Memorandum submitted by ARUP
1. OVERVIEW
1.1 Introduction
1. Arup welcomes the opportunity to respond
to the call for written evidence by the House of Commons Select
Committee for Energy and Climate Change.[2]
In preparing our response we have consulted UK staff within Arup's
various energy teams including transmission and distribution,
generation (fossil, renewable, nuclear and distributed), oil and
gas, buildings and strategy. One of Arup's key strengths is this
breadth of scope, including regulatory, transactions and policy
experience, both in the UK and internationally.
2. Arup is a global firm of designers, engineers,
planners and business consultants with nearly 10,000 staff in
37 countries, providing a diverse range of professional services
to clients around the world. Arup has four main market areas—Energy,
Resources and Industry; Property; Social Infrastructure and Transport.
Further details are available via our website www.arup.com.
3. Arup recognise that electricity networks are
key to the essential reduction in green house gas emissions from
the UK, not only in electricity generation, but as a facilitator
for reduction elsewhere, particularly in transport (e.g. via electric
vehicles,[3]
rail electrification and heat pumps for buildings).
1.2 Executive Summary
4. Significant network changes are required to
meet future renewables targets and achieve climate change goals.
System stability, potential large instantaneous losses of generation
(with consequent frequency excursions) and reliance on ageing
assets are major challenges. To economically overcome these, innovation
will be required, including more intelligent networks and consumer
characteristics. Arup foresee a greater role for demand side management
in system balancing and reserve provision.
5. Many studies are predicting increased volatility
in market prices and security. This may prompt a radical shift
in the relationship between consumers and electricity production/transmission.
Instead of the current arrangement, where the generated supply
has to match the load, load may need to be controlled to match
the electricity production (or network capacity) for significant
periods in any day. However, before this could emerge, research
into consumer attitudes and understanding of their electricity
supply would be required.
6. A key concern is the availability of
appropriate skills within the industry to deliver such changes
and innovations. In addition, changing networks will alter overall
resilience and security.
2. ARUP RESPONSE
TO CALL
FOR EVIDENCE
2.1 What should the Government's vision be
for Britain's electricity networks, if it is to meet the EU 2020
renewables target, and longer-term security of energy supply and
climate change goals?
7. The significant changes required to meet
future renewables targets and achieve climate change goals require
significant changes and additions to the electricity networks.
Acceptable security of supply performance and affordability need
also to be delivered. The networks must also be capable of facilitating
energy substitutions, especially in the transport sector, from
oil based energy to lower carbon electricity.
8. Arup welcomes the report of the ENSG.[4]
Many studies (EMO,[5]
All Island Grid Study[6])
indicate that increasing proportions of variable renewables within
the generation mix are likely to increase volatility in market
prices and security. In order to manage these, there is a requirement
to embrace new technologies such as demand side management (DSM),
dynamic system ratings and active system management, in order
to deliver best value to consumers. This will also require greater
interconnection within Europe plus consideration of revised transmission
planning standards.
2.2 How do we ensure the regulatory framework
is flexible enough to cope with uncertainty over the future generation
mix?
9. A key advantage of the UK's competitive markets
is the ability to respond flexibly to volatile global drivers.
Such flexibility also requires flexible networks that are capable
of transporting electricity at times and between locations that
can not be accurately predicted. Arup welcomes the recognition
of this uncertainty by the regulator Ofgem and the future scenario
work it has undertaken.[7]
10. However unlike in state owned times, the
assumption that consents and/or construction timescales for network
reinforcement would be quicker than consents for the generation
development, is no longer valid. Arup welcomes the indication
from Ofgem that funding for early transmission scheme development
and consenting will be forthcoming.[8]
Early consenting will significantly reduce the perceived risk
of delayed grid connection for new low carbon generation developments.
However, this will need to be carefully communicated to the public,
as there is a risk of planning blight with schemes being proposed
and consented, but perhaps not implemented.
