To be published as HC 1065-ii




Energy and Climate Change Committee

The UK's Energy Supply: security or independence?

Tuesday 7 June 2011

Mark Hanafin, Mark Rigby and David Porter

Nick Winser, Steve Edwards and Steve Johnson

Evidence heard in Public Questions 86 - 170



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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 7 June 2011

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Dr Phillip Lee

Christopher Pincher

John Robertson

Laura Sandys


Examination of Witnesses

Witnesses: Mark Hanafin, Managing Director, Centrica Energy, Mark Rigby, Commercial Director, Stag Energy, and David Porter, Association of Electricity Producers, gave evidence.

Q86 Chair: Good morning and welcome. Thank you very much for coming in. This inquiry is attracting a certain amount of interest, so we are delighted to have you all here. May I start off with a general question about how resilient you think our electricity and gas infrastructure is at present? In other words, how easily would it recover from a shock such as interruption to supply?

David Porter: Generally certainly the electricity system is pretty robust against things like weather events. That is partly down to the diversity that we have in types of power generation and partly a matter of geography. We are conscious of issues such as the risk of drought, which could affect cooling water, and also at the other end of the scale the risk of flooding. We work very closely with people such as the Environment Agency on those issues. The industry, of course, takes that matter very seriously indeed.

Mark Hanafin: I would just add that the key to energy security and resilience is having the infrastructure and a diverse range of supplies. If you look at the gas market, we have more than 150% of import capacity against gas demand, so that is very robust. We have an increasing range of sources now for natural gas. Then on the power side we currently have about 30% reserve margin of generation above peak demand today. If we look forward, that becomes more challenging, clearly, as coal plants begin to come off the system through the LCPD and some of the older nuclear plants come to the end of their lives. So, very much challenges ahead but today quite good security and quite good resilience.

Q87 Chair: The implication of what you say is that even if it is relatively easy at the moment to switch to different fuels, it will get more difficult unless we make some further investments.

Mark Hanafin: Clearly, a lot of further investments are required. Policy in the UK is to decarbonise. That will require new forms of base-load low carbon generation. It will require flexible generation to meet that and to replace those plants that are retiring. That is a big challenge.

Q88 Chair: Is there more that can be done through emergency demand reduction arrangements?

Mark Hanafin: The demand side of the energy security equation is important. We tend to focus on the supply side-how do we balance supply and demand through more generation or through more primary energy supply-but increasingly demand-side management will be important. We need to see the continued rollout of smart meters, hopefully to every home by 2020. We can have time-of-day pricing and we can begin to use that demand side to help balance the system. It probably needs a change in attitudes as well. Currently, if you are watching the European Cup Final and at halftime you put the kettle on, you will fully expect to be able to boil your kettle. In the future, we need to think about how that last, very expensive megawatt hour is produced, how it is used, and whether we can have better ways of balancing the system. Two years ago, probably the coldest winter on record, we had some interruptions of large industrial users. This was actually part of the system design. Those were companies that contracted to take their gas on an interruptible basis. When it happened-the system coped very well with that challenge-it was seen as somehow a failure of the energy system, but, in fact, it was the energy system working properly.

Q89 Chair: Other witnesses have said there will be changes in social attitudes. All I can say is I detect absolutely no willingness on the part of the public to make those changes at all.

Mark Hanafin: The key is to provide greater information about how energy is used and how it can be provided. If you ask customers, "Are you interested in saving money?" they will absolutely say yes. If you ask them, "Do you see the need for energy efficiency measures in your home?" they perhaps don’t see the need as strongly. We have to find a way of making that relationship clear.

Q90 Chair: That sounds like a polite way of saying you ought to be warned five minutes before halftime that the price of boiling your kettle is going to go up 10 times and you should switch it on now.

Mark Hanafin: No, with smart meters you will be able to see how you are using energy. You will have much better information about how your home is using it, how you can save it, and with time-of-day pricing how you can actually lower your bill.

David Porter: The domestic customers, of course, have not yet been given the means by which to make these decisions and judgements. Industrial customers are rather more used to that sort of thing.

Q91 Chair: Going back to what you were saying about preparing for flooding or drought and so on, the expectation is, I think from the scientific assessment, that those are going to become more extreme. There is at least a probability of more violent storms and longer periods of drought and possibly rising sea levels and so on. Given the length of life of the average bit of generating plant, are those long-term possibilities factored in sufficiently in your view to the investment that is being made?

David Porter: The planning of new power stations takes in those considerations. I mentioned earlier that we were working with the Environment Agency and also with DECC and the Cabinet Office because there is a rolling review going on of the resilience of our sector. That includes, for example, the modelling of the effects of a onein200-year storm surge in the North Sea. This is taken pretty seriously.

Mark Rigby: If I can just make a comment about the resilience of the gas system, essentially there are nodes on the gas system that are vulnerable to interruption. There are four key nodes: the St Fergus import facility in Scotland, which is becoming less important as the fields decline; the area around Theddlethorpe, which is where the Rough and Norwegian facilities come in; the Bacton area, which is the interconnector in the southern North Sea fields; and the Milford Haven Port. Failures on one of those can cause problems. The system is resilient, but when you have multiple failures then there are questions that could be raised. I am sure the National Grid is in a better position than we are to comment in detail. When Mark talked about the problems last winter, what we had was a partial failure on only one of them, the Norwegian pipeline system.

Coming back to your question about any impact in terms of severe weather conditions, there is an issue, I think, possibly on the offshore facilities, the Norwegian pipelines and maybe the Rough facility, in relation to more extreme offshore weather conditions. But what we have to be satisfied about is how robust the system is to a failure maybe of two or three of these facilities at one time, and that could be an unfortunate coincidence or it could be weather dependent because the compressors, particularly in the Theddlethorpe and Bacton area, will possibly be affected by extreme weather conditions.

Q92 Chair: Just broadening that out, are we also somewhat exposed to the resilience of European infrastructure as well now? If we are going to have more interconnection, possibly even get towards a super grid of some kind, is what is happening in the rest of Europe also something we need to take account of here in assessing risks?

Mark Rigby: In the sense of the European interface at the moment, that is my node point again. Effectively, there are two key nodes. We count Europe as Continental Europe and not Norway, which are the two interconnectors. On the other side of the Continent, the system is much bigger and things like storage is more evenly distributed across the Continent rather than concentrated in a number of key nodes. Therefore, you can argue the whole European system is a more integrated and self-supporting system, whereas we are more isolated definitionally with those two interconnectors. It does not necessarily mean that if you change trading rules or put more resilience in the continental system it makes any major contribution to us if we are still limited to those two interconnectors. They are what they are; they are two dedicated pipes and, therefore, a potential area of vulnerability by definition.

Mark Hanafin: On the power side, there is interconnection now with France, with the Netherlands. There are plans to significantly increase those interconnections with Continental Europe and Norway. I think that that is a help to energy security because you are broadening the base of the infrastructure and you are making it more resilient to a single or a double failure. That is probably a positive thing, but clearly we will need to keep an eye on how those issues develop in Europe.

