Memorandum submitted by Prospect
INTRODUCTION
1. Prospect is a trade union representing
102,000 scientific, technical, and managerial and specialist
staff in the Civil Service and related bodies and major companies.
In the energy sector, we represent scientists, engineers and other
professional specialist staff in the nuclear and radioactive waste
management industries, the wider electricity supply industry and,
increasingly, also in the gas industry. Our members are engaged
in operational and technical management, research and development
and the establishment and monitoring of safety standards, environmentally
and in the workplace. We are fortunate in being able to draw on
this broad range of knowledge and expertise to inform our views.
2. Prospect welcomes the opportunity to contribute
to this consultation, and does so primarily from a pragmatic engineering
perspective.
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?
3. Prospect supports a balanced energy policy
and we believe that the twin priorities of climate change and
security of supply are inextricably interlinked. Prospect therefore
welcomes the Government's support for renewable energy sources
which, alongside nuclear and clean coal, will have a key role
to play in 2020 and beyond. Investment, facilitation and
action are urgently required to deliver this vision. A secure
medium-term energy policy, both in the UK and the EU, from 2010 to
2020 will be essential to facilitate private investment in
both generation and networks to deliver a quantum-leap change
from the historic centralised system to a more response set of
active networks. The current global recession threatens delivery
of any energy vision because with long lead times on projects
of this dimension, the current cost of capital seriously inhibits
the willingness of investors to commit resources.
4. The report published earlier in the month
by the Electricity Networks Strategy Group[101]
(ENSG) clearly demonstrates both the scale and urgency of the
challenge. The ENSG's 2020 assessment is based on a "gone
green" scenario encompassing a range of generation sources
connected to transmission as follows: 34.1% share for gas; 19.8%
for coal; 6.9% for nuclear; 29.1% for wind; 3.3% for other renewables;
and 5.5% for other sources. On best case assumptions, ENSG estimate
that this will cost £4.7 billion in network reinforcements
in order to accommodate a further 45 GW of generation, of
which 34 GW could be a combination of onshore and offshore
wind. In Prospect's view this scenario represents the absolute
limit of what may be achieved in the relatively short timescale
now remaining until 2020, particularly as it does not take account
of the need for planning consent.
5. The considerable efforts to "go
green" will be rendered useless if the construction and commissioning
of new, thermally-based generating stations fails to keep pace
with the proliferation of renewables-based technologies. Large,
centralised stations utilising gas, clean coal and nuclear are
absolutely essential to delivery of network stability and security,
complementing the diverse nature of renewables. Stakeholders must
not make the fundamental mistake of simply equating the capacity
of a generating set in a large, conventional power station to
so many wind turbines; the physics of each scenario are very different
to one another. Renewable energy generating technologies have
made massive progress in recent years in terms of system voltage
and frequency control but are, as yet, to demonstrate anything
close to the transient stability of large synchronous machines.
Failure to appreciate this could have profound consequences for
the stability of the transmission networks and the national economy.
6. We do note that by 2050 Britain's
electricity networks could look very different, however the current
challenge is also exacerbated by the fact that the existing policy
mix discourages long-term investment other than in wind farms
and is insensitive to long-term security of supply issues. If
the UK is to encourage research into clean coal and new nuclear
build than some certainty is required otherwise the export benefits
of this new technology will be lost.
How do we ensure the regulatory framework is flexible
enough to cope with uncertainty over the future generation mix?
7. Regulation must focus more on medium
to long-term security of supply and environmental issues and rather
less on short-term economics. The fact that no statutory authority
has the ultimate responsibility to ensure security of supply often
comes as surprise to those who take a more casual interest in
energy policy. Provided the market and regulatory process ensures
the right signals are available to investors to bring on new generation
then we may continue to cope without this responsibility being
allocated but it is difficult to rest easy in an increasingly
volatile market for energy. Furthermore the regulatory framework
should be flexible enough to encourage investment in network improvements
and new generation stations that can clearly demonstrate that
they will provide system stability to complement and facilitate
the connection of more large-scale renewable generation sites
to the transmission networks. It will therefore need to be both
more adaptable and more closely aligned on a practical basis with
transmission and distribution companies to enhance awareness of
new connections of all types onto the system. Overall then, there
is a need for engineering based regulatory oversight with clear
direction, incorporating robust investment signals and imbuing
confidence for those investments to be made. In terms of networks,
the next twelve months is vital to secure the right investment
signals in new technology, network reinforcement and skills: there
will not be another opportunity to change the ground rules for
DNOs until 2015.
