Memorandum submitted by the Scottish Chambers
of Commerce (SCC)
Scottish Chambers of Commerce is the leading
representative organisation in Scotland with over 9,000 member
companies covering all sizes of company, all sectors and all geographical
parts of Scotland.
Q1. 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?
The central vision for the UK and devolved governments
must be for the electricity networks to be able to respond efficiently
to greater demand stemming from investment in new generation capacity.
In the period to 2020 and beyond, the UK's mix of
electricity generation is projected to change in three main ways.
1. Different types of generation capacity will
become more prominent, with an increase in renewables (especially
wind power, but also new areas such as tidal), micro generation,
possibly new nuclear power plants, and less reliance on traditional
coal fired power plants. Networks will need to be able to adjust
to allow new connections and increased capacity in different geographic
areas to cope with this.
2. New technologies will need to be harnessed
by electricity networks, including smart metering and smart grid,
storage techniques and methods to adjust to variable supply and
volatility in usage.
3. Overall capacity will need to be expanded
to cope with increased demand for network electricity as the economy
resumes growth and transport systems (both rail and car) switch
from on-board fossil fuels to electric power.
All these likely changes[110]
will (or should) result in increased market demand for network
capacity in different geographic areas. Policy should therefore
focus on creating and maintaining a system where demand can be
met by additional supply of capacity within time frames that are
compatible with the investment timetables of new generating plant.
In other words the network must be willing and able to respond
to price signals.
With a flexible system under this vision, the
competitive nature of the UK's energy markets should ensure that
they respond to pricing instruments designed to favour renewable
energy so that the UK can meet its carbon obligations without
placing financial costs on businesses and households that outweigh
the environmental benefits they are trying to achieve.
An electricity market that responds to market
signals should naturally encourage investment to bolster energy
security as political risk places a premium on imported energy.
Government should be wary of regulating to engender energy security
in case this removes the incentive for generators to invest for
the same purpose.
Q2. How do we ensure the regulatory framework
is flexible enough to cope with uncertainty over the future generation
mix?
Uncertainty is a given in this market as in
others. No-one can predict with any certainty how the electricity
market will develop, as Ofgem freely admits.
The liberalisation of the UK's energy markets has
allowed us to cope well with change. In fact, reform was undertaken
in part to encourage change, since competitive markets spur the
innovation required to improve productivity, lower costs and improve
service.
SCC believes that this process has been a success,
and that we are therefore well placed to embrace further change
to come. The essence to success lies in ensuring that electricity
networks continue to respond to changing demand signals.
Q3. 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.
One of the primary regulatory barriers to new
investment is the planning system. The planning system across
the UK has historically hampered new investment in two ways:
(a) complex developments take too long to be
assessed by the planning system; and
(b) the system does not take into account changes
in the economic importance of development relative to environmental
considerations. This is particularly important with regard to
electricity networks where the changes described in Q1 above are
leading to major shifts in the relative economic importance of
different developments. In other words, if a type of development
increases in terms of the return on investment, its value to society
should grow relative to any environmental disbenefits it inflicts,
and the planning system should take this into account. At the
moment it does not, though in Scotland as elsewhere in the UK
recent reforms are attempting to engender more of a culture in
favour of economic development among planning authorities.
A classic example of both these problems is
the controversy over the Beauly to Denny power line which is essential
to improving network capacity so that new renewables projects
can come on stream in the North of Scotland. The planning system
has caused a 10 year or more delay in this project and seems to
take little account of the increasing economic importance of this
investment.
Such a regulatory barrier is a major impediment
to the network's ability to react to the demands of a changing
industry, so that of the contracted generational capacity that
is being developed in the North of Scotland, 50% is not due to
come on stream until after 2014.
In terms of industry regulation, a critical
factor is to ensure long term stability in the rules that govern
the market so as to inspire investor confidence. SCC believes
that network charges must reflect the actual costs of access and
transmission as far as possible. It is important for the regulator
to ensure that a level playing field is maintained in this regard
so that competition from incumbents and market entrants is maximised
in the consumer interest, and costs are kept down for businesses
and consumers.
Such a regime will allow investment in the new
technologies that will become more important over the next decades.
Of course, government and the regulator must
introduce incentives that encourage the development of generating
capacity that does not inflict environmental costs on society
as a whole. But these should be kept simple and proportionate.
There is no point subsidising certain types of generation if the
overall cost of doing so outweighs the costs saved by lower carbon
emissions, for example.
So that this balance is struck as accurately
as possible, SCC believes the advantages of low carbon generation
should be reflected as simply as possible using a small number
of mechanisms so that market distortions are kept to a minimum.
The existing system of ROCs is a good one that can be adjusted.
There is no need to add extra incentives for renewables, for example
by awarding preferential access terms or subsidised transition
charges.
Q4. What are the issues the Government and
regulator must address to establish a cost-effective offshore
transmission regime?
Access and cost are the crucial issues that
govern new capacity, and offshore transmission is no different.
Again, government and regulator must work to establish a system
that allows investment where it can find a return. In the case
of offshore development, this may mean a more co-ordinated approach
to the distribution of development licences so that the industry
can react in building infrastructure in a cost efficient manner.
Q5. What are the benefits and risks associated
with greater interconnection with other countries, and the proposed
"supergrid"?
Potential Benefits
1. Greater competition from operating a larger
market, leading to lower costs and higher productivity. 2. Economies
of scale from a larger customer base may create additional opportunities
for lower costs (so long as they do not undermine competition).
