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


Examination of Witnesses (Question Numbers 420-435)

LORD HUNT OF KINGS HEATH, MS LORRAINE HAMID AND MR JOHN OVERTON

17 JUNE 2009

  Q420  Judy Mallaber: Do you have any mechanisms other than trying to persuade them? Secondly, should not the Government itself be investing much greater sums in smart grid technologies?

  Lord Hunt of Kings Heath: I am not sure that it is for government to do that. I do not see why industry as a whole should not be investing. After all, this is going to give them huge opportunities in the future. Clearly we need to look at incentives and my understanding is that Ofgem in the RPI-X@20, if I can call it that, that is one of the issues that they are looking at alongside how to encourage major investment in the grid. Government as a whole is setting the conditions. The development of DG, smart meters, smart grid, these are huge challenges and there is a huge amount of investment that will be required. We want a competitive industry in which those who innovate do best out of it. That is what our role should be.

  Q421  Judy Mallaber: So there is no role for government in trying to complement what the companies are doing and what action are you actually going to take when you meet the companies to tell them to get on with it?

  Lord Hunt of Kings Heath: I am quite happy to tell them to get on with it and to encourage them down the innovation route. I still believe that our main role is to set the right policy, to get the consultations going, for people to understand how we are going to introduce smart meters, how we are going to develop the smart grid, to ensure that Ofgem in their RPI-X@20 review get the financial incentives right. I believe that is the best approach.

  Q422  Sir Robert Smith: We had evidence on network ownership and the structure and history has given us three different owners of the transmission network. Does the Government have any plans to look at unbundling?

  Lord Hunt of Kings Heath: There are two issues there, are there not? One is the question of unbundling in relation perhaps to the European Directive. The other is the arrangement we have now. I am not aware of there being substantive evidence which suggests that the current arrangement for the grid does not work. As you know, the National Grid has an overarching responsibility for ensuring the integrity of the whole grid. I think it could be argued there is some advantage in having more than one company involved. I see no reason why that should be changed. On the issue of unbundling, which affects the two Scottish companies in relation to the European Directive, my understanding is that we have a derogation that if they can show that their arrangements are better than the options that are in the Directive then they can argue their case with Europe, so we were able to get that derogation.

  Q423  Sir Robert Smith: Do you think in the long run the distribution networks and transmission networks will merge? Will there be such an obvious boundary between transmission and distribution?

  Lord Hunt of Kings Heath: Perhaps I could ask my colleague to comment on that.

  Ms Hamid: This comes back to what we were talking about earlier about this smart grid. First of all, once we are a little bit clearer about what it actually needs to do, the question then is whether the regulatory framework, which does split the responsibilities between the transmission companies and the distribution companies, is fit for purpose. Clearly it is an open question whether that type of arrangement in terms of that sort of split and/or the way the incentives are put together in terms of what the National Grid has to do and consider and what the distribution networks have to do and consider would probably need some review, but I think that is all that needs to be done in respect of some better clarity on what we think we need to do to get the smart grid capability that helps deliver our energy security and climate change goals.

  Lord Hunt of Kings Heath: I think there is a balance to be drawn. We have shown with the offshore licensing regime that we are prepared to be innovative and to bring in new arrangements. It will be interesting to see how that works through and having learned lessons from that whether we should look at that in the context of other parts of the grid. At the same time we need stability too because companies need a degree of certainty in terms of the big investment decisions that need to be taken. I think it is important that we try and give as much certainty as possible but that we do retain flexibility so that if we have to change the arrangements around the whole regulatory system and the way companies operate then we have to be prepared to do so. We have to have a certain degree of caution about not causing uncertainty and then stopping the right investment decisions being made.

  Chairman: We just talked about the European aspect of this and interconnectivity and the notion of a supergrid which has been talked about quite a lot. Colin?

  Q424  Colin Challen: There is quite a lot happening on this front. I think the European Commission is taking a very serious interest. We saw this week an announcement by several very large German companies to form a consortium and there is a great deal of talk on President Sarkozy's initiative on the Mediterranean Union. How involved are we in this proposal?

