Examination of Witnesses (Question Numbers
379-399)
LORD HUNT
OF KINGS
HEATH, MS
LORRAINE HAMID
AND MR
JOHN OVERTON
17 JUNE 2009
Q379 Chairman: Welcome to the Committee.
As you know, we are a new Select Committee following a new department.
We saw your colleague Mike O'Brien some time ago. We have seen
the Secretary of State but since then there have been changes
and changes in a row. Can you spell out what the ministerial responsibilities
are of the ministerial team that you have agreed?
Lord Hunt of Kings Heath: Thank
you very much. You are a new Select Committee, but I am even newer
in my role. I do not think that the announcement has been made
yet about ministerial responsibilities, but essentially it would
be fair to say that I have taken over much of Mike O'Brien's role,
as Energy Minister.
Q380 Chairman: But there is a lot
of interest in energy issues and climate change issues. The sooner
the world out there knows who is doing what would be helpful!
Lord Hunt of Kings Heath: I very
much accept that, and I will certainly make sure the Committee
knows as soon as it has been completely resolved. I was a minister
in DECC from the start, though sharing responsibility with Defra,
and previously had responsibility for energy innovation. Part
of my role in the Lords was to take through the final stages of
the Planning Act, the Energy Act and the Climate Change Act. It
is a very exciting place to be. DECC has a critical role to play
in terms of energy and energy security but also climate change
and the negotiations going up to Copenhagen.
Q381 Chairman: Could I just say,
in a gentle kind of way, there have been a lot of changes in the
Minister for Energy, and I do not think it is good for the Government
or its reputation, and I do not think it is good for the industry;
so we hope you will stay with us for some time.
Lord Hunt of Kings Heath: That,
too, is my hope. I am aware of the concern about frequent changes
in Energy Ministers. I, too, in the nine years I have been in
Government, have changed portfolios quite a few times. I recognise
that for the sectors you are in that they wish for continuity;
on the other hand, I hope that I can bring other experience that
I have gained in other areas. The key issue is perhaps not so
much the ministers, but whether we have the right policies and
the right framework, and can we give stability and certainty to
the energy sector! Certainly that is my aim.
Q382 Chairman: Let us get on with
the business now. We are going to move to a low-carbon economy,
which means big changes in the transmission system. You and your
colleagues will have followed the evidence we have received. Part
of the issue is that people in the sector say you lack vision
about this. Clearly, you will not agree with that, but will you
comment on that?
Lord Hunt of Kings Heath: I think
that is a little unfair. If you think about the activities that
have taken place over the last year or so, there has been a tremendous
amount of work, not just in terms of the electricity network,
but if one starts generally with energy policy, we, I believe,
have made some very critical decisions around renewables targets
on which we shall publish further information very shortly—but
also the decisions in relation to nuclear and carbon capture and
storage in relation to coal. These are very big decisions. Clearly,
access, and issues around the integrity of the electricity grid
are as important. I do think that the work that was done last
year on the Transmission Access Review, the work that has been
done within the ENSG, the desire that we have clearly expressed
to make sure that we use the grid more effectively; and the issue
to do with immediate access to the grid—and, as you know,
very shortly Ofgem will be taking us to the next stage in relation
to offshore licensing and in addition, we have the Ofgem review
of RPI-X@20—all of these actions and more show determination
on our part not only to get the vision right but to make sure
that the grid is fit for purpose in what is a very challenging
new situation.
Q383 Chairman: There are a number
of suggested scenarios and models for the grid in the future,
and nobody seems to know what it will look like. We are in the
age of more intervention from Government these days: should we
not be saying more clearly what the Department thinks the grid
might look like?
Lord Hunt of Kings Heath: As you
know, the approach that has been taken over a number of years
in relation to regulation of the grid et cetera is very
much one in which Government sets the legislative and regulatory
framework but does not micro-manage or, if you like, central-plan
what the outcome will be. Clearly, we are in a new situation in
terms of where we are going; the decisions that have been made
in relation to the energy mix that we need in the future; decisions
about smart meters and smart grids; issues around distributive
generation; and the renewable target: all of these lend support
to there needing to be work on scenarios and enabling people to
plan and invest in the future. That is very much what Government
is concerned with: providing a vision; making sure that the system
helps us deliver energy security, a diverse energy mix, ensuring
that we move to a low-carbon economy. We are working on scenarios.
