Appendix: Government
Response
Introduction
The Government welcomes the Select Committee's report
on "The future of Britain's electricity networks".
The report identifies the vital role of the underlying electricity
network infrastructure in delivering our energy and climate change
targets, and the importance of greater and more strategic investment
and the transition towards a smarter grid.
We have made significant progress to ensure that
our electricity networks can best support new low carbon generation.
The Secretary of State for Energy and Climate Change announced
in the July Annual Energy Statement a comprehensive package of
actions around the electricity grid. The Committee's report helped
inform the development of this package of actions.
Getting connection to the grid has historically been
a major barrier to the new renewable and other generation the
UK needs to meet its climate change targets and deliver energy
security. To help address this, we announced as part of the Annual
Energy Statement the implementation of a new enduring "Connect
and Manage" regime for grid access, enabling new generation
to connect to the network quickly and removing a key barrier to
new renewables. We implemented this regime in August 2010. This
provides greater certainty for all new generators about the rules
for access to the grid over the long term.
As the Committee notes, investment in new network
is the real solution to connecting the new generation required
to meet our energy and climate change targets. The March 2009
Electricity Networks Strategy Group 2020 Vision sets out the potential
transmission investments needed to connect the significant changes
in the generation mix to 2020. The report estimates that upgrading
the onshore grid could require up to £4.7bn of new investment
over the next decade. Ofgem is currently working with transmission
companies on the required regulatory approvals for this investment.
Good progress is being made. In April Ofgem made changes
to Transmission Owner licences to implement its final proposals
for £319m of priority investments within the current transmission
price control period (2007-2012). Ofgem is now considering further
priority investment proposals from the transmission companies
for a decision by April 2011.
Offshore wind will be crucial to delivering our renewable
and low carbon targets. Under current plans, up to 50 GW of offshore
wind generation and other marine technologies is expected to be
developed over the next 10-15 years, which could require up to
£20 billion of transmission assets to connect offshore wind
farms to the onshore grid. The Government has therefore been
working to put in place the most effective regulatory regime so
that these connections can be delivered in a cost effective, timely
and co-ordinated manner.
The Annual Energy Statement stated DECC's decision
to consult further with Ofgem on the enduring regime for offshore
transmission. This consultation proposed that offshore windfarm
developers be allowed to construct transmission assets, before
transferring them to an Offshore Transmission Owner, to give them
more flexibility and to address project delivery. DECC and Ofgem
announced in an Open Letter on 21 October 2010 our intention to
implement the changes necessary to deliver this option.
The Annual Energy Statement also pre-announced Ofgem's
independent review of the transmission charging regime. Project
TransmiT, which was subsequently launched on 22 September with
a call for evidence, aims to ensure that arrangements are in place
that facilitate the timely move to a low carbon energy sector
whilst continuing to provide security of supply at value for money
for existing and future consumers.
We are also considering future electricity network
policy and the steps towards a smarter grid. Ofgem is providing
£500m funding over the next five year through the Low Carbon
Networks Fund to support smart grid trials, and DECC is providing
£2.8m towards eight smaller smart grid demonstration projects.
DECC is rolling out smart meters to every UK home by 2020 - giving
consumers more information about the energy they are using and
putting in place the first steps towards a smarter grid. We are
working with industry to develop a framework for smart grid standards,
focussed on cyber security issues, to be published by the end
of the year. Building on this, as part of our work on Electricity
Market Reform, we are considering the future challenges for the
electricity networks, the options for balancing the future electricity
system, and the development of smarter grids.
Responses to the conclusions/recommendations of
the Select Committee
1. 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)
The Government recognises that networks will be vital
to enabling the transition to a low carbon economy and that Government
will need to be proactive in grid development and provide strategic
leadership so that we are prepared for the future changes expected
to Britain's electricity system. In line with DECC's 2050 pathways
work and the Electricity Market Reform project, work is also underway
to fully understand the future implications for networks of the
move to a low-carbon economy.