2.3 What are the technical, commercial and
regulatory barriers that need to be overcome to ensure sufficient
network capacity is in place to connect a large increase in onshore
renewables, particularly wind power, as well as new nuclear build
in the future? For example issues may include the use of locational
pricing, or the availability of skills.
11. The potential technical barriers to
large increases in renewables and new nuclear units include system
stability, potential large instantaneous losses of generation
(with consequent frequency excursions) and reliance on ageing
assets. To economically overcome these, innovation will be required,
including more intelligent networks and consumer characteristics
(eg smartgrids with self healing properties). Demand side management
should be incentivised to play a greater role in system balancing
and reserve provision.
12. In future, if we are to rely on wind and
other similar resources to the extent implied by European targets,
then the UK and Europe may need a radical shift in the relationship
between consumers and electricity production/transmission. Instead
of the current arrangement, where the generated supply has to
match the load, load may need to be controlled to match the electricity
production (or network capacity) for significant periods in any
day. If so, this will mean that the "new" grid will
be different in nature and design.
13. From a commercial/economic perspective,
it is sensible to maintain and increase cost reflective pricing.
Locational pricing should therefore be strengthened and consumers
should be given the opportunity to participate to a greater degree
in the market, via dynamic pricing (using smart meter capabilities)
and more effective tariff offerings (especially to improve the
current ultimate solution of rota cuts to manage energy shortages,
when it would be technically feasible to discriminate between
core/essential uses and discriminatory uses, so that in time of
shortage only the latter is curtailed).
14. As greater intelligence is built into
generation, networks and consumer equipment, the skills of staff
within the industry and supporting organisations (eg consumer
equipment installation and repair) will need to be enhanced. Crucially
the industry will require staff who appreciate the full ramifications
of the many changes that will be implemented. The current market
tends to foster "silos" that pose barriers to key staff
understanding the full picture. To overcome this, concerted effort
may be required to develop broad skills.
15. To acerbate this, the age profile of
the existing skills base in the electricity industry exhibits
a high proportion in the 50+ band.[9]
Therefore in addition to considerable recruitment of "raw"
talent, there will need to be considerable skill development of
existing industry staff.
2.4 What are the issues the Government and
regulator must address to establish a cost-effective offshore
transmission regime?
16. Whilst the concept of a competitive
offshore transmission owner regime offered potential benefits
for consumers, we are concerned that the risk allocation and complexity
in the scheme as currently formulated may undermine or eradicate
these benefits.
17. Offshore transmission is a relatively new
business area where there is very limited experience of costs
and risks, a limited equipment supply chain and uncertain maintenance
and operator safety considerations. Companies may underestimate
such factors and risk insolvency or overestimate, risking prolonged
higher costs to consumers than are warranted.
18. Some of these issues are raised in responses
to Ofgem consultations.[10]
2.5 What are the benefits and risks associated
with greater interconnection with other countries, and the proposed
"supergrid"?
19. The principal advantages of greater
interconnection are the opportunities for diversity and mutual
support. However, for these benefits to be maximised requires
free trade of electricity between countries and implicitly similar
market structures/products that are exchangeable (spot vs long
term etc).
20. The risks associated with interconnection
are twofold. Firstly the risks of faults on the interconnectors,
which can be minimised by appropriate design and operation and
secondly the added system operation complexity and reliance on
third parties, which requires better operator understanding and
sharing of information.
2.6 What challenges will higher levels of
embedded and distributed generation create for Britain's electricity
networks?
21. One challenge will be increased unpredictability
of net load to be supported by the networks. In addition there
may be uncertain behaviours of embedded generation during system
difficulties. This was evident in the response of embedded generation
to the European system split incident of November 2006, which
made re-synchronisation more difficult.
22. One of the potential benefits of embedded
generation is the potential of standalone operation and resultant
increased user resilience to wider system disturbances, however,
safety concerns and resultant operational rules prevent these
benefits being fully realised. In combination with active demand
management these benefits may be realisable in future.
