Examination of Witnesses (Question Numbers
196-219)
MR DAVID
PORTER, MS
BARBARA VEST
AND MR
ALASTAIR TOLLEY
29 APRIL 2009
Q196 Chairman: Good morning, ladies
and gentlemen; welcome to the Select Committee. As with our previous
witnesses, for the record would you care to give your name and
organisation? Mr Tolley, if you would like to start?
Mr Tolley: I am Alastair Tolley;
I am the Head of Renewable Energy at the Association of Electricity
Producers.
Mr Porter: David Porter, Chief
Executive, Association of Electricity Producers.
Ms Vest: Barbara Vest, Head of
Electricity Trading, Association of Electricity Producers.
Q197 Chairman: Thank you and welcome.
Can we start off with accessing the transmission network, which
of course is very topical at the moment? We have the current Transmission
Access Review, which has made a number of short term recommendations,
particularly in trying to address the queue of capacity, which
we know is in the system. Do you think those short term recommendations
are going to have an impact?
Mr Porter: I think our views are
not too far apart, Mr Chairman, from those that you heard earlier.
We are reasonably comfortable with some of the short term measures
because it makes sense to make the best possible use of the existing
capacity. We do have a huge level of new production being proposed
but of course you simply cannot get away from the conclusion that
these short term measures are sticking plasters; they have attached
to them sometimes some risk of unintended consequences and of
course the answer is to get much more network built.
Q198 Chairman: Are we seeing some
unintended consequences in the short term measures?
Mr Porter: There are risks with
some and those risks were referred to earlier—the constraint
costs, for example—and I know that the regulator is already
quite concerned about the increase in constraint costs that we
have seen in the last couple of years and we are under a bit of
pressure from that now. So we cannot ignore these things; we have
to take a very careful look at them because these costs end up
to some extent or other on the customers' bills.
Q199 Chairman: So disagreement on
those constraint costs in terms of the calculations, is that view
as well?
Mr Porter: I am not sure how deeply
we have got into the differences between the two extremes that
were put forward, but I will ask Barbara whether we can comment
on that.
Ms Vest: I would just reiterate
what was said earlier, the fact that there are a wide range of
views on how much those constraints are actually going to cost
and we have seen recently some urgent proposals being brought
forward by Grid in response to concerns raised by Ofgem. Unfortunately
the industry really did not get the opportunity to have proper
dialogue and input into those proposals because they were raised
in extremely short timescales under an urgent banner, and it meant
that we really did not fully understand the full intention of
those proposals. In fact I am a member of the Connection and User
System Panel who had to sign off the urgency for those proposals
and, to be quite honest, at our subsequent meeting following that,
when we had seen the legal drafting for what the full proposal
was, many of us said that we would not have signed off on urgency
and we would have preferred to have the industry understand more
about the full extent and range of what had been proposed.
Mr Porter: As a result of things
like this, Mr Chairman, we get accused at times by the regulator's
office of being obstructive in terms of improving the prospects
for new networks and improving the arrangements for access and
we have objected very strongly to that sort of thing. We have
had people sitting for months on end very thoroughly and properly
engaged in the issues that Ofgem have brought forward, and at
times it seems like they are trying to find a scapegoat for a
problem which, as you all know, from what you have heard already,
is actually quite difficult. We are moving from a situation where
we are today where by 2020 we are meant to have something like
50 per cent more generation connected to our electricity system.
This includes offshore wind and it includes the generation to
replace retiring plant and also the generation that we will have
to have to provide back-up. This is a massive change and it is
something which some people—not many in the industry, I
ought to say—think can be done as if by magic and it simply
cannot. I hope that in the course of this discussion we will bring
out some of the difficulties but in a way which reveals that we
want to see them solved. After all, we represent a very wide range
of companies, including not only the conventional generators but
a great many others as well—some in renewable energy that
have been members of our Association since we were formed at the
end of the 1980s. I ought to point out as well that those which
are involved in conventional generation are also the companies
that are going to put a very large part of the money into the
investment to bring forward new renewables. So we want to see
things happen but we are much less likely than some to pretend
that it can be done simply.