2. 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)
DECC has carried out work to identify the electricity
supply and demand pathways to 2050, which was published for views
in July. These pathways provide the basis for understanding what
the challenges will be for networks from both a generation and
demand perspective. The Government will take account of these
future uncertainties when developing network policy, both with
regard to types of technologies and behaviours that are likely,
as well as the timing and trajectory of future developments. However,
it should also be recognised that there is a trade-off between
ensuring flexibility for the future and the need to take decisions
early enough so that the network is prepared to enable future
changes to the energy system and not be a barrier to it. This
is especially important given the long lead times associated with
network development. The Government will seek to balance avoidance
of lock in against the need for early investment.
3. 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)
To deal with greater levels of inflexible and intermittent
generation at the same time as increasing levels of demand, there
are a number of potential solutions available to enable effective
balancing of demand and supply whilst maximising asset utilisation.
These include demand management but also others such as more storage
and greater interconnection. Increasing demand management is potentially
a very attractive option, especially given the expected electrification
of the transport and heating sectors, and should play an active
role in the management of our energy system.
The Government is considering the potential trade-offs
between these different solutions based on their associated costs
and benefits and the implications of different demand and supply
scenarios for networks and balancing policy.
4. 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)
The Government and Ofgem recognise the importance
of long-term regulatory and policy stability for investment.
In line with DECC's 2050 pathways work and the Electricity
Market Reform project, work is underway to fully understand the
future implications for networks of the move to a low-carbon economy.
On 4th October 2010 Ofgem published its
"RIIO: A new way to regulate energy networks Final Decision"
document setting out the new regulatory framework for electricity
and gas transmission and distribution. The RIIO (Revenue=Incentives+Innovation+Outputs)
model incorporates the conclusions of the RPI-X@20 review. The
document set out Ofgem's desired outcomes for networks playing
a fuller role in a delivery of a sustainable energy sector and
providing value for money for existing and future consumers.
These outcomes are driving changes in the regulatory framework
and are aligned with the views set out in the Committee's report.
There are a number of aspects of the framework that are relevant
to long-term regulatory stability, most notably a focus on delivering
outputs related to sustainable energy sector (including security
of supply and delivery of low carbon), a focus on efficiency over
the longer term and, related to this, a need to consider how best
to keep options open where appropriate and how to value flexibility
in the assessment of delivery solutions, as well as strong rewards
for delivering and strong penalties for not delivering.
The RIIO framework for electricity networks will
be applied in the next Transmission Price Control ( 2013-2021)
and Distribution Price Control ( 2015-2023). The Government recognises
the need for the regulatory framework to adapt to incentivise
and enable network companies meet the future challenges of a sustainable
energy sector. We therefore welcome the outcome of the review
and are engaging with Ofgem and other stakeholders in this area.
5. 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)
Ofgem is responsible for ensuring that all licensed
GB market participants comply with relevant licence requirements
and it enforces competition law rules in the GB gas and electricity
sectors. There are clear standards for non-discriminatory third
party access to gas and electricity networks underpinned by the
requirements of EU legislation. Ofgem keeps the market under
review and can investigate complaints of discriminatory or anti-competitive
practices.
The Government intends to consult shortly on the
implementation of the Third Package of EU legislation relating
to the internal energy market. This legislation, which includes
new Gas and Electricity Market Directives, strengthens the requirements
for the unbundling of transmission assets. Ofgem will be responsible
for certifying whether transmission undertakings in Great Britain
(including the Scottish electricity transmission businesses) meet
the unbundling requirements of the Third Package.
6. 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)
The Committee raises some important principles for
developing a smarter electricity grid.
We are considering the delivery of smart grids within
the development of overall network policy to ensure an integrated,
coordinated approach. Smartening of the grid should help to enable
increased demand management, which will be important in managing
the future energy system. Demand management needs to be considered
alongside other solutions which will help manage inflexible generation.
We recognise that "lock-in" should be avoided
where possible and uncertainty should be minimised, but there
is also a balance that needs to be found between these two objectives.
To achieve this balance the trade-offs between them need to be
considered and the value of waiting understood.
