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

2 Creating a vision for Britain's electricity networks

10.  The transition to a low-carbon economy will require a fundamental change in the philosophy of power generation and supply, and the development and operation of a new, much larger and significantly more complex electrical energy system. The costs of achieving this will be huge—Scottish Power, for example, has estimated £37 billion for the required network investment between now and 2020.[13] The scale of the challenge, combined with the timeframe over which it is to be achieved, has led many within the industry to call on the Government to provide more strategic direction on how it expects the networks to evolve over time. In this Chapter we look at the progress to date in developing a vision for Britain's electricity networks and the potential key principles we believe should underpin such a vision.

Does Britain need a vision?

11.  Several of our witnesses argued the Government needed to provide more leadership on the future development of the electricity networks. The risk that the market might otherwise fail to deliver in time, especially given the longer lead time for new network infrastructure, was a primary concern raised, for example by the Energy Networks Association.[14] Similarly, Electricity North West Ltd said that: "To make a change of this magnitude in the short timescales available requires the identification of a unifying strategic direction for the GB energy industry. To rely on hope and market mechanisms alone is doomed to failure".[15] Dr Jim Watson told us: "there is a need for more coordination and some semblance of a strategy, a plan of where we are going",[16] while the Institution of Engineering and Technology noted: "There is no vision document showing a joined-up transmission-distribution-end-user picture".[17]

12.  In general, the view of many within the industry was that given Government policy is currently shaping the future low-carbon energy mix, for example through the Renewables Obligation and the facilitation of new nuclear build, it is therefore reasonable to expect the Government to provide some high-level guidance to ensure the networks develop in a way that is consistent with its overall vision for the energy sector.[18] As the British Wind Energy Association put it: "Government is the one that is setting the targets; […] it has to be the one that actually actively propels us forward".[19] Any vision for our electricity networks must therefore sit within a wider strategy for our future energy mix. It is important too that it is built on a consensus of stakeholders, rather than determined top-down by the Department.[20] We note Ofgem's recent Project Discovery report, and we have arranged to take further evidence on this work.

13.  The transition to a low-carbon economy will transform the role of our electricity networks over the next 40 years. Whereas today the networks are seen as a means to an end in the transportation of electricity from generators to consumers, in the future they will play an integral and active role, enabling supply and demand to be managed in a much more complex and decentralised energy system. The market alone will not be able to deliver these changes—it requires strategic leadership from Government delivering a vision for the future that engages actively both consumers and the energy sector.

Building a long-term vision

14.  We believe the Government's strategy for the development of the electricity networks should contain four key features. It should: avoid locking Britain into a particular outcome for the future energy mix at an early stage; seek to integrate and manage energy demand within the energy system; minimise regulatory and policy uncertainty for the companies who must invest in new network assets; and be open to the prospect of a new industrial structure evolving over time. The following sections consider each of these in more detail.


15.  The long-term vision for our electricity networks will to a large extent depend on the future generation mix, or as one witness told us: "we should not let the network tail wag the generation dog".[21] The Government believes the market should determine the contribution of different technologies to the energy mix, though in reality it is influenced by public policy through the target for 15% renewable energy by 2020, and the stated desire for nuclear power and carbon capture and storage to play a future role, albeit delivered by the private sector. In the short to medium term there is some certainty as to how the system will evolve. For example, in its UK Renewable Energy Strategy the Government stated that the majority of growth in electricity from renewable sources between now and 2020 will come from wind power, both onshore and offshore, with bioenergy making an important contribution.[22] National Grid also expects up to 14 GW of new gas-fired capacity to come on-stream in the next few years.[23]

16.  Beyond 2020 it is more difficult to predict how our energy system will evolve. A useful example of this is Ofgem's Long-Term Electricity Network Scenarios (LENS) project.[24] This set out five plausible network scenarios for 2050, dependent on the direction of policy over time and the underlying energy mix. One potential outcome is for 'bigger' transmission and distribution networks to cope with the variability of large renewables. Another is a micro-grid based scenario, which would include higher levels of local renewable generation and less strongly interconnected local grids. A key conclusion of the study was that a large degree of uncertainty existed over what the final outcome might be, although all the scenarios posed a potential challenge to the status quo. Ofgem told us: "it is not clear whether we will need much larger networks or much smaller networks in the future".[25]

