Memorandum submitted by Energy Networks
Association
Energy Networks Association (ENA) is the industry
body for UK gas and electricity transmission and distribution
licence holders.
Thank you for the opportunity to address the very
important issue of the future for electricity networks. The networks
are vital for the successful delivery of Government energy and
climate change objectives. The electricity transmission and distribution
companies have a proven track record of efficiency and delivery
and are unique in having an enduring relationship with all thirty
million electricity customers in the UK.
We have responded to each of the Committee's
specific questions in the attached Annex. First, however, we have
highlighted below the key messages that we would like to convey
to the Committee.
— The electricity network companies are
highly efficient, having achieved improved levels of service reliability
and safety, and significantly reduced their costs and charges
since privatisation in 1990.
— Since 1990 real prices have declined
by about 60% in electricity distribution and 30% in electricity
transmission, despite levels of capital investment well above
those in the preceding period.
— Operating efficiency has increased—real
operating costs per unit have fallen by 5.5% per annum in electricity
distribution since 1990.
— Quality of service has improved with
a 30% reduction in both the number and duration of reported power
outages between 1990 and 2008.
— Since privatisation, fatal, major and
over 3-day accident incidence rates have seen a fivefold reduction.
— Networks are essential in meeting the
Government's low carbon agenda—-there will have to be more
of them and they will have to change.
— There will need to be more networks and
they will have to change the way they operate to help deliver
the low carbon future; in so doing they will unlock economic value
for new generators, users and society as a whole.
— Distribution networks will need to transform
from their traditional passive role receiving power from the transmission
system, to a dynamic operation accommodating the complex flows
of energy entering their systems at all voltage levels.
— Transmission networks will be strengthened
and extended offshore and to the continent in order to harness
the potential of renewable generation and secure the country's
electricity supplies.
— The networks are ideally placed to enhance
their role in areas where a regulated solution will deliver objectives
more effectively than a market one.
— Network companies, unlike energy retailers,
have an enduring commercial and physical relationship with all
customers' premises.
— They have the expertise, knowledge and
experience and a history of delivery of key projects.
— ENA supports the development of market
solutions in the energy sector. However, for certain projects,
particularly those which are large scale and complex and where
substantial externalities exist, e.g. the roll-out of smart meters,
enhancing energy efficiency, low carbon homes et cetera, consideration
should be given to solutions delivered through the regulated network
companies. It was done for North Sea gas conversion and rural
electrification. It can be done again.
— ENA members are ready and willing to
accept a leading role in the energy market to help Government
achieve its policy objectives.
— Achieving this vision will require a
flexible and supportive regulatory framework.
— The success of the networks has been
founded upon the effective regulation of privately owned network
companies.
— The increasing investment required to
deliver our energy future will require the provision of a significant
amount of finance from the investment community. We therefore
need a regulatory framework that gives positive long term signals
to attract investors to ensure that the finance is forthcoming.
— The framework should also be flexible
in recognising the future uncertainty, encouraging strategic network
investment and ensuring that the companies are remunerated appropriately
for the risks that they face.
— The fundamental changes that have occurred
in the capital (debt and equity) markets must be reflected in
the returns the companies are allowed to make.
— Under the current framework the companies
have significantly reduced their operating costs. But they cannot
continue to reduce them indefinitely. There will be a clear need
to increase operating resources if we are to successfully tackle
the challenges ahead.
— The regulatory framework must encourage
innovation. The new incentive schemes introduced in 2004-05 must
be developed to ensure the necessary innovation is forthcoming
in order to support the required changes in network operation.
— Decisions being taken now by Ofgem should
recognise the imperatives for 2020 and beyond.
— Decisions covering the period to 2015
will be made by Ofgem in December of this year for the current
price review of the electricity distribution companies. Ofgem
must acknowledge the longer term policy framework and objectives
when developing its proposals.