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
8. Investment in the necessary workforce skills
is vitally important. Recognising, as DEFRA's report on "Skills
for a low carbon and resource efficient economy" does, that
at present much of this demand is latent and not clearly articulated,
there is also a need for a concerted cross-departmental programme
of action co-ordinated by the Commission on Employment and Skills.
9. It is certainly true that engineering skills
will be at a premium. The evidence from our relationships with
the companies in the industry is of a tightening of the labour
market for engineering, technical and craft skills. This is despite
the economic downturn of the last 12 months as many of the
skills required are specific to the sector and the training required
is lengthy. Whilst reduced economic activity will have an impact
on aggregate demand, the process of network renewal is a longer-term
process beyond the immediate challenges of the economic cycle.
Moreover, the DNOs, as with the rest of the ESI, are the potential
source of high quality jobs critical to stimulating the economy
and fulfilling Government policy. Given the increasing complexity
of networks with a shift from passive networks to active networks
as distributed generation expands and the need to apply complex
engineering judgements to ensure the efficient repair, maintenance
and replacement of equipment, we believe that there is need to
increase the level of engineering expertise available to the sector
at a reasonable cost to customers.
10. Prospect is particularly concerned that
the current Distribution Price Control Review (DPCR) ensures adequate
resource allocation to meet the costs of bridging the skills gap
which has opened up in the Electricity Supply Industry (ESI) generally
and notably within the DNOs. The drastic measures by DNOs to drive
down OPEX as a result of past Distribution Price Control Reviews
have cleared an alarming amount of skilled resources out of the
ESI; so much so that current efforts to backfill these resources
only serves to underline the skills gap and the predicament of
the industry in the UK and can do little to remedy the situation
in the necessary timeframe. It takes at least the whole five years
of a DPCR period to take a good engineering recruit from the universities
or related industries and produce an effective engineer. It takes
at least another DPCR period to make an effective engineer into
the kind of skilled professional the UK requires to deliver the
investment projects that are needed to realise the vision for
2020. DNOs appear to be fighting with one hand tied behind their
back in their attempts to recruit and retain the talent that they
need and the nation needs to fulfil their mission. Whilst project
management skills are clearly essential, the tendency to laud
and reward these skills over specialist engineering skills has
led to much engineering talent shunning technical specialisation,
regarding it instead as a ticket to a dead-end in career terms.
If this approach does not change quickly, there will be real restrictions
upon the ability of companies to deliver the networks required
to meet energy policy objectives. In the medium to long term,
investment in skills reduces the cost to customers of operating
an efficient, responsive, low-carbon electricity distribution
network.
11. Neither should the scale of the technical
challenge be under-estimated. The ENSG report points to the need
for appropriate diversity of supply sources across the GB system,
for example taking account of the fact that wind generation output
averages around one third of installed capacity. It also recognises
that traditional methods of enhancing system capacity, for instance
involving new overhead line routes, are difficult to achieve due
to planning constraints and environmental concerns. Therefore
to avoid long delays, consideration will need to be given to the
deployment of new or previously unused technologies. Whilst Prospect
is aware that the industry is keen to embrace change but there
is an unavoidable inertia about the delivery of that change. New
technologies need to be researched, developed and deployed but,
in the meantime, mature technologies will have to be at least
under consideration on a level playing field in order to keep
the lights on while the technical challenges facing these new
technologies are identified and overcome.
What are the issues the Government and regulator
must address to establish a cost-effective offshore transmission
regime?
12. Since directly extractive renewable
generation (wind, wave, tidal) has to be sited where the renewable
energy source exists, it is inevitable that this will very rarely
be near load centres. Currently transmission pricing is geographically
based, which is a legitimate mechanism for encouraging construction
of fossil fuel fired or nuclear generation near the load centres,
but acts as an additional disincentive to remote renewable generation.
We would suggest that transmission charging rules be amended so
that specific types of renewable generation automatically qualify
for the lowest band of transmission charges regardless of location.
This should not apply to renewable energy technologies that involve
burning a fuel, eg biomass, since in choosing a location for this
it is right that all economic factors including the relative costs
of transporting fuel and electricity should be considered.