17.  In the face of such uncertainty, some of our witnesses made calls for the Government to do more to narrow the range of options for the future.[26] Electricity North West Ltd told us: "it is now necessary to move the whole weight of the industry behind a clearly stated, preferred option if we as a nation are serious about achieving targets".[27] Similarly, Centrica said: "there is a need to recognise the overall direction—is it towards a 2050 'big' transmission, 'small' distribution network scenario or vice versa […]".[28] However, other witnesses took a different view. Dr Michael Pollitt told us keeping technological options open has benefits, noting that: "We just don't know at this stage what the best network configuration is for 2020 or 2050, not least because of price, policy and technological uncertainty".[29] Another cautioned: "Government and the regulator should not try to 'pick winners'".[30]

18.  The primary disadvantage with adopting a single approach is that it risks locking the system into an outcome that is sub-optimal in the long run, either because it proves more expensive, or because it does not make the best use of emerging technologies. Moreover, Britain's existing electricity infrastructure is already highly centralised, built as it is around large-scale fossil fuel and nuclear plants. Dr Jim Watson of Sussex Energy Group told us: "The 'lock-in' of this system […] presents a challenge when government policies now require the system to change".[31] In other words, our existing model of 'big' transmission and passive distribution increases the likelihood of the same approach continuing in the future, unless regulation and policy allows for the possibility of other outcomes. As the Department put it: "We […] need to ensure that our policy framework is flexible and supports innovation in network development and operation".[32] Fortunately, in the short term it is possible for the existing networks to accommodate changes in demand and increased renewable generation without radically changing our energy networks.[33] This should allow some time to experiment with different technological options.

19.  Although we know with some confidence how the electricity mix will evolve in the run up to 2020, there is much less certainty over what a completely decarbonised energy system might look like in the long run. The Government's vision for the future of our electricity networks must take account of the range of possible scenarios for the evolution of the energy mix, ensuring it does not lock Britain into a particular outcome at an early stage.


20.  Britain's current electricity system is demand driven. When a consumer increases their electricity use, somewhere generation increases by a commensurate amount to satisfy that demand. This is possible because our electricity mix includes a large amount of capacity that is able to respond to changes in demand. For unexpected demand fluctuations, National Grid can use pumped storage or call on reserve capacity.[34] In addition, gas and coal-fired power stations, which currently provide around 68% of electricity supply, can to varying degrees respond flexibly to changes in demand.[35] Historically, generation capacity has expanded as a result of increases in demand. As Professor Strbac told us: "The whole culture and philosophy of the system is based on a predict-and-provide mentality".[36]

21.  The transition to a low-carbon economy, however, poses a challenge to this traditional modus operandi. In the next few years, the expansion of large-scale wind power will increase dramatically the amount of variable generation entering the system. Whilst the network system operator will be able to estimate the availability of wind power using weather forecasts, this form of generation cannot respond directly to changes in consumer demand. At present, and in the short to medium term, this may not be a significant issue for the networks because the level of wind-based generation will be manageable within the overall system. However, if in the longer term up to 30% of electricity comes from wind, this could pose major challenges for the networks, particularly as such variable capacity will operate alongside baseload nuclear power, which cannot be switched on or off to meet differing network load demands. Without mitigating action it is likely electricity supply will often exceed demand, for example during the night, or fall short, such as when the wind fails to blow.

22.  If Britain were to maintain the existing approach whereby supply is entirely responsive to demand, then the solution to the inflexibility of wind and nuclear power would be to build more back-up capacity for when the wind fails, and curtail wind farms when their output exceeds demand. This option would, however, be very expensive. Furthermore, to achieve the Government's 2050 target for carbon emissions it is likely that it would also require the electrification of both the heat and transport sectors combined with a large increase in renewable generation, much of which would be variable wind. Accommodating these changes within the electricity system under the current approach would necessitate massive reinforcement of the transmission and distribution networks, and lead to very low levels of generation and network asset utilisation, and hence low utilisation of capital investment. Electric vehicles provide one example of why this would happen. If in the future they charged from the time they were plugged in, they would add significantly to the peak in electricity demand that occurs in the early evening each day when people come home from work. The approach Britain has at present would mean greater generating and network capacity would be necessary to meet this demand peak, though these assets would remain idle at most other times.