Mark Rigby: All these things are trade-offs. It is what are we looking for here, how much security, how much certainty are we looking for against the possibility of building in redundancy to the system. That is the judgement that always has to be made. Whether that judgement can be made purely commercially or whether you need that judgement to be made by more regulation is a difficult issue to address.

Q93 John Robertson: Just before we move on, the interconnectors have not exactly been seen to be reliable. Are you satisfied that deals made will be fulfilled by the other side of the water?

David Porter: I am not sure that they have been that unreliable. In fact, the interconnector with France, of course, has been around for a long time and has proved beneficial to countries on both sides of the Channel. The Dutch one is rather newer; I think that is just a few months old. I think if there is an issue with interconnectors it might be that the issue is how long it takes to actually build one. I think the Dutch one was about 10 years between conception and delivery.

Mark Rigby: An electricity connector is a much more reliable interface. I would argue that the gas interconnector for purely physical reasons, the issue of compressors, issues of dew point temperature, all of those affect a gas interconnector; they don’t affect an electricity interconnector. I think your point is absolutely right, but it is about electricity interconnectors.

Q94 John Robertson: DECC is anticipating the demand for natural gas to fall by 30% in 2020 and then by 90% by the mid-2040s. What implications does this have for the immediate investment in gas, and do you accept these figures?

Mark Hanafin: Let me start with the longer term figure. Energy markets are notoriously difficult to predict what will be happening in five years’ time, 10 years’ time, and certainly 30 years’, 40 years’ time nigh on impossible. To give you an example of that, I used to live and work in Houston and in 2007-08 we were building regasification terminals as quickly as we could in North America because of the major imports that were expected. The issue was not do we need imports into North America; it was just what quantity. Within a year, with the dawn of shale gas, that position was completely reversed and we have now perhaps North American self-sufficiency, energy security for gas for perhaps 100 years. It is an example of just how difficult it is to be very precise about what the energy market will look like at a given time. I think predicting what that will look like in 2040 is very difficult. If we look forward over the next 10 years, different commentators will have a different view. The general trend, however, will be that gas is either flat to gradually falling. We will see less use in heat, for example, but more use in power.

Q95 John Robertson: Could I come in there? The National Grid have told us that they see gas share of power generation rising by 50% by 2015. How does that fit into the equations and do we have the existing infrastructure in place?

David Porter: I think when sane and sensible organisations like DECC and National Grid disagree over forecasts like that, as in the rest of the world it is usually to do with the assumptions that are being made. This may well be differing assumptions about how much new nuclear power comes forward by when and how much wind power comes forward in that period.

Q96 John Robertson: What is your assumption?

David Porter: I am not making an assumption other than the one that the Government makes and that is, for example, that we will get new nuclear power around 2018 and we will meet our renewable energy target in 2020 because the Government’s response to the EU officially is just that.

Q97 John Robertson: How do you think the volatility of the price of gas-it can be up, it can be down, and the effect in the market that will cause-is going to affect things?

Mark Hanafin: The first thing to say about price volatility is that if you have the right infrastructure and you have the right diversity of supply, you are going to avoid the major shocks in price that come from a dislocation in that. But then within that you will see price variation season to season and year to year, and that is the natural working of the market. For example, in gas in 2009 you had a world recession, you had liquefaction, LNG projects, being delayed, being cancelled, demand coming out of the picture and prices falling. That had a chilling effect on investment. As gas prices recover, those investments will come forward. That cycle is a normal cycle. The key I think is that those first steps around diversity of supply and the energy infrastructure means that you don’t have the dramatic shock.

Q98 John Robertson: If we get to the stage where nuclear is put back and we get to the stage where wind is not supplying the necessary power, as has been seen already, and we get to the stage where we need gas to fill in that space, does that not put a demand on gas that will automatically bring an increase in price?

Mark Hanafin: Well, it certainly will increase the demand for gas and gasfired generation will need to increase its share of the load. But the UK is operating within the context of a global market and you have to look at what that demand means in relation to the rest of the market. The UK is a big gas market but in global terms it is only a small percentage.

Q99 John Robertson: How does gas compare to other fuels with volatility? Is it more volatile or is it less volatile price-wise?

Mark Hanafin: The volatility has been actually reducing and this is one of the challenges around the storage projects.

Q100 John Robertson: I get from that it is more volatile then?

Mark Hanafin: No, we have seen the volatility, for example winter-summer differentials, reducing and that is a concern in terms of how we get those storage projects coming forward.

Q101 John Robertson: You talked about weather there. I can’t remember which one, I think it was you, Mark, that said that two years ago was the worst winter. Well, last winter where I come from was a lot worse than the previous one, but that is two bad winters in a row we have had. What happens if we keep getting these bad winters and we have to expect this? An add-on to the other thing: what happens if we have a good summer and the air conditioners start coming on and we start buying-because one of the things that has been said by many companies is that the actual use in summer is starting to approach the use in winter.

David Porter: There are parts of the world, of course, where the peak occurs in the summer.

John Robertson: Absolutely, yes.

David Porter: But that is not here and it is probably not likely to be for some time. But the point that you make about-

John Robertson: I will remember you said that.

David Porter: Thank you.

Mark Rigby: Could I pick up on a couple of your points, Mr Robertson? I think, first of all, going back to how much security we want, you hit the nail on the head when you talked about demand because, of course, it is how much security we want against an assumption about demand. Looking at some of the material that has been published both by Government organisations and consultants over the last two years, I compiled a list of I think nine longterm gas demand forecasts. The lowest number I have seen is in 2023 72 BCM, and the highest number I have seen is 124 BCM. That is David’s point, it depends what assumptions you make, but all of these are from perfectly respectable consultants in the industry.

I think the baseline number that DECC is using at the moment is something of the order of 83-84, but when Ofgem looked at the issue in Project Discover and they did a scenario analysis, they had a variation of between 113 and 76. In that context, you have an enormous variation and to decide security you have to say, "Am I providing security against these higher numbers or am I providing security against the Government’s base case?" and I think you have different answers to that.

Coming to your point about volatility, as someone from Edinburgh who is acutely aware of your point-I live in Edinburgh-I think the Government, to be fair, its policy in the sense of sharpening balancing incentives and the SCR process they have in clause 79 of the Energy Bill is precisely about that point. They see the way to encourage more gas storage is to send a signal to the industry that reform of the balancing rules, which is what essentially drives the wholesale market, will introduce more price volatility and, therefore, there will be a signal to invest in gas storage. I think that is the current view of the Government and what they are trying to do through the Energy Bill. Whether or not that will be effective, of course, is subject to quite a lot of debate within the industry at the moment.

John Robertson: A good time to move to the next lot of questions, Mr Chairman.

Q102 Chair: Just before we do that, it is clear, I think, is it not, that given that range of possibilities for gas demand that security in 10 years’ time would be greatly enhanced if we had a substantial amount of new nuclear capacity? David Porter is saying he is happy to accept the assumption that this will start in 2018-that is the official assumption-but on any realistic assessment of what has happened in the last six months there can’t be any hope at all there will be significant new nuclear working by 2018. So we are in danger of being at the higher end of that gas demand range, are we not?