We welcomed the publication of the Electricity Networks
Strategy Group smart grids route map.This set out a high-level
description of the way a UK smart grid could be delivered, outlining
the need for a range of well targeted pilot projects to be delivered
between 2010 and 2015, with a view to scaling up those that are
technically and economically successful for UK-wide application
from 2015 onwards. It identified a range of potential challenges
from a technical, industry, customer and regulatory perspective
and emphasised the need for cross-industry coordination and stakeholder
engagement.
7. 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)
We would like to thank the Committee for the scrutiny
it has undertaken to date on the draft National Policy Statements
(NPSs). The Government has announced that it will reform the major
infrastructure planning system by abolishing the Infrastructure
Planning Commission (IPC) and replacing it with a Major Infrastructure
Planning Unit (MIPU) based in the Planning Inspectorate. In the
MIPU system decisions will be taken by Ministers in accordance
with the policy framework provided in NPSs, and on the basis of
recommendations by the MIPU.
The IPC's fast-track application and examination
processes will be retained and the Government intends that the
statutory timetable for decision-taking will be no longer than
the current IPC regime. A more detailed implementation plan will
be published later in the year. The Government published its
response to Parliament (including the ECC committee recommendations)
on 18 October 2010 alongside the revised draft NPSs, (including
a revised draft NPS on electricity networks infrastructure).
NPSs will play a central role in the new system as the primary
documents used by the IPC and Ministers under MIPU when making
decisions. They have been written to integrate environmental,
social and economic objectives and provide clarity on the need
for infrastructure, to enable the IPC to balance the benefits
against the adverse impacts.
The Department for Communities and Local Government
(CLG) have also been looking at planning at local authority level.
The Killian Pretty Review undertaken in 2008 investigated opportunities
for improving the planning process. It made 17 recommendations
to Government on ways to make the planning application system
faster and more responsive.
The majority of the recommendations in response to
the Killian Pretty Review have been implemented. There are a number
of outstanding recommendations in relation to development management,
the use and discharge of planning conditions and statutory consultation.
The Government intend to radically reform the planning system
based on the principles set out in the Conservative Party publication
"Open Source Planning". In this context, the new Government
has yet to decide its approach or timetable in relation to the
outstanding Killian Pretty Review recommendations.
8. 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)
The Government agrees that the Electricity Networks
Strategy Group's work represents an important contribution to
ensuring the grid infrastructure is in place to help meet our
2020 renewables and climate change targets. The investments identified
by the ENSG need to be assessed and authorised by Ofgem to ensure
that they are required and will be delivered cost effectively.
As the Committee notes in paragraph 52 of its report, this process
has already begun with investment proposals put forward for priority
projects identified in the ENSG. In April 2010, Ofgem authorised
£319 million for pre-construction and construction activities,
representing the first tranche of up to an additional £1bn
of funding for the period up to the end of March 2012. Ofgem
is considering the approval of further investment based on information
provided by the transmission companies.
The Government welcomes the progress made to date.
We recognise the need to avoid delay to grid investment but also
that the proposed costs of such investments require scrutiny .
We note that Ofgem's proposals have received support throughout
the industry, including from the transmission companies, and that
it anticipates providing further funding for projects. We are
mindful of the importance of progress in this area remaining on
track and will continue to engage with Ofgem and the transmission
companies.
9. 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)
The Government agrees that the fundamental review
of the Security and Quality of Supply Standard being led by the
three transmission licensees (National Grid, Scottish Power Transmission
Limited and Scottish Hydro Electric Transmission Limited) is important
given the need to maintain adequate levels of supply, while also
determining how security of supply standards might best align
with future generation profiles. The transmission licensees
are seeking to prioritise the elements of the review, with first
substantive outputs expected shortly, which will among other things
address the optimum transmission capacity to support intermittent
generation (e.g. wind and wave).
The Government looks forward to these outputs and
anticipates that the review will establish a suitable technical
framework for planning and operation of transmission infrastructure
as the generation mix changes in favour of increasing levels of
renewable generation.
10. 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)
We note the Committee's concern that the nature of
BETTA could artificially inflate the level of constraint costs.