23.  Denmark, which relies on wind power for about a fifth of its electricity needs, has already begun to experience problems managing generation across its system.[37] However, its small size, combined with its interconnection with mainland Europe and the Nordic countries, enables it to export excess supply to neighbouring countries. Britain does not benefit, at present, from the same level of interconnection. Moreover, we cannot assume that closer linkage to European markets would bring the same benefits as it has for Denmark, given Britain's expected expansion in wind power will take place against a backdrop of similar drives to increase renewable energy across the Continent to meet the European Commission's 20% target by 2020. We consider interconnection in greater depth in Chapter 3.

24.  The solution to the problem of inflexible supply lies in making demand flexible instead.[38] More intelligent demand-side management could take a variety of forms. For example, heating, refrigeration and air-conditioning systems could provide a form of energy storage to accommodate short-term variations in electricity supplies.[39] The mass deployment of electric vehicles could also offer such storage, charging up when there is enough system capacity and, if necessary, exporting electricity back into the system during periods of constrained supply.[40] The inherent storage potential from the electrification of the transport and heating sectors, therefore, presents the opportunity to decouple energy production and use.

25.  Elsewhere, smart metering could allow customers to respond more dynamically to market prices, changing their demand profile through arrangements such as dynamic demand technologies so that they consume more energy when the system is less constrained. A blunter form of this already exists with Economy 7 (an electricity tariff which charges less for overnight usage), but it has the potential to be linked more closely to real-time fluctuations in the energy system. Integrating demand into the overall management of the energy system is a core part of the concept of what has become known as the 'smart grid'—"an electricity network that can intelligently integrate the actions of all users connected to it—generators, consumers and those that do both—in order to efficiently deliver sustainable, economic and secure electricity supplies".[41]

26.  Creating a smart grid will require distribution networks to transform their current approach, moving away from their traditional passive role towards more active management of the potentially highly complex flows of energy entering their systems at all voltage levels.[42] This will only be achieved through the deployment of advanced information and communication technologies (ICTs), combined with a radical rethink of how the system is controlled, and the role of the electricity supply company in delivering energy services to customers. We discuss this more in Chapter 4. The potential benefits are huge. Revolutionising the relationship between consumers and electricity producers could foster greater public awareness of the relationship between energy use and the need for new energy infrastructure. Furthermore, the Centre for Sustainable Energy and Distributed Generation estimates the smart grid approach could halve the level of investment in generating capacity needed to meet future demand, compared to a scenario that assumes a continuation of the existing philosophy.[43]

27.  Whatever the scenarios for the future development of the electricity mix, it is likely that they will include a much higher proportion of generating capacity that is not able to respond easily to demand. The only cost-effective response is for demand itself to be more flexible and play a more active role in the management of our energy system. This should sit at the core of the Government's vision for Britain's electricity networks.


28.  The UK was one of the first countries to liberalise its energy markets 20 years ago. At that time the regulator's main objective for the electricity networks was to improve operational efficiency. It achieved this through an RPI-X regime that linked companies' allowed revenues to the rate of inflation (RPI), minus some factor 'X' calculated to incentivise them to cut costs in order to make a profit. Now Ofgem's primary focus is the efficient delivery of a low-carbon economy and continued security of supply both for present and future consumers.[44] This change in the objectives for the regulatory framework, therefore, requires a fundamental rethink of the regime itself. Accordingly, 20 years after privatisation the regulator is currently conducting a review of network regulation known as RPI-X@20. Due for completion later in 2010, the initiative should see a significantly different regulatory regime designed to meet the new challenges the networks face.