David Porter: I ought to say that the preliminary report on the nuclear industry that the inspector made did suggest that we need not expect any significant delay to the nuclear programme. I would accept, of course, that there are other reasons why it might be delayed, finance being one of them perhaps, but that was the official signal. I don’t know whether Mark wants to add anything to that in terms of your stake in the nuclear industry.

Mark Hanafin: Yes. I think the events of the last six months do put pressure on the timeline without question. You have had the generic design assessment for the reactors due out this month. That was the original plan. Clearly now that interim design assessment can’t happen until after the final Weightman report on Fukushima. That is a six-month type slip in the generic design assessment. You have then had some slippage in the planning process with all of the requirements to get to a point where you can submit applications to IPC, so a lot of these things are interrelated. I think it is fair to say that it is probably too early for us to say what is the new date because we need to see what the final Weightman report actually says. If it says, "You need to test against these design parameters" and those lead to relatively modest design changes, then the delay can be quite minimal. If they are major design changes, then in the nuclear industry that always needs great care and attention, so that would be a longer delay. It is a bit premature to say at this moment what it would be; probably in the next six months it will become clearer. But I agree with you that the pressure is on the timeline.

Chair: We are taking evidence from Professor Weightman on Thursday.

Q103 Laura Sandys: Just following up on international; we have been talking very much about the domestic infrastructure and the European infrastructure. When you start to look at price volatility we have not really discussed some of the more politically unstable areas that we are importing gas from, the increase in demand globally, and also the German decision to in many ways make their nuclear redundant, which will put an extra strain on the whole European infrastructure. How much do you examine and look at that political instability, the politicisation of energy, and how we are going to be able to hedge that and not in many ways find that on the gas, which is the resource that fills the gap when we have problems, we are being hijacked on price due to those politicisation and instability issues?

Mark Rigby: Well, I was hoping my esteemed colleagues would take that question first. I am just a simple man, not looking at global markets, but I guess there would be two points. First of all, when we talked about price volatility and I talked about short-term price volatility incentivising storage, if you like that is prices going up and down very much in the short term against an average underlying price. I think what you are talking about more is a structural movement of gas price due to the fundamental world supply-demand balance and, therefore, the whole gas environment is tighter and prices are higher over a sustained period, which is a different sort of volatility that I am sure you are better placed to deal with than I am.

Mark Hanafin: I think the context to the question is that if you go back seven years we were self-sufficient in gas; today we are importing about 45% of our gas needs, and perhaps in 2020 that might be up towards 70% of our needs. That is the broad trend and clearly there can be variations from that. What it means is that we have to do a number of things. We have to make sure that we do everything we can to get all of the reserves of gas out of the North Sea that are there before they are stranded and left there forever. We need to start competing on the international stage for our share of that gas. There are countries that have never been blessed with indigenous sources of gas that have been doing that for years and years and their governments work hand in hand with their businesses to compete for that gas internationally. I think we will need to do more of that. The previous Government was very supportive of Centrica’s efforts to get a term LNG contract signed with Qatargas. That was continued with the current Government, that very good support. I think that was a great example of Government and business working together to secure the UK’s energy needs.

Yes, it leads us into all sorts of other risk areas and political areas but, as I said at the beginning, the key is diversity, the key is having the sort of contracts that we are building long term with Norway, with the Netherlands, with Qatar and with other countries.

Q104 Laura Sandys: Would you make additional recommendations to Government on what they should do to support particularly greater gas security, not just what they did in Qatar but in other parts of the world? Do you feel that we are proactive enough from the Government’s perspective?

Mark Hanafin: I have been back in the UK for three years and over that period I have seen a change in this respect from a little bit of handsoff, that is a commercial matter and we don’t deal with that, much more to a recognition that the Government does need to be interested in this, does need to be involved, does need to recognise that when we land in places like Doha you will see the German Chancellor or somebody else arriving. I have seen great response in that respect and I think it is a continuation of that that we need to see.

David Porter: I think as with all aspects of our energy infrastructure it might be worth mentioning planning consent. People have had problems getting consent for storage. A great deal of will to do it, but it has not always been as easy as it might be.

Q105 Christopher Pincher: On the storage question, do you think that we would benefit from a security aspect from having a larger amount of storage? You said, Mr Hanafin, that we need to compete hard in the world marketplace to get gas, that we need greater diversity of supply, but surely a corollary of that is that we should also have greater storage capacity to guard against short-term supply interruptions?

Mark Hanafin: I agree. I think that the country does need more storage. The National Grid has said that of the 4.6 billion cubic metres of storage we have today, probably we need something like twice that in 2020. I think it is difficult to be precise about exactly what is needed, but that direction and that order of magnitude seems reasonable.

It is important to recognise, though, that the actual need of the market is not storage per se, it is flexibility. There is a need for the market to be able to balance supply and demand. Traditionally, a lot of that flexibility came from the North Sea gas fields that could be ramped up and down. As those deplete that flexibility reduces, but at the same time LNG in the last couple of years has provided a remarkable amount of flexibility. The send-out rate from these LNG terminals can be turned up and down. We talked a little bit about the demand side earlier and how the demand side now can begin hopefully to help with that balancing. But having said all of that, I still think that there is a case for more storage, and I know Mark is passionate about that.

Mark Rigby: I am the union rep, yes. What I would say is that there is an active debate within the industry as to whether or not more storage is technically necessary, quite an active debate, and the Poyry report for the Gas Forum, which David Porter quotes in his evidence, is saying for day-to-day purposes the system is quite resilient. I agree with that, but I cite those problems with nodes. It really is a fine judgement as to how much extra facility you want for storage, and I think Mark is absolutely right to talk in terms of flexible storage.

What I have always argued from my point of view is that storage is different in kind. It is providing security compared with other mechanisms in that flexible contracts ultimately are between good partners. What the Labour Government did when it took a great lead with both the Norway and Qatargas contracts were tremendous contributions to this country’s security of gas supply. But at the end of the day they are paper contracts that are subject to physical interruption over long distance. That is different in kind to actually having the stuff in the ground inside UK jurisdiction and under UK control at all times. That is a different qualitative type of security if at the same time on paper it is no more flexible than a flexible contract is. That is the quality of judgement I would argue from a storage point of view.

Q106 Christopher Pincher: In terms of storage balance, what do you think the balance should be between salt caverns and high-pressure containers and storage in existing reservoirs?

Mark Rigby: I think that is a very good question. What is normally put forward is that people quote the number of days storage cover, which I think is very misleading because it is a question of whether you can get at it or not. If you look at the UK, two-thirds of our storage is from the Rough facility, which empties in 67 days. So, while Rough contributes massively to our 14 days’ cover, you can’t empty Rough in 14 days. The reason for that is that Rough is a reservoir and reservoirs have lower flexibility and you can’t empty them so quickly. If you are looking for security you do need high deliverability facilities, the salt facilities. The problem with that, of course, is they are more expensive so you have the usual tradeoff between getting what you need and paying more for it or having a second best but at least getting something.

