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)
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