What are the benefits and risks associated with
greater interconnection with other countries, and the proposed
"supergrid"?
13. In many ways the vision of a super grid is
an attractive one. If achieved and operated efficiently by an
overall controlling body, there will be a requirement for less
installed capacity on the system. It would also enable cheaper
electricity costs to the consumer. However, there are significant
problems in application. The first and major challenge is to rebuild
and extend "whole industry" thinking from a fragmented
and often deficient resource base. There are real risks that network
integration challenges will not be met because they have been
seriously underestimated. For example, connection of the London
Array is akin to connecting a distribution system operating in
reverse the size of half of the Scottish Hydro network. This cannot
simply happen overnight and requires a whole set of engineering
skill sets in designing, specifying, planning, building, testing
and operating the network. All of these skill sets are currently
in short supply. A realistic view of capabilities is required.
14. The risks are that instability in one region
could cause the collapse of large parts of the system. If any
one country which was a net provider of electricity noticed that
demand frequency was falling, they would disconnect the supply
to adjacent countries possibly leading to system collapse and
major blackouts. For example, the blackout that occurred in Europe
in 2001 was evidence that an under-developed AC system with
lots of interdependencies has similar effects to a load of toxic
debt in the banking system: sooner or later the effects of the
borrowing have an impact on the strength of other parts of the
system. There needs to be a tight focus on maintaining an appropriate
balance between interdependence and appropriate network security.
Otherwise, the customer will not appreciate a greener but inherently
less dependable energy supply.
15. There are also risks from any assumption
that there is a new approach that can solve all the challenges.
For example, although the ENSG report correctly points to the
potential of High Voltage Direct Current (HVDC), it is less advanced
inherently than many of the flexible AC solutions being developed
to maximise the efficiency of the AC network and cannot be used
to the exclusion of other options. An entirely HVDC system would
struggle with re-energisation following a blackout; maintaining
stable thermal generation and wind farms functioning against a
large-scale control system of the network; and managing access
and protection of that large network (as HVDC networks cannot
detect faults efficiently).
What challenges will higher levels of embedded
and distributed generation create for Britain's electricity networks?
16. We have previously commented[102]
that we were not persuaded that distributed generation (DG) would
lead to improvements in network flexibility, not least because
of the significant additional investment needed in distribution
networks to make this happen. We said that although existing networks
are capable of taking new power flows, there are key physical
differences between networks below 132kV that are designed as
passive systems and those at higher voltage levels that can be
actively controlled. There are protection related challenges to
address in order to manage the interaction of DG with the high
voltage network. If increasing amounts of DG are added, local
systems will increasingly need to be redesigned around it. These
features will be expensive to install, lead to more complexity
and add to the challenges of network management. Most importantly,
they will also require different skill sets efficiently to deliver.
17. In summary, the high network fault levels
that are used to provide network stability often militate against
accommodating DG at an economically viable point of connection.
In fact, the strenuous efforts demonstrated by DNOs to use all
practical solutions to connect DG have, in many cases, reduced
network flexibility as the increase in fault level caused by the
additional generation may cause the safe working ratings of older
plant to be exceeded. The network then has to be temporarily "weakened"
in order to let routine network operations take place. In terms
of network voltage control, there are still significant hurdles
to be overcome. Recent developments in active distribution voltage
control have raised issues surrounding safety in terms of network
access by third parties with no DNO-recognised safety authorisations
in order to implement these controls and also regulatory issues
concerning the operation of the active control itself. Proposals
for active control simply allow the first generator to install
it to implement their own control requirements, rather than the
traditional automatic control used by the DNO. This means that
any subsequent generator wishing to connect to the same part of
the network using active control will not be able to do so, as
the chances of their control requirements being technically compatible
with any pre-existing active control are practically nil. Basically,
the first generator to "bag" the active control of a
high-voltage network effectively obstructs access for similar
schemes to that bit of network. There can only be one hand on
the "steering wheel" at a time and it makes sense for
it to belong to the DNO.
What are the estimated costs of upgrading our
electricity networks, and how will these be met?
