UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE

To be published as HC 907-iv

HOUSE OF COMMONS

ORAL EVIDENCE TAKEN BEFORE THE Energy and Climate Change Committee

A European Supergrid 

Tuesday 14 June 2011

Stuart Cook, Martin Crouch and Alison Kay

Daniel Dobbeni and Alberto Pototschnig

Evidence heard in  Public Questions  56 - 129

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Oral Evidence

Taken before the  Energy and Climate Change Committee

on  Tuesday 14 June 2011

Members present:

 Mr Tim Yeo (Chair)

 Barry Gardiner

Christopher Pincher

Sir Robert Smith

 ________________

 Examination of Witnesses

Witnesses: Stuart Cook, Senior Partner, Transmission and Governance, Ofgem, Martin Crouch, Partner, European Strategy and Environment, Ofgem, and Alison Kay, Commercial Director for Transmission, National Grid, gave evidence.

Q56 Chair: Good morning. Welcome to this meeting of the Committee and thank you very much for making time to come and talk to us. We are in the middle of this particular inquiry, as you probably are aware. Could I start off with a general question about how big you think the potential for UK offshore renewable energy is and why we need a supergrid if we are going to take full advantage of it?

Alison Kay: I think in our scenarios we see a very big potential for offshore wind. We see 16 GW of offshore wind by 2020, rising to some 37 or 38 GW by 2030. So we see, particularly for the 2020 renewable targets, offshore wind has a very big part to play. We see that the benefits that a wider supergrid can bring, other than provide things like backup support for intermittency, will enable us to enact more of the EU Liberalisation Directive, enabling cross-border trade. So I think we see very much offshore wind as a step towards a supergrid; a very important step towards something that ultimately we feel could be very valuable to the UK.

Stuart Cook: Perhaps if I could say a few words; Stuart Cook from Ofgem. My responsibilities are to lead on regulatory framework for distribution and transmission businesses. I think the Crown Estate have put into the public domain estimates of 40 GW of offshore generation as the potential that we might roll out to and clearly, in the context of the scale of generation that we rely upon to meet needs here, that is a massive opportunity. It is absolutely essential that that generation can connect into the onshore system, but it is a step further then to go to say that we need to have a supergrid and I think there are a lot of questions about what a supergrid would look like; how it would operate; whether it is technically feasible in the short-term. So I think it is absolutely clear that we need interconnection to the onshore grid network. It is also very important we have increased interconnection with other countries, for reasons which I am happy to elaborate on. I think there is a lot of work to be done yet to work out whether the supergrid is the right way of delivering all of the resources, but we are very open to doing that work.

Q57 Chair: If we had a supergrid, could that make us a net exporter of electricity?

Alison Kay: It certainly has the potential to do so, yes. At times when we have surplus energy here in the UK, there is definitely an increased ability for us to be able to export that spare capacity.

Stuart Cook: I would add to that, even with the existing interconnectors-Northern Ireland, the interconnector with France and the interconnector that has just come online called BritNed, which links us with the Netherlands-the Northern Ireland interconnector is permanently in export mode at the moment for physical reasons. The BritNed interconnector and the interconnector with France alternate between import and export. So we are already net exporters on occasions.

Q58 Sir Robert Smith: So is export leaving Britain to Northern Ireland or from Northern Ireland to Britain?

Stuart Cook: It is export from Scotland to Northern Ireland.

Q59 Chair: Why is a meshed grid better than point-to-point connections?

Alison Kay: We believe that an integrated offshore grid brings a number of very substantial benefits; one is cost. Our estimates have shown that we could knock some 25% off the cost by having an integrated grid. It enables us to scale up the size of the asset so somebody is planning ahead, making sure that the assets are not just sized for a particular generator appearing at the end of a radial link but are sized for all generators that may come at the end of that link. A very important benefit as well is that it does decrease, probably by around half, the number of onshore connection points that you want and, as we all know, planning and availability of land within the UK is a big issue.

These converter stations are twice the size of a football pitch and, therefore, the space they require as they go onshore is very great indeed. Another obvious benefit is co-ordination of the supply chain: making sure that we are giving clear signals as to what is going to be needed going forwards; giving the suppliers the necessary certainty to go out and do some R&D and to make sure these things are technically feasible and thus are able to size and plan their workbook accordingly for this very limited resource. The western HBDC cable that we are currently looking at from Scotland to England will tie up manufacturing capability of cable for two years. So there is a very great need to signal to suppliers the scale of this challenge coming forwards.

Q60 Chair: Your written evidence suggests that the integration of offshore energy is critical to meeting EU environmental targets. Does that mean that without a supergrid we won’t be able to generate enough renewables?

Alison Kay: We think that an integrated offshore grid, which we see as an important step to the supergrid, is very, very important for meeting our renewables targets. I would agree with Stuart that the evolving of the supergrid is something that we need to take step by step. It is the integrated offshore grid that we see as absolutely key to being able to meet our renewables targets.

Q61 Chair: Can that be done by 2020?

Alison Kay: The integrated offshore grid can be done by 2020 with the necessary caveats on supply chain, on onshore planning, on environment constraints. As I said, we are planning 16 GW of offshore by 2020.

Q62 Sir Robert Smith: The difference between an integrated grid and a supergrid?

Stuart Cook: If I may answer. I think sometimes these debates can be cast in quite black-and-white terms. The reality is there is a range of options for the way in which the offshore grid could evolve and which option makes sense, I think, will depend upon factors like the extent and the location of generation; whether or not you get planning consents for particular cables and interconnections onshore; the way in which technology evolves as well and the way in which the regulatory framework assists. The range of options that the transmission companies in Europe have looked at span from, at one end, something that simply is point-to-point, which is more or less the way that the system has evolved so far; to a system that involves optimisation of the onshore connection; to a system that involves the optimisation of the onshore connections and the interconnections across countries; to something that, at the extreme, is a meshed system looking like a grid on the sea.

Where we end up in that spectrum very much depends upon the factors that I was explaining at the start. It depends on how quickly generation comes on offshore and what level and extent and location of it. I think most studies point to the 2020s as the determinant decade. So it will be the generation that connects in the 2020s that will really place a shape around the way in which that grid evolves and determine it. Up until the 2020s, it is more in the realm of avoiding duplication of resources and optimising in a more limited way, rather than pushing out to the full supergrid potential.

Q63 Christopher Pincher: Can we talk a little bit about how the supergrid will reinforce the existing grid? You have touched a few of these points already, but in terms of congestion the flow of electricity in the UK is north to south and in terms of the current use of wind, as I understand it, the majority of offshore projects rely on a single connection to the onshore grid. So I wonder how you think an integrated offshore grid will help to ease the bottlenecks that we face.

Alison Kay: An integrated offshore grid will help ease some of those bottlenecks. If you size the connections to allow for all generation to share those assets, firstly, you are making sure that there is no risk of stranding. I think that you will able to ensure that the points at which those offshore connections come onshore are at parts of the system where the system is currently very constrained onshore, thus helping to ease congestion as we build out our offshore networks. So it is certainly a help in easing that congestion going forward. It is not a panacea. It still relies on the onshore network that we have in train, and things like the bootlaces that we see coming down the east and west coast of Scotland are still very necessary. We believe that with an integrated network, largely because of where you can be very much more co-ordinated in where those points come onshore, we can help to relieve some of those constraints going forward.

Martin Crouch: From an Ofgem perspective, we would certainly agree that an integrated network offshore can help. It is not going to solve the problems of intermittency on its own, but it is a contributing factor, along with the work on market coupling and integration with other markets, which will ensure that when GB prices are high we are importing and when our prices are low we are exporting, based on the flows across the interconnectors. When we have a lot of wind generation, we are more likely to be exporting. When we have less wind generation, we are more likely to be importing. So it will help balance the system there as well.

Q64 Christopher Pincher: You said that a supergrid would reduce costs by something like 25%. Is that largely soaked up by the curtailment that currently exists, by the bottlenecks that exist in the system? By removing those bottlenecks, are you saving 25% of costs or are there other ways of saving costs?

Alison Kay: No, if I can clarify. The 25% savings was on the integrated offshore grid. It is very important that I clarify it was on the integrated offshore, rather than the supergrid where work done through ENTSO-E-who you are going to hear from next-has shown that if we get some more co-ordination we should see savings of around 10%. That 25% saving was very much on capital costs, simply because you are sizing the assets slightly bigger than you would do with radial point-to-point connections. So it was very much 25% savings on capital costs, rather than on the ongoing constraint costs that we are likely to see. It was very much the capital costs point.

Stuart Cook: If I may, I think it is worth saying that a number of estimates are being produced about savings for co-ordination offshore, and indeed savings for the North Sea supergrid itself. We are, ourselves, at quite an early stage in the assessment of those. We have two steams of work under way at the moment: one through Europe and one through a Great Britain initiative, which is trying to understand assumptions and implications of costs and benefits. As far as Ofgem is concerned, we note the analysis that has been done to date, but we are not yet in a position to validate it as something that we would support.

Q65 Christopher Pincher: You said that you will be able to reduce the connector points by something like half. In terms of other transmission asset savings, are there others as a result of a meshed grid or is it just the connector points that we are reducing?

Alison Kay: For the integrated offshore coming onshore, it is just the connection points coming onshore. Our work has shown that, in order to meet the 2020 targets, we need the onshore reinforcements that were identified through the Electricity Networks Strategy Group and which we are currently taking forward.

Q66 Sir Robert Smith: Yes, continuing on the sort of spectrum of what might happen and over-sizing. To get a supergrid, do we need a lot of anticipatory investment by networks, assuming more future demand rather than waiting for that demand to appear?

