Examination of Witnesses (Question Numbers
144-159)
MR GORDON
EDGE, MR
TIM RUSSELL
AND MR
JASON ORMISTON
29 APRIL 2009
Q144 Chairman: Good morning and welcome
to the Energy and Climate Change Select Committee. We very much
appreciate you coming today to talk about Britain's electricity
networks and we are very interested to hear your views from the
renewables side, which, of course, is going to be a very important
part of networks in the future. I wonder, for the record, if you
would just like to introduce yourselves and say which organisation
you are from?
Mr Ormiston: My name is Jason
Ormiston. I am the Chief Executive of Scottish Renewables, which
is also known as Scottish Renewables Forum, or SRF. We will hear
those being interchanged within the next few months, I think.
Mr Edge: My name is Gordon Edge.
I am Director of Economics and Markets at BWEA, also known as
British Wind Energy Association.
Mr Russell: I am Tim Russell and
I am here today representing the Renewable Energy Association.
I advise them on network matters.
Q145 Chairman: Thank you very much.
I will start off. There is a huge interest, discussion and hopefully
investment in networks going on at the present time. There are
a lot of strategy groups. The Electricity Networks Strategy Group,
for example, stated that reinforcements to the transmission system
can be delivered in time to meet the 2020 renewables target. That
is an ambitious target. There is an awful lot of investment in
the pipeline, which is not yet built and connected. Do you think
that the investment programme so far and the regulatory framework
are suitable in terms of giving that delivery within that kind
of timescale to renewables?
Mr Ormiston: It is probably the
major question about whether or not we will deliver for 2020.
You use the word "can", which is crucial, of course.
We can deliver that investment by 2020. I think the regulatory
infrastructure is being developed to be able to deliver that.
The ENSG's transmission study was very useful and is the kind
of visionary document that we require to deliver the 2020 target.
I think it needs to be regularly reviewed, however, because the
demand to connect, the amount of capacity that will likely want
to connect by 2020 may be greater than that identified in the
current ENSG report. Those are the longer term drivers which I
think are useful. Shorter and medium term, the regulatory background
has to be fit for purpose. Our experience to date over the last
ten years trying to deliver our 2010 target has not been good.
Q146 Chairman: Could you give us
an example of why it has not been good?
Mr Ormiston: A very good example
is in Scotland, where we have a significant amount of renewables
capacity that wants to connect to the transmission network and
the distribution networks but that network is not there. It is
a planning issue. In other words, you would not necessarily blame
those who wish to invest in the transmission network or, indeed,
the regulator for that, but it is arguable that the planning for
that investment was not pressing enough long enough ago, and so
we are left in a situation with something like nine gigawatts
of potential renewables capacity waiting for a connection beyond
2012, beyond even 2018, which is a major problem if you want to
meet your 2020 targets. This is now being addressed in the Transmission
Access Review, but it remains to be seen whether the Transmission
Access Review will deliver the goods or the regulatory infrastructure
required. We are going to have a discussion hopefully later about
"connect and manage", and we are supporters of that
approach, but there is an awful lot to play for in the debates
around the Transmission Access Review and the various CUSC amendments
and other initiatives and modifications that have been brought
forward through that.
Q147 Chairman: You said the regulatory
framework was developing. Does that suggest it is not there yet?
Mr Ormiston: No, it is not there
yet. The Transmission Access Review has to play out, and there
are also an awful lot of modifications and proposals for reform
outwith the Transmission Access Review. You take a view whether
that is useful or not, but, nevertheless, that continuing debate
dominates much of the discussion within the industry about what
is probably the principal issue for the renewable electricity
sector in the UK.
Mr Russell: I think it is quite
important very early on that everybody acknowledges the elephant
in the room, and the big risk with all of this is that currently
the planning system does not adapt to be able to give more timely
decisions, whichever way they go, and everything else that you
may or may not wish to ask us about this morning all really arises
because of the inordinate length of time it often takes to get
planning for networks but also, of course, generation projects
of all types.
Q148 Chairman: Can I perhaps pick
this up, Mr Russell. Some of the timescales are really quite remarkable,
shall we say. Indeed, if we have got time, you may want to address
some of these issues of planning. Do you want to say something,
Mr Edge?
Mr Edge: Yes, please. I think
we need to acknowledge that there has been some considerable progress
here. The ENSG process and report are actually quite significant
advances in taking us on the way. Our view is that there is a
current delivery gap between this visionary plan, which is really
good, it is excellent and it is on the table and we are really
pleased that Ofgem is bringing forward new initiatives for investment
ahead of user commitment—again, that is a major advance—but
there just does not seem to be someone with whom the buck stops
and who is the back-stop, who makes sure that all the different
things that need to happen happen in the right time, in the right
place, and that leadership element is what we think is missing.
Q149 Chairman: Who do you think should
give that leadership?