  Lord Hunt of Kings Heath: We are very interested and we will obviously want to get involved. If I could start with the North Sea supergrid on which the EU has made proposals. We are a member of the working group. I am due to meet the leading EU official on this in the next week or so to discuss it. The answer to this at the moment is the same as in relation to other parts of the supergrid. As you were saying, there are a lot of ideas floating around at the moment. We have to be convinced that in the end it is cost-effective. It sounds great but we have to ensure that it is cost-effective to do so. In my discussion with the EU that is the point that I will be making—that we want to engage with them, we will be active on the working party, but we have got to get down to some serious discussion about what is actually going to be cost-effective because clearly if you look in the future there is an enormous amount of money that is going to be spent in the energy field and we have to make sure that it offers us real advantages.

  Q425  Colin Challen: Cost-effective as compared to what? In climate change terms it is sometimes difficult to price things probably, the carbon price and so on, so do you have any comparators in mind? What might offer better cost-effectiveness?

  Lord Hunt of Kings Heath: What are the choices for the UK? We are concerned about diversity of supply. We have signalled that we are encouraging developments in nuclear, coal, CCS and renewables. You will know that in terms of interconnectors there are proposals and actual expansion of the interconnector facility taking place and also in terms of storage facilities and LNG facilities. So our overall aim is to ensure that we have security of supply and that there is diversity of supply. We welcome liberalisation of the European market in which to encourage that and we have been strongly in favour of the third package of reforms. We clearly see costs that are going to have to be paid one way or another by expansion of the grid, the renewable obligation costs, all of these things, and I suppose it is against those kind of costs that we then have to look at the cost of a supergrid. I am not in a position to give you a definitive view. What I am saying is that we are not closing the door at all to the idea of a supergrid. We are prepared to engage. On the North Sea we are very seriously involved in the working group but in the end we have to be convinced that this is right for the UK to do.

  Q426  Colin Challen: It looks like, whatever happens, we will have more interconnectivity with the European markets?

  Lord Hunt of Kings Heath: Yes.

  Q427  Colin Challen: Can that happen if they do not liberalise a great deal more? What are the problems that would be associated with greater interconnectivity and the impact as to what extent markets are liberalised?

  Lord Hunt of Kings Heath: We obviously supported the third package because we believe that European policy needs to liberalise. It is one way that we will get over some of the problems that Europe has had to face in the last few years. The third package in itself is an important signal towards liberalisation. I think the EU has got an aspirational figure that countries should have ten per cent interconnector facilities. We are much smaller than that. It is growing but of course there are reasons for that, being an island, and probably we will always want to be focused on a lot more self-sufficiency for obvious reasons, but I think that in terms of the increasing interconnector facilities that offers two-way advantages to us. The key thing in Europe is for us to continue to urge greater liberalisation, to encourage Europe towards greater diversity of supply. You will know of the proposals for building pipelines to southern Europe of which again we have been very supportive.

  Q428  Colin Challen: If it was found that the proposal for a supergrid was cost-effective and there were no technical problem, do you think that nevertheless there would be insurmountable political problems? People talk about connecting up with solar from North Africa. Do you think that is an insurmountable problem with some of the regimes perhaps a little less stable than we would like?

  Lord Hunt of Kings Heath: I think it is a very good question. Clearly I have seen the reports about the potential of solar coming from Sub-Saharan Africa. As we know, cross-country pipelines in countries where political stability is not always there does present a risk but nonetheless I do not think we should allow that to completely rule out consideration of a supergrid, and we are not doing that. I think it is too early for us as the UK to come to any definitive rule. I think our role at the moment is to explore and have discussions. Of course in the North Sea supergrid in which we are very directly involved we will get down to very detailed discussions with our European colleagues. Of course the North Sea is a very interesting place in terms of energy. Not only do we have at least the discussion of a supergrid, we also should not forget that North Sea oil and gas will continue to play a major role for many years ahead, and I am very interested in CCS and the storage of carbon in the North Sea too, which again has prospects. Whatever decision about the supergrid North Sea collaboration between ourselves and the countries that border the North Sea will be very important in the future.