Alison Kay: That is a very good question. I think, certainly in terms of our view of an evolvement to a supergrid, in some of the integrated offshore, we would see some need for anticipatory investment. Sizing assets back to shore slightly bigger than was currently signalled might be appropriate in some cases; still very appropriate to take into account user signals. I think you may also, depending on how the supergrid evolves-and I am very much with Stuart on this; we do need to take this step by step-there may well be some cause for some degree of anticipatory investment, but one of the things that we should absolutely make sure of is that we are really taking account of the way things develop, where the generation is coming on and the appetite for cross-border trade, before we look and see whether some form of anticipatory investment might be necessary.

Q67 Sir Robert Smith: For the layman, if you are laying a cable for 50 miles, if you put in a cable that is a bit bigger, is the cost in the cable worth the risk, because of all the other associated work doing it, or is better to come back and lay a second cable?

Alison Kay: After the event, I could clarify the exact cost, but it is certainly cheaper to lay a bigger cable in the first instance than to come back and lay a second cable. You wouldn’t do that without being fairly certain that you were going to see that further generation coming off as well. You wouldn’t take these decisions lightly. It would be a question of looking to see what was happening, where were the signals from the generators. Then it is very much cheaper to size a bigger cable than to go back and lay a second or indeed a third one.

Q68 Sir Robert Smith: Does over-sizing need to be led by Government or regulation or does the market signal deliver?

Stuart Cook: I will answer that question and, with your permission, I will also ask my colleague to expand on some of the other regulatory issues as well, which I think are quite important. On the onshore regime, we are already in a place where we fund certain anticipatory investments. That reflects the fact that nobody can know with certainty the way in which the system is going to evolve and we have to make decisions in the interests of future customers as well as current customers. That pushes us in the direction of doing our best to understand how the system is going to evolve. Onshore, we rely on the companies to come to us with evidence to make a case as to why they feel that that necessary investment is required. I would expect that sort of model to be appropriate offshore as well, because the companies are much closer to the coalface and understand-if I can use that analogy-exactly what is required, but I think anticipatory investment is not the only challenge.

Martin Crouch: No. Certainly the biggest cost issue and the biggest technical challenge is not the size of the cable so much as when you start to link the cables together, because we don’t have an example anywhere of a meshed DC grid to follow. So I think it is probably not realistic to imagine us leaping towards a meshed supergrid or a meshed integrated grid in one step; it is more likely to be an incremental approach. We have lots of interest at the moment from developers in point-to-point interconnectors between us and different countries. Over the last year, we have seen levels of interest expand enormously in that, and that can be a component.

If we were to do that and then come back and say, "Should we have laid a bigger cable?" I think that is unlikely to be the question. The question is more, "Can we link into that cable and create multiple hubs?" which is a real technical challenge. What we are focusing on in the North Sea Group, and in some of the other work, is identifying the building blocks and the hurdles that we need to address to enable some of these developments if, as things progress, it looks like that is a good way to go. So it is identifying the technical challenges; identifying the regulatory frameworks that are different around different countries around the North Sea and how do those enable anticipatory investment, where that is sensible; how do we get the right signals as to what will be required in future.

Q69 Chair: We had quite contradictory views about how the supergrid would balance out intermittency; Friends of the Supergrid, not surprisingly, on one side and the report from Pöyry on the other side. What is your view about that?

Stuart Cook: Can I give a view first and then I will let my colleagues come in with their own opinions? I think intermittency itself is a problem that lots of solutions can play a part in the evolution of the smart grid onshore, the development of storage solutions and the development of flexible response and smart meetings. All those things will play into this space. I think interconnection plays an important part in that overall mix of tools and opportunities, and there will be occasions when the ability to export and import is exactly what you need in order to plug a gap between generation and demand.

It does not solve the full intermittency problem though. There will be occasions, as we know from weather studies, when quite large geographical areas of Europe, in the north-west, will be without winds, collectively, and that is a problem that isn’t addressed by interconnection. The other issue that greater interconnection, supergrids and so on, does not readily address is what you might call in-feed loss; so the event when a single event trips off a circuit, for example, as a result of an accident or malicious action or whatever. In those circumstances, the system has to be resilient to cope with that loss of supply. Again, that is not something that is resolved by interconnection in the sense of some problem that is exacerbated by it.

Alison Kay: By and large, I am absolutely with Stuart on the answer to that. On paper at least, it must help with intermittency, having access to a greater range of power across Europe. Stuart is absolutely right about the wind. You can see a very high pressure and no wind right the across Europe, as we saw this winter. So it is not a panacea. It is not the same as having a CCGT that you can call upon to back up this intermittency. I guess with the supergrid you can see, as the supergrid may evolve-and certainly as some commentators are seeing the supergrid evolve-into going right down into southern Europe, and even perhaps further, and then up into the north, you get a greater range of generation available in mass solar and hydro and, again, it can all help with the intermittency, but it is very much an evolving step.

Martin Crouch: A technical point to add is, I think, the big short-term opportunity is access to the hydro generation in Norway and Sweden. They have close to 50,000 MW of hydro power that can be used to even out wind fluctuations if we have sufficient interconnection, although we are not the only country that might be seeking to use those reserves.

Q70 Chair: It does need to be pretty big if it is going to be able to take advantage of all this, which certainly has an impact on the costs.

Martin Crouch: Yes. In the short-term we are talking about 2 GW connections to Norway, which is going make an important contribution but a small contribution. It needs to be a lot bigger. Then the trade-off is avoiding anticipatory investment, sinking a lot of cost into it that customers will have to pay for unless we are fairly confident that is going to be well used. So that is always going to be the trade-off in these decisions.

Q71 Chair: Can we safely reduce our backup capacity here if we think we are going to have the chance to trade between European electricity markets?

Stuart Cook: I think it comes back to my comment about the fact that you have to be ready for the event when interconnection fails. In those circumstances, if a circuit trips out because of a fault, you still need the backup generation in order to provide the supply. So it is not clear that it would make a big impact upon the need for backup.

Alison Kay: You can see it reducing the need in some circumstances for backup generation. It would never get rid of the need entirely because, as Stuart says, conditions are likely to be the same right the way across Europe and you can never rely on the fact that there won’t be a fault at some point in time.

Q72 Chair: One of your National Grid colleagues told us that substantial electricity storage could be integrated into an offshore national grid. Do you think that storage is going to be a big part of the system in future?

Alison Kay: I think it is vitally important that we look at storage and look at storage on a mass scale and invest the R&D to ensure that that can come forward. I think it is a very important part of the mix going forward, yes.

Chair: I have just noticed that I should declare an interest as a director of Eurotunnel, which may have an effect.

Q73 Sir Robert Smith: You already touched on some of the supply chain constraints. What are the technical challenges that need to be overcome to develop an integrated offshore grid?

Alison Kay: If I go first on that. The suppliers are very much a part of a number of the groups that Stuart and Martin have already referred to; the North Sea Group and Friends of the Supergrid. So we are very much talking to them all the time. I think from where we sit we don’t see huge technical problems and huge technical challenges. What we do see: yes, assets on the scale that we are looking at haven’t really been utilised on the systems, but what we are being told by the suppliers is that they believe an up-step in the technology is very easy. What they need is the certainty to enable them to do that R&D and that is what is so very critical. So, technically, not huge challenges.

Stuart Cook: I think I might have a slightly different take on it. If I can, I will just say a couple of words by way of context. Most of the offshore generation that has been connected to the grid has been in relatively shallow waters, relatively close to the coast. I think colleagues in the oil and gas industry joke that we haven’t really got to where it is wet yet, offshore. To put that into context, if we go out to 2020s and beyond, we are talking about connecting generation which is probably more than double the distance we have connected so far. It is probably at more than double the depth and it is probably more than 10 times the capacity.

Now, when you are dealing with high voltage direct current systems, which is what is envisaged for the supergrid, you need to have a large physical separation between equipment otherwise it shorts out between itself. I think that is stretching the boundaries of technical capabilities. If I can paint a picture: the first of its kind high voltage direct current platform is connected to a wind farm called BorWin1, and it is connected to the German system. As a critical part of its infrastructure, it has a platform on which sits the converter station, which converts one type of current and voltage to another one. That converter station has the footprint of a supermarket and is four storeys high. It is a very large building and that is on a platform built into the sea. That is operating at 400 MW.

When people talk about supergrid, they are talking about 2,000 MW platforms. Remember what I said about the physical separation being important; we are going to end up with a much bigger structure supported on legs in the North Sea. That is not to say it can’t be done, but it is first of a kind. It is not fully commissioned yet. It is energised, but it is not fully commissioned. We haven’t had the opportunity to learn from the experiences of operating that or working out how we design and build a bigger converter station. You couple that with the fact that there are only a very few companies out there who are active in this space in terms of the supply chain-there are not many organisations who have expertise in this area-you are fishing in a relatively small pool of expertise.

The final thing I would say around the technical challenges is that we don’t yet have a viable circuit breaker for direct current-that is an opportunity to switch off a direct current circuit. I think the jury is out on whether we need one in order to get to supergrid, but there are some people out there who are saying at the moment that this is a critical gap in the infrastructure.

Q74 Sir Robert Smith: Why can’t you switch-

Stuart Cook: An alternating current goes up and down in voltage levels. At some point it is at zero and when it is at zero you can easily separate circuits. A high voltage direct current always creates a gap and we don’t yet have viable technology for solving that. I came here to try and paint a picture of an analogy. I think a good analogy of where we are at the moment is the Channel Tunnel, in the sense that when the Channel Tunnel was built it relied upon existing technology. In fact, many people talked about the Channel Tunnel being constructed 100 years ago; I think the first Channel Tunnel company was in the 1800s.

What the Channel Tunnel did was it pushed out the boundaries in a way that technology hadn’t previously been pushed out before. I think that is where we are with some of the technology on the supergrid and that the manufacturers are absolutely right-a grid is absolutely right. This is not a quantum shift in technology, but what it is is designing new things, bigger things, in an environment that we haven’t operated in before, and what my technical advisors say to me is that the thing that we mustn’t do is rush into this because that is when we are going to start making mistakes.