Ms Vest: Can I add something about
the Transmission Access Review and modifications that were raised
in reference to the short term proposals? We had six proposals
raised in April 2008 and as someone who has had the joy of attending
many of the 70 plus industry meetings, held in London and the
beautiful place of Warwick, I can tell you that we have really,
really tried hard to make the proposals work. Unfortunately, what
were initially raised were proposals based on a zonal approach
and it became very apparent early on that was just was not possible;
we could not make it work. Therefore, we have developed a range
of alternative proposals. The short term proposals include the
system operator releasing additional capacity as and when they
can see that it is available and could be used. There are proposals
even now for generators to share access, so if you have someone
who runs a hydro plant and they are not going to run at times
when a neighbour who is a wind producer could use the network
then they will come to some commercial agreement and share that
access. Then we got on to the proposals for Connect and Manage.
It is absolutely great that Ofgem have now changed their view
and allowed the derogations to go ahead that will bring on an
additional 450 megawatts of generation. This is a very positive
and timely move. We have really seen a lot of progress on the
short term arrangements. However, part of that suite also had
within it a couple of proposals that looked at longer term arrangements
and, honestly, they were just so problematic to deal with. As
I say, this zonal approach for something, for example like auctions,
National Grid, their staff behind the scenes have put in an awful
lot of additional work to try and move that on, in addition to
what we did in the working groups. But basically what we ended
up with was an Excel spreadsheet that was meant to model what
was going to happen, and it is frankly not enough for an arrangement
that is fundamentally going to change the approach of a generator's
access in the future. So from my point of view—and I am
not saying anything untoward here—honestly I would just
concentrate on these short term arrangements, make them work,
continue with the move by Ofgem to a different regulatory approach
to enable Grid to get on with this investment, to enable the generators
to deliver and keep the lights on; and let us deal with the long
term stuff much later when we have the time to catch our breath
and see if the arrangements are appropriate long term. We need
to move now.
Q200 Dr Whitehead: You could say
that the two are indissolubly connected in as much as if you are
going down a Connect and Manage route then there are consequences
in terms of finite access rights; there are consequences if you
do go down the finite access route of then logically having to
have some sort of system, as it were, of redistributing the access
rights in the long term, and the auction process therefore may
appear to follow. But you have strongly resisted both and I believe
that you are even in the process of taking legal advice about,
for example, the taking away of access rights if there is to be
a finite access regime. Do you think that those are contributions
to the long term position or a defence of the short term position?
Mr Porter: They are both, in fact,
but they are first a defence of the companies' existing position.
They do not have any commercial option really, other than to say,
"I am sorry, but we were vested with these rights; we have
made all our business plans on the basis of these rights and it
is not something that you can take away from us lightly. So all
the companies concerned will have been consulting their own lawyers
about that. I ought to say that in the discussions about this
with the regulator I do not think that we have ever heard anybody
make the case that there is the right to take them away. So I
am afraid that there is a battle to be fought.
Q201 Chairman: Could I just say very
briefly that I would like to welcome visitors from the Youth Parliament
who are visiting Parliament today for an engagement, accompanied
by the MP for Brigg and Goole. I would like to say how welcome
you are; I hope you have a very good day and welcome to the Select
Committee on Energy and Climate Change.
Ms Vest: Can I just say on whether
rights can actually be taken away or not, right at the very beginning
of this transmission access work, the very first working groups,
we asked Ofgem to show us where within the code agreements it
actually stated that rights could be taken away, because if we
know exactly what we are dealing with at the start of the process
then that is great. So way back in April 2008 they were asked
that and they point-blank refused and said, "This is a totally
legal situation now; we cannot discuss or will not discuss it,"
and they were most unhelpful with that. But for Connect and Manage
and the short term arrangements that are actually looking as though
they will help to bring on additional megawatts you do not need
the finite rights issue; we can handle it, we can get them on.
Q202 Dr Whitehead: I understand that
in the short term but if you go down a Connect and Manage route
in the long term, which you have given an example of, Ms Vest,
of how access might be shared depending on the nature of a particular
form of transmission, does not the Connect and Manage regime inevitably
mean that there will have to be changes to access rights and that
if they are not to be finite that the entire long term future
therefore of the sort of Connect and Manage arrangements that
you have suggested relies on the voluntary goodwill of people
to actually do it, as opposed to any sort of better planning of
how the system might work. Therefore, is there not a problem arising
between the idea that perhaps the Grid cannot take away rights—and
indeed there is nothing in the documentation, as it were, that
says that they can—and on the other hand the ambition of
a Connect and Manage system, which seems to point in a different
direction?