We will have the Summer Strategy that will help clarify some of
those matters. Equally, I do not think it is for Government to
dictate exactly what the mix should be, or where it should be
provided. We also have to gain the benefits of a competitive market
in which the private sector will invest huge sums of money over
the next few years. We have to get the balance right and we have
to ensure that regulation is fit for purpose. Whilst I fully accept
that we have a role in providing greater understanding and certainty
in terms of scenarios, going beyond 2020 to 2030 and even to 2050,
we have to be very careful about too much of a micro management
interventionist approach. We have to get the balance right.
Q384 Chairman: I am sure we have
got to get the balance right, but I was struck by the comments
of Paul Golby, the Chief Executive of E.ON, who is a very respected
player in the field. He was saying that the market by itself cannot
operate and that there needs to be a firmer framework and guidelines
from Government. I just wonder whether we have got the balance
right.
Lord Hunt of Kings Heath: I do
not disagree. If it is being said that you could you rely on the
market of itself to deliver the kind of network that is required
over the next ten, twenty or thirty years; clearly, of its own
it will not. Government, in one way or another, working with regulators,
has to make sure that the incentives and the rules are there to
ensure that the grid is going to be fit for purpose. The fact
that we had the Transmission Access Review is in itself an indicator
of Government encouraging those kinds of analysis and interventions,
and we will continue to do that. On the other hand, I do not think
we would wish to move to a situation where we become very micro-management
in terms of intervention, because then the companies, which in
fairness are going to have to invest a huge amount of money, will
say, "We are very uncertain about the long-term future and
need stability". It is critical to get the balance right.
Where we do need to intervene, of course we will, but I believe
that ultimately our goal is to set the right vision and make sure
that that delivers our energy policy, and ensure that the right
financial incentives are in place and that the regulators are
up to speed. That, really, is our role.
Q385 Chairman: Part of the vision
is to have new nuclear up and running by 2017. Part of the vision
is to have local distribution around renewables. Those two things
do not sit easy when you bring forward a new transmission system.
Lord Hunt of Kings Heath: It shows
the challenge we face in relation to the transmission system.
As you know, the renewables target is a very challenging one.
At the moment renewables are responsible for about 1.8 per cent
of our energy requirements, and we have got to get up to 15 per
cent by 2020. The Committee, I am sure, will be aware of some
of the problems of access to the grid by renewables, which is
why we have had the interim connector management approach being
brought in. Equally, in terms of new nuclear, we are hoping for
the first station to be up and running by 2018, and that will
also provide demands of the grid that need to be met. In terms
of distributive generation, the introduction of feed-in tariffs,
which I am very excited about, will produce new demands there;
so clearly we need a lot of work to be done in the next few years.
I think the work of the ENSG has already indicated that an enormous
amount of work needs to be done, and it has made an estimate of
the costs. It is now for us to ensure that the players in the
system take the necessary action. Ofgem will be coming forward
with proposals in terms of the financial incentives that will
be required to make sure that the network is fit for purpose.
On distributive generation, there were studies done about three
years ago, which suggested that the network can cope with little
cost, up to 3.5 gigawatts, but one would like to think that the
introduction of feed-in tariffs will create much greater capacity
through the distributive network; and clearly we need to make
sure we can cope with that.
Q386 Chairman: One more question
from me, and we will move on. You mentioned the summer strategy.
One of my colleagues was kidding me earlier on that summer comes
later in Scotland than it does elsewhere. When is this strategy
coming out?
Lord Hunt of Kings Heath: I always
thought Scotland came earlier because of school holidays, but
I take your point. I would be a very foolish new Minister before
a new Select Committee to define exactly what DECC means by "summer"!
I have been in some departments where it has a certain elasticity.
We hope that it will come very shortly.
Q387 Chairman: Before the recess?
Lord Hunt of Kings Heath: That
is my hope.
Q388 Mr Weir: You have mentioned
several times the Transmission Access Review. There has been a
long-standing problem with queues waiting to get on to the grid;
but it is clear from our evidence that there is a tension between
Ofgem and the industry about certain aspects of this. Are you
happy with the industry's response in developing enduring transmission
access regimes?