Q75 Sir Robert Smith: On the other hand, what kinds of signals are required by the supply chain to ramp up if we do want to end up down this route?

Stuart Cook: I think that is a very important point. There is potentially a role here for policymakers to help encourage innovation. It is very interesting to me that the Department for Business, Innovation and Skills, in their recent announcement on the Green Investment Bank, highlighted offshore grids as an area where they felt that, because of the R&D challenges and because of the novelty of what was needed, it might be in need of financial support to help that. I think that is an interesting observation.

Q76 Sir Robert Smith: Is it a global supply chain challenge? I mean, is the UK better placed or-

Stuart Cook: No, globally there are not many people who can do it.

Alison Kay: Absolutely.

Q77 Christopher Pincher: You mentioned that an integrated offshore grid could reduce cost, but we don’t know what the costs of construction are, I suspect. So I just wonder, have you made an assessment of what the impact of construction of an offshore integrated grid would be on consumer energy bills?

Alison Kay: We have and it was negligible. I will come back to the Committee with a number. We have made an estimate of what we believe the integrated offshore grid would cost consumers and it is negligible, but I would like to come back with a figure. It was something like £1 on each consumer’s bill for each year of construction, but I would like to clarify that if I may.

Q78 Christopher Pincher: So it would increase consumer bills, not decrease them?

Alison Kay: They increase consumer bills because you are going out and building more networks. So there is an increase. What we are saying is that an integrated grid will lower the costs that a consumer would face by around 25%; depending on what that integrated offshore grid looks like, somewhere between £4 billion to £8 billion less than it would do than if you had gone for radial point-to-point connections. That was the point of it. Yes, there will be an increase because you are building out more transmission network, which ultimately falls to the user, but we are saying we can minimise that increase in cost to the end consumer.

Q79 Christopher Pincher: How do electricity prices in the North Sea countries, the areas that the North Seas Group operate s in, compare with UK electricity prices?

Alison Kay: Does Martin want to have a go at those first?

Martin Crouch: In the last few years, we have tended to import from France. Our wholesale prices have been higher than the French prices, so we have been importing power. The French had strikes in their nuclear power plants recently and we were exporting to France because our prices were lower. In the context of Norway and Sweden, it depends whether it is a wet year or a dry year. Last year was dry; their prices were higher than ours. So it does swing about. We have tended to be importing from France to the UK through the interconnector we have because our wholesale prices have been higher than French wholesale prices.

Stuart Cook: I think it is important to understand the way they operate. Effectively, it is about having more interconnection. If you have two markets at different prices, it brings the prices close together. By definition, the market that had the lower price will probably see price rises and the one that had the higher prices will probably see prices fall. So greater interconnection may at times lead to increase in the wholesale prices in Great Britain; at other times it may lead to a decrease. To answer the question about what is likely to happen is a big exercise, because you need to look at not only price projections in Great Britain but also understand what prices will be in France and Germany and Denmark. That is part of the work that we are doing at the moment.

Q80 Christopher Pincher: In the areas in the UK where there is currently high demand and potentially high prices, those prices could fall and consumers could benefit from that, but in those areas where there is perhaps lower demand then prices could go up?

Stuart Cook: Probably not, because we have a uniform electricity price across Great Britain. It is more between hour and hour. So on occasions when UK prices are high and it attracts power in from the continent the prices will fall, but on occasions when UK prices are low and we are exporting, it will raise prices.

Martin Crouch: Once we have a lot more wind generation that is very much going to be a driver of wholesale prices. So, when it is very windy, our prices will be low and we will be exporting, so they will be slightly higher than they would otherwise be. When the wind stops blowing, our prices will be high, we will be importing and that will help bring those prices down.

Q81 Christopher Pincher: I am trying to get to the bottom of what the benefit of this will be to the UK consumers who are already seeing increases in their bills.

Martin Crouch: Part of it should be reducing the volatility in wholesale prices, providing other sources of supply and more competition into the wholesale market. There are big costs from the infrastructure, as Alison was saying. If you spread those over enough customers, it does amount to only a few pounds a year, but we are still talking billions of pounds, so those are not investments that anyone would enter into lightly.

Q82 Christopher Pincher: How is it going to encourage new entrants into the wholesale market? Notwithstanding what might happen in the future to change that cartel, but you have a big six with a stranglehold on that market. How will this help to increase entrants into the market?

Stuart Cook: A separate team is working on our proposals in liquidity as part of the retail market reform programme. One of the things that we have observed in that context is that more interconnection increases liquidity of the wholesale market, because it provides a means by which new entrant generators can sell their power and by which new entrant suppliers are able to purchase power. We have seen an increase in liquidity with the advent of BritNed, and so on, as a new interconnector quite recently.

Q83 Sir Robert Smith: In theory, if it is a good thing, it should narrow the sort of swings and perturbations in the price. Is there a risk that, because it is a much bigger system, you could get more aberrant behaviour and real spikes suddenly?

Martin Crouch: There is always a risk of unintended consequences. I think with the moves that are happening on a European scale to have more integrated wholesale markets between countries and to have that working in a much more clearly organised way, in effect we are then moving to a larger market that should be more stable, but as to exactly what things will pan out in unintended events, there are no guarantees.

Alison Kay: I think it is very dependent on the amount of wind that does eventually connect right the way across Europe, and it is very dependent on the appetite for cross-border trade. Those two things will have a big effect on what will happen to price differentials. It is very difficult to see, and we are working very hard through the various groups to try to get some more certainty around that.

Q84 Barry Gardiner: Can I just ask you what is the potential for planned arbitrage? For example, you talked about a dry or a wet winter in northern Europe reducing storage capacity. That is then a known factor that perhaps a baseload supplier elsewhere can build into their forward projections, perhaps to artificially raise the price per unit by constricting their supply. Is there scope here for real wholesale manipulation of the market because, as Robert is saying, it is so large?

Martin Crouch: From a competitiveness point of view, the real risk would be if people could restrict the availability of interconnector flows. There is a clear framework in the European legislation and in the rules that are being rolled out, which say all the capacity of interconnectors has to be sold. That has to be identified by the TSOs and very transparently made available. A large proportion of that is sold a year ahead, but then there is this market coupling model that ensures optimal flows at the day-ahead stage. It doesn’t prevent there being market power in individual markets and that is still a risk that generates to the individual markets-a bidding up of prices in that market at times of system stress-but it should ensure that the flows across the interconnectors are optimal to reduce the way in which that market power can be transferred from one market to another.

Q85 Chair: Regulatory challenges in all this are quite complicated if we are going to go down this route. Where do you see the main difficulties?

Stuart Cook: I think there is a list of things that are uppermost in our minds at the moment. We talked about the anticipatory investments, investing ahead of need. We need a framework that allows us to regulate that in a suitable way. Where you have infrastructure that spans more than one jurisdiction you need a basis for allocating the costs between the two jurisdictions that it spans. That is relatively simple if you are dealing with just two countries, but as soon as you broaden it out to multiple countries, the way in which you allocate costs becomes trickier.

The more integration you have, the more important it is that people understand the way in which renewable support mechanisms in different countries might affect the way in which things operate. At a higher policy level than we operate within, there is a need for renewable support to be consistent across countries. There is a need for consistent standards, technical standards, and we need to make certain that the planning and authorisation processes that operate between one country and another are consistent. So I think those are the five key changes. I think those are all being taken forward in one guise or another by the North Seas initiative.

Martin Crouch: We saw the 10 Member State Governments coming together to set up the North Seas Countries Offshore Grid Initiative. As Ofgem, we took the lead in getting the regulators of those Member States together. We set up a group, which we are chairing, that has been going through and comparing and contrasting the regulatory regimes in the different Member States to try and understand how they can work together or where the barriers might come. Separately, on all the interconnector projects we have, we are talking to the regulator, the other side of the interconnector, to try and get a consistent framework that enables us to work together and support the investments.

Q86 Chair: Are we going to be able to find an easy way of showing the costs of all this-an easy and fair way?

Martin Crouch: Because it is a range as to what the supergrid might entail or what an integrated meshed grid might entail, it is expandable. I don’t think there is one easy number or even a range that-

Alison Kay: I think it is terribly difficult to sit here today and say what the cost will be. As both Grid and Ofgem have said today, we see it very much as an evolving piece. You do build out the offshore networks and the interconnectors. The cost of those will be very apparent, and then we have to look and see how much of wind connects across Europe before we can decide whether the cost justifies a greater expansion.

Stuart Cook: A couple of observations on that question from me. As I am sure you have done, if you look through all the evidence that has been presented to you you will see that from the people who provide them there is a very wide range of costs, from tens of billions to many hundreds of billions of euro in investment. We are doing a lot of work at the moment under the North Seas initiative and under the offshore grid co-ordination initiatives to try and understand what the shape of the grid might look like. The interim report from the North Seas is the end of the year and it will go into next year for a final report, but I think when we finish that we will be in a clearer position to answer your question.

Q87 Chair: Are the companies going to be able to agree standards, so that interoperability becomes the norm?

Alison Kay: I think that goes back to the very heart of the question about giving suppliers the certainty as to what is likely to be coming forward across Europe. It is that certainty that is so very key for them. It is very, very important that there is a degree of standardisation. As we are each going out at the moment and building our offshore networks, it is vitally important that the degree for interconnectability is taken forward in those designs. As I say, the companies are sitting round the table with us in a number of the groups that Stuart and Martin have alluded to. They are very keen to help this vision and, therefore, they are keen at looking at standardisation. They want that signal of certainty.