Ms Vest: I do not know what we
are getting hung up on here because, honestly, the Connect and
Manage process that we are going through and the short term arrangement
for giving up access and sharing it, we are saying that the generators
through this Transmission Access Review are better understanding
the problems. For example, the initial proposals that were raised,
the problem then was about the socialisation of costs, and we
have come up with a range of options now because we have better
understood the issue. In addition, there was a problem or a misunderstanding
between the notice we needed to give Grid about when plant would
be closing. It was very unfortunate that the one proposal that
looked at finite rights also included in it this termination arrangement
as well. If the two modifications had been separated we could
make progress on that and the working groups have come up with
some solutions that have actually been with Ofgem now since 8
January, waiting to see what the next steps are. It is quite rich
that they are saying that the industry is holding up this process
when we are sitting here wondering where is the regulatory impact
assessment; are we actually going to get a reasonable amount of
time to respond to that, which should be 12 weeks? We are hearing
from Ofgem that whilst they are using this time that is eating
into our consultation time we might only end up with four to six
weeks' consultation on something that is as big and as important
as this. And on something that, quite honestly, because there
were so many meetings—
Q203 Chairman: What do you think
would be a better consultation period then, or a better system?
Ms Vest: They should follow the
Better Regulation requirements and give us the full time. The
problem is not for the members who were involved in the process—we
understand what it is all about—but this is for impacts
that are far wider than those people who were lucky enough to
have employers that enabled them to engage properly in the process.
There are an awful lot of other smaller generators, smaller businesses
that it is only now they will be able to understand the full impact.
Chairman: Can we turn to the issue of
charging for the use of transmission networks, which is a very
hot topic, of course, with all concerned.
Q204 Mr Weir: We had a discussion
about locational charges with the last set of witnesses. Clearly
you represent both renewable and traditional—if you want
to put it that way—generators throughout the UK. Do you
agree to the extent to which location is currently priced into
transmission network and balancing services charges, and how do
you feel about the proposal for a more flat rate of postal system?
Mr Porter: There are a great many
things that a trade association like ours with a very broad membership
can agree on quite easily, but if you want to find something that
gives us a headache it is geographical things. You heard a few
minutes ago that the Scots have one very clear view of this and
I can tell you that people in the south of England have a very
different view of it and I have been personally involved in trying
to broker a deal in the past that failed dismally because it just
did not recognise the business impact of these changes. Broadly,
the Association is in favour of cost reflectiveness; it runs through
most of our policy. But we are grown up enough to recognise that
we have a huge problem here where companies can be hugely disadvantaged
by change.
Q205 Mr Weir: What about the balancing
services' use of system costs? Scottish Power and Scottish and
Southern, for example, have raised concerns about the new proposals
from National Grid at the behest, it appears, of Ofgem, which
they say will impact upon investment and plant in Scotland. Do
you have a view on that? Is it something that affects southern
generators as well?
Ms Vest: This was something I
referred to earlier. Ofgem raised at very short notice this issue
about constraint costs. We have heard earlier—and we support
the view—that there is a vast array of views on what that
actual figure is. We have concerns as an association that something
as fundamental a change as that could be brought forward, first
of all without being honest about the full impacts of it. And
just to give you a flavour of what it means, there is currently
a derogated boundary—it is the Cheviot Line. It has always
been there; we knew there was a problem with this NETA; we have
had BETTA come along and we needed that line to be reinforced.
There are certain flows across that line and unfortunately at
times energy has to be constrained, so we are seeing this rise
in costs, which have been forecast—maybe not to the level
that we have seen but lots of things change over lots of years
and so we are where we are. But this proposal under an urgent
banner will mean that special kit has to be installed at certain
plants that are subject to this derogation and have signed what
is called an inter-trip agreement, and it is a new form of an
inter-trip which will reduce their output under certain conditions.
The industry was not really involved in discussions about what
compensation there would be and you have someone who might have
a coal plant and who might be tripped off who can return to production
and get their product to the market at relatively short periods;
but then you might have a nuclear generator that is affected in
the same way and they have to stay off for five days because the
Health and Safety rules state that, and yet they are subject to
the same amount of compensation. So there is a lot of worry there
about something that has been brought in around a subject and
values that are not fully investigated or understood. We do not
know what the future behaviour is and what those levels will stay
at and we are also concerned about maybe there were other options
that could have been looked at if we had had an appropriate length
of time to do so.