Q107 Christopher Pincher: What sort of expense are we talking about here if you compare it, for example, with the cost of renewables?

Mark Rigby: Cost between salt and reservoirs, maybe salt is about double. If you compare the cost of putting in four or five BCM of storage in the sense of a mixture maybe of reservoirs and salt, a sort of balance of the two, and you compare that with the cost of the current renewables programme and ask how much that would impact on the consumer, the number that I have calculated is that the insurance premium on storage would be something between one-fortieth and one-fiftieth of the total cost of the current renewable programme on the current consumers. So it is much smaller but it is always the issue of one more straw on the camel’s back, isn’t it? I guess that again is a concern people might quite rightly have. We must be quite sure we really need to do this, and that is what the debate is about, I think.

Mark Hanafin: I think in some respects renewables can add to the need for storage, not take away the need for storage. If you have more intermittency, probably the fast cycle storage that Mark is talking about is needed. I don’t think it is a case of seasonal storage is second best; I think we need both. It is a cheaper form of storage, but you need fast cycle and you need seasonal storage as well.

Mark Rigby: I think that is what I said. It is absolutely vital to our current security.

Q108 Christopher Pincher: What about quality of gas coming through the interconnectors, the two nodes that you mentioned? Does that affect the security of supply?

Mark Hanafin: Yes, gas quality is a potential issue in the UK because on the Continent the quality is different to the UK spec. It is a slightly higher heat content. It is technically relatively easy to resolve. The LNG terminals, for example, have nitrogen injection facilities and, depending on the specification as the gas arrives, that can be used to bring it on spec relatively simply. I think the only real issue is the interconnector from Zeebrugge where occasionally the quality in Zeebrugge does not meet the UK spec and it can’t pass through the line. Normally that is not a problem, but clearly if there was a time of stress on the system you would not want to be interrupted because the quality was not quite right when there is an easy solution there. It seems like it should be just resolved. I think the challenge is that the shippers on that line all have different commercial interests and it is difficult to get them aligned to pay for this relatively modest investment for nitrogen injection at either despatch or the receiving end. Another option would be for grid to have that as part of their cost recovery mechanism; that they make that investment and they recover that cost. Spread over the whole gas system, it is a very small cost indeed. So, easily technically resolved; for some reason commercially has not managed to get done.

Q109 Christopher Pincher: Do they currently monitor the quality of the gas?

Mark Hanafin: Yes, the quality has to be monitored. Both the BBL pipeline and IUK can only transport gas if it meets the UK spec because otherwise there would be problems with burners.

Mark Rigby: I think Mark has hit the nail on the head here when he said why isn’t a comparatively small problem easily resolvable. I think that raises perhaps the general issue of governance and how these processes and how these decisions are ultimately made, where the buck stops, who actually has the final decision. Understandably, in a lot of these complex areas where there is an interface between quite elaborate market rules and an awful lot of companies and a legal process around Ofgem where everything has to be done by the book so it is not subject to judicial review and so on, it is quite difficult to unpick some of these knots, and blending is one of those because it ticks so many of those difficult process boxes, I think.

Q110 Dan Byles: I am interested in exploring the economics of gas storage a little bit more. Mark, you referred to the fact that the seasonal price difference, for example, between summer and winter is reducing.

Mark Hanafin: Yes.

Dan Byles: It strikes me that that is one of the big problems that we have in looking for a commercial solution to this. Would you like to elaborate on that a bit more? Why is it that the market is not solving this problem for us?

Mark Hanafin: Yes. I think what you are seeing is we are coming out of a period where there was plenty of gas around. There was an oversupply of gas and that essentially blankets the market, so it deadens the difference between winter and summer when that happens. If you are investing in seasonal storage, you are looking at that differential, putting the gas in in summer, taking it out in winter, trying to project that forward. We talked earlier about the difficulties of forecasting. It is extremely difficult to forecast an energy price. It is even more difficult to forecast future differentials.

What I would say is that there are numerous projects in the pipeline on storage, both fast cycle and seasonal, and we have some of those projects. They are real projects, they are good projects, and they need to come forward. At the moment those commercial conditions are very challenging for that, so the question is what we do about that. Does Government need to do something? Mark and I might have a slightly different view on this. I think we are agreed that we need storage. Our view is that intervention at this point is a bit premature. I really like to see whether markets can work; whether companies can deliver these solutions without running to the Government for help. I am very hopeful that in the next couple of years two or three of these bigger projects are going to come forward, they are going to be viable and we are going to get those storages being built.

Q111 Dan Byles: Are you talking about things like the Baird gas project?

Mark Hanafin: The Baird project. This is 60% the size of Rough. It is a very big project. It is over a billion pound project. It is an excellent project. We are in detailed engineering work on that project now and when we complete that we can take a real assessment of whether it can move forward. If in the next couple of years, however, the market is not delivering and there is a sense that this is more like an insurance product than the old reliable winter-summer product that it used to be, and that the market is not going to invest to provide that insurance, then we need to look at what Government intervention would be appropriate. I think there are the support mechanisms that could be considered, there is strategic storage and there is a storage obligation. Very quickly, I would say let’s see if we can make the market work without the support mechanisms first. Strategic storage I am very concerned would have unintended consequences like chilling other commercial storage ventures. It is probably around the storage obligation that any intervention would work.

Q112 Dan Byles: Just briefly on your concern, if the Government start pushing for strategic storage, will commercial operators see that as a threat and see no point in investing in shorter term commercial storage?

Mark Hanafin: I think that is clear, yes.

Mark Rigby: I think to a certain extent, Mr Byles, strategic is always a bit of a red herring in that nobody at all argues for strategic storage in this country. Jonathan Stern, who I think you heard from last week, was the only major pundit who did think it had a role, but even he now has doubts if I understand what he had to say to your Committee. What we are talking about are some of the other measures that Mark mentioned that have been subject to regular DECC consultation. I am not actually saying there should be direct intervention by the Government now on any of those. All I was arguing for in my evidence was that such long lead time is involved in these projects between making the decision, marketing, investing and so on, that you may be talking five to seven years from start to finish. I was saying, given that there is an active debate now, why not have an active debate about everything and at least agree what we are going to do if we have to do it. Not do it, just set out a framework of how we might do it so the industry knows where we are, because there are so many different angles in the way this could be approached.

Could I quickly answer your question? On price mechanisms, it has only been for three or four years that there has been a summer price differential that relates to storage, and you could argue that in the liquid markets where you only have a price curve that is discoverable and transparent three or four years forward anyway, it is unlikely that most of the time there will be a price signal for storage, because it is one of these paradoxes that it is only when it is too late and there are severe conditions that the price signal is there. Most of the time it will not be there and, therefore, relying on the short-term market curve to produce a storage signal for storage is not going to work and it really is a strategic judgement. It therefore comes down to either the sort of things I have been talking about, about Government measures, or you are relying on the big companies like Mark’s to take a strategic view that storage will happen irrespective of what the price curve might say. Maybe things like the Third Package make those things more difficult for his company to do that sort of thing.