Q88 Sir Robert Smith: On that signal of certainty and standardisation then, what are the challenges of the fact that our offshore transmission lines are not part of the transmission system operator’s responsibility yet? When you get into the other territorial water, it is the transmission system operator. Do you see any challenges there?

Alison Kay: Shall I go first? Joking aside, we do see it as an issue. As you know, throughout most of the rest of Europe, the TSOs have been mandated to build their onshore network offshore. We believe, for all the reasons that I have been through on the integrated offshore, that there are some real benefits in allowing people to get on and do that. It then comes down to who is going to take the decisions on what the size of the link should be, and the TSO is very well placed to do that.

One of the other problems that we do foresee is, when we are trying to co-ordinate around our transmission system operator colleagues around Europe, there will be 11 or 12 of them around the table, and with the current regime that we have, we could have 11 or 12 transmission system operators from the UK sitting around that table too, because we could have many transmission system operators offshore in the UK. So I think we see that the radial connections have worked fine for what we have so far, but as you get further out into the deeper water it is much more sensible for that to be an integrated design and the TSO is clearly very well placed to take that forward.

Stuart Cook: I think the other countries wrestle with similar issues. It is clear that the regulatory framework has a profound implication on the way in which these systems evolve, but it is not true to say that the TSOs are responsible for offshore generation universally across Europe. In France, the Netherlands and Sweden, the generator is responsible for building the connection to the onshore grid. So there are multiple parties out there at the moment. Alison is right-and I think we would agree with this-that at the moment we do not see evidence for where we are at this point in time that the offshore regime is causing difficulty, but we are not complacent about the fact that the regulatory framework can pose challenges, which we need to address. That is part of the work that Martin’s teams are working on at the moment, is to try and understand whether, as you go forward into the 2020s and up to the 2020s, the regulatory framework will act as an impediment. If we find that it is, then clearly we will have to do something to fix it, but at the moment we haven’t seen the evidence to support that.

Q89 Sir Robert Smith: Is there anything at the moment though, with so many different offshore owners, in trying to co-ordinate that sort of anticipatory ability of a future network? Are we missing an opportunity?

Stuart Cook: I think it is right the grid provides connection agreements that combine multiple interests at the moment, and I think it is also true that National Grid, in its role as system operator, has a role of ensuring that the design of offshore is understood in a co-ordinated way. I do emphasise-I am not being complacent about this-that we do need to understand whether that goes far enough.

Alison Kay: To Stuart’s point, we publish the Offshore Development Information Statement on a bi-annual basis, which gives developers a view of how we see the offshore system developing and where are the most optimal points. It is an information statement, as its name implies, and no one is obliged to build to that specification. We are currently, as National Grid, where we can integrate those offers, planning for integrated network. We are sending out connection offers on the basis of an integrated system, so taking into account more-but we are absolutely ensuring that in doing so we have the ability to move away if that is not how the regime plays out in the future.

Q90 Sir Robert Smith: Just one last thing. On the merchant model for interconnection, does that have enough incentive to ensure maximum interconnection or does that need looking at as well?

Martin Crouch: We have been looking at that over the last couple of years. We found that, because of the process for getting an exemption to be a merchant, we would take our decision and then the Commission would effectively have a veto at the end of the process. That was exposing developers to a lot of risk that the Commission would say something unexpected, which happened effectively with BritNed. So we have been devising a regulated regime, which would be available as an option alongside the merchant regime. Since we started doing this work, as I said, we have moved from having one project that was interested in building a new interconnector to now we are up to about a dozen. So the interest is very definitely there. I think there is a lot of support within those developers for the regime that we are developing with the Belgian regulator as a test for an interconnector to be built by National Grid and Elia as a first case, say.

Q91 Sir Robert Smith: You are saying you could have parallel; as an investor you could choose?

Martin Crouch: Yes, you have the two options. The project that recently announced itself using the Channel Tunnel has implied to us that they are interested in exploring the merchant route. We have lots of other projects that are interested in exploring the regulated route. We are trying to devise a regime that allows both, so that the most investment can be encouraged.

Alison Kay: I think that National Grid, as a builder of interconnectors, has really welcomed the great work that we have done together to look at moving that regime. I have real concerns that merchant interconnectors, with all the uncertainty throughout Europe at the moment, are going to prevent a lot of further interconnections coming forward, but we have been doing some great work using the Belgian interconnector as a test case as to what that new regime could look like.

Q92 Sir Robert Smith: When you say merchants would be a barrier, having the availability of the merchant option still would not be a barrier, but merchant-only would be?

Alison Kay: Absolutely, yes.

Q93 Christopher Pincher: Although there may be appetite for a regulatory regime, someone has to finance the investment to build the first stage of the grid, and I think the Offshore Valuation Group suggested that to build a first stage of interconnection by 2020 would be somewhere around £8 billion. I wonder if you can tell us something about the financial challenges of getting the infrastructure built.

Stuart Cook: I am not familiar with that number, but I have certainly seen figures of £15 billion for the offshore investments up until 2020. We have, of course, run one tender round under the offshore regime so far, and I think it is very welcoming that for £1.1 billion of investment we attracted £4 billion worth of interest. So the number of bids, when you total the sums of money that people were willing to commit was almost four times the volume of the initial investment. So far we have seen a lot of enthusiasm from new parties and existing parties to raise funds for the offshore environment and the offshore regime. Part of the reason we think that is the case is because we are resting on the fact that we have a very stable and understood regulatory framework in Great Britain, which, of itself, attracts funds from international investors and makes this a relatively attractive place for people to invest. I think as long as that continues there is no reason to believe that that type of investment won’t come forward, certainly on the basis of the evidence we have seen so far.

Christopher Pincher: £4 billion has come forward so-

Stuart Cook: We had £4 billion worth of bids, of which the winning people contributed £1.1 billion. So it was £3 billion worth of funds, which we didn’t need in the initial round because there were unsuccessful bidders.

Q94 Christopher Pincher: You said you have seen figures that suggest that £15 billion was required for that initial spend?

Stuart Cook: Yes.

Christopher Pincher: Let’s assume that you need at least £ 11 billion; where is that going to come from?

Stuart Cook: There is an appetite for investments, even in today’s climate, where people can see an understood and stable regime and an opportunity to make a return in that context. I don’t think we are concerned, based on the evidence we have seen, that people won’t come forward with money.

Q95 Christopher Pincher: Do you think there will need to be a substantial public investment?

Stuart Cook: There hasn’t been so far.

Christopher Pincher: D o you think there might be?

Stuart Cook: The only area that I think is worthy of mention is the point I made earlier about the Green Investment Bank and the way in which the Department of Business had looked at using some of that money for the speculative, quite uncertain and risky research and development aspects of the offshore regime, where I think it is rather more difficult to get investors to stump up money where their gains are less certain. In the stable end of the regime, where we are implementing technology that is already understood, we have not seen any evidence that there is a problem in raising finance.

Martin Crouch: We also know that the European Commission, through their infrastructure package, is looking at establishing funding potentially for what they see as priority projects and the North Seas is high up their list among priority projects from a European interest. So it may not just be UK taxpayers funding some of this. There may be sources of funding from a European level available.

Q96 Christopher Pincher: So beyond the European funding, which obviously incorporates a significant degree of UK taxpayer funding, what other experiences do you have in putting in place a regime that will share the costs? If there are lots of potential beneficiaries across the North Sea, have you experience of getting other players to invest, so that some of that cost is shared, as opposed to public funding?

Martin Crouch: Doing it on a multilateral basis is definitely a new challenge. For the existing interconnectors, the interconnector with France was shared cost between the UK and France and BritNed is a 50:50 joint venture between the Dutch transmission company and National Grid. So there are examples of sharing of costs between the two Member States involved. Extending that to potentially 10 countries around the North Seas is definitely a regulatory challenge. That is high on the list of-

Stuart Cook: A political one as well.

Alison Kay: Yes. Once again, it comes back to certainty. If, around the North Sea, you have 10 countries all working together towards a common regulatory regime that can accommodate all parties, you start to give that certainty to investors to want to put their money into it. So I think some of the regulatory challenges, which Martin and Stuart have talked through, are absolutely key to ensuring that investors come forward and do wish to invest in this network. That will come back to a lot of things that we have talked about; how does the supergrid evolve? It is getting that certainty out there.

I would agree with Stuart that so far we have not seen the need for public funding. I think as you move out further into the sea and get towards what we would call an integrated offshore grid, if you want to build bigger assets it is going to be much more difficult to get investors to invest in assets that are not only sized for their own projects but maybe taking some degree of optionality for the future. There are lots of challenges to overcome.

Chair: We have another set of witnesses we have to give time to as well, so thank you very much indeed for coming in. It has been very helpful.

Examination of Witnesses

Witnesses:  Daniel Dobbeni, President, European Network of Transmission System Operators (ENTSO-E), and Alberto Pototschnig, Director, Agency for the Cooperation of Energy Regulators (ACER), gave evidence.

Q97 Chair: Good morning. Thank you for coming in to see us. I think you have both travelled to do so, and we appreciate that, and welcome. I think it is the first time, certainly under my chairmanship, you have given evidence to this Committee; so we are very glad to have you. Could I ask, first of all: the Strategic Energy Review said that a North Sea offshore grid was an energy security priority? How much work has been done in Europe to assess the costs and the benefits of developing an integrated offshore grid?

Daniel Dobbeni: If you allow me, I wouldn’t say that we have a clear definition in Europe about the ultimate cost of the energy and climate change policies, because basically it starts with the decision taken by the 27 Heads of State to move towards renewable energy sources. Because of that decision, you need to tackle measures in terms of how to ensure that the power system will still work with this new energy mix. In that sense, the cost issue is to be linked to the political decision to move towards renewable energy sources. So the figures you can read in the documents coming from either the European Commission or the ENTSO-E associations are best guesses based on the known technology we have today. So these figures are estimates and the best estimates we could deliver but not more than that.