18. It is clear that the scale of investment
envisaged in the ENSG report poses major financial challenges,
especially in the current economic circumstances. Companies are
currently prioritising the investment required to meet their licence
obligations and the regulatory cycle itself militates against
a longer-term approach to investment returns that will be vital
to deliver this vision. Any discretionary spend which may augment
networks and therefore require the requisite skills to be deployed,
is going to be under sharp consideration as the cost of capital
increases. Even ESI companies, that would in the past have been
gilt-edged investment propositions, are encountering appreciating
capital costs as investors and lenders become more risk-averse.
Prospect's view is that this will not be realised by relying on
markets alone and that government will need to take a more proactive
approach to ensure policy and financial stability.
19. Investment in all forms of energy generation
is long-term in nature, and requires a greater degree of certainty
than currently exists over future energy policy and the long-term
price for carbon. Whilst welcoming the provisions of the Climate
Change Act and work in progress to strengthen the European Union
Emissions Trading Scheme, Prospect is concerned that the time
horizons of these measures may be too short to encourage the necessary
investment. Prospect would therefore support the introduction
of an Energy Agency, operating at arm's length from government
but accountable to Parliament, that would balance the public interest
with market solutions.
How can the regulatory framework ensure adequate
network investment in light of the current credit crunch and recession?
20. The energy industry needs significant
investment to achieve many of the Government's targets (renewables,
energy efficiency, nuclear etc). We have already stated our belief
that investment in the energy industry would be timely considering
the current economic condition. However, the current climate for
raising finance for investment is very tough. Available capital
is limited and the price of capital is higher (particularly for
utilities) meaning returns have to be attractive enough to attract
the capital that is available. Current regulated returns in the
UK are not high enough to cover cost of raising capital or high
enough to attract limited capital available for investment. Regulatory
authorities in other countries are responding to these conditions
and the UK has to react to keep pace.
21. Whilst interest rates have dropped significantly
over the past six months, we are concerned that the lower base-rate
cost of borrowing could distort decisions over the appropriate
rate of return. As base rates have fallen, lenders and investors
have become substantially more risk-averse, augmenting the cost
of capital in sectors that are seen as being risky. Looking slightly
longer ahead, the Bank of England's adoption of quantitative easing
at least has the potential for a rapid and unwelcome turn in inflation
indices and, inevitably, interest rates. The UK has moved in short
order from a period of relative economic stability to one that
is likely to be characterised by government and regulators trying
to play catch-up with a rapidly changing set of economic indicators
that will only deter risk-averse investors. All stakeholders have
to be prepared and empowered to respond in kind to these fast
changing circumstances, which could "oscillate" through
many cycles in a typical price review period if sufficient "damping"
measures are not introduced. Prospect members will not be well
disposed to meagre cost-of-living wage settlements when the rate
of change of the indices such agreements are based upon is likely
to short-change them in a matter of a few months.
22. In addition, ownership of the DNOs has
become increasingly international in recent years, with Scottish
and Southern Energy remaining the sole UK-based owner. Owners
will therefore compare the reward and risk balance for transmission
and DNOs within a global context. There has to be the risk that
cross- border energy companies will attend to the needs of their
"home" market as the priority. Moreover what may be
rational corporate decisions, for example the deferral of expensive
projects that have an uncertain return due to the state of energy
policy at any one time, may be diametrically opposed to public
interest that manifests itself as a national power gap without
this investment. Whilst targeted incentives do have a benefit
in improving performance, we believe that the number and range
of financial incentives need to be considered against the increased
uncertainty that incentive schemes can generate. If the scope
for financial penalty is too large, even if balanced by reward
for improved performance, it will create a significant amount
of regulatory risk that will push up the cost of capital.
23. Therefore it is important that Ofgem
recognises the financial constraints on investment in the UK and
the danger of creating extra risk by an over-complex set of incentives.
Given the international nature of ownership and current events
in the global economy, it would be helpful to consider the electricity
network investment policy of energy regulators in France, Germany,
Spain and the USA.
How can the regulatory framework encourage network
operators to innovate, and what is the potential of smart grid
technologies?
24. There is a clear tension between the
wish to encourage the development of distributed generation and
the requirement on Ofgem to ensure efficient pricing. As Distributed
Generation develops, some schemes, indeed some technologies, are
likely to become redundant creating stranded assets. Therefore
a shallow pricing policy will need to ensure that DNOs can recover
the cost of connecting schemes that the DNO would not chose to
connect due to the additional commercial risk placed on the DNO
or Ofgem would need to give DNOs greater discretion to refuse
connection. Given our reluctance to require DNOs or any other
party to pick winners, we would prefer a more permissive approach
to connections that recognises the benefits to all network users
of any specific DG scheme.