23. Ostensibly moving towards local distributed
generation should reduce the need to transmit power and associated
I2R losses. However, in the UK transmission losses are less than
2%, with more ~7% in the local distribution networks, so distributed
generation will be more effective (from a losses perspective)
if sited close to matching load. Micro CHP units for central heating
tend to be programmed to match heat load requirements, rather
than electrical requirements. Maximum generation may therefore
be a variance with grid system needs. Dynamic pricing may incentivise
operation more tailored to grid needs, increasing the economic
case for greater thermal storage (eg larger domestic hot water
tank).
2.7 What are the estimated costs of upgrading
our electricity networks, and how will these be met?
24. The recent ENSG study indication that
significant (£4.7 billion) additional investment will be
required to connect future renewables and new nuclear generation.
However, there are already significant costs just to maintain
the status quo, mainly associated with the replacement of ageing
or obsolete network assets (ref recent distribution and transmission
price control reviews), plus significant investment is required
for new international HVDC interconnections. These costs will
be met by the consumer over time, but will require financing by
shareholders and debt in the short to medium term. Such investment
will therefore have to compete with other global investment opportunities
and be subject to the vagaries of global markets for finance and
equipment.
25. To provide best value for consumers, innovation
will be required. In particular as overhead line ratings are a
function of the cooling provided by wind, it will be appropriate
to consider dynamic circuit ratings, especially where conservative
circuit ratings may result in unnecessary constraint costs.
26. Upgrading of networks may also require
outages of existing infrastructure. During such outages, risks
and costs may temporarily rise and there needs to be effective
incentives to minimise both capital expenditure and short term
system operation costs. The current separate regulation of system
operation (by Ofgem Markets) and network investment (by Ofgem
Networks) will require better co-ordination to avoid historic
problems.[11]
2.8 How can the regulatory framework ensure
adequate network investment in light of the current credit crunch
and recession?
27. The regulatory price controls will need
to ensure an adequate rate of return (via weighted average cost
of capital, WACC). The current credit crunch has increased rates
for major capital investment. One way in which the cost of capital
can be minimised is by reducing risk premiums associated with
perceived regulatory risks. Ofgem's current RPI-x@20 review of
and their work on longer term electricity network scenarios (LENS)
should help in this regard.
2.9 How can the regulatory framework encourage
network operators to innovate, and what is the potential of smart
grid technologies?
28. The innovation funding incentives[12]
(IFI) introduced by Ofgem at DPCR4 and since extended in some
form to electricity transmission (and gas) were excellent stimuli.
But innovation brings risk which requires commensurate technical
competence and operational understanding in both the network companies
AND the regulator who is judging their performance. This reinforces
the need for appropriate skills to be developed and maintained.
2.10 Is there sufficient investment in R&D
and innovation for transmission and distribution technologies?
29. There has been a marked improvement in R&D
and innovation in recent years. Such improvements will need to
be continued to cope with the new challenges facing the industry.
Smartgrids and related technology offer new opportunities for
consumers. For these to be fully realised, further research into
consumer attitudes and understanding, plus the development of
user friendly interfaces will be required.
2.11 What can the UK learn from the experience
of other countries' management of their electricity networks?
30. The work of the all island grid study[13]
for Ireland and Northern Ireland is to be commended. In addition
there are considerable learning points to be gained from international
experience. The UK has of late been less active in international
fora, such as CIGRE and CIRED. Greater engagement should be encouraged,
both to capture new ideas and practices from overseas and to share
the benefit of UK experience to other countries following a low
carbon path.
31. As the UK becomes more connected to Ireland
and mainland Europe, staff in the GB networks will require greater
understanding of the operating systems and networks in those countries.
32. Regulation needs to balance the needs
of government, consumers and equity investors. We note that imbalances
have recently acted against network unbundling within a western
European state, dissuading potential investors from pursuing this
acquisition opportunity. No regulator is perfect, but the UK benefits
from transparency and an obligation to allow sufficient funding
for network licensees to operate efficient, economic and coordinated
networks, helps ensure that businesses remain robust and viable.