Alberto Pototschnig: If I can add: as it was made evident in the previous panel, we still need to understand exactly what kind of technological and system solutions we are talking about. It is clear that a greater penetration of offshore wind is needed. It may not be essential by 2020, even though it will make a significant contribution more essential beyond that, but I think we are still at the stage where we are trying to figure out exactly what this would mean, in terms of grid and in terms of the electricity system more generally. The Commission communication last November identified an area, the connection in the North Seas, as a priority area, but from there to say that we know exactly what shape this priority area will take in terms of developing the infrastructure, I think it is still work ongoing.

Q98 Chair: There is a slight sense that we have this concept that we think sounds good, so we are pressing ahead with it before we really know how much it is going to cost and what benefits it is going to bring.

Daniel Dobbeni: If you allow me, this is a little bit of a chicken-and-egg issue. If I only take the targets that have been set out by the European Commission and the European Union, and I try to have a reasonable look at what it means in terms of the number of wind farms in the North Sea-and at this stage the North Sea is the only case; we have also the Baltic Sea but let us take the North Sea-we may imagine by having, let us say, a standout wind farm of 300 MW, which is reasonably what we have today, if I take the figures that have been put together by different kinds of organisations, I come up with between 220 and 230, and up to 280 wind farms in the North Sea. Of course, if I have wind farms of 500 MW, I will reduce a little bit, but just the number of it gives a real indication of one of the needs for grids in the sea, because I cannot honestly imagine having 280 individual connections to the shore only for the North Sea. There is a rationale behind the fact that we have so many wind farms, and because of that we have a rationale to say that it may be worthwhile to think about a grid in the sea.

Q99 Chair: Yes. Will this supergrid help to meet the EU’s strategic objectives: security of supply, decarbonisation and market coupling?

Daniel Dobbeni: It all depends what the definition of supergrid is, because you have different definitions when you talk to different people. I would say that there are different needs in order to tackle the 250 target. If I take that one, because it is even more ambitious than the one we have with 220, we all know we need a more complex grid operation-what we usually call smart grids. We need grids in the sea to try to tackle all the issues, and then we also need, at least in the continent, what are called either electricity highways or overlaid grids, basically a grid that allows you to transfer more power over a longer distance. We need three of them, and we also need storage and so on.

A supergrid in itself is a concept, as you said. We need to clarify what we talk about. If I take all the grids in the sea, the electricity highway, my answer would be definitely yes, because honestly I do not see how we are going to do it differently.

Alberto Pototschnig: If I could just reinforce that message: interconnection between Member States, including interconnection that is able at the same time to connect offshore wind, is clearly part of the strategy to try to support the achievement of the three strategic objectives.

For the North Sea’s countries, I think the current stored capacity is around 3,600 MW. We are looking to 2020 at 36,000 MW. As I mentioned beforehand, that is a sizeable contribution, but it is not probably, strictly speaking, essential. An offshore grid will become an essential component beyond 2020. The new development will be further away from the shore, so some form of offshore grid is probably inevitable. That would also allow the complementary generation technologies to be used together: hydro in Norway, or if we look further south in Europe, in the Alps, to be used to balance off wind and other intermittent technologies. Clearly, this does not prevent or does not allow us not to have local backup because of the ability of the interconnection, which is still obviously an issue. I think it is a component, both offshore and inshore. A reinforcement of the interconnection is still an essential component of meeting or pursuing the targets. Then obviously greater integration of markets is essential for competitiveness and for market coupling, so probably it is going to be very useful.

Q100 Chair: What about the rules for network development? Are they changing across Europe the way the electricity networks develop at the moment?

Daniel Dobbeni: Yes, of course. If I can give you an example of what is happening in my home country, Belgium: today, when there is more or less wind in northern Germany, we see the difference in the network and we have to take potential action in order to facilitate or avoid having constraints in surrounding countries, and this is also felt in Poland and Hungary. The power system in continental Europe, because of its connection, is already behaving more and more as a single power system, which is ultimately the objective.

Alberto Pototschnig: I think you also mentioned planning. With the Third Package, there are new instruments for ensuring planning of the networks at a European level is made with a greater European focus. ENTSO-E is responsible for developing an EU-wide Network Development Plan every two years. It is non-binding, so it will still allow some flexibility at the level of Member States, but it will clearly represent a reference for developing the grid at a European level and taking a more unified approach, and this will also help with the integration of markets.

Q101 Christopher Pincher: You heard, because I think you were here during the previous panel, the importance that was stressed of getting a regulatory framework in the North Sea. Can you explain what the role is of your two respective organisations in helping to develop that regulatory framework?

Daniel Dobbeni: The task of ENTSO-E is not to, let us say, design the regulation framework. We help regulators as much as we can to understand what the hurdles are and what can be improved, especially looking forward, given the challenges we have on the table, among which is the supergrid. I think, when you talk about grids in the sea, the major issue is to ensure that we have-I am not saying "harmonised"-compatible regulatory framework among the different Member States. Once you build the network that will interconnect those different Member States more than is the case today, especially because they will be linked to intermittent generation sources like wind, it is absolutely essential that you have compatible frameworks in the different Member States that are interconnected. Of course, it is not up to us to do that. We are there to help regulators when it touches the design of the network, implicitly or explicitly. As was said during the previous panel, this is more of a challenge to me than building those supergrids in the future, even though all the elements of the supergrids are not yet available, and Governments as well as regulators will have to ensure that this compatibility is there.

I would like to clarify one point, because I didn’t completely answer the previous question when I said it is a chicken-and-egg issue. When we do these investments, they usually have a lifetime offshore, we anticipate, of 25 to 35 or 40 years. Onshore, we have often 30 to 50 years. It is a major challenge to all of us-TSOs, you, regulators-to take the right decisions now because, if we don’t get the right signals, we may expect that we are not going to have the best power system in 2030, 2040 and 2050. This is a chicken-and-egg issue, because investors’ research and development would only start to invest once they have a clear view coming from the political side, the Government, and the Government is asking us how much it is going to cost and whether it is added value for the consumer. It is a chicken-and-egg issue, because we should not underestimate the change we are making in the energy mix all over Europe. It is a tremendous change moving to 30%, 40% and, even further, 80% renewables, and I don’t think anyone today has a clear view on the complete set of consequences this movement is going to create. At a certain point in time, we have to believe in a given solution, and I am afraid that nobody today can answer your question about what the regulatory consequences are. We will have to learn by walking.

Alberto Pototschnig: If you will allow us to briefly describe the function of the Agency for the Cooperation of Energy Regulation. It was established as part of the new institutional framework of the Third Package, and its mission is to assist national regulatory authorities to exercise their regulatory functions at a community level and to co-ordinate their action whenever necessary. We have a support role with respect to NRA and also a co-ordination role with respect to NRA. The issues that we are discussing today have regulatory implications, both at national and cross-border levels. I will take three examples. When it comes to cost recovery-the allowed revenues in each Member State-that is clearly within, and will remain within, the sole jurisdiction and sole responsibility of national regulators in each Member State. Obviously, there you can try to either harmonise or have a common framework, but that is as far as you can go.

Then when you have access to the regime, to a cross-border infrastructure, clearly there you need to make sure that the access regime on the many sides of the infrastructure is consistent. That is where the agency can more directly support the co-ordination between the national regulators involved. In fact, it may even have stronger powers, even when the national regulators involved are not able to agree on a common access regime or when they decide to pass the decision to the agency, so there we can have a more relevant role.

Then, for example, there is the cost allocation issue. When an infrastructure provides benefit or connects two or more jurisdictions, then clearly there is an issue of how you allocate the cost. The simple rule is 50:50, but if you go into more complicated schemes, if you have an integrated grid in the North Sea, for example, that may affect all the coastal countries then clearly the issue of cost allocation among the different jurisdictions becomes relevant. That again is where the agency is part of the process by which this is resolved at European level. That is our role. Our role is much more relevant when it comes to cross-border or multi-lateral issues and less relevant in a more supportive role, maybe sharing best practices or trying to harmonise, to the extent that it makes sense when it comes to mainly national issues.

Q102 Christopher Pincher: How far have your deliberations taken you? I see that when the initiative was launched last December, three working parties were set up for integration, regulatory and market issues, which I guess is one way of dealing with it when planning an authorisation. A number of initiatives were set to be delivered, deliverables set for this month. What progress has been made against those?

Alberto Pototschnig: At the moment, working group number 2, which is the one on regulatory issues, has been surveying the regulatory regime in different countries, and basically what has emerged is that there is a significant difference at the moment in the regulatory regime applicable to connection of wind generation. This will be released by the end of the month. The next issue is: what is the best way of addressing these different approaches? If you want to develop an integrated grid in the North Sea, you want to have consistent regulatory frameworks on all sides: firstly, because that will make the development easier; secondly, because you don’t want to give spurious incentives of locating the capacity not where it is economically optimal but where there is a more favourable regulatory regime, for example, when it comes to access charges and connection charges. So that is the effort. As I said, we are still very much in the early stages at the moment; it was just a survey of what was happening, and I think the more interesting stage will be the next one.

Q103 Christopher Pincher: I am sure it will be. It has taken six months to survey what the differences are between the different regulatory groups in the countries. You now need to work out how to harmonise those. How long is that going to take?

Alberto Pototschnig: The next deliverable is at the end of the year and the work will be completed by the end of next year, so basically there are still 18 months to go. That is the timeframe over which these exercises are planned.

Q104 Christopher Pincher: Then you will report to whom?

Alberto Pototschnig: That is to be reported to the 10 Ministers of the 10 countries.

Q105 Christopher Pincher: Is that a reasonable timeframe or do you think the process could be expedited?