Lord Hunt of Kings Heath: I would
like to bring Lorraine Hamid in on this, who heads up the forward-looking
work on the electricity network. If I could just say by way of
introduction, the companies have done a lot of work and you will
know that this is being considered now alongside what has been
described as "the fourth way". We want to see the outcome
of that work. There seem to be two options on the table: one is
what is called enduring connect and manage, and the other is reverting
to a wholesale auction of the existing and future grid. Clearly,
the latter proposal looks very complex—but of course they
are dealing with a very complex issue. I am satisfied that the
companies have been working very hard. Our concern, of course,
is that these discussions have been going on for quite some time
and we need to see progress. One of my roles in the next few weeks
is to make sure that people really are working hard to come to
a solution. Ideally you want a solution that is owned both by
the companies and Ofgem, but if that does not occur, then we will
have to consider whether we need to take further action ourselves;
and I hope that might be an encouragement to the parties to sort
this out.
Ms Hamid: I think you have covered
most of it there, but where we, as Government, needs to come from
is that these are issues that have been discussed for quite a
long period of time. We have a connection queue building up. Clearly,
our interests are to get a resolution sooner rather than later,
because we obviously need to hit our renewables targets by 2020
and grid access is a critical issue for new investors. We will
be taking the advice that Ofgem will give us by the end of this
month on where they think the process has got to. We are obviously
in close contact with all the industry parties on this throughout
the process and we will be taking our views on what should happen
next in the light of that evidence.
Q389 Mr Weir: Does that mean that
if there is not agreement in the next couple of months, then the
Minister will use his powers to intervene and impose an agreement
on the parties?
Lord Hunt of Kings Heath: Clearly,
it would be much better if a satisfactory outcome were reached;
but in the end we do have powers of intervention, and I would
argue that that is an indication in terms of the original question
that Mr Tipping asked me, about strategic leadership and vision.
We do have the ability to do that, and in the end, if there is
no satisfactory conclusion, we will have to intervene. It is not
ideal. At this stage I would want to encourage the parties concerned
to come to a resolution. I do want to assure you that I am by
no means complacent. In my previous role in terms of energy innovation,
I was in contact with a lot of the companies concerned with renewable
energy. In every meeting I had with the companies, I think, one
of the issues they raised with me was access to the grid. Given
the challenge for all renewable companies in making accessible
what they have to do, this is vitally important, and I understand
very much the need for this to be gripped as soon as possible.
Q390 Mr Weir: Can we take it from
that, that there will be a decision one way or the other in the
very near future?
Lord Hunt of Kings Heath: You
are pressing me a little harder than I want to go, because I do
not want then to be asked to define what you mean by "in
the very near future". I have identified that as an issue
that needs to be sorted out as quickly as possible. I think people
have been discussing this for a year and I think the time has
come for a resolution.
Q391 Sir Robert Smith: Is one of
the problems the history of the regulatory regime whereby Ofgem
cannot propose changes but has to wait for the industry to come
forward with changes? Do you think that is something that could
be changed?
Lord Hunt of Kings Heath: I would
like to come back to that when we see the outcome of the current
discussions. Clearly, if government has to intervene, that would
suggest to me that the Government's arrangements themselves might
not be up to scratch. However, I do have to say that my general
experience in other sectors is that if people want to make it
work, they do make it work, whatever the Government's arrangements.
Q392 Sir Robert Smith: What is the
history behind having the rules set the way they are?
Lord Hunt of Kings Heath: Since
I have only been here seven days, I had better ask my colleague
on that.
Ms Hamid: The background to this
is that it is industry that owns and runs the codes, so these
are Governance arrangements with respect to those codes. For regulatory
certainty and stability this was all set up in such a way that
basically it should be for industry at the edges to be sorting
out those proposals and putting them in to Ofgem rather than the
regulator imposing solutions on them from left field. As the Minister
said, perhaps in this particular case that has not been the most
ideal way of looking at what are some quite complex models. However,
if two parties are willing to try and come up with something that
can work, obviously the Governance is flexible enough for proposals
to be brought forward, which Ofgem might be able to accept. The
broad principle is that this is a system that allows the stability
for industry to know where the goalposts are, for them to be working
within that. Allowing Ofgem more power obviously changes that
balance and creates more uncertainty, which may be the way forward;
but we look forward to seeing Ofgem's proposals in respect of
this in a few weeks' time. We are expecting them to put to us
a paper about what the Governance proposals might otherwise look
like, and we will obviously consider those.