  Q429  Dr Whitehead: Could I return to the question of cost-effectiveness particularly in the North Sea supergrid for a moment. A number of the proposals appear to suggest that investment in such a supergrid—DC cabling, interconnection between large offshore fields, delivery to shore on a collective basis—might well be done by the private sector and that therefore the issue is rather more how the ground can be cleared and how the facilitation can take place between EU Member States rather than whether it might be cost-effective or not. Do those considerations change your view of what is defined as cost-effective or are you concerned that eventually it will be down to Member States themselves to fund such a supergrid rather than the industry which clearly could benefit from it? Might it be the case therefore that we would end up being carved out of the supergrid if we do not help to facilitate its development at an early stage?

  Ms Hamid: Just to develop on what the Minister said, we are in active discussions with Member States who for example are interested in looking at interconnections for offshore wind generation plant over trans-boundary water, so we are speaking to the Dutch for example about a particular project. We are not standing back and just waiting for somebody to produce a report at some point in the future. We are discussing specific projects with countries who have got an interest in developing the network to procure that generation, thinking about what the regulatory/technical issues are around that. However, at the same time, in terms of a broader strategic view about whether we as the UK want to invest a lot of money (because the private sector will build it but it will be charged back to consumers at the end of the day) what we need to do more work on is how the cost of, say, procuring more renewable energy through the North Sea Supergrid compares to other ways of managing our security of supply, for example, developing more storage facilities and capability or investing in more sophisticated energy efficiency measures. The cost/benefit analysis of that needs to be done in a broader sense. Notwithstanding that, we are still working on specific projects. As the Minister said, we are a member of the working group on the North Sea supergrid and we are only one of two Member States who are actually in those discussions working with Mr Adamowitsch, so we are active; we are engaged. We are looking at the practical issues involved in this and at the same time we clearly need to do some more thinking about whether there is more that we need to be doing to develop these facilities to meet our longer term goals.

  Lord Hunt of Kings Heath: The term supergrid is very alluring obviously, but I think we just need to have our eyes open as to what we are getting into and what the potential might be.

  Chairman: Finally I would like to turn to the workforce. To make all this happen you have got to have a skilled workforce. Judy?

  Q430  Judy Mallaber: The DECC memorandum to the Committee referred to the problem of the skills gap in the network sector and specifically also to the ageing of the workforce. Do you think current action by the industry and Ofgem is sufficient to address this?

  Lord Hunt of Kings Heath: I think you are right to raise this because I think the work has shown that we have got a retirement peak coming up to 2023 and clearly we need to bear that in mind. My understanding is that it is estimated that 4,500 new recruits need to be trained and another 4,500 members of staff need to have their skills raised. It is important that we do so. The Sector Skills Council is very much engaged on this task and I understand the companies too are looking at introducing bursary schemes themselves and of course the apprenticeship schemes too can play a part. My understanding is that the industry is aware of the issue. They understand it and they know they have got to deal with it. The Sector Skills people also are very actively involved and at this stage I am confident that they are gripping the issue. I think there is a more general issue here because you could have asked me the same question about other parts of the energy sector. I was in Aberdeen yesterday in terms of North Sea oil and gas and, interestingly enough, four years ago when I went as Health and Safety Minister they were very concerned about the ageing workforce, but I was getting a much more optimistic picture about people prepared to come into the industry. Then you think about nuclear and then you think about coal and CCS. It is a fantastic sector. Over the next ten years with this huge expansion for young people and people with skills that can be translated into this sector, the opportunities are huge. We in government have a role to make sure that the Sector Skills Councils and the industries themselves are doing what they need to do. The industry itself needs to start promoting itself more. The whole of the energy sector needs to get across much more, particularly to young people, that there are these huge opportunities. Also the challenge of course for government is in schools too and the work of DCFS on their programme to encourage young people to continue with their maths, science and engineering. It is absolutely critical for our country's future that we do this. Can I say obviously these are very early days for me but it is a matter on which I feel very passionately. I will be very concerned to ensure that we are going to make sure that we have enough people with the right skills. I also want to ensure that that applies to the supply chain as much as it does to the network companies.

  Q431  Judy Mallaber: Can we take it from that that you are going to be in early discussions with the DCSF and the Department for Business, Information and Skills, particularly about attracting young people not just into science and technology but also specifically into the power industry. Would that be a role for you as Minister?