Alberto Pototschnig: That is the timeframe that was envisaged in the agreement. It is quite challenging. I think we have probably been through-I wouldn’t say the easier part, because part of this time has also been used to establish the working groups and so on, so I don’t know whether we will be able to cut the time, because seeing what scope there is for approximating the different regimes is not an easy task, but I think there is goodwill on all sides. We are there as observers because, at the end of the day, this is something that the national regulators involved, the Governments, the Member States and Norway would have to agree or would have look into, but I would say it is a reasonable if not challenging timeframe.

Daniel Dobbeni: I think it was a very good initiative that was taken because of the experience we have now in bringing market coupling to continental Europe, where basically it started between three countries and has now moved to Germany, Luxembourg and the northern countries. Experience has shown that the earlier you start involving the Ministers, the administrations, the regulators, the TSOs of course, but also the market parties, the higher the chance that you can quickly achieve a common understanding of what is needed and how to achieve it. Afterwards changing the law or regulations, if necessary, is a question of following the procedures, but it is fundamentally important that we start by understanding what we want to build and for this you need both the political vision, the regulatory vision, the TSO vision and the market parties.

So this initiative-and I know there are a lot of initiatives in Europe-I was pretty optimistic that there was a very short timeframe; one year is not a lot. It does not allow us to go into the detail of the design, but at least to be sure that we understand what we want to build. When we talk about €70 billion-this is one of the figures-we had better be sure what we are doing. I don’t think we could do it faster. To give you an example, before going forward in terms of the necessary infrastructure, we needed to obtain the national allocation plans for renewables. This was only in June last year. So, everything is going pretty fast. What is important is that all those parties are ready and want to open the debate and agree on a common view. That is fundamental.

Alberto Pototschnig: If I can just add one other comment: this is quite an ambitious project because I think it is probably the first time that so many countries with such different legacies and backgrounds in electricity are trying to work together, from Norway to Ireland. They have different market structures; they come into different trajectories. The Nordic countries have been running an integrated market now for 10 years in the current configuration; 17 years from the very beginning. In continental Europe, we have a more recent, very encouraging and very fast-moving market development. It is quite ambitious. I think we should be ambitious in the results but not over-ambitious on the timing.

Daniel Dobbeni: A last point. This initiative is fantastic, but at the same time we should not forget that the interconnected power systems concern 34 countries, so what we do between the Member States having shore and the North Sea is also to be included in the larger view about the power system. This is where ENTSO-E enters into the game. The same TSOs are working on the technical aspect, but it is also absolutely necessary to ensure that all TSOs understand what is happening. If I go back to my example about more or less wind in Germany impacting the Belgian network, imagine what it will be in 2020, 2030 or 2040. Those 34 countries need to be very closely involved in what is happening in the North Sea, in the Baltic Sea, and maybe tomorrow with sun in North Africa, because everything is working together all the time.

Q106 Christopher Pincher: Given that, at the end of the day, this infrastructure has to be built and then operated, how closely are you working with the investor community and with energy providers, so that you don’t just create a regulatory framework that is nicely harmonised between countries but also works for the investors so they can build it, and then the energy companies so they get to operate within it?

Daniel Dobbeni: There are a lot of contacts between either directly those who are delivering or will be delivering those components to the TSOs in the future, also through the associations, also towards the generators, because they will also have a game to play in the whole story. The big advantage of having a single TSO association for the last two years is that we are now in a position to give the same message and the same perception of what is going to happen in the next 20 or 30 years, so that they can adapt their research and development.

I think a major concern is that when contemplating the recent evolution in Germany, Switzerland and Italy, for example, it is important that, given the fact we are going even faster towards a new energy mix in the different Member States-and by definition all over Europe-there is sufficient manufacturing capacity among those who will have to deliver those products. I am sure today that there is not enough manufacturing capacity to answer all the questions, because we should not expect the Chinese to stop investing in all the countries on this planet. There again, we need to give the right signals as soon as possible of what we want to do in 2020, 2030, 2040 and 2050, knowing, of course, that this is a moving target and that we will have to correct the way we are aiming at this target through the years. Manufacturing capacity: we are in discussion with those parties, of course, but they will not invest unless they have more security for the future.

Q107 Christopher Pincher: Lastly, quickly, what about governance? As a result of the work you will be doing-you are going to produce a regulatory framework-do you believe that there is a political will to actually deal with the deadlock whilst the regulatory framework is in place?

Daniel Dobbeni: From what I have understood, yes, and I hope it will remain like that, because if it wasn’t the case then the Member State policy towards renewables would have to be looked at again. Either we go forward towards this new energy mix and then we meet the adequate transmission distribution capacity, or we will not achieve it, so it is not a question of do we want to do it. It is linked. You cannot have one without the other.

Alberto Pototschnig: At the European level, there seems to be a strong political commitment in trying to pursue the infrastructure agenda, to the extent that the Commission has now proposed that probably there may be some financial support or some initiatives; something that is quite new to the regulatory practice in most Member States where, in the past, most developments were done through the tariff system. So clearly, at the European level, the Commission-and I would say the other institutions also-are very much on this piece.

Q108 Sir Robert Smith: When looking around the North Sea at the regulation, are you just looking at the specific regulation of the electricity networks, or are you also imputing into, say, the decisions of Governments? For example, if we have a floor price for carbon, the incentive may be to build lots of interconnectors and invest in power stations on the other side of the Channel supplying through those power stations where there is a different regime for the price of carbon.

Daniel Dobbeni: It is an excellent question. I was supposing the European Union was there to solve these kinds of discussions or issues. The fact is that because you cannot easily store a huge amount of electricity, the power system is one of the domains where the Member States have to agree on a common view and then walk the talk. If that is not the case then we will have problems.

Q109 Sir Robert Smith: You have touched a lot on the roles of both organisations. Do you have the powers to make it happen, or in your situation do you not have the power so much as to provide the information and the sense of direction?

Daniel Dobbeni: In an association like ENTSO-E, its ambition is to bring forward these three pillars of the European Commission’s energy and climate change policies. So of course you are looking at how you can make it happen; but at the end of the day, it goes back to the individual TSO and its Member States with its local regulation and legislation. I am not saying that the hurdles are solved there. Again, the closer we get to the targets the Commission and the European Union have fixed for themselves, the more I hope there will be sufficient political will to move ahead in order to achieve that. As an association, we have the power to bring in the 10-Year Network Development Plan, like we did a year ago, and the next one is now in the making, to show you policymakers the size of the challenge and identify what we believe are the things that need to be fixed in order to go forward. We will implement it once we have a clear indication of what is needed and the regulation and legislation is in place. As engineers we will find the solutions, provided of course solutions exist.

Alberto Pototschnig: As I mentioned before, the main task for the agency is to support the regulators. I also mentioned areas where we might have direct powers. We are also part of the process of developing the criteria and principles for the ENTSO-E to develop the rules, and then these rules could be adopted through comitology, rules that will govern in future the operation of the networks in the period of operation of the market throughout Europe, so we are part of this process. We are only one part. I wouldn’t say we have powers, but we can be quite influential, and we bring together within ACER all the national regulators. The national regulators are our clients but they are also our constituencies, so in that respect we can be quite influential in shaping the way in which the market will work in the future, so at least one of the pillars: the integration of markets.

When it comes to security of supply, we also have a role here. It is mainly for national regulation of Member States, and when it comes to sustainability, that is mainly Member States. We don’t have much input in that.

Q110 Sir Robert Smith: The costs and benefits for the consumer is that at the heart of the agency’s-

Alberto Pototschnig: Together with national regulators, we promote the idea that any development should be assessed for costs and benefits, not just monetary costs and benefits but also to try to include externalities because there are still aspects that are not priced through markets. We are getting better there, especially as some of the environmental aspects are now priced through a market. We are not sure that the prices that emerge from those markets are fully reflective of the sort of implicit cost, but, yes, this is basically what we are trying to promote.

When it comes to political decisions on targets-especially, for example, the 2020 targets-we take it as a given that there are some objectives to be achieved at the European level. I don’t think it is for regulators and definitely not for ACER to question. The issue is more about how you achieve the target and the measures you put in place.

Q111 Sir Robert Smith: I suppose you should make sure that those who make those targets know the consequences. I mean, you can inform them of that.

Alberto Pototschnig: Maybe it is for national regulators. As an agency that is looking at cross-border issues, to be honest we are not seeing that at the moment as our main objective. Also, given the fact that we were only established a few months ago, at the moment we have to stick to the main priorities: to inform of the costs and benefits of policies that have been agreed at a European and political level. Where we may look into it, as I said, are the costs and benefits of alternative approaches to achieve. In this we clearly work very closely with the national regulators because obviously this is something that the national regulators have to do in a harmonised and co-operative way.

Daniel Dobbeni: To add one thing about that, when we think about the new grids in the sea or the electricity highways, one way to have the cost as low as possible, taking into account, of course, the lifetime of those assets, is to go forward as much as we can to a standard approach. Today, in Europe we have 27-and sometimes even more-different kinds of power system transmission distributions, because all of us use different kinds of standards. They are not totally different, but a little bit different. We now have the unique opportunity, when we are working towards these grids in the sea and the electricity highway, to define those commons standards. ENTSO-E has received positive advice from ACER and goes through the open communication and the comitology process. We have the possibility to have network codes. Once they have been approved by comitology, they become law. I think this is exactly what I was trying to say in the beginning. Given the challenge we have and the amount involved, we now have a window of opportunity to determine this common standard, and we should do that. We are working on it, but of course we cannot do it alone; we need manufacturers; we need the other market parties; and we need the comitology process.

Q112 Barry Gardiner: Mr Pototschnig, could I just ask you to think with me? We are in England here. I am a Scotsman, so I find it difficult as well. In the UK, we look at European monetary union, and you know the background in the UK of not being part of that, believing that a common currency might require a common Government. In a sense, do you see a parallel between your body of regulators and the sort of European Bank position, where you can set a set of rules, you can have your regulatory framework, but you can’t ensure adequately, because you don’t have the statutory powers of the Government, that it is going to be observed in the different sovereign states? How do you propose to prevent the equivalent of a Greece or a Portugal happening in this area?

