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

Conclusions and recommendations

1.  Does Britain need a vision?

2.  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. (Paragraph 13)

3.  Building a long-term vision

4.  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. (Paragraph 19)

5.  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. (Paragraph 27)

6.  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. (Paragraph 30)

7.  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. (Paragraph 35)

8.  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. (Paragraph 38)

9.  Transmission: the role of planning

10.  Reform of the planning process is vital if network improvements are to be delivered on time to connect new generating capacity in the future. We note the recent changes to the planning systems in England and Wales, and Scotland, and are pleased to be playing a role in scrutinising the draft National Policy Statement for Electricity Networks Infrastructure. We hope the new system will lead to a faster decision-making process, but one that nonetheless will take account of the environmental concerns associated with new proposals. For this, developers have a duty to ensure their initial applications take adequate account of alternative options. The Government should also look closely at the consenting process for applications in England and Wales that will not fall to the Infrastructure Planning Commission to see whether reform or improved guidance is necessary at this level as well. (Paragraph 48)

11.  Transmission: strategic investment

12.  To avoid delays in connecting new power stations a more strategic approach to investment in transmission capacity is necessary. We welcome the Electricity Networks Strategy Group's work to identify the reinforcements it believes are needed in the next ten years. We also note Ofgem's cautious approach in allowing funding to advance particular projects and we urge them to be more proactive in promoting ways of avoiding delays. (Paragraph 58)

13.  Given the costs involved, the resulting impact on customers' bills, and the risks of delay, it is vital the case for investment is as robust as possible and preferable to any alternatives. There is some concern that the existing regulatory framework is driving the case for transmission investment presented by the industry at the expense of other more cost-effective options that seek better to utilise the existing network infrastructure. The current fundamental review of the Security and Quality of Supply Standards (SQSS) presents a major opportunity to address these issues. However, the review, which had aimed to publish detailed proposals in September 2009, has not yet reported. Therefore, we are concerned that some of the currently proposed strategic network investment that is based on the existing SQSS may prove unnecessary. Furthermore, reform of the SQSS will be vital for the development of a future smart grid. It would be totally unacceptable if Ofgem failed to fulfil its duties to consumers by not ensuring the timely completion of this review, especially as the regulator has already begun to grant funding for additional investment. We consider it essential that consideration of new investment in transmission has the benefit of the outcome of the SQSS review and strongly recommend that urgent measures are taken to complete and publish the review. (Paragraph 59)

14.  Transmission: constraint costs

15.  Constraints occur on the transmission network when the system is unable to transmit the power supplied at a particular location to where demand for it is situated. National Grid's management of these constraints gives rise to costs, which are met by generators and consumers. The level of constraint costs are an important signal of investment needs. It is, therefore, vital that this signal is accurate. We are concerned that the nature of the British Electricity Trading and Transmission Arrangements (BETTA) appear to artificially inflate the level of constraint costs. We note the general review of the BETTA market announced by the Government in the Pre-Budget Report in December 2009. However, we recommend Ofgem conducts a specific review of the BETTA market with a view to addressing this issue. We also support the Government's intention to enhance Ofgem's powers to regulate against companies artificially inflating constraint costs. (Paragraph 69)

16.  Whilst we agree in principle with the current proposals to implement locational pricing for the Balancing Services Use of System charges as a means of reducing constraint costs in the short run, we question whether Ofgem should continue to pursue the modification brought forward by National Grid, given it could be replaced by another set of charging arrangements in the short to medium term when DECC implements a new regime for determining transmission access. (Paragraph 70)

17.  Transmission Network Use of System charges

18.  We are concerned that the current system appears to charge wind generators disproportionately more than conventional generators for grid usage. We believe that it is imperative that transmission charges should not discriminate against renewable energy wherever it is located in Britain. Whilst we received conflicting evidence on this matter and acknowledge that other factors such as the planning system, grid access and financing play an important role in determining the investment case for new renewable generation, we believe it is vital that this issue be fully investigated as soon as possible. We note Ofgem's long-term commitment to the model of locational charging, but given the evidence we have received we recommend the Department establishes an independent review to develop an appropriate transmission charging methodology. (Paragraph 80)

19.  Transmission access

20.  The old arrangements for gaining access to the transmission network gave rise to a queue of at least 60 GW of projects at various stages of development, a large proportion of which are renewables, some of which have potential connection dates as late as 2023. A new regime is vital if the Government is to meet its targets for renewable energy and emissions reductions. We welcome the 'interim connect and manage' arrangements, which should facilitate the earlier connection of 900 MW of renewable capacity in Scotland. We are, however, concerned by the lack of progress in developing a long-term access regime. It is extremely disappointing the industry has not been able to agree reforms and the Government has had to intervene. As far as possible, it is important an enduring regime is based on consensus between all parties—the Government, the regulator and the industry. (Paragraph 99)

