2 Creating a vision for Britain's electricity
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 hugeScottish Power, for example,
has estimated £37 billion for the required network investment
between now and 2020.
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.
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".
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",
while the Institution of Engineering and Technology noted: "There
is no vision document showing a joined-up transmission-distribution-end-user
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.
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".
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.
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 changesit 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".
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.
National Grid also expects up to 14 GW of new gas-fired capacity
to come on-stream in the next few years.
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. 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".
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.
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
Centrica said: "there is a need to recognise the overall
directionis it towards a 2050 'big' transmission, 'small'
distribution network scenario or vice versa [
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".
Another cautioned: "Government and the regulator should not
try to 'pick winners'".
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 [
a challenge when government policies now require the system to
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".
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.
This should allow some time to experiment with different technological
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.
INTEGRATING ENERGY DEMAND
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.
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.
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
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.
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.
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.
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.
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 itgenerators, consumers and those that do bothin
order to efficiently deliver sustainable, economic and secure
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.
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.
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
MINIMISING REGULATORY UNCERTAINTY
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.
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
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".
Similarly, Dr Michael Pollitt said: "it is important that
network investments face a more consistent policy framework going
forward than at present".
Elsewhere, ESB International Investments said: "Investors
such as ourselves require a stable regulatory regime and policy
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.
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
THE INDUSTRIAL STRUCTURE
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 firmNational Gridis the transmission owner for
England and Wales, while two firms have both transmission and
distribution networks. These latter twoScottish Power and
Scottish and Southern Energy (SSE)additionally own generating
assets. National Grid is also the system operator for the whole
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. 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".
Scottish Power and SSE disputed strongly any assertion their position
gave them undue market power that was not compliant with EU law.
Whilst the Minister also supported this position, Ofgem told us
third parties connecting to the Scottish networks felt "uncomfortable"
about the current situation.
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
- The possibility of a new industrial
structure emerging over time.
13 Ev 258, para 7.2 (Scottish Power) Back
Ev 164 (Energy Networks Association) Back
Ev 158, para 3.3 (Electricity North West Ltd) Back
Q 6 (Dr Jim Watson, Sussex Energy Group) Back
Q 279 (Institution of Engineering and Technology) Back
For example, see Ev 129, para 11 (Centrica) Back
Q 150 (British Wind Energy Association) Back
Q 281 (Institution of Engineering and Technology) Back
Q 8 (Dr Michael Pollitt, Judge Business School, University of
Department of Energy and Climate Change, UK Renewable Energy
Strategy, July 2009 Back
House of Commons, Official Report, Col 1336W, 16 December
Ofgem, Electricity Network Scenarios for Great Britain in
2050, November 2008 Back
Ev 211, para 1.4 (Ofgem) Back
For example, Ev 174, para 3.5 (E.ON) Back
Ev 159, para 3.4 (Electricity North West Ltd) Back
Ev 130, para 20 (Centrica) Back
Ev 218 (Dr Michael Pollitt, Judge Business School, University
of Cambridge) Back
Ev 182 (Helius Energy) Back
Ev 270, para 4 (Dr Jim Watson, Sussex Energy Group) Back
Ev 147, para 10 (Department of Energy and Climate Change) Back
Ev 218 (Dr Michael Pollitt, Judge Business School, University
of Cambridge) Back
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
Department of Energy and Climate Change, Energy Trends,
September 2009 Back
Q 47 (Prof Goran Strbac, Imperial College London) Back
Danish Energy Agency, Energy Statistics 2007, October
See for example, Q 285 (Institution of Engineering and Technology) Back
Ev 185, para 3 (Institute of Physics) Back
Q 277 (Institution of Engineering and Technology) Back
EU SmartGrids Technology Platform definition, quoted by Ev 188
(Institution of Engineering and Technology) Back
Ev 164 (Energy Networks Association) Back
Q 47 (Prof Goran Strbac, Imperial College London) Back
Ev 211, para 1.1 (Ofgem) Back
Ev 260, para 12 (Scottish Renewables) Back
Ev 218 (Dr Michael Pollitt, Judge Business School, University
of Cambridge) Back
Ev 179, para 1 (ESB International) Back
Ev 116 (British Wind Energy Association) Back
Qq 111 (National Grid) and 355 (Ofgem) Back
Q 26 (Dr Michael Pollitt, Judge Business School, University of
Qq 110 (Scottish and Southern Energy) and 111 (Scottish Power) Back
Qq 355 (Ofgem) and 422 (Minister for Energy) Back