In broader policy framework terms, DECC and HM Treasury
are taking forward the Electricity Market Reform project, to ensure
the electricity market framework can most effectively deliver
a fair deal for the consumer and the low-carbon investment needed
in the long term. This review will take account of the available
analysis and evidence, such as Ofgem's recent Project Discovery
work and the advice of the Committee on Climate Change.
Within this context and informed by DECC's work to
establish generation and supply pathways to 2050, work is underway
and will continue over the current months to fully understand
the implications for networks of the move to a low-carbon economy.
In addition, as the Committee notes, in the Energy
Act 2010 a new Market Power Licence Condition was introduced,
with the aim of protecting the consumer from the potential exploitation
of market power in the electricity balancing market. This measure
will help ensure a fair deal for consumers while essential network
investment is made. Investment in upgrading the transmission network
will significantly reduce the constraint situations that may give
rise to exploitation and provides the long-term solution to this
form of market power.
11. 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)
On 1 March 2010, Ofgem vetoed the locational Balancing
Services Use of System (BSUoS) modification that had been brought
forward by National Grid and considered through the normal governance
process. Ofgem concluded that on balance implementation of the
modification, GB ECM-18 Locational BSUoS, would not better facilitate
the achievement of the relevant objectives specified in National
Grid's licence and the Authority's principal objective and statutory
duties.
The Government's enduring grid access regime, which
was implemented in August 2010, requires the continuing socialisation
of constraint costs. This means that locational BSUoS does not
make up part of the enduring arrangements.
The Redpoint analysis commissioned by DECC to inform
the consultation on grid access reform suggested that the locational
BSUoS model had the potential to reduce overall costs by altering
the dispatch behaviour of conventional generation in constrained
parts of the network. However, this reduction is only of significance
if constraint costs are at the upper limit of expectations, and
if generators are able to perfectly forecast the likely BSUoS
charge and decide to alter their behaviour accordingly. In determining
the enduring grid access reforms, we concluded that the introduction
of a complex ex-post charge could adversely impact parts of the
network (particularly Scotland) where good renewable energy resource
needs to be harnessed, would not send the best signal for investor
confidence, and would not be justified by the expected impact
on costs.
12. 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)
We are grateful for the Committee's contribution
to the debate on transmission charging. We announced in the Annual
Energy Statement in July that Ofgem would launch an open and independent
review of the transmission charging regime.
Ofgem published a call for evidence on 22 September
launching Project TransmiT.
Transmission charging arrangements are an important
matter for Ofgem and the EU Third Energy Package imposes a duty
on the independent regulator in relation to the fixing or approving
of transmission tariffs or their methodologies. It is therefore
appropriate that this review is being undertaken by Ofgem. At
the same time, the European Commission's Interpretative Note on
the Third Energy Package recognises that Government has a role
in setting the high-level policy framework. The Government has
a strong interest in seeing a transmission charging regime that
supports overall low-carbon generation and security of supply
policy goals. Putting in place transmission charging arrangements
that facilitate meeting these goals is explicitly set out as Ofgem's
stated objective for Project TransmiT.
13. 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)
14. 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)
In determining the way forward on grid access, the
Government took full account of the Committee's view that timely,
effective and enduring reforms were vital in supporting the UK's
climate change targets and ensure energy security. That is why
we announced in the Annual Energy Statement that we were implementing
an enduring grid access regime in August 2010.
This enduring regime is based on a 'Connect and Manage'
Socialised Cost model, which enables new generation to connect
to the grid without waiting for wider network reinforcement to
be completed. The costs of managing this additional generation
on the network are socialised across all generators connected
to the grid. The analysis commissioned from our consultants Redpoint
indicates that the costs will not be excessive - around 20 pence
per household per year to 2020 - and that the model will not have
a significant impact on existing generators. We expect this to
be the best model for investment, whilst other potential reform
models would have been considerably more complex to design, implement
and administer.
The Government agrees with the Committee's assessment
of the Interim Connect and Manage regime that was approved by
Ofgem in May 2009. This has already enabled National Grid to
advance the connection dates of around 13 GW of generation projects
by an average of 4-5 years. Our grid access reform puts the successful
Interim Connect and Manage arrangements in place on an enduring
basis and therefore involves minimal disruption to industry.