Alberto Pototschnig: That is an excellent question, because I am often asked, "Are you the new European regulator?" and I have to say no, because we are not. A lot of people would like us to be, but I don’t think Europe is ready for that. On the other hand, we don’t have direct powers, but I think there is a system in place where eventually Member States or national regulatory authorities who are not behaving in line with the new European rules would be brought to account.

Let us take one example; I could give you more. The new network codes: we developed the framework guidelines, which includes principles and criteria. ENTSO-E develops the network codes, they come back to us, we see whether they are in compliance with the framework guidelines and we recommend their adoption by the Commission. The Commission goes through comitology; they become law-that is, they are mandatory in the 27 Member States. Now, let us assume that one national regulator in one country takes a decision that is in contrast with these codes. We can be asked by another regulator to look into it, and if we find that this is the case we can issue a recommendation. The national regulator has a period of time-I think it is six months: three months, plus three months-in order to bring the decision into line. If they don’t do it we make a recommendation to the European Commission, and the European Commission can launch an infringement procedure. You can say this is a very long process-

Q113 Barry Gardiner: We are talking years, are we not?

Alberto Pototschnig: I am talking about months here.

Barry Gardiner: For the launching of the infringement procedure, but then you know how long infringement procedures take. This is the European Union.

Alberto Pototschnig: At the moment, the European governance is based on infringement procedures. Unless you get to having, as you mention, a European Central Bank and European energy regulators, that is what we have. Again, in the case of disagreement between national regulators on terms and conditions for access to cross-border infrastructure, as I mentioned beforehand, after six or 12 months, depending on the circumstances, this decision may come to us and we will decide. Again, we will not be able to enforce the decision, but we will have to rely on either national regulators or the Commission. They have the powers. The Third Package increased the power and the independence of national regulators. So either we rely on national regulators in the jurisdictions or we have to rely on the Commission. It is already quite a step forward with respect to what we had until 2 March.

Q114 Barry Gardiner: I don’t doubt that, but you can see the scepticism that one can have here of, particularly, national Governments under domestic political pressure to back up their own TSO and to back up their own regulator in protecting certain aspects of their own economy, being out of step with the regulations that you are trying to ensure get common adherence. You have quite openly said that you don’t have powers to enforce compliance. Ultimately, you will rely on the national Governments bringing themselves into line, or the European Union, in a process of Kafkaesque complexity and tendentiousness going on perhaps for years with a country not in compliance.

Alberto Pototschnig: I can agree with you that this probably is not the most expeditious process. Keep in mind, however, that this is also the process through which the European Union institutions can enforce proper implementation of the Third Package to start with. The deadline for implementing the Third Package, which is basically the framework within which all we are talking about today is set against, was supposed to be implemented by all the Member States by 3 March. No Member State implemented it or transposed it into national legislation by 3 March. The Commission indicated that they would give a six-month grace period but now, I think, in September the issue will come as to whether the Commission will take it seriously. I am sure that there will be a long list of countries receiving communication infringement procedures. That is the way in which the whole game is set at the moment. I may be able to share your scepticism, but that is what we have at the moment.

Barry Gardiner: At the start, people tend to start off with the best of intentions and, as you say, it is not an auspicious start.

Daniel Dobbeni: Maybe it is worthwhile to remember again that electricity, because of the nature of the product and the service, implies a very high level of co-operation to make it work.

Barry Gardiner: Just like money.

Daniel Dobbeni: The interconnection of several Member States in Europe happened before the European Union was invented, and I am convinced that, given the targets we have for 2020-and we don’t yet know the targets for 2050-the pressure will be pretty high on all bodies, TSOs included of course, to make it happen. When I contemplate for the UK, Ireland and Scotland the ambition in terms of wind energy and imagine that you can balance this intermittent generation as an electricity island in a cheap way, it is even more of a challenge. So there is a need to interconnect to benefit from a larger power system, and I hope this will be the driving force to accelerate and maybe to avoid having to go towards an infringement procedure. I hope this will be the way it goes forward.

Q115 Sir Robert Smith: I suppose there were lessons learned, because we built gas connections and we thought that meant that, if we had problems, gas would flow into the country but in reality, because of the different regimes in different countries in Europe about the obligation for security of supply, the gas flowed against the market out of our country.

Daniel Dobbeni: If you go back to what happened in the case of Ukraine, in the meantime, investments have been achieved to allow gas pipes to move gas in two directions, which was not always the case in continental Europe. This is also an example where the problem happened and then we applied very quickly, much faster than any regulation change or legislation, because there was a real need. That is what I was trying to say for electricity. For electricity, it is even stronger; you cannot easily store electricity.

Alberto Pototschnig: If I may just add on a more positive note, there have been a number of initiatives in Europe that have seen regulators, TSOs, Governments and Member States very much supporting the integration of markets. In fact, those that were bound by Member States were the ones where progress has been achieved more speedily, and probably better progress. The integration of the market in central continental Europe between France, Germany and the Benelux countries, between Spain and Portugal, then integration of it obviously in the Nordic area, are all examples where Governments were key in promoting development. I have to admit there are other areas of Europe where probably the situation is slightly different. We are looking into it, because it also has to do with the independence of national regulators, but if the UK Parliament wanted to propose greater power for the agency, personally I wouldn’t complain.

Daniel Dobbeni: I am not so sure I would not complain.

Q116 Chair: If this is going to work, is it principally going to be a top-down process, though, or can it be a bottom-up process?

Daniel Dobbeni: You need both. The worst would be, in a complex power system like we have, just to think that you can reinvent everything from a top-down approach, and the same would be true if you only think about doing it bottom-up. We are in the position today where we are redefining the power system all over Europe. A good example is of having 27 different kinds of airplanes leaving from 27 Member States. At the end of the journey, you land with the same airplane, with a different kind of motor and different kind of fuel, and the passengers didn’t notice anything. That is the challenge, because we cannot shut down the system for the weekend to do an upgrade. So the expectation is to continue to have the full quality we have delivered successfully nearly all over Europe for the last 10, 15 or so years, so absolutely each time you need to very carefully take into account what we have and how you can improve it, whether with electricity highways, smart grids or a grid in the sea, but you cannot decouple one of these new things with respect to its existence, so you need both.

Q117 Chair: It is inevitable, is it not, that if we have a more integrated electricity network, that means national sovereignty in relation to energy and electricity issues has to be pooled?

Alberto Pototschnig: I guess this just goes back to the fact that we will have common rules that would be binding on all 27 Member States, rather than having 27 sets of rules that are more or less harmonised, as was the case up until the Second Package. The First and Second Packages were mainly about harmonising national rules. Now we are going, at least for what concerns cross-border issues, towards a common set of rules that would be binding throughout. So yes, in that respect you can read it that way.

Q118 Chair: If we have a common set of rules that relate to the harmonisation of an offshore grid, can that happen without a common set of rules that might relate to electricity generation?

Daniel Dobbeni: That is, to me, decoupled to some extent. I am used to saying that it is not a problem for a country to be highly dependent on imports as long as you find someone ready to export. This is the extent of not taking care of your neighbours. Yes, we will have to evolve towards more, let us say, common points of view in terms of energy mix. It doesn’t mean that you will have a European energy mix imposed because that doesn’t make sense either. You have more wind on the coasts of Scotland and Ireland than there is in other place in Europe, so the geography in itself is already a good reason why we will have-and we will keep-different energy mix among the Member States, but we need more understanding of each other.

Q119 Sir Robert Smith: Of the barriers to this ambition of a North Sea grid, which are the most pressing: the technical, the economic or the socio-political?

Daniel Dobbeni: All of them, because you need all of them. Don’t forget that it is not because you build the grid in the sea that you do not need to reinforce grids offshore. Grids in the sea may help you to optimise by having the highest usage of this onshore connection and offshore connection, and reducing their number, but it will not solve the fact that we still need permits to build infrastructure onshore.

Alberto Pototschnig: Perhaps because I have the greatest esteem for engineers, I would say probably the non-technical aspects are the most challenging. At the moment, in Europe, permitting, not only for offshore-in fact, mostly for onshore-is clearly the single most relevant obstacle to developing grid infrastructure. I think that is clearly a challenge. Here we are looking at possibly 10 different systems currently, and if you look at an infrastructure that links a number of them, clearly you don’t want the difficulties in each of these systems just to add up, one on top of the other, and then, as we mentioned before, also, a good regulatory regime that would facilitate this development when it comes to access costs and location, and so on.

Q120 Sir Robert Smith: You are saying there will be onshore developments that still need to be accepted by the community if we are going to have our energy?

Daniel Dobbeni: Yes. The danger with words like "supergrid", "smart grid", "super-smart grid", and "electricity highway" is that these are concepts, and you can add different definitions to them. It may happen that people believe, "We just have to wait a little bit and then we will not have to deliver permits to build onshore infrastructure". That is not true. It is something that helps the whole process. It does not cancel the needed reinforcement all over Europe. You said during the previous session that there was a tremendously important flow from the North to the South. You cannot solve it only with grids in the sea. You still need to do reinforcement all over Europe. We identified 500 projects only to handle the three pillars of the European Union policy, and I am not talking about the day-to-day investments that each TSO has to do. In this 500, you don’t find the grids in the sea and the electricity highway.

One of the points that regulators will have to tackle, and also how to explain that to consumers, is that this will definitely have an impact on the price of electricity, not that much on transmission. Transmission represents in the electricity bill of a consumer something around 4%, 2%, 6% or 7%, something like that, so before the price of grids in the sea or the electricity highway makes a tremendous difference in the electricity bill at home, we would need to invest much more than in grids in the sea. Nevertheless, we need to attract investors. For many TSOs, this means more than nearly doubling your investment requirements for the next 20 years, so we need to be attractive for the investment community, and there we come back to the point: signals.