29.  One of the key messages from our evidence was the need for the future regulatory framework to provide long-term certainty to market participants. Scottish Renewables told us: "a strong and long-term signal to the investors is absolutely crucial if a fit for purpose electricity network is to deliver a decarbonised and reliable electricity supply".[45] Similarly, Dr Michael Pollitt said: "it is important that network investments face a more consistent policy framework going forward than at present".[46] Elsewhere, ESB International Investments said: "Investors such as ourselves require a stable regulatory regime and policy framework".[47] The British Wind Energy Association also gave the example of how stability would be important for ensuring the increased cable manufacturing capacity necessary to ensure the future connection of offshore wind.[48]

30.  The regulatory framework will need to adapt to meet the new challenges of facilitating the transition to a low-carbon economy, whilst ensuring security of supply. As such, we welcome Ofgem's current RPI-X@20 review. At the same time as ensuring flexibility in the potential outcome for how the networks might evolve, it is important that reforms arising from the review and the Government's vision for the electricity networks take account of the need for long-term regulatory and policy stability to give firms the confidence to make the investments required.


31.  The current industrial structure of the networks sector reflects the evolution of the GB market since privatisation. At present, five companies operate as distribution network owners, one firm—National Grid—is the transmission owner for England and Wales, while two firms have both transmission and distribution networks. These latter two—Scottish Power and Scottish and Southern Energy (SSE)—additionally own generating assets. National Grid is also the system operator for the whole GB system.

32.  There are various ways in which the industry's composition could change in the future either as a consequence of regulation, or through the market response to developments in the networks sector outlined already. For example, the vertical integration of the Scottish companies was questioned by some of our witnesses, including the regulator, who thought it could constrain competition.[49] Dr Michael Pollitt told us: "the evidence, though fairly anecdotal, is quite strong that countries that have independent transmission companies do better and have more successful electricity systems".[50] Scottish Power and SSE disputed strongly any assertion their position gave them undue market power that was not compliant with EU law.[51] Whilst the Minister also supported this position, Ofgem told us third parties connecting to the Scottish networks felt "uncomfortable" about the current situation.[52]

33.  Elsewhere, international experience points to different ways of managing transmission. For example, it is not clear whether there should be an onshore monopoly of new build for transmission assets, such as that held by National Grid in England and Wales, and regionally by the two Scottish companies. In Chile, Argentina and some US jurisdictions, the system operator role is separate to network ownership and run on a not-for-profit basis, thus allowing different firms to take responsibility for owning and maintaining the networks. The Government is already pursuing this approach for offshore transmission, which we discuss further in Chapter 3.

34.  Finally, in the future there may be a more general debate over the separation of distribution and transmission. The development of a smart grid could lead to distribution network owners also becoming system operators for their areas, actively managing the flow of electricity between the distribution and transmission networks. In this situation the old distinction between the two types of network would become blurred. This could bring into question the need for separate asset ownership between the two sectors as is currently the case in England and Wales. The existing 14 distribution networks are a remnant of the pre-privatisation organisation of the electricity sector. It is conceivable that these could fragment or merge in the future depending on how the smart grid develops.

35.  Britain's networks sector currently has a hybrid structure that is largely the result of the evolving regulatory framework since privatisation. Whilst it may be adequate for now, the transition to a low-carbon energy system may require a different organisation of the industry. The Government and the regulator should not be afraid to allow this to happen, whether through regulation or otherwise, so long as it provides transparent and fair access to natural monopoly network assets for both generators and consumers. In particular, we recommend Ofgem monitors closely the market behaviour of the two vertically integrated Scottish firms. These arrangements could be changed if they are found to be detrimental to consumers.

Progress so far

36.  During 2009 the Government made progress in developing a vision for Britain's electricity networks. In March the cross-sector Electricity Networks Strategy Group (ENSG) published Our Electricity Transmission Network: A Vision for 2020. This set out the strategic investment the transmission system could require over the next decade if the system is to have enough capacity to connect the large expansion of renewable energy, particularly wind power, needed to meet the Government's 2020 target. We discuss the case for such transmission investment in the next chapter.