— ENA and its members are working closely
with Ofgem on its RPI-X@20 Project to develop a regulatory framework
to meet the challenges of the changing external environment. The
project is due to report in late 2010.
— Markets have served the industry well
but the scale and speed of the changes that are needed require
Government to raise its profile and provide dynamic leadership
and strategic direction.
— This is not the same as central planning.
— DECC should only intervene where there
is a risk, in the face of great uncertainty, that markets will
fail to deliver what is required in the necessary timescales.
— DECC should become the "guiding
mind" for the future direction of the whole industry and
provide leadership and strategic direction.
— DECC should agree key assumptions with
the industry, specifying how security of supply and environmental
targets should be met.
— It should establish a steering group
of key energy industry stakeholders and thinkers to inform its
direction.
— Ofgem should regulate to ensure the efficient
delivery of these targets.
I hope that the information contained in this
submission, the issues raised and our responses to your Committee's
questions are of assistance to your Members. If we can assist
in any further way or provide further clarification we would be
very happy to do so. In addition, we would also be very happy
to elaborate on the issues raised at our forthcoming oral session
with the Committee.
Annex
THE COMMITTEE'S
SPECIFIC QUESTIONS
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?
ENA members believe that the Government through
DECC should provide strategic direction to the industry in order
to guard against, in the face of great uncertainty, the risk that
markets will fail to deliver what is required in the necessary
timescales. It should agree key assumptions with the industry,
specifying how security of supply and environmental targets should
be met and should establish a steering group of key energy industry
stakeholders and thinkers to inform its direction. Ofgem should
regulate to ensure the efficient delivery of these targets.
We believe that the Government vision for electricity
networks should comprise:
— A combination of initiatives including
the more efficient use of energy, decentralised energy production
and centralised large scale generation based largely on nuclear
and renewable technologies. — The need for major transmission
system developments (both offshore and onshore).
— The upgrading of the distribution networks
both in the renewal of ageing assets and in the way that they
are operated and managed in order to support increasing amounts
of local generation.
— Development of innovative solutions to
accommodate new forms of generation connecting to the networks.
— An expanded role for network companies
in the delivery of a low carbon future; they are ready and willing
to take up the challenges presented, including working with generators
and customers on demand-side issues including energy efficiency,
zero carbon homes, supporting the roll out of smart metering.
How do we ensure the regulatory framework is flexible
enough to cope with uncertainty over the future generation mix?
The rationale for the establishment by Ofgem
of the RPI-X@20 review of network regulation was the recognition
that significant changes to the regulatory framework for energy
networks may be needed to facilitate the move to a low carbon
economy. One of the key objectives of the project is to devise
a framework that is sufficiently flexible to adapt to changes
in the energy industry. However, it is not expected to publish
its proposals until the autumn of 2010, well after the conclusion
of the current distribution price control review (DPCR5). It will
therefore be important that Ofgem in the current price review
(which applies until 2015) recognises the importance of achieving
the 2020 targets and ensures their proposals are consistent with
them.
One of the key challenges for both transmission and
distribution operators is to provide the necessary network infrastructure
in a timely and efficient manner. For this to happen there needs
to be a framework in place which encourages companies to deliver
the new networks when they are needed.
Ofgem is seeking to achieve this in transmission
via enhanced incentives to anticipate user demand via some form
of pre-construction funding. Whilst this addresses the timing
issue there remains the concern that more will be required in
order to ensure that the necessary network infrastructure is delivered
within the required timescales. The challenge for distributors
is even greater as the networks are more complex and the sources
of generation more diffuse. It will often not be practicable to
identify where network reinforcement may be required ahead of
need.
The regulatory framework for both transmission
and distribution should therefore seek to incentivise this investment
but also acknowledge that companies will have to make judgments
within a very uncertain environment and should not be penalized
if in the event some investment turns out to be sub-optimal.
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.