  Lord Hunt of Kings Heath: I very much see that as one of my roles. We need the industry to do a lot themselves. I think they need to be up there and much more proactive. They have got a great offer for young people. Interestingly enough, we might have wondered whether a young person should go into North Sea oil and gas, and the point made to me by the industry is yes because we can offer many years ahead. As you know, 39 billion barrels have been extracted and at the moment they reckon there are another 20 or 25 billion barrels but as one chief executive told me, "The projections at the moment are for another 20 years but we have been having these 20-year projections for a long time. I reckon I can say to young people we are going to be in business until 2050." I certainly accept that challenge and it certainly is one of my priorities.

  Q432  Sir Robert Smith: Can I thank you for your early visit to Aberdeen.

  Lord Hunt of Kings Heath: And thank you for your welcome to my appointment.

  Q433  Judy Mallaber: Now we have got that out of the way, has the Department actually identified any specific strategic areas where we need investment in skills? Is there any way where that can be channelled other than us just having a grand statement that this is what we want? We have high unemployment at the moment, we have more people out of work, we want retraining, and we want opportunities for people to come in. Is there a way of channelling specifically into those areas where the skills investment is really needed?

  Lord Hunt of Kings Heath: Perhaps I could bring in my colleague. I think it is a very good question because clearly this is the time to be very proactive in ensuring that people who are employed now or facing issues know that here is a new sector emerging and clearly it does call for a certain amount of leadership.

  Ms Hamid: I think in terms of what are the strategic areas, as the Minister said, this is an issue that faces the whole of the power sector, but the key issues are, as we submitted earlier, we need to ensure that there is an attractive recruitment offer and that there are first of all enough people studying physics, chemistry and electrical engineering at university so that we have got a pool of graduates from which to recruit to get into networks. A lot of the maintenance work and jobs in the network sector are highly skilled so there is clearly a need for a lot more of a focus on training these people up and keeping them within the sector. As you have mentioned, there is obviously an opportunity at the moment given the downturn to try and bring in people who have got transferable skills of which there are many that could be applied in this industry. The recruitment side of the issue is something that the Minister said is really for the companies to be thinking about, but we in government through our education policies, through the work that we do with DCFS and, arguably now with DWP, on looking at where our new job opportunities are going to be is something that we can be focusing on.

  Lord Hunt of Kings Heath: I wonder if it would be helpful if I wrote to you with some more details about our work across government on this.

  Q434  Judy Mallaber: Just by way of example, post 9/11 Rolls-Royce, a major large company for me, obviously had cutbacks in the workforce and our Aberdeen MPs were suggesting that their skills would be transferable into the oil industry, but it was not clear that there were obvious mechanisms, so it would be helpful if you can give me any indication of how that might develop in the future where we have that sort of situation. Just one final thing, what is the role of the National Skills Academy for Power? If you could maybe explain that as well that would be helpful.

  Ms Hamid: It is an employer-led organisation so they are there to get consensus for an industry-wide programme that deals with these issues that we have been talking about so, they work on developing training programmes which are shared between the companies, identifying the skills and the training that needs to be done, both within companies as well as on the recruitment of people into the sector. They will be launching this October and at the moment the plan is for them to build on the existing training centres and facilities that are already available in the various companies in the sector and to give it a more co-ordinated focus, so building on the facilities that are there, getting a clear focus. They have targets for example for how many people they need to recruit and upskill within the next ten years. I think that the key issue is that this is actually business critical for the industry. If they are not successful in getting the people they need and the skills they need there are real questions about whether they can survive. I think we can see that they are working at establishing a National Skills Academy for Power to try and make the most use of all their resources to actually tackle this problem together.

  Lord Hunt of Kings Heath: Plus we have got to recognise that we have got some highly skilled people in the energy industry. I think it is noticeable how exportable those people are and I think we need to really build on that.

  Q435  Chairman: It was very remiss of me at the beginning of the meeting not to welcome John Overton and Lorraine Hamid to the meeting but thank you both for coming and supporting us all. I feel that it has been a very useful session. I am sorry we have dropped on you in the first week into a changed role. You have promised us one or two bits of paper, in particular national policy statements and an early indication on the timetable on that would help our work as well if you are able to help us. Can I thank you very much for coming and thank Lorraine and John as well.

  Lord Hunt of Kings Heath: Thank you very much indeed.


 
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