Our approach of embedding the key features of the
new regime in transmission licences will provide a stable access
regime. We understand that uncertainty for industry could deter
or delay investment and thereby undermine the objectives of our
grid access reforms.
Other possible reforms, such as the potential for
greater sharing of network access, are a matter for the existing
industry governance process to take forward.
On the matter of priority dispatch for renewable
generation, the Government notes that, unlike many European markets,
the UK does not have a centralised dispatch system. Instead,
the UK provides guaranteed access, with every connected generator
having a guarantee of being able to use the electricity network.
The only reason generators may not be able to generate is to
ensure the reliability and safety of the grid system. On such
occasions, the UK's market arrangements determine which generator
reduces its output, with compensation provided. This type of
arrangement is specifically recognised in the Directive 2009/28/EC
on the promotion of the use of energy from renewable sources.
Renewable generation sources such as wind benefit from these
arrangements as zero-marginal fuel cost generators will be higher
in the merit order, and will therefore run ahead of other generation
types.
15. 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)
Ofgem has now made the necessary licence changes
that will lead to the implementation of its proposals by the end
of the year. This includes reforms that will allow more parties
to propose changes to codes and charging methodologies, allow
Ofgem to undertake significant code reviews and also allow Ofgem
to step back from less material areas of the codes. These changes
should speed up the code modification process and contribute towards
meeting the Government's energy goals on tackling climate change
and ensuring security of supply.
16. 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)
The Government agrees that the new offshore transmission
regime represents a valuable commercial opportunity for domestic
industry and investors. A key element of the enduring regime for
offshore transmission Is the competitive tender process for appointing
Offshore Transmission Owners (OFTOs) to own and maintain (and
also construct, where this option is selected by a generator)
the offshore transmission assets. This is intended to encourage
innovation and enable new entrants to compete in the market, as
well as deliver best value to the consumer. The first tender round,
commenced in July 2009, has attracted very strong interest and
preferred OFTO bidders were selected in August 2010 to own and
operate the first £700 million worth of transmission links
to seven of the nine projects in this round. The preferred bidders
are new entrants to the market.
The flexibility for offshore generators to decide
whether to construct onshore themselves or for a third party appointed
on the basis of a competitive tender process acknowledges the
challenges faced offshore.
17. 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)
The Government welcomes the Committee's support for
the competitive approach to offshore transmission to deliver cost-effective
connections to the onshore grid. We also recognise the importance
of coordination of grid connections. As part of the new offshore
transmission regime, National Grid's role as onshore GB System
Operator has been extended offshore to become the National Electricity
Transmission System Operator (NETSO). This should help ensure
coordination and efficient operation of the network.
An obligation was also placed on National Grid to
produce an annual Offshore Development Information Statement (ODIS).
This statement sets out a range of future scenarios for the development
of the offshore transmission system, with the purpose of providing
information about the likely impact of possible future scenarios
on the development of the national electricity transmission system.
It also highlights opportunities for developers to develop co-ordinated
transmission connections together. The ODIS was published on 30
September 2010 and will be updated annually.
The recent consultation on the enduring regime for
offshore transmission, launched in August, sought further views
on how the regime can deliver co-ordinated development. Following
analysis of the responses, the Government and Ofgem announced
in an Open Letter on 21 October 2010 that we will undertake further
work to consider whether additional measures will be required
to deliver co-ordinated networks through the offshore transmission
regime and, if so, what these measures might look like in practice.
We will continue to engage with National Grid, the Crown Estate,
developers, OFTOs and other stakeholders to ensure the regime
remains fit for purpose for Round 3 projects. We envisage launching
a specific consultation on the strategic development of offshore
transmission in 2011, on the back of this further analysis.
The Committee has expressed a concern that companies
might underestimate the cost of the work for which they have tendered.
Ofgem has designed a robust competitive tender process which will
ensure that bidders are fully informed of the costs and risks
involved with tendered projects and that the bidders are properly
assessed to ensure they have the capabilities to meet the requirements
of the tender, and is monitoring the process.
18. 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)
The Government agrees that greater interconnection
with other European markets should help manage intermittency as
more wind generation connects to the GB system in the coming years.
