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
makingthat 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 supergridDC cabling,
interconnection between large offshore fields, delivery to shore
on a collective basismight 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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