Q206 Mr Weir: So it is a rushed thing
that is ill thought out is basically what you are saying about
it. To what extent do renewables receive priority access to the
electricity networks at present, and is this not necessary given
the government's ambitious targets for renewable energy?
Mr Tolley: At present they do
not, is the short answer. The new Renewables Directive I think
requires either priority or guaranteed access to the network,
and that is for things that are already connected; so it is not
the connection itself, it is the actual access once you are connected.
It is up to the government to determine what guaranteed access
would mean in that context and whether we comply. My view is that
we probably do at the moment because once you are on the network
you have access to the network unless you are constrained for
security reasons or for reliability reasons.
Q207 Mr Weir: Given the now very
ambitious targets for electricity from renewables, does that mean
that renewables will have to be given that priority to enable
us to meet these targets, and what is the effect going to be on
other generators; or is there going to be an effect on other generators?
Mr Porter: I think you are alluding
to another big question about what is going to happen to pricing
and price volatility and so on when we have a large amount of
variable renewable energy production on the network. These are
very big questions. We are a bit fearful of the present trading
arrangements being able to cope with this. It even leads us to
questions about the incentives, the signals that are given for
people to build new plant, to back up variable renewable energy;
and we do not have all the answers to this yet. There are some
quite big issues lurking there. It is possible to envisage prices
dropping to very low levels at times, as we have seen in parts
of Europe—Denmark I think is an example. We have some very
big questions to address there.
Q208 Mr Weir: To put you on the spot
then, what incentives do you think are necessary to deal with
the intermittency problem?
Mr Porter: I have talked at a
very senior level to people in the major companies about this,
and I have to say—and they can be forgiven for this—not
everyone is of one accord on how you deal with this. They are,
however, of one accord that we have a problem and one Chief Executive
said to me, "I simply cannot sign off the building of a brand
new power station to come into use occasionally to deal with variable
supply of energy from renewables." One possible route out
of that is that we have some kind of new incentive mechanism to
get people to do that but all these things in the end have an
impact on the customer's bill and we are faced all the time with
the strong desire to see change in the composition of the energy
mix. It is being driven more politically than it is being driven
by the companies—they want to do what it is necessary to
do, but I think if it were not for the level of the Renewables
Directive that we have signed on to they would be choosing commercially
a mix which is rather different from what it looks like we have
to have. At the same time we have pressures on the industry to
make sure that customers' bills do not rise unduly. We are talking
here, in effect, about how much insurance we buy. The back-up
plant is cover and it looks as though we are going to get into
very high levels of insurance. As somebody who believes that the
first priority of energy policy is to keep the lights on I am
not out of sympathy with that, but we all have to recognise that
the political drivers to bring forward new types of generation
do have a cost attached to them.
Q209 Sir Robert Smith: Earlier on
you mentioned this inter-trip; is that controlled by the grid
operator and the power plant has virtually no say?
Ms Vest: It is controlled by grid,
yes, and grid controls the piece of kit that they install at the
generating site.
Q210 Sir Robert Smith: Suddenly you
find you lose access and you have to switch everything off.
Ms Vest: It goes.
Chairman: Can we move on to the issue
of connecting to offshore wind, which, as we know, there is an
awful lot of capacity in the system and there are concerns about
delays and also the regulatory regime for that.
Q211 Paddy Tipping: Can you give
us a view on whether the approach is right that DECC and Ofgem
take?
Mr Porter: On the DECC and Ofgem
approach to offshore wind? I think to start with we do not have
a problem with the idea of National Grid extending its role offshore;
that is the starting point. Neither do we have a problem with
a competitive regime.
Q212 Paddy Tipping: Do you think
that there are enough people around who are going to tender for
this offshore process?
Mr Tolley: We do not know for
certain, do we, but it is not a foregone conclusion that the existing
onshore companies will be the only people who win out in these
competitions because offshore transmission is slightly different
and there could well be new entrants from other countries and
other companies getting involved. For the round one and two offshore
wind projects we are quite confident that the competitive arrangements,
OFTOs, will deliver benefits in terms of lower costs, more innovation,
getting more companies in to finance these networks. I think the
question really arises in terms of round three when you have much
more offshore wind being built, whether you get that strategic
approach, coordinated approach to designing an offshore network
that you may need.
Q213 Paddy Tipping: The Sea is a
bit of an unknown frontier. There is going to be some big engineering
work here. Do we really understand the marine environment enough
to make this happen?