Q113 Dan Byles: Do you think that the sorts of measures that the Government have announced to date are the right ones? I detected in your answer earlier, I think it was to Chris or it might have been to John, that you were not entirely confident that what the Government has said it is going to be doing will have the right effect.

Mark Rigby: What we have said is we doubt that the price balancing mechanism reform in itself will incentivise more storage for the reasons I just said, that it probably won’t have an impact on the forward curve and it will only be after the crisis that people will see the effect and they can price it in. You are asking people to second guess a future unknown at the moment, which is a very difficult sell to an investment committee.

Q114 Dan Byles: What should we do?

Mark Rigby: That is not to say it is the wrong thing; I am just saying that possibly we do need more things as well along the lines that Mark talked about. He and I seem to be in agreement that if more storage doesn’t come forward in the next two or three years maybe we need to do something like that. I have supported the supplier stocking route as the way forward. All I am arguing at the moment is that it is better for the Government or for Ofgem in particular to look at all of these things now holistically and say, "This is the way we are going to go," rather than just do one study on one particular measure, which may not work.

Q115 Dan Byles: Plan now for what Government might have to do and hope they do not have to do it?

Mark Rigby: That’s right.

Q116 John Robertson: Most companies have a forward plan, whether it is a shortterm, mediumterm or long-term plan, and they always tweak them about. I am a bit concerned about some of the things you are saying here about basically not planning because you are not sure of how things are going to be. We have the Government saying one thing about where they think things are going to go. We have other companies who have their own ideas. In between we have a case of do we need gas, do we not need gas? We have asked various questions of various people in the chairs you are now sitting in and nobody seems to be willing to come forward and say, "We need to go down this road". Unless we get some kind of forward planning ahead, we will be caught or could be caught rather badly off in energy circles. Let me ask you a question here. You have talked about winter, you have talked about summer. You have not actually talked about what might happen with new technologies, for example if electronic cars start to take off, and the actual extra burden that would be put on to electricity through these new technologies. Is there a plan for that and, if so, when will we get a definitive answer of what this country is going to need? To be honest, gentlemen, we cannot wait until 2015 for an answer. We need an answer like yesterday.

David Porter: The other side of that coin is the message that we give quite often, and that is that it is, of course, very difficult to make some of these investment decisions. The industry can see reasonably clearly the general direction that we are going. We have a renewable energy target to meet, we have a decarbonisation target to meet, but the mechanisms for getting us there are not yet as clear as they need to be. We are going to get some preliminary signals on those reasonably soon if DECC fulfils its promise, and we shall see a White Paper taking forward the energy market reform before the summer. But there is a great deal to be done after that comes out and I think the Energy Minister himself said at one point a few months ago that we do have to go through a period of uncertainty before we get to the certainty.

Q117 John Robertson: You see my predicament here. You have said exactly what everybody else has said, and that is basically nothing. You are not giving me any idea whatsoever. Your profit margins are pretty good; you are making lots of money. The fact of the matter is there does not seem to be much risk management going on. Yet I always thought that one of the things in business risk management was you saw a chance to make a few bob and you moved in. What is happening?

David Porter: There are also opportunities to lose a few bob and that is why-

John Robertson: That is called risk management. You take the risk, and you have plenty of money to throw about.

Mark Hanafin: Can I come in here, Mr Robertson? You said that it is frustrating that there isn’t clarity about the direction and what is needed. I will give you a perspective from an investor side. If we decided that the only mechanism that we needed to worry about was cost price and returns, what were the best investments to make money, I think probably the industry would go out and build coal plants today. If that was the only condition that was placed on the market, that is what you would see happening. As a country we have decided, quite appropriately, that that is not the right course of action and that we need to take into account the environmental impacts of that, not just climate change but the environmental impacts of coal, so most of the coal plants are being phased out. You then have a very complex situation where you are trying to provide security of supply, decarbonise the generation, and do all of that in an affordable way. The policy framework that will enable that to happen is EMR and the Government has been consulting on EMR. There are good proposals there around how we bring on low carbon base-load generation, how we bring on flexible generation, but that framework has not been put in place yet. If you are waiting on an investment in biomass or you are waiting on investment in offshore wind, you really do need to know what that framework is for the future. Hopefully, it does not sound as though I am making too many excuses, but that is the reality of where you sit as an investor today faced with those challenges.

Q118 John Robertson: But it has always been that way in business. When the atom was split, you must have thought, "I wonder where we are going to go here." It has always been like that.

Mark Hanafin: It has always been like that, except the difference now is that you don’t just invest in what you think is the cheapest technology, because what is the cheapest technology will not deliver the other policy requirements around decarbonisation.

Q119 John Robertson: Yes, but you know that and I know that. The question is how do you deliver? You are telling me what can’t be done. You are not telling me what can be done and how it will be done.

Mark Hanafin: We need to see EMR coming forward with pace. We need to make sure there is no further slippages to that plan, provide the clarity, provide some confidence for investors, make sure that we do not have nasty surprises around taxation or policy shifts, and the investors will make the necessary investment.

John Robertson: There are always nasty surprises.

David Porter: It is vitally important that the energy companies are profitable. They are already major investors. People tend to forget that. But what is ahead of us is massive compared with what we have been doing in the past. The figure that has been bandied around, the £200 billion that needs to be invested in the next 10 years or so, is pretty real. It is so substantial that the companies can’t meet that from their normal operations, and this means that investors are going to ask pretty tough questions. Some of those questions the companies themselves can’t answer until the Government has laid out in a bit more detail how it intends to reform the market.

Mark Hanafin: I don’t want to leave the impression that investors are sitting around dithering. In the case of my own company, we have invested £4 billion in the last three years in the UK’s energy infrastructure. We built the largest wind farm in the world at the time. We built the most advanced gasfired power station in the country. We have invested £3 billion in upstream oil and gas. These investments are happening, but in terms of longer term energy security we do need that clarity of what the framework is.

Q120 John Robertson: The big wind farm you are talking about, if you had not had Government subsidies to do that, would you have done it?

Mark Hanafin: Wind farms cannot be built economically without Government support. It is more expensive to produce low carbon generation than high carbon generation. That is just a fact that we have to deal with.

Q121 Dr Lee: Moving on to intermittency and the future role of gas, where do you see gas in the electricity generation mix in the next 10,15 years? Is it base-load, is it midmerit or is it peak?

Mark Hanafin: That is one of the challenges about how new gasfired plants get built. A modern gas-fired, efficient plant will want to run base-load. The investor will want to see that happening for returns. The way that an investor is rewarded for building a gasfired plant today is through one revenue stream, which is energy, so the price of electricity. In the future, if large amounts of wind come on and off the system, the intermittency issue, it will mean that gas-fired plants will effectively be providing that back-up service. That produces a problem with that business model because you are only getting revenue when you run; you are not being rewarded for providing that back-up service. Part of EMR consideration is whether there should be a capacity market, as there is in north-eastern US, so that an investor in gas-fired plants has a revenue stream from energy and a revenue stream from a capacity market, perhaps an auction process.