21.  We believe that to facilitate cost-effectively the formation of a smart grid and the delivery of the Government's strategic objectives, a long-term regime must contain four key features:

·  Greater sharing of network access, particularly between renewable and conventional generators. This will reduce the need for investment in grid capacity, and the likelihood of large constraint costs, although it may need to be supported by additional market arrangements that guarantee spare generating capacity on the system;

·  Prioritisation of renewables in electricity dispatch to maximise their contribution to decarbonising the energy system;

·  An equal role for the demand-side in managing network access; and

·  Arrangements that provide a degree of stability and regulatory certainty for generators to have the confidence to make investments.

We urge the Department to move quickly to ensure an enduring regime is in place as early as possible in 2010. (Paragraph 100)

22.  The industry rule-making process

23.  We welcome Ofgem's decision to review the industry's rule-making process. The existing system, under which only network owners can propose changes to the grid codes and charging methodologies, has for far too long forestalled reform in areas such as transmission access. The regulator's proposal that it take powers to implement code amendments arising from major policy reviews, whilst conceding power in areas of less significance to consumers or competition, is a sensible approach. So too is the proposal to make governance of the charging methodologies more inclusive. Changes in both these areas will facilitate the delivery of the Government's climate change and security of supply objectives. (Paragraph 103)

24.  Offshore transmission

25.  There are many challenges associated with the expansion of the electricity network offshore. It is important the regulatory framework reflects these difficulties and treats generators connecting offshore equitably vis-à-vis their onshore counterparts. The offshore wind industry presents a significant commercial opportunity for British industry, which requires a regulatory regime that will stimulate domestic investment in cabling and associated equipment manufacture. (Paragraph 111)

26.  Connecting the first three rounds of licences for offshore wind farms will require a capital investment of £15 billion—twice the value of the existing onshore transmission network. We therefore support the auctioning approach for the delivery of future offshore transmission links to ensure costs are minimised for the consumer. In the short to medium term this will lead to the direct 'point-to-point' connection of Round 1 and 2 wind farms as the most cost-effective and technically feasible way forward, which also militates against the possibility of delays. However, risks remain, particularly if companies underestimate the cost of the work for which they have tendered. This means the Department and Ofgem must keep its approach under review. Moreover, it is not yet clear how the present framework will deliver the most efficient network solution to connect the 33 GW of offshore wind that is possible under Round 3. There remains a risk that the current approach could lead to the piecemeal development of the offshore network that is less cost-effective in the long run. We note that the Department merely believes that zone-based approaches to connecting wind farms onshore will develop. We do not consider this is a sufficiently robust approach, and recommend the regulator conducts more analysis to develop a route-map of how it expects the competitive tendering regime to evolve to meet this long-term challenge. (Paragraph 120)

27.  Interconnection and the super-grid

28.  As the level of wind generation in the electricity mix increases over the next decade, its intermittency and unpredictability will make it increasingly difficult for the system operator to balance supply and demand. A potential solution may be greater interconnection with European networks. However, the lack of progress in liberalising the European energy sector, means Britain risks tying itself closer to markets that lack competition and transparency, as has already happened, many would argue to its detriment, in the gas sector. The Government should continue its efforts to ensure the European Union makes rapid progress on implementing full transparency of Member States' energy sectors so that the UK is not further disadvantaged. In addition, it is not yet clear to what extent the GB system would be able to rely on other countries to provide balancing services, given weather systems rarely conform to national boundaries. The regulator should, therefore, proceed with caution in licensing future interconnection. Moreover, the electrification of the transport and heating sectors combined with active management of demand through smart grid technologies could provide a means of managing wind intermittency in the future. We believe it will be necessary to attain a clear view of the cost/benefits of interconnection in the context of UK energy security and the balancing of services, and recommend Ofgem conducts research to better establish this view. (Paragraph 127)

29.  The 'super-grid' could make a significant contribution to a low-carbon economy. However, there are major technical and regulatory challenges, while the necessary funding would likely require the redirecting of capital from domestic investment in network and renewable energy infrastructure. The super-grid would have some energy security benefits such as reducing Britain's exposure to fossil fuel price volatility, but would also bring with it new energy security risks, for example, through a new energy dependency on North African countries. We recommend the Government remains engaged at a European level in exploring the super-grid's potential. Any future decision to invest would require a robust analysis of the scheme's cost-effectiveness relative to other means of securing electricity supplies, such as greater demand flexibility. (Paragraph 132)