While we are continuing to press for full and timely implementation
of the EU Third Package of internal energy market legislation,
we are encouraged by the progress that has already been made in
liberalising the European energy sector. Both the Government
and Ofgem have been particularly proactive in pursuing improvements
in transparency. The electricity sector has led the way in releasing
information to the market but, even on gas, the level of information
provision has improved markedly with the release of daily information
on the use and availability of gas networks in North West Europe
and on daily gas storage levels throughout Europe.
Greater interconnection will also provide trading
opportunities which should have a positive impact on market liquidity
in GB, and thereby lower costs to consumers. This is why one
of the goals of the Third Package is to foster greater integration
of national energy markets by identifying where cross-border investment
may be needed, ensuring that interconnector capacity is used efficiently
and imposing new duties on national regulators to eliminate the
barriers to cross-border trade and ensure compliance with the
Third Package more generally. Ofgem will therefore need to provide
a regulatory framework for future electricity interconnection.
In this context, Ofgem issued from January to March a consultation
seeking views on how policy on the regulation of interconnectors
should be developed. Ofgem is developing an approach following
the consultation, with a proposal for a pilot project by the end
of the year.
19. 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)
The Government agrees that greater interconnection
with other European grids has the potential to make a useful contribution
to a low-carbon economy. For example a grid linking offshore
wind farms on the North and Baltic Seas (with each other and to
the nearest mainland grid(s)) could potentially have benefits
in addressing the intermittency and variability of wind generation.
However, as the Committee notes, connecting offshore
wind farms across Member Statesf
borders would raise many difficult regulatory, legal and technical
issues. Member States will therefore need to cooperate closely
to ensure that regulation and legal frameworks do not act as a
barrier where it makes sense to connect across in this way.
DECC is fully engaged in discussions within Europe
on these issues. The European Commission will publish a Communication
on Energy Infrastructure in November 2010 which will propose ways
in which priority infrastructure projects, for example offshore
grids in the Northern Seas and the connection of renewables in
South West Europe, can be taken forward. At the Energy Council
in December 2010, the Government plans to sign a Memorandum of
Understanding with the Energy Ministers of Germany, France, Belgium,
Netherlands, Luxembourg, Denmark, Sweden, the Republic of Ireland
and Norway, committing to cooperate on developing an offshore
grid to support renewables projects. This initiative promises
to be an effective way of progressing this work to our mutual
benefit. In particular, it will provide an opportunity for us
to feed in the experience we have gained in developing our offshore
regime and play a full part in developing wider EU arrangements
which support our political objectives.
However, to develop a more extensive North Sea grid
than is currently envisaged would require the laying of more
cables offshore, which would increase costs for offshore wind
developers and, under current arrangements, would have to be paid
for by electricity consumers. The Government therefore agrees
that further work is needed to better understand the benefits
and risks for the UK to support any additional costs.
The Government is supporting the initiatives to develop
concentrated solar power and wind energy in North Africa and the
Middle East, for example the Mediterranean Solar Plan. Such developments
will be costly and involve complex cross-border regulatory issues
but have the potential to be beneficial in terms of the energy
security and low-carbon agendas. We agree that a robust cost-benefit
analysis will be required to ensure that such initiatives provide
a cost-effective way of meeting our political objectives. On
the issue of energy security, the mutual dependence in the relationship
(solar energy for the EU, payments for the producing North African
states) should reduce the likelihood of supply interruptions.
Added security would come from the fact that there would be diversity
of supply, with several North African states being involved, none
of which would be in a monopoly position. Our view is that the
issues of investment costs (in production and cables), investment
regimes in the producer countries and cross-border regulation
seem of far greater significance than those of security and EU
dependence on one region.
20. 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)
As the committee recognises, the smart grid could
enable the use of demand side and distributed energy resources
more broadly, in a manner that would help integrate inflexible
generation, reduce network reinforcement and maintain network
stability and energy security. Heating and transport electrification
present the challenge of higher demand and different demand profiles
but will also offer a higher degree of flexible demand. This
will need to be integrated with both generation and the network
(with smart grid likely to provide the enabling underlying infrastructure)
as well as in the home through smart meters. Ultimately the smart
grid will allow integrated optimisation of transmission and distribution
connected generation dispatch, storage and demand response to
reduce the total UK system costs (across generation, networks
and consumers), and maintain system integrity.