2.12 Other issues
33. In addition to our responses to the
specific questions listed in the call for evidence, we would like
to mention the following:
Security/resilience
34. Electricity is likely to become an even
more significant enabler of modern life in future. Therefore resilience
to external events needs to be appropriately increased. There
has already been considerable progress on increasing resilience
to adverse weather—eg winds and flooding. Certain key infrastructure
is also protected from malicious attack in accordance with critical
national infrastructure designations. Equipment spares holdings
and contingency plans have been reviewed in recent years (by E3—joint
government, regulator and industry emergency planning) and will
need to be continually developed.
35. However, competitive markets rightly require
considerable information transparency, but it should be recognised
that this can also reveal potential weaknesses to those with malicious
intent. In addition, considerable extra information is available
to staff and contractors working in the industry. Some of these
require a degree of security clearance, but not all and there
is the added dimension of work, such as software development,
which may be contracted overseas.
36. In the future, with more generation
from renewables, the scene will become more diverse, both in geography
and in generating technology. A geographically diverse grid may
be more resilient in terms of networking round a damaged section,
but this will only be true if the grid network is engineered with
"redundant" capacity. This is not always warranted on
engineering reliability grounds (ref Offshore Transmission Security
Standards), however, it might be more vunerable to "non-engineering"
interruptions.
37. It also seems that more reliance on
renewables will create demand for a mix of standby "traditional"
generation and energy storage. If so, the links to the storage
sites might become unusually significant to the security of supply
and provide new targets.
38. We would also raise the question of
whether the changing scene in generation and distribution is also
changing the vulnerability of the system, and whether the fragmentation
of multiple organisations could lead to gaps in the industry's
security strategy.
39. If events occur that require unplanned
responses, the industry requires innovative people with a deep
understanding of the system to find temporary solutions, plus
rapid regulatory and government support to allow solutions that
might otherwise be precluded. Some of the measures adopted to
overcome the 1998 Auckland blackout are illustrative, such as
innovative temporary transmission lines routed through a disused
railway tunnel.
40. The government may also have to balance
compliance with some legislative requirements with minimising
interruptions of supply. For example, in an emergency, would generation
that is unable to operate FGD equipment be allowed to continue
generating. We note that Defra has already clarified that plants
operating under National Grid's instruction during an emergency
will not count as opted out LCPD hours.
Climate Change
41. We note and welcome the reports prepared
by the Met Office specifically for the industry that highlight
potential impacts of climate change on networks, such as seasonal
shifts in demand and soil moisture changes affecting underground
cable ratings. Further work is to be encouraged, as the assumptions
that underly many of the design standards and guidance used in
networks are called into question by climate changes.
March 2009
2 http://www.parliament.uk/parliamentary_committees/ecc/ecc_pn4_06_02_09.cfm Back
3
Arup report available on www.berr.gov.uk/files/file48653.pdf Back
4
www.ensg.gov.uk/assets/1696-01-ensg_vision2020.pdf Back
5
http://www.berr.gov.uk/energy/energymarketsoutlook/page41839.html Back
6
http://www.dcenr.gov.ie/Energy/North-South+Co-operation+in+the+Energy+Sector/All+Island+Electricity+Grid+Study.htm Back
7
www.ofgem.gov.uk/Networks/Trans/ElecTransPolicy/lens/Pages/lens.aspx Back
8
www.ofgem.gov.uk/Networks/Trans/ElecTransPolicy/tar/Documents1/081219_TOincentives_consultation_FINAL.pdf Back
9
http://www.euskills.co.uk/electricity/index.php?pageID=25 Back
10
Eg www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=81&refer=Networks/offtrans/pdc/cdr/cons2008 Back
11
www.ofgem.gov.uk/Markets/WhlMkts/EffSystemOps/SystOpIncent/Documents1/20090217Managing%20constraints.pdf Back
12
http://www.ofgem.gov.uk/Networks/Techn/NetwrkSupp/Innovat/Pages/Innvtion.aspx Back
13
http://www.dcenr.gov.ie/Energy/North-South+Co-operation+in+the+Energy+Sector/All+Island+Electricity+Grid+Study.htm Back
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