Mr Porter: We have to rely on
the business judgment of our member companies that want to do
this. We heard earlier from I think it was Gordon Edge of the
British Wind Energy Association that a lot of the issues are similar
to issues that were addressed by the offshore oil industry, so
we ought to have a certain amount of confidence. But there is
a lot of work going on in the industry now to get the assurance
that some of these things can be delivered. Technical work—there
is work going on on metering currently.
Ms Vest: I think as well that
our members think that if it is a competitive tender and, say,
somebody else were to win that, they could bring in innovative
new ways of dealing with things which we can learn from and then
look across to National Grid and the Scottish transmission operators
and say to them, "Why are you not delivering something similar?
Where is the innovation here?" So we can see benefits from
this.
Q214 Sir Robert Smith: There is one
warning from offshore, of course, that the history of the offshore
was that each different operator had their own infrastructure
and now new entrants are finding it difficult sometimes to access.
So presumably any regime has to be careful that it does not embed
rigidities that do not allow future development.
Ms Vest: Yes. I think they understand
that as well.
Chairman: Could we turn to an issue potentially
for the future, the issue of interconnection with other countries
and the supergrid. Interconnections with France, for example,
have been around for a very long time; but there are a number
of proposals, I understand, for connecting to Ireland, connecting
to Holland, and then there are the European proposals for a European
supergrid, which is a very interesting proposal.
Q215 Judy Mallaber: Briefly, what
are the benefits, do you think, and what are the risks of greater
interconnection with other countries?
Mr Porter: Having plenty of connection
goes with having a good, well working market and that should help
to deliver greater security of supply; it ought, as well, to make
the best possible use of our resources by drawing on power where
it was sometimes surplus and getting power from where it is most
economically available. So we feel very comfortable with the idea
of much more interconnection.
Ms Vest: I just remember in the
not too distant past we had problems—if we face a severe
winter it is quite likely that they are facing one in Europe too,
and it could be even worse in fact. We did have a situation where
we expected energy to come here but every country has their own
rules and requirements about looking after their own country first,
so we need to be very careful that we are not reliant on imports
too much and we need to make proper provision here for that extreme
winter. It might even be an extreme summer—who knows, the
way things are going? But we cannot just say, "We are getting
lots of wires so the energy will come here."
Mr Porter: There is another implication,
of course, that the more that you have of this and the more that
the European market becomes integrated—and we supported
that—you are going to need a different type of regulation,
and this was actually alluded to by the Chairman of Ofgem yesterday
at a meeting at which your Chairman and I were present.
Q216 Chairman: He was indeed.
Mr Porter: This is also going
to present us with some challenges because regulation viewed from
a European perspective may not always fit comfortably with regulation
to which we have become accustomed in the UK over the last 20
years. Broadly speaking we do it quite well here. It has its flaws
but it has worked and I suppose it is fair to say that we would
have a watchful eye on what came out at a European level to make
sure that it was not going to have any serious downsides for us
locally.
Q217 Judy Mallaber: So with a lack
of market liberalisation in Europe, do you think that that does
create risks and problems for our market?
Mr Porter: It does. We are hoping
that the third package will lead to a greater freeing up because
that is something that, as an Association, we support very strongly
and always have. We now have within our membership a number of
companies which are not British owned but they are in effect European
companies and they also feel that very strongly.
Q218 Judy Mallaber: The Chairman
referred to the supergrid. What do you think is the potential?
Mr Porter: This has attracted
a lot of interest and I think a great deal more work is needed
on this before we can be very confident about any net benefits.
I suppose that in principle what I was saying just now applies
to this supergrid as well, that you are back to how you run it,
how you coordinate it, how you regulate it. Apologies to our own
regulators who think that you can deal with these kinds of things
almost overnight—these things do take time and they take
even more time when you have lots of different countries' interests
to consider.
Q219 Judy Mallaber: Can you identify
which of the main regulatory considerations need to be covered?
It is obviously a very complex area.
Mr Porter: There are things like
how much it costs to move electricity across borders and if you
move across more than one border are you into an issue of paying
two charges, that kind of thing. These are challenging issues
that take a lot of working out and I am still sore from being
told by our regulator as recently as yesterday that we need to
wake up and smell the coffee. We know about the coffee.
Chairman: That is indeed what he said,
yes.
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