Q121 Sir Robert Smith: And certainty. How confident can the investors be that the wind farms will actually be producing the electricity?

Daniel Dobbeni: Of course. You are hitting a very nice target. When in some Member States existing contracts for renewables are put into question, this increases tremendously the perception of risk by investors and investors usually translate that into a higher risk premium, so nobody is advantaged by increasing the risk perception of the financial markets, but it is happening now.

Q122 Sir Robert Smith: Your 10-year plan is €23 billion to €28 billion?

Daniel Dobbeni: The first five years.

Sir Robert Smith: The first five years. How much more do you think we would need to create a viable supergrid?

Daniel Dobbeni: How? If I knew the answers, I would quit my job and start as a consultant. As I said at the beginning, we at ENTSO-E have given rough ideas and we came out with something around €70 billion for the total grids in the sea, only for the North Sea. Don’t attack me in 10 or 20 years if it is €80 billion or €60 billion. It is too early. What is important is to have an idea of what this means with respect to all the investments TSOs are doing anyhow, and then this relative wave is important for policymakers because, at the end of the day, it will have an impact on the consumers, the poorest family among us, as well as the industry. This is where the target is. As long as it remains, let us say, acceptable and that we do it the cheapest way through standardisation again, then I think we are on the right road.

Q123 Christopher Pincher: At the risk of boring everyone to death by talking even more about regulation, the current rather simple system of compensating for the cost of infrastructure into quite a more complex supergrid because it tends to benefit the exporter of energy rather than the importer of energy. It seems to be rather unfair, so it needs to be changed. Do you think it is going to be possible to create a mechanism for fairly sharing the costs of the supergrid structure?

Daniel Dobbeni: I can’t answer you, because this is clearly a Member States’ and a regulatory issue. As TSOs we are open to any allocation keys whatever. What is important-and again, that is the added value of this initiative of 10 Member States in the North Sea-is that we need clarity there as soon as possible. Ultimately, a decision will have to be taken, and there is no perfect allocation key, because even if we were to design a fantastic computer to calculate it nobody knows what there is going to be in terms of energy mix in the next 20 years, or in the next five years. So who is importing? Who is exporting? Who will benefit from the wind in the seas of the UK, and who will benefit from the sun? You don’t know, so we will have to build something that is reasonably correct for all consumers in Europe and all Member States, knowing that we have no clear view of the next 40 to 50 years, so allocation keys will have to be decided politically. I don’t think there is an engineering formula able to bring that out.

Alberto Pototschnig: There is in operation in Europe, an entry into TSO compensation schemes since March 2002. That scheme has been modified slightly but basically is still running more or less on the same principles. I think now the challenge is to see whether it is still fit for the new situation in which more complex and probably larger infrastructure would have to be built. That scheme was mainly devised to try to compensate for the use of existing infrastructure for transits. Personally, I think it will require some rethinking before it can be used for supporting new investment. It is not easy. This has been looked into by several academics and other institutions over the years. I agree with Daniel; I don’t think we will have the magic formula, so it is a matter of finding a reasonable formula. It is also true that energy flows will not necessarily be the main driver or the only drivers for the allocation, because there are some benefits that are not necessarily reflected in energy flows. There are wider benefits of integration, of sustainability and security of supply, typically. I think it is a challenge, but it is one of the challenges that we will need to address in the next few years.

It is not particularly relevant for TSOs’ decisions to invest, because at the end of the day what is relevant is whether they would be allowed revenues sufficient to cover the costs, and here we are talking about how the different jurisdictions would share the cost. Where it is relevant is on building consensus for new infrastructure, because that would be how the new infrastructure is seen from the national perspective of the different jurisdictions.

Q124 Christopher Pincher: That is going to be partly political, isn’t it, which is going to mean energy spirals, and therefore knowing how that cost is going to be spread out will be important to that decision?

Alberto Pototschnig: It is a zero-sum game, which makes any agreement very complicated. Fortunately, we have a regulatory system in place, so any time you propose an amendment or modification of the system there are some countries that are going to win, according to likely scenarios, and some other countries are going to lose. I have been involved in this for a few years, and my experience is that the first question you get is, "What does this mean for country X?" Then all nice technical details behind the quality of the algorithm are not particularly of interest.

Q125 Barry Gardiner: You said that sooner or later, politicians are going to have to take a decision. On a scale of one to 10, 10 being top of the priority list and one being in the category of "just too difficult to decide upon," where would you say European Energy Ministers are at the moment on taking that decision you talked about?

Daniel Dobbeni: I can’t answer you. I have no idea whatsoever whether it would be one or 10. Being an optimist by nature but not necessarily a believer, I would not say 10, but hopefully we will get there. If you allow me, you said, "sooner or later". I would like to qualify it, "Sooner the better."

Q126 Barry Gardiner: I am going to push you, because it seems to me that you must have a clear view of how focused different energy departments around the European Union are on this issue, how much their officials have brought it to the attention of their Ministers and how engaged those Ministers are with this particular matter as opposed to all the other problems that they are dealing with. Surely, you have some sense of whether this is something that most Energy Ministers are absolutely seized of the importance of and what to get on with, or whether it is just a law and order issue that on the whole is not on their political priority list.

Alberto Pototschnig: Sorry, are you referring to the cost of location or more generally the integration of the market in the North Sea?

Barry Gardiner: I am specifically going to the point that Mr Dobbeni said when he said, and I think I am quoting you almost exactly, "Sooner or later, a decision is going to have to be made here, and that is going to have to be made by politicians".

Daniel Dobbeni: The only element I have to give you is the summary of the meeting of the Heads of State in February, where for the first time clearly some of the points we have discussed today were addressed in writing by saying that they have discussed it at the highest level. I hope that if the Heads of State are discussing this at the highest level, it is the same for the Energy Ministers.

Barry Gardiner: So do I.

Alberto Pototschnig: If I can add another dimension, Ministers at the technical level would have to be part of the comitology process, so that we will have a clear sign. I think the first comitology process will be launched probably next year, so we will have an immediate sign of how engaged the various ministries are and the various administrations are. There is a commitment at the highest level. Then, when you look at the involvement at the technical level, I think you have a more varied picture and you have some countries that are really following and pushing, and others that are at the moment still looking from the outside.

Barry Gardiner: I will not ask you to name names. Thank you very much.

Q127 Christopher Pincher: I have one more question about decisions that have to be made in this case about the various low-carbon schemes we have operating across Europe. Here we are going to have a carbon price support scheme. That presumably means that electricity prices here go up. If you have a supergrid that presumably means that cheaper electricity could be imported from abroad, where there may be no carbon price support or a less advantageous carbon price support system in place, so what sort of alignment do you think might need to take place to ensure that those low-carbon schemes work across Europe, and do you think it is an important issue?

Alberto Pototschnig: I think there are two dimensions, if I understand your question correctly. There is now a European carbon market, which will hopefully operate in an unbiased way throughout Europe, and then there are other promotion schemes that may have an impact on the way in which the electricity market works. The Commission tried a couple of years ago, with the initial proposal on the renewables directive, to create a more integrated market; for example, for renewables support. It didn’t get its way. It is still very much national. There was a strong resistance to any form of European market in that respect. I think what worries me the most is that some of these schemes would keep a large share of generation out of the market or not respond to price signals, so this would have an impact on the liquidity of markets. That is where I think the problem is. It is not the fact that you still have national schemes; it is the fact that some of the national schemes may deprive the market of some important liquidity, especially if we look in the future at having renewables at 30%, 40% and, in some countries, 50% of generation. You take that out of the market somehow and you prevent that generation responding to price signals. That might be a problem.

Q128 Chair: We have been looking mostly at a grid around the North Sea. How are the prospects for north-south, to Europe, to Africa, or east-west to Russia? Are those projects coming along?

Daniel Dobbeni: There are, for the time being, trials with Turkey. They are going forward. In the next few weeks, the first market exchange will take place. I still don’t think we are contemplating a step by step approach, because the bigger the system, the more we have to ensure that we keep the stability and a well-functioning power system. When you talk about Russia, there are also discussions. We did a study before-a former association now-UCT with the Russians, whether it was a good idea or not or feasible to synchronously interconnect with Russian. It appeared that it would not be feasible at that time and that a DC-DC connection would be better.

I think there also you have to put time in perspective. When we go forward in terms of relying more and more on generation with a large part of it being intermittent generation, the bigger the system, of course, providing it is stable and so on, because at some time you will have a very high quantity of energy produced with a low demand. We will be happy to find someone that needs it. That is also another reason why it is so difficult to answer a question by saying which country is going to win and which country is going to lose, because the more we have of this kind of intermittent generation, everyone will lose and everyone will win, not every five years, but every hour, every day, every night or whatever. There, again, interconnection is a natural benefit. How to calculate it is another story.

Q129 Sir Robert Smith: They used to argue whether Scotland supported England because it provided most of the power, but then the people operating the grid said, "Well, really, England supports Scotland by providing all the phasing."

Daniel Dobbeni: If you go by going from a very huge power system, the European power system is today the biggest. Of course, China will be bigger someday. Some 530 million people are receiving energy of a very high quality. Of course, if I drill down and I go to a given village, maybe this given village will benefit from another village because they reduce electricity when there is a peak, so I think we have to look there in terms of added value, advantages and pros and cons at a higher level for all Europe. If you drill down to specific cases, you will always find good reasons to connect or not to connect, but globally the advantage is clear.

Chair: Thank you very much indeed. It has been a very interesting session, and we do appreciate your time and trouble in coming to give evidence. Thank you.

Prepared 20th June 2011