator says, "I need to get a connection." But I think the challenge going forward is more about how we develop the integrated transmission system in a way that allows those connections to be made economically. There is an interplay between the connection from an individual wind farm to its connection on to an integrated grid system, and the point here is to what extent should that integrated grid system be able to be developed off shore and reaching out to offshore developments. There is a danger, I think, that we end up with single radial circuits occupying spikes going out from the mainland to all the offshore locations and we miss an opportunity to build perhaps a more efficient system offshore, which integrates nicely with the mainland system but is an integrated system offshore—perhaps starting to look a bit more like a mesh system—which would also play into a strong basis for connecting between countries, and it starts to become a supergrid. A supergrid will evolve. We will not just lay it down; it will grow from these places.

  Ms Kay: Supplementing Mike's points there, I think that point-to-point connections are if you have got lots of individual connections coming in from offshore. First, there will be a question with how do you get the critical mass to go out and get cable supplies in a very, very tight market but, more importantly, building a whole host of individual cables, I think really gives us a concern about how they are all going to be there to really help us meet the 2020 targets. We have 21 gigawatts for offshore wind in the ENSG forecast. It is just not going to be there in time if we have point-to-point connections. As many of you will know, we have been advocating for a long time that we should extend the onshore grid offshore, but some sort of zonal connection or regional connection from clusters of wind farms into the system, from an economic point of view, from the point of being able to get into manufacturers' books, from the point of view of ease of build does seem to be a very sensible way forward and will help us achieve those 2020 targets.

  Q99  Charles Hendry: We have spoken earlier as well about the inherent variability of offshore wind and wind generally and the need potentially in the capacity payment to have some back-up capacity in the system. Is that the only way you think this can be addressed, or to what extent can that process be taken account of through storage, perhaps batteries, high definition compressed air, or, indeed, are there other ways in which it can be done through a smart grid so that you can manage demand more effectively?

  Mr Steele: We think that there are definitely opportunities for demand management. You have to work them through, starting from the application. For example, you could envisage a fridge that could be signalled to switch off for an hour or so at a time to deal with a large peak and the food would not be damaged, but it is not much good if it comes off for 24 hours. There are similar issues with things like plug-in hybrids, hot water, all sorts of things which we can demand side manage for short periods of time. Aluminium smelters can turn down for a bit, but not for long enough for their vats to solidify, because otherwise they are kind of broken. There is an issue about how long demand side management works. Most of the applications that have been identified to date tend to be short-term intra-day solutions, and if you have got an anticyclone and there is no wind blowing for three or four days, that is not much help. So our assessment at the moment is that, whilst the demand side stuff is really valuable and particularly valuable in places like the distribution network where short-term peaks can be managed without the need to build extra wires, it is probably not going to be enough. You do need the back-up, regrettably almost a gigawatt of back-up for a gigawatt of wind, and we do need to make sure there is a way of financing it.


 
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