The technical challenges associated with the
connection of large generators to onshore transmission networks
have been addressed in a recent report to the Electricity Networks
Strategy Group (ENSG) "Our Electricity Transmission Network:
A Vision for 2020" (March 2009). Similarly, the connection
of medium sized generators to distribution networks is well understood
and solutions are available. ENA has also developed a "plug
and play" solution for small domestic scale embedded generation.
The provision of additional transmission capacity
and its efficient allocation are very important elements of the
Government's strategy and the arrangements put in place to manage
access to the network will be a key determinant of the amount
of renewable generation that can be connected. We generally support
the proposals of the recent Transmission Access Review (TAR),
notably that network owners will be incentivised to build infrastructure
ahead of user commitment through higher potential rates of return.
However, without greater clarity in the signals being given to
generators in relation to zonal losses, charging and constraints,
there is a risk that parallel investment paths in generation and
transmission will not be forthcoming, so increasing the risk of
stranded assets. It is therefore important that a stable regulatory
regime for both generators and transmission network operators
is established to enable them to respond to signals with confidence.
We also support the fundamental review of the
Security and Quality of Supply Standard and "connect and
manage" principles which have been proposed to assist in
resolving the current network access problems. Any revised access
arrangements must however result in greater access and the correct
signals for investment rather than just re-allocating existing
resources.
In addition to these issues others can be identified:
Skills
The large scale network development to accommodate
renewable energy will require a substantial increase in qualified
and skilled workers to build and operate the new infrastructure.
There is a need for innovative and highly qualified engineers
to design new systems that push at the boundaries of network technology.
As a responsible industry, our members are actively
involved through the sector skills council (EU Skills) in collectively
looking at the skilled resource challenges for the sector. We
need to make the networks sector more "career attractive"
to young people and ensure that we have good, and experienced,
academic and sector specific trainers. We have been instrumental
in support for the new national skills academy for power.
Supply Chain Capacity and Procurement
Supply chain constraints at both the UK and
international level—whether a shortage of ships able to
lay subsea transmission cable or long lead-in times in procuring
vital components—are one of the major challenges of extending
and reinforcing the transmission and distribution networks. Therefore
Government policy towards creating a harmonised enabling environment
must also take into account possible supply chain capacity and
procurement issues.
A co-ordinated approach by Government
We welcome the establishment of a new department
that brings together the key energy and climate change issues.
We believe that this has the potential to remove significant barriers
to progress in major policy areas.
However it is important that the office for renewable
energy deployment (ORED) and other bodies such as the Renewables
Advisory Board and the Manufacturing Advisory Service should work
together, without duplication or overlap, under the direction
of DECC to address barriers to deployment including supply chain
and planning.
Planning
Lengthy planning procedures for renewable generation
projects, transmission lines and distribution networks present
a major obstacle to the development of renewable sources of energy.
Reform of the planning system as established in the recently passed
Planning Act is essential if we are to connect up new, remote
renewables generation in time to meet the 2020 targets.
We believe the Infrastructure Planning Commission
(IPC) will have a vital role to play in delivering these objectives.
The ENSG is currently forming a new sub-group of industry experts
who will be charged with establishing the necessary "criteria
of need" for new transmission infrastructure that will be
used by the IPC to judge future planning submissions. Establishing
clear criteria will be a key input to the national policy statements
and will be fundamental to the effectiveness of this new planning
regime.
What are the issues the Government and regulator
must address to establish a cost-effective offshore transmission
regime?
One of the determinants of the success of the
offshore transmission regime will be the commercial arrangements
that are established to facilitate the development of the necessary
generation and transmission infrastructure. Currently, a rather
complicated approach to procuring a transmission asset owner licence
has been established which is neither a pure market nor a pure
regulated approach. ENA members have expressed their concerns
that the current arrangements create a risk of delay, and of creating
inferior and more expensive networks than could perhaps be achieved
via a more strategic co-ordinated approach to the investment.