Q122 Dr Lee: Which renewable energy form would be easier in terms of security of electricity supply? If you were going to have a form of renewable energy in the mix, which one is the easiest one to deal with if you are the gas supplier who is providing the peak demand?

Mark Hanafin: Well, I think that probably biomass is the renewable energy source that has the least impact in terms of intermittency. Providing there is a good supply chain in terms of the feedstock then that plant should be able to run relatively base-load. Obviously, wind is subject to the climatic conditions, which vary week to week, month to month, year to year, and that is where the back-up comes from. You then get into wave and tidal, but there the cost equation starts to really bite because some of those technologies can be 10 times the price.

Q123 Dr Lee: Sure. I just wonder whether being a gas supplier you benefit greatly from having a large wind farm component to the energy mix.

Mark Hanafin: As a gas supplier?

Dr Lee: Yes, because the intermittency of wind is a problem. We have had people in front of us about super grid and how we can export it when it is windy and so on, but ultimately the gas suppliers benefit, don’t they, from wind? In comparison to, say, tidal, the Severn Bore or whatever, where it is, "Right, press the button, boom, here it comes", and it comes every day. Irrespective of weather, you know you are going to get 10%, 12% of potential national demand.

Mark Hanafin: I don’t really see-

Dr Lee: My point is that is there a danger here? Is there a conflict of interest danger here?

Mark Hanafin: I don’t think so. You have to compare how much carbon are you abating and what is the cost of the electricity that you are going to be producing. As I mentioned earlier, if carbon was not an issue, you would be building coal plants and some gas plants, and maybe that is around the £60 to £80 a megawatt hour level. Maybe nuclear is around that higher end. Then you are into onshore wind, which is a bit cheaper but more difficult to build for local reasons, and then offshore wind, maybe £140 per megawatt hour levelised cost. Then you get into tidal and wave, which may be more predictable but perhaps five to 10 times the cost.

Q124 Dr Lee: I guess what I am trying to say is, is there a danger with going for wind like we have done that we are actually not enhancing our energy security in the same way we could have done if perhaps we had built more nuclear or gone down the tidal route, because ultimately if the wind does not blow we are importing this gas? We have already heard about the problems with Zeebrugge and quality and what have you. Is there not a danger here that we are increasing our energy insecurity by relying upon a form that is intermittent?

Mark Hanafin: No, I think that the investment in gas infrastructure that we have had, in securing diverse gas supplies, in different forms of renewable energy, in a nuclear renaissance in terms of new nuclear stations, all of those things are necessary. As a company, Centrica is reasonably technology neutral. We are not a global nuclear company. We are not a global wind developer. We are quite reflective in a sense of what the UK’s demands are, which is how do we get that right balance in the mix. I think the-

Q125 Dr Lee: I am looking at from a UK as in Government-country position, not, with respect, about Centrica. Centrica is in the business of making money and good luck to it to do so. Ultimately, though, if we have a greater proportion of our energy need coming from imported gas, we are less secure.

Mark Hanafin: I think the security, as I say, comes from diversity and gas is an important part of the mix. It can provide a path towards a low carbon future cost-effectively. Gasfired generation is very cost-effective. It brings with it risk. I do believe that we should be investing more in nuclear. That is why we are participating in it. But let’s say, for example, we said, "Let’s be less reliant on gas, let’s quadruple, let’s multiply by 10 the number of nuclear plants we want to build," does that immediately reduce risk? It changes the risk profile. It makes you less reliant on international risks, perhaps, but what if there was a type fault in that technology so that you had to take all of the reactors offline at once? If we over-build on offshore wind, what if there is a change in the weather patterns and the jet stream moves to Spain rather than the UK? These are all unknowns and they are certainly risks. We are not really different from the UK Government in that sense. We want to diversify those investments and that risk so that we can cope with them.

Q126 Dr Lee: I am sold on the need for diversity. I suppose, leading on from the rather baffling decision of the German Government on nuclear, clearly they are not going to replace it with renewable in the next 20 years. Let’s get real, that is not going to happen. So they are going to start burning more gas. That is going to impact upon our security, is it not, as a country? If we are becoming more dependent on gas, for the reasons we have just been discussing, isn’t that strategic decision by the German Government going to impact upon our energy security?

Mark Hanafin: I don’t think it has a huge impact. It is one factor in a global market where you have large changes in demand for all different reasons: the German demand being up; huge changes in supply with the advent of shale gas; new LNG; coal bed methane in Australia providing new sources of gas supply. So there is probably one to 300 years of gas supply and it is a question of do the markets operate properly and does it bring the gas when it is needed. So I don’t see it as a huge immediate threat to the UK.

Q127 Dr Lee: Finally, on carbon capture and storage, do you see that technology playing a big part by the 2020s?

David Porter: We are hoping that it will. We have members that want to-

Dr Lee: Is that a yes or a no? We always get back to CCS here and it always strikes me that we are all sort of fingers crossed under the table, aren’t we?

Mark Hanafin: I would say no, in answer to your direct question about whether we will have CCS in 2020. If the question is will we have scaled commercial carbon capture and sequestration in 2020, I think the answer is clearly, no.

Q128 Dr Lee: So the conclusion is that if nuclear is delayed, for whatever reason, our gas demand goes up because, as you have alluded to, we are not really thinking about how all the electric cars are going to get charged, and everything else, and on top of that CCS isn’t working, what hope us hitting our carbon targets? I do not see how this all adds up to-

David Porter: Our carbon target is, of course, for 2030.

Dr Lee: Well, even 2030.

David Porter: By 2030 a great number of things may have happened, and if carbon capture and storage is going to come forward it is likely to play its part after 2020, I would have said, and so would more new nuclear power, but it remains to be seen.

Q129 Dr Lee: It is all a bit uncertain. Is that a fair assessment?

Mark Hanafin: The main contribution to meeting the carbon targets is the replacement of coal-fired plant with gas-fired plant, which is happening over the next three to five years. We are having a build out of renewable energy. EMR will clarify that. It will clarify what are the mechanisms and the market policies around such things as biomass. So that will be happening. The nuclear programme needs to proceed as quickly as possible. So the carbon targets are mainly going to be met from energy efficiency and displacing coal, and I don’t think there is a threat to that. If we say, "Well, that creates an additional threat because we are too reliant on gas," what I would say is that Mark showed the range of predictions but I think the majority of predictions are that gas will be flat to slightly down, because energy efficiency will reduce the heat load for gas and there will be a greater need for gas in power generation. British Gas has seen its customers’ gas consumption decline by 22% in the last five years, and where we have worked with customers on specific energy efficient measures we have seen up to 44% reduction. So a flat to slightly declining gas market, given all I have said about diversity and sources of supply, is manageable.

Chair: It may be manageable but it would be reckless, I think, to assume we can base policy on the availability of carbon capture and storage within a decade and the likelihood of any new nuclear power coming on stream within a decade. We have to live in the real world, however much we regret both those things. The CCS is a matter of whether we make the technical progress or not but the nuclear is a matter of political will, which is singularly absent at the moment. So the truth is that we are going to be using an awful lot more gas with all the risks that that implies. There seems to be absolutely no alternative. You have given very balanced assessments of how you see it, but it is hard to draw any other conclusion.