Mr Edge: We cannot see anyone
else but government being the one that holds the ring here.
Q150 Chairman: Not the regulator?
Mr Edge: Government is the one
that is setting the targets; I think it has to be the one that
actually actively propels us forward.
Q151 Chairman: So it is the Government,
basically?
Mr Edge: Basically, yes.
Q152 Sir Robert Smith: You touched
on investment ahead of need. How much difference will it make
if you go down that route?
Mr Edge: I think it will make
quite a significant difference if the incentives are right. There
are many slips between cup and lip in terms of putting that system
in place. What I have a problem with is, incentives are all very
well, but people do not have to take the incentive, there is no
compulsion for them to actually take it up. It is an enticement,
but it does not necessarily ensure that it happens.
Q153 Sir Robert Smith: So you may
be being a bit more fundamental and so using the market.
Mr Edge: I think the market is
good, but there needs to be a back-stop to make sure that, if
it is not coming forward, buttons can be pushed to make sure things
do happen, and there needs to be that back-stop power because
we do not have much time.
Q154 Sir Robert Smith: How do you
respond to the concern that, if you do it ahead of need, you could
end up with investment in all sorts of a nice shiny bits of network
that are not actually going to be needed but make money for the
network provider?
Mr Ormiston: I think that is a
bit of a red herring, to be honest. I think we already have a
situation where there are parts of the networks that are under
utilised, and that is managed perfectly well and acceptably by
Ofgem, National Grid and other organisations. Are there likely
to be bits of the network in the future that are likely to be
under utilised as such? I think the answer to that is probably,
yes, but that may have happened in any case. I think the key is
in planning and things like the ENSG report and our understanding
of where development is likely to take place, not just the renewables
but in other generation as well, and what type of response is
required in terms of delivering the networks. If we are clever
about it and we are sensible about it, we will get that right.
You will find that where there is spare capacity, there is an
encouragement to develop projects in any case, and that can be
an incentive as well.
Mr Edge: I think the only risk
is that it may be under utilised for a bit longer than we thought
it might be. The other side of this is that we do not build the
capacity; we do not get anywhere near our targets.
Mr Russell: Can I just correct
an unfortunate use of words. Nobody actually in this context,
when they say "investing ahead of need", means that.
The investment is needed now, but if it is genuinely not needed,
it should not be done. What people actually mean by "investment
ahead of need" is investment ahead of individual generation
projects being able to give specific and substantial financial
commitment. So we are not investing ahead of need; nobody is talking
about that. What is actually meant is investing ahead of specific
financial commitment. Now, with a large number of (for the transmission
system) often not very large projects, you know there are, for
example, going to be several gigawatts of new generation in Scotland,
as an example. You do not, however, know which of the many individual
projects are going to be successful. Therefore, those individual
projects cannot themselves incur liabilities of many millions
of pounds to give financial security to the investment, which
is why this sort of requiring specific projects to give financial
commitment does not work any more, but there is a high degree
of certainty that the reinforcements are needed, which is why
the investment is needed now. The other thing that is very important
to say in this context is that most transmission, the expensive
part of building it, when you actually order the kit and buy the
wires and string them up on overhead lines or bury them in the
ground, the timescales for that are not dissimilar to the timescales
for constructing most types of power stations. The one exception
would be nuclear, I guess, but we are talking two to three years.
What has got to be done ahead of that is doing the preliminary
engineering work and starting the planning process and getting
planning consent. That expenditure is not hundreds of millions
or billions of pounds. The really expensive stuff really only
starts at the same time as the power stations that precipitate
it are being built. So there is no expenditure ahead of need.
What people are talking about is expenditure ahead of individual
plants being able to put their hands in their pocket.
Q155 Charles Hendry: Can I broaden
it slightly to financing support. We have seen companies like
Shell pulling out of the London Array; we have seen Centrica putting
some of their offshore schemes on hold. The issue has been raised
that the ROCs were not generous enough, and the Chancellor changed
that support system in the Budget last week. This goes really
beyond the investigation we have got in front of us, but as we
have you here it would be very helpful to know whether you feel
that they have now gone far enough to encourage those offshore
projects to come back into the system?
Mr Edge: I believe so. We have
been very pleased with the announcements in the Budget. We think
that should be sufficient to keep the projects that are currently
in the market going and, indeed, to make orders as they should.
So in that sense we think it is probably about right.
Mr Ormiston: Now that we have
accepted the principle of differentiated support for different
renewable technologies, known as banding, you have to do an objective
test of the cost of developing different technologies and respond
accordingly. Clearly, developing offshore wind is perhaps a bit
more expensive than we anticipated a while ago and the response
by the Chancellor last week was helpful.
Q156 Chairman: I wonder if we could
just turn to the issue of accessing the transmission network.
The traditional pattern has been to invest in "connect",
and there has been a proposal that we should move towards "connect
and manage". Des, do you want to start off with this?