The Committee's report raises some interesting points
about the future changes to the role of distribution companies.
This will result in a more complex system at the distribution
level that may lead to changes in the market framework to enable
efficient system operation. Distribution companies taking on a
local system operator role is one way that the future system might
be managed, however there are a range of options that we will
be considering.
21. 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)
DECC and Ofgem are in discussions with Ofcom regarding
suitable spectrum for Smart Grids.
22. 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)
The Government also welcomes the outcome of Ofgem's
DPCR5, which was preceded by a five-year period of record increases
in capital investment in the distribution network. Ofgem's final
decision on total expenditure implies an average cut to DNOs'
proposals but a record increase of almost 50% with respect to
the previous price control review. We believe the introduction
of the £500 million Low Carbon Networks Fund will encourage
investment in smart grid technologies which will help with increased
distributed generation and demand-side management.
23. 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)
We believe the introduction of Ofgem's Low Carbon
Networks Fund will encourage further innovation within the industry
which will help UK companies grasp the huge opportunities that
the global market will offer. We believe the opportunity offered
under the fund for end-to-end trials will ensure the UK is a first
mover in developing smart grids.
24. 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)
The Government is supporting the demonstration of
smart grid technologies through DECC's Smart Grid Demonstration
Fund. DECC have made £2.8 million available to SMEs and large
organisations over 2009/10 and 2010/11 to promote smart grid development
to support storage, balancing and automation load control measures
on the distribution network. The Government continues to explore
opportunities to fund smart grid development by collaborating
across Departments and ensuring funding programmes are complementary.
A particular focus for the future will be to pursue integrated
demonstration of smart grid technologies. Ofgem through the RIIO
package are further developing funding mechanisms for innovation
on the networks.
25. 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)
26. 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)
The Government recognises the important role that
distributed generation (DG) has to play in our transition to a
low carbon economy. The expected increase in DG will require an
appropriate charging regime to connect to, and use, the network.
Responsibility for the charging regime lies with
Ofgem, as the independent regulator, and National Grid, in its
role as National Electricity Transmission System Operator.
The Government agrees with the Committee's point
that the treatment of distributed generation is an issue requiring
industry and Ofgem consideration. Generators connected to the
distribution networks ('embedded' generators) are currently paid
the equivalent of demand Transmission Network Use of System (TNUoS)
charges, leading to a benefit of around £18/kW compared with
those generators directly connected to the transmission network.
National Grid's preliminary analysis suggests that the benefit
of embedding, in terms of avoiding transmission investment, may
be nearer to £6.50/kW, but there are conflicting industry
views on the justification for varying the level of embedded benefit
on that account.
This issue was extended into Scotland through the
development of the British Electricity Trading and Transmission
Arrangements (BETTA). In addition, due to the differences in transmission
voltage levels, embedded generators in England and Wales connected
at 132kV are treated differently to those in Scotland under BETTA.
Ofgem introduced the 'small generator discount' as an interim
measure to ameliorate the issue of differential treatment, and
National Grid has been under an obligation to use 'best endeavours'
to establish enduring arrangements for Scottish generators by
April 2011.
National Grid was in the process of seeking an enduring
solution to the 'small generator discount' which would predicate
a resolution of their view that embedded benefit is over-stated.
This process has been suspended as the issue is now being considered
as part of Ofgem's wider review of the transmission charging arrangements.
The Government agrees that this issue needs further
consideration by the industry and welcomes the opportunity now
available for this to be considered within the context of the
wider charging review. In considering revised arrangements
for distributed generation, we expect Ofgem to take into account
the possible impacts on both energy security and climate change
policies and other benefits introduced by locally generated electricity.