Q130 Barry Gardiner: First of all, gentlemen, my apologies, I am going to have to leave shortly for the Natural Environment White Paper launch, so I will try and make my questions succinct and if you could make your responses succinct that would help us all.

I want to focus on the EU Third Energy Package and to look at the ways that, by March of next year, we will have to have done the unbundling proposed there, either ownership unbundling, the independent systems operator or the integrated transport and transmission systems operator. Can I ask the two Marks, initially, which model of unbundling would you prefer for your company? The second question is which model of unbundling do you think would aid the UK’s security of supply best? Then I will turn to David to answer the same questions, but not obviously in relation to his own company.

Mark Rigby: If I could just confine my comments, as usual, to the gas storage area. This is an area where our trade association have been very active in dialogue with Ofgem on the application of the Third Package. Essentially, the model in the Third Package, in terms of so-called third party access, is one where gas storage is treated as a utility return business, with price regulation and elements of price capping in it and no preferred access to the owners of that particular facility. That is a model that fits very well with the European gas storage industry, which, as I have explained before, largely is a capacity payment-type system with guaranteed throughputs, guaranteed return, regulated return. It is very difficult to apply that model to the UK because we don’t have that framework at all. We have a virtual framework where, understandably, people are looking for good returns when the times are good for storage and accept the fact that you are not going to make much money when times are bad, like at the moment.

Therefore, the paradox is that what I think the Government has done is it has negotiated an arrangement where we have a negotiated access, and Ofgem will grant exemptions to new facilities so they don’t fall under this European framework. So you have a paradox here that we are actively supporting a framework that possibly will not be applied to new storage projects.

Mark Hanafin: Perhaps I will limit myself then to electricity, given Mark’s answer on gas. I think the UK market operates with largely integrated energy companies and so the question might be: is that the appropriate model? Should retail be separate from generation and distribution? Of course, in terms of the pipes and wires that is the case. I think, in terms of generation and supply, there is a very important linkage between the two. Energy markets are very volatile. The world is littered with examples of companies that have gone bankrupt because they were pure generators or they were pure retailers. British Energy went bankrupt a few years ago as a pure generator. In the US you have seen lots of examples of pure retailers going bankrupt as the volatility of pricing impacts them. So I think that integrated approach is the appropriate one. It gives a robustness to the energy companies.

Q131 Barry Gardiner: To respond to the question that I asked, the model that you would favour would be what, the integrated transmission system operator out of the three?

Mark Hanafin: I am not as familiar with precisely how that is working. Maybe David can help.

David Porter: First of all, at a high level I ought to say that we see the Third Package as being generally helpful in that it should approve security of supply. That, of course, does not happen unless you have some of the physical things developing. Your trading does not have a great deal of meaning unless you have more interconnection and so on, and at the moment some of the suggestions as to how to bring that about we are not entirely comfortable with. There has been a draft code for connections across Europe where the level of harmonisation that they are seeking has been, in our view, seriously over the top. I think you have to bear in mind that the EU in this regard is really following what we kicked off 20-odd years ago. We know here how to run liberalised markets and we are very conscious of the possibility that something being imposed centrally from Brussels may actually disadvantage us here if we had to follow it.

Q132 Barry Gardiner: Mr Porter, we do have to follow it by 3 March next year, don’t we? We have to implement one of the three unbundling strategies, do we not?

David Porter: Yes.

Barry Gardiner: So which one do you favour?

David Porter: I don’t have a view on that at the moment.

Q133 Barry Gardiner: You are the industry spokesperson. Is that because your members have different views on this?

David Porter: Our members do have different views, of course, but what has concerned us, as an industry association, is the risk of something being imposed that would make the UK’s market, which has worked so effectively, less effective. There was a proposal recently that we had to look at rather carefully, which we concluded would make it impossible for France to operate its nuclear power fleet. The whole thing was so clumsy in its drafting that it was almost laughable, but we are closely engaged-

Q134 Barry Gardiner: But that has not got to do with the unbundling proposals, has it, which is what I specifically asked you about?

David Porter: We don’t have strong views on the unbundling issues. We feel that we have managed in the UK to run our market successfully in the way that we have and we want to be able to go on doing that.

Q135 Barry Gardiner: Therefore, you have no view as to which of the three models that will have to be introduced by March of next year might aid or deplete the energy security of the UK? You have no view on that?

David Porter: Not at the moment.

Q136 Barry Gardiner: Have you a view on how other countries may implement the unbundling proposals might have an impact on security of supply in the UK? Have you looked at the way in which they might choose one of those three to their advantage and our disadvantage? Please, if there are people behind you that can help then we are very happy to get it not from the horse’s mouth but from the-

David Porter: We will do what we usually do when in a position like this at a Select Committee and offer you, Mr Chairman, some comments on that in writing afterwards as fast as we can, if that is acceptable to you.

Q137 Barry Gardiner: Thank you. That is helpful. The European Commission was of the view that national energy regulators alone and the existing advisory group, the European Regulator Group for Electricity and Gas-ERGEG, I presume-were insufficient to cope with the task of regulation at the EU level. Do you think that their response in setting up the agency for co-operation of energy regulators will actually do what it says on the tin and ensure greater co-operation between energy regulators? If so, what impact will that have on security of supply in the UK?

David Porter: It is necessary to do that, and I believe that it will eventually but we should expect it to take some time before an organisation like that can become a mature and effective regulator of the type that we are used to in the UK.

Chair: Unfortunately, I think we are out of time as we have another set of witnesses. There are one or two other issues that we had hoped to explore with you, so perhaps we might write to you on some further points, but we are grateful to you for coming in and we have had an interesting session. Thank you.

Examination of Witnesses

Witnesses: Nick Winser, Executive Director, UK, National Grid, Steve Edwards, Head of Regulation & Commercial at Wales and West Utilities, and Energy Networks Association (ENA), and Steve Johnson, Chief Executive, Electricity North West, gave evidence.

Q138 Chair: Good morning, and thank you for coming in. I think you have heard all or most of the previous exchanges and these are interesting and important subjects. May I start, as I did before, with a fairly general question? What would you say the biggest risks to the security of our energy transmission systems and networks are right now?

Nick Winser: In terms of just straightforward transmission we often forget, in our enthusiasm to, rightly, look at the future and moving to a low carbon economy, to review the assets as they are today. A lot of our transmission systems, a lot of the components date back 40 or 50 years. We are pretty busy already getting into asset replacement of those components. Like a lot of our national infrastructure, quite a bit of it is starting to get towards the end of its life. So, I think if you were to ask me what is the principal risk associated with transmission leading to a lower level of security of supply, straightforwardly it is probably the need for us to get on and replace the assets. We are working closely with Ofgem in the context of the next series of price controls to make sure that there is sufficient funding to get on with that.