However, there is now an opportunity to progress
"round 3" offshore transmission networks by extending
onshore licensed transmission areas offshore which ENA members
believe will facilitate the development of a true offshore interconnected
grid. We believe that consensus is developing amongst the major
stakeholders, i.e. TNOs, potential offshore generators and environmental
groups, that this is a more economic and sustainable approach.
What are the benefits and risks associated with
greater interconnection with other countries, and the proposed
"supergrid"?
There are considerable benefits from increased
interconnectivity with the networks of other countries in terms
of improved security of supply and effective sharing of both generation
capacity and energy storage, although it will give rise to some
new, but manageable, risks. Given the envisaged contribution expected
from intermittent wind generation to the UK's future generation
portfolio, those are potentially valuable benefits. Moreover,
effective interconnection with mainland Europe will ultimately
facilitate the development of a pan-European market for electricity.
What challenges will higher levels of embedded
and distributed generation create for Britain's electricity networks?
The UK's electricity distribution networks have been
designed to transport electricity from transmission network "exit"
points, via successive stages of transformation from higher to
lower voltage systems, to end users. This has given rise to essentially
unidirectional power flows which are relatively predictable in
terms of daily and seasonal load profiles. Hence it has been necessary
to design distribution networks to operate in a largely passive
way, with a high level of confidence that power quality and security
of supply will not be adversely affected by abnormal levels of
electricity demand or unexpected power flows.
Increasing levels of generation embedded within distribution
networks give rise to certain operational and control challenges
for these traditionally designed and passively operated distribution
networks. For example, there will be uncertainty over the location
and volume of future generation facilities which will influence
the optimal connection arrangements. The key technical challenges
relate to maintaining power flows at levels consistent with equipment
ratings, ensuring voltage variations remain within safe and statutory
limits, and ensuring that the additional energy in-feeds from
local generation do not give rise to dangerous short-circuit currents
in the event of network faults.
What are the estimated costs of upgrading our
electricity networks, and how will these be met?
No precise figures can be given for the estimated
costs of upgrading the electricity networks as they will be largely
dependant upon the future generation scenarios. To provide an
indication of the scale of the investment that will be required,
the DNOs capital expenditure allowances for the current five year
price control period amount to over £7 billion (at 2007-08
prices) and this is expected to increase significantly over the
next period from 2010 to almost £9 billion even without major
reconfiguration.
Beyond 2015, the scale of distribution network investment
which will be necessary is less easy to determine. This is because,
while there is a clear strategy in terms of where major onshore
and offshore wind farms will be developed, there is much less
certainty as to where smaller scale onshore distributed generation
will locate. The focus for distribution networks will therefore
be more towards maximising existing available capacity through
the development and deployment of smart grid technologies as well
as providing additional network capacity. Individual connections
of generators to distribution networks will be largely funded
by the generation developers.
In transmission, the current price review allowed
£4 billion of capital expenditure for the three electricity
transmission companies over the period 2007-12. The likely location
of future onshore and offshore wind farms can be estimated with
reasonable accuracy. The ENSG report which examines a number of
generation scenarios to 2020 estimated a cost of £4.7 billion
for the proposed transmission reinforcements necessary to support
45GW of new generation of which 34GW is offshore and onshore wind.
How can the regulatory framework ensure adequate
network investment in light of the current credit crunch and recession?
A key requirement of any regulatory framework
is to ensure that the confidence of the financial community is
retained, even during difficult economic circumstances. Over the
next 10 years all energy network companies will need to further
increase their capital expenditure both for the refurbishment
and replacement of their ageing infrastructure and to meet the
need for new capacity. This will require the provision of significant
amounts of finance from the investment community. Prospective
investors must be reassured that all efficient expenditure by
the companies is recoverable and that the rewards available to
them are commensurate with the risks they are facing in transforming
their networks.