Q393 Sir Robert Smith: For industry
to make the current system would given them the probably best
outcome, if they could show they could work under the current
regime.
Ms Hamid: As the Minister indicated
earlier, these are very detailed technical issues, and looking
from the outside it is not an area where Government wants to be
involving itself on a regular basis, neither should the regulator
have to be intervening on a regular basis on these matters. The
idea would be that there is a system that is flexible enough for
the broad policy objective to be met and followed, but that industry
are able to proceed and take those things forward in a simple,
stable way.
Lord Hunt of Kings Heath: It is
clearly not ideal for Government to have to come in with its own
detailed proposals, which is why it is much more preferable for
this to be resolved by the industry and Ofgem. Perhaps, given
the signals that Government is prepared to intervene, it may well
encourage them, I hope, to try and resolve this.
Q394 Mr Anderson: For ten years Ofgem
has been trying to get this to happen and the industry has basically
said at first it was not even a problem; it did not accept there
was a problem. What will happen if the Government has to intervene
and the industry does not agree with the way ahead?
Lord Hunt of Kings Heath: Of course,
we have taken powers to intervene under the Energy Act. I do not
think that our powers to intervene are in doubt.
Q395 Mr Anderson: No, but what happens
after that, I am asking you, if they say, "We do not agree
with the process you are putting in place"?
Lord Hunt of Kings Heath: In the
end of course, Government will have to do what it has to do. Clearly,
we are always subject to JR, and no doubt we would have to take
our chances on that. Coming back to your original point, you will
know that there is a huge queue at the moment. I think over 60
gigawatts are in the queue, and some dates have been given as
late as 2023. Given the imperative is to make sure that we have
a grid that is fit for purpose that is unacceptable. Clearly,
we have to ensure that we have a much better process. The interim
connect and manage is at least allowing for some very early, quick
connections; so hopefully we are dealing with some of the immediate
problems.
Q396 Colin Challen: I wonder whether
you are painting too black-and-white a picture of what the Government
ought to be doing. You talk about not dictating and not micro-managing,
but the challenge you face is that about 35 per cent of our electricity
should be renewable if we are to meet our 2020 targets. That is
in ten years, and we are still talking about writing scenarios
and so on: would it not be good if the Government showed it was
going to intervene a bit more? I wonder whether these scenarios
show different levels of Government intervention, and what the
pros and cons of those different levels of intervention would
be.
Lord Hunt of Kings Heath: I would
rather not anticipate the work we are doing in relation to both
the Renewable Energy Strategy but also the Summer Strategy. The
scenarios are looking at energy requirement and a possible mix.
I think you are right to pose the question. Am I painting too
black a picture in the sense that it is either being portrayed
as completely hands-off or hugely interventionist. I hope I was
not doing that, and if I have suggested it, let me correct that.
I do think that Government has to intervene and make sure that
the grid is fit for purpose. If you have a real problem of queuing
in a way that is unacceptable, then we have to ensure that changes
are made. Our preference, for the reasons we have already intimated,
is for industry and Ofgem to come to a satisfactory resolution.
As long as we are prepared to intervene, as I have said we would,
I think that is the right signal. We would want to ensure as far
as possible that people could sign up to it without reaching the
situation that Mr Anderson has suggested, in terms of the companies
having outright opposition, and we would want to consult extensively.
I think that Government intervention can be relatively benign,
given that parties are prepared to play ball; but, if not, in
the end we will have to.
Q397 Mr Anderson: They have not so
far, have they? The fact that for ten years it is not an issue,
and now all of a sudden it quite clearly is an issue, does not
give you much confidence! It does not give me much confidence.
Lord Hunt of Kings Heath: I would
want to give you the confidence that I am determined that we will
sort this out. We have to sort it out. As Mr Challen has said,
moving from the amount of renewable energy we have now to the
amount required in 2020 is a huge challenge. It is not only the
grid, but there are many other issues that we have to face up
to.