25. At the same time as encouraging innovation
in technologies designed to facilitate DG interconnection or the
smart operation of networks, the operators of these networks could
be encouraged to develop partnerships with designers of demand-side
controls to ameliorate some of the voltage control issues. This
is much the same as looking at implementing energy efficiency
measures in homes, offices and schools before investing capital
in renewable energy sources to generate energy only to waste it
through inefficiency. Demand-side control technology has a significant
part to play.
26. Given the split between distribution
and generation activities and the need for DNOs to allow lower
voltage generators to connect directly to their networks, it is
important to modify the conservative approach to investment that
anticipates demand for increases in network capacity. With a need
for a significant increase in the amount of renewable generation
attached to networks, it will be critical to assure DNOs that
they are not going to be penalised for producing stranded assets
when generators' plans change and demand for capacity in a particular
location decreases. This will continue to throw up tensions between
the desirability of stimulating Distributed Generation connections
and a requirement on Ofgem to ensure efficient pricing. Therefore,
as we have said before, we favour a shallow pricing policy that
will (a) ensure DNOs can recover the costs of connecting schemes
that they would otherwise not choose to connect due to the additional
commercial risk placed on them and (b) not unreasonably penalise
DNOs when generation demand changes after plans to strengthen
the distribution network have been implemented.
27. In terms of licence conditions, we would
propose that DNOs should not be subjected to quality or other
technical requirements that unreasonably restrict their ability
to connect DG. To achieve this DNO licences will need to make
provision for recovery of the additional capital and additional
operational costs incurred through the connection of DG. If the
consumer is to obtain the full benefit of additional DG, then
there is an additional cost for more sophisticated and active
management of the distribution networks. In addition, some further
relaxation of licence exempt supply could be considered to remove
a potential barrier to successful launch of DG especially in the
DCHP schemes. Prospect would also like to see consideration given
to the scope for creating "lite" DNO and supply licences
for DG schemes that are intermittent suppliers to ensure the right
degree of customer protection and provide a clear framework for
DG interaction in the market framework. Where consumers are removed
from the competive market by DG schemes, then an approach to cap
charges and limit the life of local supply monopolies is required.
It may be, for example, that DTI with OFGEM could produce a standard
approach that would reduce costs.
Is there sufficient investment in R&D and
innovation for transmission and distribution technologies?
28. There is evidence of lack of support,
both generically and in relation to specific technologies. Many
new technologies are developed within the university sector, which
is increasingly beset by a lack of scientific and engineering
resource and expertise to progress them to development on a commercial
scale. The Government's own research facilities face similar pressures,
including lack of long- term support for demonstration and commercial
development. Unfortunately the UK is still bearing the legacy
cost of ESI privatisation which resulted in lack of funding for
R&D by utility companies and enforced a contract-driven culture
in companies such as EA Technology.
What can the UK learn from the experience of other
countries' management of their electricity networks?
29. The experience of both Denmark and the Netherlands
suggests that a fundamental shift in the origin of electricity
requires the examination of the generation, transmission, and
heat supply as a whole rather than some fine-tuning of the rules
for distribution and connection of renewable electricity. The
arrangements for connections are difficult to consider in isolation
unless there is certainty about the development of both generation
and distribution in the UK.
30. For example, the emphasis on supply competition
in the UK is potentially a barrier to the development of DG if
there is a need to link supply and distribution to make DG schemes
economically viable. This problem simply does not exist in other
EU member states with a different approach to security of energy
supply and the commercial separation distribution of generation,
transmission and distribution activities. Even where suppliers
own generation plant, UK regulation requires a substantial degree
of business separation that makes effective comparison with more
integrated energy networks very difficult. We suggest that the
experience of other EU member states is considered as part of
work on the Energy Review to identify a long-term energy strategy
that responds best to the specific circumstances of the UK.
March 2009
101 "Our Electricity Transmission Networks: A
Vision for 2020"-Report by the Electricity Networks Strategy
Group. Back
102
Distributed Energy-Submission to the Department for Business,
Enterprise and Regulatory Reform (January 2007). Back
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