3. Operating across a larger geographic area should allow a better
balance to be struck between different generating types, leading
to less volatility. For example, variable sources of wind energy
in Northern Europe could be countered by those in the Mediterranean.
4. Security of supply could be enhanced in certain
circumstances, for example, if power plants in one part of Europe
experienced difficulties from industrial action or technical failure.
Risks
1. Differing regulatory regimes could put UK
businesses at a competitive disadvantage. 2. The UK could lose
control of its regulatory regime, leaving it exposed to less beneficial
regimes imposed at the EU level.
3. The UK could become exposed to the greater
political risk experienced by some continental markets, for example
those that are reliant on imported fuels from less stable regions.
4. A financial commitment to a supergrid, especially
if politically driven, might not be justified by the ensuing benefits.
5. We must not lose sight of the effects of losses
over distance. It is vital that if the principles that dictate
the sense behind renewable are valid that all generation is as
close to usage as possible. Selling spare capacity across long
distances inevitably leads to large losses as against inputs.
If it means we profit from surplus capacity well and good. Our
first priority, however should be security of home supply and
the maximisation of efficiency within that.
On balance, SCC believes that, so long as the
UK government ensured a benign regulatory regime, and expansion
of the market would be beneficial to UK consumers and industry.
Q6. What challenges will higher levels of
embedded and distributed generation create for Britain's electricity
networks?
These are likely to increase overall pressure
on the capacity of electricity networks, and also increase volatility
of demand. Both these issues are part of the wider challenge,
and will be addressed adequately if regulatory barriers to investment
are removed.
It does seem that the National Grid is developing
a level playing field in terms of connection, but there is a further
issue of fair access charges. The regulator needs to ensure that
all users are charged on an equal basis that reflects the costs
imposed on the system.
Microgenerators should be encouraged (on the
German model). Sources of stored capacity (eg water header tanks
for hydro, hydrogen conversion) should be found to even out daily
fluctuation in capacity and allow the storage of potential energy.
Economic uses for plentiful supply should be identified close
to source of generation. This is potentially a major source of
rural regeneration.
Q7. What are the estimated costs of upgrading
our electricity networks, and how will these be met?
A number of reports have looked at the question
of overall cost in detail, and SCC has little to add in terms
of technical information. On a per capita household and business
basis, most estimates point to a manageable annual cost. The challenge
lies not so much in the level of investment, but how it should
be channelled, and that underscores the importance of a demand-responsive,
flexible network that can respond to the needs of the industry
and is capable of raising the necessary capital on the back of
stable and predictable income flows.
Q8. How can the regulatory framework ensure
adequate network investment in light of the current credit crunch
and recession?
The credit crunch is placing enormous burdens on
industry generally by making it harder to raise capital, causing
economic uncertainly, and reducing demand across the economy.
The electricity sector is no different. There is nothing specific
the regulator can do to address these generic problems. However
the difficult times we find ourselves in can act as a spur to
ensure that the climate for investment is as attractive as possible,
which means stability, certainly, transparency, responsiveness
and a level playing field in terms of access costs, which in turn
allow a rate of return commensurate with investing in new capacity.
Q9. How can the regulatory framework encourage
network operators to innovate, and what is the potential of smart
grid technologies?
Maximising competition in the marketplace is the
best way to encourage innovation, as operators seek to gain market
advantage by deploying new techniques and new technologies.
At the same time the regulator needs to adjust pricing
where necessary to ensure that innovation can take hold in areas
such as storage, which will become increasingly important as new
sources of power come on stream and volatility of supply increases.
Q10. Is there sufficient investment in R&D
and innovation for transmission and distribution technologies?
SCC is not aware of any major gaps in investment
in R&D or new technology. The government's proposals for smart
metering are a welcome addition to efficient usage.
Q11. What can the UK learn from the experience
of other countries' management of their electricity networks?
The UK enjoys a liberal regime which encourages competition
and innovation in different segments of the market. It is in the
interests of business and domestic consumers that the regulatory
regime continues to encourage market entry, new capacity and investment,
whether in generation, networks, wholesale or retail.
As the prospect of connecting the network internationally
grows, the UK government would do well to look at best practice
from other international agreements, for example in Ireland and
Scandinavia.
But SCC believes that the most important lessons
are to be learnt in the field of planning and infrastructure project
management. The UK has a poor record of handing major infrastructure
projects in both these fields.
Our planning system is sclerotic compared to
how other countries handle strategic investments. SCC believes
strongly that government at all levels in the UK needs to look
carefully at how the planning system in countries such as France,
Germany, Denmark, the Netherlands, the Irish Republic and Spain
copes with the competing demands of economic imperative and environmental
concerns. In particular there are lessons to be learnt in terms
of how local communities are compensated for major development
while planning authorities are incentivised to make decisions
swiftly and in the greater economic interest.
A further issue is in project management costs.
Britain has a woeful record of cost overruns and delays in the
construction of major infrastructure projects, particularly when
government is involved. The electricity network is likely to need
a series of transformative investments, some of which may require
direct government involvement. We should look carefully at our
record of fulfilling such projects and seek to learn best practice
from comparable countries round the world.
May 2009
110 Explored in detail in reports such as Our Electricity
Transmission Network: A Vision For 2020, by the Electricity
Networks Strategy Group, March 2009. Back
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