30.  The changing role of distribution: technical and regulatory challenges

31.  In the future there could be potentially thousands of generators connected to the distribution networks at scales varying from domestic solar panels to large wind farms. Energy demand could also evolve and increase through the electrification of the transport and heating sectors. The deployment of smart grid technologies, such as smart meters, will therefore be crucial to the effective and economically efficient management of an increasingly complex energy system. This necessitates a fundamental rethink of the role of distribution companies who in the future will need to play a more active role in balancing demand and supply across their networks, potentially taking on a local system operator role. (Paragraph 144)

32.  Creating smarter distribution poses significant challenges. Although many of the technical aspects are well-understood there is relatively little experience of their application to the smart grid. Furthermore, the regulatory framework does not at present provide a level playing field for the adoption of smart grid solutions, such as active demand management. Ofgem must address these issues in the coming years. One area in which we believe it could make an immediate difference is to work with Ofcom to ensure the allocation of suitable spectrum for smart grid use as soon as possible, thus enabling the full range of smart grid technologies to be considered for deployment in Britain. (Paragraph 145)

33.  Distribution investment

34.  We welcome the outcome of Ofgem's fifth distribution price control review (DPCR), which seems to balance the requirement for network renewal on the one hand, with the need to minimise the resulting impact on consumers' bills on the other. However, the success or otherwise of the DPCR will need to be assessed against whether it encourages a significantly greater role for distributed generation and demand-side management within the energy system over the review period, and the extent to which it leads to the deployment of smart grid technologies. (Paragraph 149)

35.  Innovation

36.  The level of research and development conducted by the networks sector has risen significantly over the last five years, though still represents just 0.33% of firms' income. If Britain is to be one of the first to deploy smart grid technologies on a wide scale, the industry must invest sufficiently to turn what is at present a vision into a reality. To the extent that the lack of R&D is a result of the rules governing companies' expenditure under the Innovation Funding Incentive, Ofgem should look again at this matter. To the extent that the underspend is the result of the absence of a "culture of innovation", the industry must accept that it has failed in its responsibilities and that it needs to show significant improvement not just in the interests of both the nation and the consumer, but also to grasp the huge opportunities that the global market offers. (Paragraph 157)

37.  We welcome the introduction of the Low Carbon Networks Fund and the continuation of the Innovation Funding Incentive. We recommend Ofgem keeps both these mechanisms under review with the aim of increasing the available funding for both within the current distribution price control period if there is demand. We welcome also new public sector funding for smart grid demonstrations, and hope the Government will continue to support this area despite the current fiscal constraints. (Paragraph 158)

38.  Embedded benefits

39.  Generators connected to the distribution networks do not currently pay transmission network use of system charges because it is assumed their output is absorbed by local demand and therefore reduces the need for transmission capacity—a concept known as 'embedded benefits'. The level of distributed generation, particularly renewables, could increase significantly in the next decade, to the extent that local supply will at times exceed local demand, resulting in spillovers back into the transmission system. Moreover, where renewable generation is intermittent, transmission capacity will still be necessary to respond to shortfalls in supply. For this reason, the current treatment of embedded generation is not sustainable in the long run. (Paragraph 163)

40.  Because the proportion of distributed generation in the electricity mix is still very low, there is no need for Ofgem and the industry to reach an immediate decision on an enduring set of arrangements. Instead, it should wait until it can be shown clearly that distributed generation is impacting on the transmission system. We recommend the regulator develops a set of criteria to determine when it would be appropriate to reconsider this issue as the risk of change too soon is that it may exacerbate the 'lock-in' of a centralised energy system. Central to the debate over the two options proposed by National Grid is the question of whether in the future there should be separate regulatory frameworks for the distribution and transmission networks, or if there is a case for regulating the whole system as a single entity. The regulator must resolve this question first, which forms part of its RPI-X@20 review, before it can conclude on an enduring set of charging arrangements for distributed generation. (Paragraph 164)

41.  Network skills

42.  The transition to a low-carbon economy will require trained people that have the skills to deliver the many challenges the networks face in the coming years. Yet an aging workforce and a lack of new recruits mean the industry currently faces an acute skills shortage. This problem has been exacerbated by a regulatory framework that has reduced firms' expenditure on skills over time. We welcome the establishment of the National Skills Academy for Power, but believe DECC and the Department for Business, Innovation and Skills need to do more to inspire young people and graduates to take up a career in the energy sector. Network companies too should face improved incentives through the price control reviews. Accordingly, this must form a key part of Ofgem's RPI-X@20 review. Looking forward, firms must also accept their role in ensuring employees have the opportunity to improve their skills. A skilled workforce will be crucial to the development of a cost-effective low-carbon energy system. As one witness put it: "Without the broad skills of all participants within the sector, the UK faces a dirtier, more expensive and less efficient future". (Paragraph 174)

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 23 February 2010