It will therefore be important during DPCR5 that
Ofgem provides positive signals to prospective investors in their
proposals in July and December 2009. Crucial to this will be the
weighted average cost of capital (WACC) that the companies are
allowed. We are currently in unprecedented times and would urge
Ofgem when making its decision on the WACC, to follow the recent
example of CAA (in its proposals for Stansted Airport) by explicitly
factoring in the effects of the current financial turmoil and
economic recession, particularly the increased cost of debt financing,
rather than relying on long term trends.
How can the regulatory framework encourage network
operators to innovate, and what is the potential of smart grid
technologies?
Ofgem's RPI-X@20 project has as one of its objectives
to examine how innovation by the network companies can be encouraged
in order to meet the challenges ahead. One of the difficulties
of the traditional five yearly approach to price reviews is that
it does not often allow companies to capture the full benefits
of innovation since they are likely to accrue over longer periods
of time.
At the last electricity distribution review Ofgem
acknowledged that the traditional RPI-X approach to utility regulation
had led to a serious decline in R&D expenditure by the companies
at a time when considerable effort was required from them to facilitate
the connection of new sources of distributed generation and to
meet the technical challenges to network operation that such developments
would bring. Ofgem's response was to introduce new incentive mechanisms
for distribution network companies. They included the Innovation
Funding Incentive (IFI) and the creation of Regional Power Zones
(RPZ) to encourage companies to provide innovative cost-effective
solutions to the connection of distributed generation.
Discussions have already begun with Ofgem during
the current price control review on ways to strengthen incentives
for companies to adopt innovative solutions which encourage the
development of flexible networks that support a low carbon future.
It is proposed to replace the RPZ incentive with broader based
innovation incentives and ENA members are working with Ofgem to
develop such mechanisms.
The potential for smart grid technologies is
considerable and benefits will accrue throughout the energy supply
chain. They will typically permit higher penetration of distributed
generation, greater utilisation of network capacity, and a reduced
need for investment in conventional network capacity and centralised
generation—at the same time as providing improved quality
of supply through increased automation. The biggest benefits will
derive from smart grid technologies that are able to interact
with customers and customers' equipment. Developments such as
intelligent appliances are in their infancy, but smart metering
will be essential in enabling the demand side of the smart grids
of the future.
Is there sufficient investment in R&D and
innovation for transmission and distribution technologies?
There has been a significant increase in R&D
in both distribution and transmission networks in recent years
following the introduction of the IFI incentive. Network companies
have sought to make efficient use of this incentive through collaboration
with research partners and through leveraging of external funds
to supplement their IFI allowances.
In the future, it will be important to build on this
initiative and provide further incentives to network companies
and others to take forward the more promising outputs of their
research and development programmes. Network companies have difficulty
in employing R&D development for the whole energy supply chain
that requires investment by generators, networks and customers
in an integrated manner. The objective will be further development
through field trials of prototypes, leading ultimately to commercialisation
of new technologies which will then be deployed as standard components
of future network architecture.
What can the UK learn from the experience of other
countries' management of their electricity networks?
In response to the global requirement for lower
carbon and renewable forms of electricity generation, many countries—European
and American companies in particular—are exploring the potential
for new, more innovative, ways of managing their transmission
and distribution networks. ENA members have established links
with network companies in other countries so that the benefits
of R&D effort and experiences in accommodating new lower forms
of generation can be pooled. Indeed, one of the benefits of foreign
ownership of some UK electricity network companies is that sharing
of best practice with other countries naturally takes place.
Links have also been established through participation
in established international congresses such as CIGRE and CIRED;
through participation in initiatives such as the SmartGrids European
Technology Platform and the North American IntelliGrid Programme;
and through international collaboration forums such as ENARD (the
International Energy Agency's implementing agreement for Electrical
Network Analysis, Research and Development).
There is clearly much to be learnt from international
experience. Transferring engineering solutions will be relatively
straightforward; the challenge will be in adapting the commercial
arrangements to suit the UK's liberalised markets.
March 2009
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