37.  In December 2009 the Department published Smarter Grids: The Opportunity. This set out a high-level vision of what a UK smart grid might look like. It highlights three main challenges to overcome for the successful deployment of the smart grid. First is the importance of engaging consumers who will play a key role within the future energy system, potentially as micro-generators, but also through the management of their energy demand, whether passively or proactively. Second is the testing and application of new technologies, particularly ICT, that are crucial components of the smart grid. Underlying both these challenges is a third, which is to ensure the regulatory and commercial framework evolves in parallel to facilitate the changes required. The report states: "The overall aim will be that smarter grid investments are increasingly seen as 'business as usual'". The Department has now asked the Electricity Networks Strategy Group to develop a road map for the delivery of the smart grid. DECC will combine this with its own analysis and will publish later in 2010 its views on the actions required to deliver the smart grid in Britain.

38.  We note the progress the Department has made in beginning to develop a strategic vision for how Britain's electricity networks will evolve over time. In preparing a road map for delivery of the smart grid, it should take account of the following principles:

  • The need to avoid locking the UK into a particular outcome for the future energy mix at an early stage;
  • Integration and management of energy demand within the energy system;
  • Minimisation of regulatory and policy uncertainty for network companies who must invest in network assets; and
  • The possibility of a new industrial structure emerging over time.

13   Ev 258, para 7.2 (Scottish Power) Back

14   Ev 164 (Energy Networks Association) Back

15   Ev 158, para 3.3 (Electricity North West Ltd) Back

16   Q 6 (Dr Jim Watson, Sussex Energy Group) Back

17   Q 279 (Institution of Engineering and Technology) Back

18   For example, see Ev 129, para 11 (Centrica) Back

19   Q 150 (British Wind Energy Association) Back

20   Q 281 (Institution of Engineering and Technology) Back

21   Q 8 (Dr Michael Pollitt, Judge Business School, University of Cambridge) Back

22   Department of Energy and Climate Change, UK Renewable Energy Strategy, July 2009 Back

23   House of Commons, Official Report, Col 1336W, 16 December 2009 Back

24   Ofgem, Electricity Network Scenarios for Great Britain in 2050, November 2008 Back

25   Ev 211, para 1.4 (Ofgem) Back

26   For example, Ev 174, para 3.5 (E.ON) Back

27   Ev 159, para 3.4 (Electricity North West Ltd) Back

28   Ev 130, para 20 (Centrica) Back

29   Ev 218 (Dr Michael Pollitt, Judge Business School, University of Cambridge) Back

30   Ev 182 (Helius Energy) Back

31   Ev 270, para 4 (Dr Jim Watson, Sussex Energy Group) Back

32   Ev 147, para 10 (Department of Energy and Climate Change) Back

33   Ev 218 (Dr Michael Pollitt, Judge Business School, University of Cambridge) Back

34   Pumped storage is a form of hydroelectric power generation where low-cost off peak electricity is used to pump water to a higher elevation, which is then used to drive turbines during peak periods when prices are higher. Back

35   Department of Energy and Climate Change, Energy Trends, September 2009 Back

36   Q 47 (Prof Goran Strbac, Imperial College London) Back

37   Danish Energy Agency, Energy Statistics 2007, October 2008 Back

38   See for example, Q 285 (Institution of Engineering and Technology) Back

39   Ev 185, para 3 (Institute of Physics) Back

40   Q 277 (Institution of Engineering and Technology) Back

41   EU SmartGrids Technology Platform definition, quoted by Ev 188 (Institution of Engineering and Technology) Back

42   Ev 164 (Energy Networks Association) Back

43   Q 47 (Prof Goran Strbac, Imperial College London) Back

44   Ev 211, para 1.1 (Ofgem) Back

45   Ev 260, para 12 (Scottish Renewables) Back

46   Ev 218 (Dr Michael Pollitt, Judge Business School, University of Cambridge) Back

47   Ev 179, para 1 (ESB International) Back

48   Ev 116 (British Wind Energy Association) Back

49   Qq 111 (National Grid) and 355 (Ofgem) Back

50   Q 26 (Dr Michael Pollitt, Judge Business School, University of Cambridge) Back

51   Qq 110 (Scottish and Southern Energy) and 111 (Scottish Power) Back

52   Qq 355 (Ofgem) and 422 (Minister for Energy) Back

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