Q157 Dr Turner: Yes, I will be slightly
more keen and start at the tail of last year's questions. Everything
that is being planned with grid restructuring at the moment and
with reinforcement relates to the needs which are already identified—the
queue of onshore wind, et cetera, and several gigawatts—and
does not seem me to relate to what could be facing us in, say,
five years' time, when the picture could look very different,
when we start to see gigawatt scale exploitation of marine resources
which will not necessarily even match the grid distribution that
is already envisaged. Do you think that our grid vision for the
future is going to be adequate to take maximum account of our
renewable resources?
Mr Edge: I think the issue there
is more of a 2030 issue than a 2020 one. We, obviously, champion
the wave and tidal industries, alongside wind, but we do not see
it producing much more than the gigawatt scale in the 2020 timescale.
You need to be planning into the 2030 level, and that is why we
are very keen that there be a vision for beyond 2020 out to 2030,
because, particularly with the grid, you talk about long lifetime
assets: you need to be planning long lifetime visions. So we need
government to be bringing forward its view for the post 2020 era,
but what I would also say is that those wave and tidal marine
resources are very complementary to wind in a lot of ways. You
maximise the use of the network through having that diversity
of resources. Indeed, tomorrow we will be publishing a report
on precisely this issue, the way that the complementarity of wind
and marine resources can actually benefit the system overall,
which we are very happy to share with the committee.
Q158 Dr Turner: I would be grateful
for a copy of that, certainly. Coming back to the short-term,
do you feel that the short-term measures arising from the Transmission
Access Review are going to have a significant impact on the current
queue of renewable generators waiting to connect?
Mr Ormiston: You use the word
"significant". In Scotland there are nine gigawatts
of projects that have a contract to connect on a firm basis, and
they stretch from tomorrow right through to beyond 2018. Some
of those projects have consent; they have a connection offer going
beyond 2014. In response to the Transmission Access Review and
the desire for interim "connect and manage", National
Grid was asked to actively pursue advancement of projects that
can advance, that can connect through the queue more quickly,
and in doing that have identified projects that are consented
or are close to a decision and they have identified 450 megawatts
in the north of Scotland to advance to the queue. I think that
is very helpful, and I think they should be congratulated on that
effort. They have now identified a further 450 megawatts. That
perhaps will make it a little bit longer, but they think they
can also advance those through the queue in Scotland as well,
and, again, I think they should be given credit for that. If you
consider a 50 per cent attrition rate in planning for that nine
gigawatts that has not had a consent yet, you are looking at four
and a half gigawatts. So 900 of that—you are talking about
a fifth—has been advanced through the queue, and I think
that is very helpful. I would not know whether to call that significant
or not, but it is certainly a very helpful amount and will have
a big impact actually on meeting renewables targets. What was
disappointing from my perspective was recent debate around the
cost of advancing that capacity through the queue and Ofgem's
apparent u-turn on its commitment to put short-term measures through
the Transmission Access Review and calling into question the efficacy
of moving that 450 megawatts that have been identified by National
Grid through the queue more quickly. It actually caused a huge
amount of consternation in Scotland, because we thought Ofgem
was at least behind the Transmission Access Review, but it appeared
to step back a bit and have second thoughts. Fortunately, they
realised they could not actually continue with that position and
have supported the advancement of the 450 megawatts, and more
megawatts, in Scotland. Just to sum that up, I think everyone
now is back on course. I think that queue advancement work by
the National Grid is to be applauded.
Mr Russell: I think the technical
position is we are waiting for Ofgem's final decision in terms
of its policy on derogations that will facilitate the interim
"connect and manage" that I think they have promised
by the end of April, which is tomorrow. So as long as it goes
ahead, yes, it should make a difference in the short term.
Mr Edge: There is a general issue
with Ofgem's attitude to the constraint costs that arise from
"connect and manage", which obviously all three of us
here very strongly support. Their view is it is all very well,
but look at the bill. There was a CUSC amendment to Cap 48 that
some of our members brought forward, and we commissioned some
analysis of the impact assessment that Ofgem did around that.
Ofgem was assessing a net cost of £917 million for this proposal,
and our analysis said 23. So Ofgem takes a very high view of what
those constraint costs are going to be, which we do not think
is actually the reality.
Q159 Chairman: Why do you not think
that?
Mr Edge: They take a very pessimistic
view of how much constraint will be needed and how much needs
to be paid. We can provide you with that analysis to show you
what it was. It was a rather strange attitude to the cost of the
Renewables Obligation.
Mr Ormiston: Ofgem had some previous
history as well on this 450 megawatts. Initially they were responding
to a concern that advancing 450 megawatts would cost £100
million extra in constraints. Subsequent research and a reappraisal
of the situation brought that down to 40 million, which is a much
more acceptable position.
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