Q398 Colin Challen: I am just wondering
if we are really going to courageously tackle what I think is
an institutional bias in the industry, which is about reinforcing
what we have got rather than going out into the great blue yonder
of renewables. That is where I think the Government needs to intervene.
That is what I want to hear; how we are going to correct the imbalance
in the industry, which obviously will go with what it is familiar
with. If one looks at the comments of Vincent de Rivaz, the Chief
Executive of EDF, that bias is expressed at the top level in the
board rooms.
Lord Hunt of Kings Heath: There
are two points. Clearly, the grid does need reinforcement; but
to meet the challenge of renewables we have to see considerable
extension. The Government knows that. We will require the system
to ensure that the necessary investment takes place. That is why
we have started with the Transmission Access Review and that is
why we co-chaired the ENSG group, and why we are looking very
closely at the work by Ofgem in terms of the financial incentives
that are required to get the extension to the grid. I am in no
doubt about my responsibility to ensure that the grid meets the
requirements. Of course, we may need to bang heads together and
intervene as we have just discussed. I will not have hesitation
in doing so. Equally, part of our role is to publish a vision
and convince people we are serious about our renewables target,
which we are. I am confident that we can then ensure that we have
the right grid. Perhaps I can bring in my colleague to explain
more about the detail work that has been undertaken on that.
Ms Hamid: Thank you, Minister.
It is important to state that we have already taken a step forward
in terms of the way we intervene on the grid; so notwithstanding
the outstanding question about whether or not we will get involved
in dictating codes and licences, as a result of our renewable
energy target we facilitated the ENSG work precisely because we
could see that in order to get to the network that we need to
deliver 2020 targets we needed to get people round the table and
there needed to be a long-term strategic view in terms of how
we will anticipate the investments we need, getting the regulator
to understand that that means they would need to take a decision
within their current price control to allow for more spending
by the transmission operators and to deliver what we need on time
and for us also—and this was not something that happened
before—to get all the companies into the room and set out
a consensus view about what has to happen. As has been previously
said, these issues that have been talked about in broad terms
for a number of years but without any clear end goal in sight.
With the introduction of our input to the renewable energy target
for 2020 there is obviously momentum and a clear goal, and we
can now bring people around that goal, to say, "This is what
we need to achieve and this is what needs doing, what has to happen
on planning and financial incentives." As the Minister has
described, we have been talking to Ofgem to make that happen.
We are quite clear about the facilitative role, emphasising the
overall direction of travel and the timings involved—because
one of the lessons of history on this is that things take a long
time for decisions and changes to be made within the grid, in
governance structures. We have got targets that are time-limited
and clear, very stretching targets that need to be met, and so
the Government has got people to start working on those. I think
we have made good progress this year, and a lot of participants
in that process, particularly ENSG, have been very clear that
that is now a way of working that we will want to take forward
and continue. We are committed to working through that group and
others to make sure that we continue to tackle these issues. I
am sure we will come on to this later on, but we have also started
to talk to ENSG about the smart grid future as well; so we are
not just talking about new investments but how you use those networks.
These are all issues, using that model, of Government saying,
"this is what has got to happen; this is what the challenge
is", bringing people to the table and getting them to focus
on a broad consensus view about what that means for them in the
way forward, and I think we will continue to use that in the coming
years.
Chairman: We will come on and talk about
smart networks in a while, but we will talk about charging now.
Q399 Mr Weir: One of the old chestnuts
is the transmission charging regime. What do you think of extension
network charges for generators being determined by location?
Lord Hunt of Kings Heath: I realise
that there is considerable debate about what seems to be called
the transmission signal. Clearly, the basic principle is that
cost should reflect charges, to encourage the efficient use of
electricity. Clearly, the more use that is made of the network,
the more the transmission charge should be. I will bring my colleague
in on the theology of this. I know this has been raised particularly
in relation to renewables and the distance that has to be travelled.
The key for me is: does the transmission charge inhibit the development
of power generation from remote areas? That is not my experience
so far. I am not sure that any convincing evidence has been brought
forward. I have met a number of companies in the past few months,
particularly in the renewables sector, and they raise three things.
One is access to finance, which clearly is very difficult at the
moment. The second is access to the grid, which we have already
discussed, and which they have always seen to be a major problem.
The third is planning issues. I cannot say that transmission charges
have been raised with me as an issue.
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