The current industry review process referred to in
paragraph 161 of the Committee's report is expected to provide
a robust charging solution based on the application of fundamental
economic principles of cost reflectivity, non-discrimination and
competition, and will seek to provide efficient and coordinated
allocation of access. The impact on the amount of investment in
transmission capacity required to accommodate the growth in DG
and the efficient allocation of this cost, recovered through electricity
transmission charges, is being addressed by Ofgem and National
Grid as a matter of urgency.
The Select Committee refers to Ofgem's RPI-X@20 review
which looked at the four network sectors and the extent to which
it is appropriate to regulate them in the same way. However, Ofgem
will not be regulating the system as a 'single entity'. The
structure of having four sectors regulated with their own price
controls will remain. Ofgem is, however, considering with stakeholders
what the outcomes and outputs are that would need to be delivered
in each sector. This is likely to include outputs relating to
connection conditions for DG at local grid level and there may
be cases for considering arrangements at transmission level too.
27. 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)
The Government accepts that the skills position is
challenging. But the electricity sector has the best analysis
of its current and future workforce, probably in the world, and
is developing a robust strategy for the ensuring that is has the
skills it will need.
Currently 35,000 people work in the electricity sector
and its immediate supply chain. This workforce is ageing and retirement
rates are set to increase sharply. Around 28,000 will leave the
industry by 2024. On top of this, at least 10,000 more need to
be recruited and trained to deliver the new investment, including
those required to integrate renewable energy and deliver smart
networks and meters.
The Sector Skills Council, Energy & Utility Skills,
has strategic responsibility for the electricity sector. The skills
strategy for the sector has been developed by employers from
the electricity industry and its supply chain through the Power
Sector Skills Strategy Group (PSSG). This group initiated plans
to develop a National Skills Academy to be the strategic manager
of skills and training for the industry. The PSSG was reformed
over the summer to form the sector strategy groups for the Academy.
Numerically, most vacancies will occur at craft and
technician grades. The most immediate need for the sector is to
increase both recruitment and the capacity to train these recruits
(through apprenticeships and conversion training for mature entrants)
to deliver skills at levels 3 to 4. This requires the training
capacity to be increased by at least 75%. Graduate recruitment
is also challenging, especially for power engineers.
The National Skills Academy for Power, which was
launched in March 2010, will provide strategic leadership for
the industry. It will work with EU Skills to ensure that occupational
standards and qualifications are up to date, develop and quality
control a network of accredited training providers, manage training
programmes on behalf of employers and refine the labour market
models to ensure that skill supply and demand are well matched.
It will also, on behalf of employers, deliver a major programme
on sector attractiveness, to promote the industry and its employment
opportunities to both young people and mature entrants from other
sectors.
The Power Academy is a collaboration between major
electricity sector employers, the Institution of Engineering Technologies
and seven UK universities to support up to 60 undergraduates per
year through power engineering degrees.
Employer members of RenewableUK (formerly the BWEA)
have developed an apprenticeship programme for wind turbine technicians,
to fill an important gap in training provision. The first cadre
of 18 students started their courses at Carnegie College in Fife
in September, with roll out of the programme to England and Wales
in the near future.
DECC has worked with EU Skills and an alliance
of Sector Skills organisations in a review of skills for renewable
energy. This has identified what exists in occupational standards,
training and qualifications and has highlighted key gaps in provision
for priority action by the SSCs and Academies.
Ofgem, in its draft settlement for Distribution Price
Control Review 5, has allocated £220 million for training,
in recognition of the need to address the workforce demographics
and also for the industry to prepare for a steep increase in
capital investment.
DECC and BIS launched a consultation on low-carbon
skills in March. This set out what was being done and gave us
feedback on both current activities and on what more needs to
be done. In the summer, BIS launched a consultation on simplifying
the skills support structures and making the system more flexible
and responsive to employers' needs. These will inform both departments
and enable us to better target our future strategy. We expect
to publish the formal response to both consultations in November.
Higher education is seeing a real increase in STEM
subjects and many engineering courses now offer elective modules,
for example in renewable energy and nuclear power. Specialised
Masters courses are also available. The Government, through EPSRC,
is funding five doctoral training centres across the energy field,
aimed at developing people with technical depth, coupled to a
broader business and societal understanding, who will become future
strategic leaders.
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