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 termsand I am going
to come back to one exception in a momentBETTA 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 windalmost the converse of the problem
that you raisebecause 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 Scotlandbecause
as far as we can see that generation is still needed for that
purposeand (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 measuresas I see it,
the 450 megawattsis 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
arethey cannot moveand 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 offshoreperhaps
starting to look a bit more like a mesh systemwhich 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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