Clearly at the moment we have, internationally, levels of reliability that Britain can be very proud of: 99.9999 is right up there. As far as we are concerned, it is all about keeping that level of reliability for our citizens, which they have come to expect. Looking forward, of course there are a variety of other issues coming out of decarbonising, in particular the electricity supply, replacing our indigenous natural gas with those new imports of gas through LNG and through interconnection from Norway. So we need to invest strongly in our systems to make sure that they adapt and are reliable with those new sets of energy inputs.

Steve Johnson: If I perhaps talk a little bit about the electricity distribution network. It is the part of the network that takes electricity to people’s homes. I would echo what Nick says; we should be very proud of the levels of customer service we currently provide. They are some of the best in the world. I think if I look at the threats that we are going to face in terms of security, they are probably linked to the move to a low carbon economy.

A couple of factors in that. Clearly, as you have already heard this morning, the advent of renewable energy, more distributed generation connected to my network, as opposed to the National Grid perhaps, is going to bring different demands on our network. Also, as we move to a low carbon economy, and perhaps the decarbonisation of heat and the decarbonisation of transport, it is going to place significant demands on the local network, demands that we have not seen to date.

If you think about our planning standards, when we look at domestic properties and we look at housing estates, we assume an average of about 1.5 kilowatts for that type of dwelling, which is fine for the type of environment that we live in today but if you roll forward to 2020 or 2030, when perhaps there is going to be an awful lot more heat pumps, there are going to be an awful lot more electric vehicles around the UK, that places a massive strain on our network. We can see with heat pumps, perhaps we are going to see 6 to 8 kilowatts of demand for perhaps six hours’ duration, during the night, during the day; electric vehicles, depending on the type of charging, 3 kilowatts to 8 kilowatts again, perhaps for eight hours a day. That is a massively different profile.

There are two issues for us, I think, as a distribution company. One is demand-side management, and you will be aware of some of the discussion around that. Nick currently manages the generation to match demand, brings on generation to make sure that we can cope with whatever demand that is out there in the UK. In the future with the intermittent and the inflexible generation that we have, as people bring on more demand with the electric vehicles, with the heat pumps, we are going to have to see more demand-side management to match with generation. That is going to be quite a change for people in this country, and is an education process for everybody to go through. That is one element that we are going to have to look at.

The other element from my perspective is: can the networks cope with the increased load? At the moment I have to say we are spending in this five-year period about £100 million or so on network reinforcement. If the projections that we are currently looking at, and that DECC are looking at, in the next 10 to 15 years come to fruition, in the next regulatory period from 2015 to 2023 we may have to spend up to £1 billion on network reinforcement, simply because of the rollout of electric vehicles and of space heating. So that is going to be quite a demand for us, and demand-side management in the future will not just be about matching the demand to the generation, it will be ensuring that we have some control of the demand-side management to make sure that we do not overload the local network. So, again, that is going to be quite a change for us and something we need to think about if we are going to maintain the levels of security that we have had so far.

Steve Edwards: I work for a gas distribution company and probably face slightly different challenges to Steve in that we don’t see a huge increase in demand on the horizon. I think most scenarios either have gas demand, annual and peak, slightly falling with a range of scenarios. So we are about to submit our business plan to Ofgem for the period 2013 to 2021, and the keys for the gas distribution networks are to ensure that we get the kind of no regrets investment funded at a reasonable rate of return.

The other area that clearly we are looking forward to working on is introducing more biomethane into the gas network to aid the indigenous security. There is probably not a great deal more to say on the transmission and gas distribution side.

Q139 Chair: Is there anything we can learn from what is going on in other countries?

Steve Johnson: We do look at what is happening in other countries, but certainly in terms of the move to a low carbon economy, while there are quite a number of companies that have a greater penetration of renewable energy, in terms of distribution businesses, which I look at, we are clearly doing a lot of work now looking at smart networks and what that might mean in the next five, 10, 20 years. There aren’t many places in the world that are a great deal more advanced than we are. Certainly the work that we are doing now with the DECC/Ofgem Smart Grids Forum, which has just been set up in the last few months, is going to be looking at the kind of benchmarking that we are looking at around the world, but at the moment there is not a great deal more than we are currently doing.

Nick Winser: I think it is a great question. We should make sure as we go through these very significant times of change that we do look at other countries. China is obviously very interesting in that sense. In terms of shipping very large amounts of power around the country from very remote sources, although our distances are somewhat smaller we have the same general trend that the sources of low carbon generation are going to be further from where power needs to be used than the fossil sources that we are used to. When you look at China, they are very much rolling out DC and AC transmission systems that allow them to ship power from remote areas.

The other thing I think we should think about, as we look around Europe in particular, is how we connect up offshore wind, because we have a very different approach here to all of the other countries across Europe. I think I am right in saying all of them. We have here a point-to-point sort of arrangement where each of those point-to-point links are brought forward individually and in a contestable framework. Everyone else around Europe is trying to have an integrated approach to connecting up offshore wind. It brings greater resilience and greater economy, and is less disruptive onshore because you end up with less landing points for the offshore transmission system as it comes to shore. We think that probably would halve the number of places that you actually have to build facilities on the shoreline to bring in offshore wind. So I think we should very much look at other countries in that and make sure that we are looking far enough ahead and being ambitious enough and making sure that we build an integrated solution to offshore, a solution that also links in with the need for a more integrated and more interconnected Europe as well, so linking in our approach to greater interconnection and bringing in that offshore wind. I think that is a huge learning point for us at the moment, and we are quite frustrated that as yet that does not seem to have got the traction as an idea that it will deserve.

Q140 John Robertson: Mr Edwards, I was interested to hear your forward planning. The plan you are going to put forward, was it 2013 to 2021?

Steve Edwards: 2021. That is correct.

John Robertson: That is really interesting, because when we asked the gentlemen that were in before you they couldn’t do that. How are you going to have a plan when they don’t have a plan to get the gas to you?

Steve Edwards: As a gas transportation company what we did prior to setting off on this journey was we commissioned a piece of work that complemented the DECC Pathways analysis and the Project Discovery analysis, which obviously gave a range of energy mixes and solutions over the next three or four decades. We expanded that out to 2050 and looked at costed solutions. So what we are looking to do out to 2021 is obviously look at the no regrets behaviours that we can carry out during that period. I think everybody acknowledges that beyond 2030 the gas in the mix or not, the success of renewables, nuclear, there are a lot of questions to be answered. Clearly, over the next 15 to 20 years as a gas distribution company we see a significant role over the transition period and possibly into the longer term. So what we are looking to do is obviously make sure that we invest to align that and also try to meet the needs of the environmental challenges, so to bring more biomethane into the network.

Q141 John Robertson: So that I understand exactly what you cover here, is your gas after the power station or to the power station?

Steve Edwards: Yes. We receive the gas predominantly from the national transmission system and the gas distribution companies then transport it to homes and small business.

Q142 John Robertson: So you would see a reduction in gas. Is that just on general terms due to people cutting back the use of, or is this due to works and buildings and homes being built that will not be putting gas into their homes?

Steve Edwards: I think it is a combination of many factors. There is clearly a drive for efficiency and there are clearly improvements in the housing stock, insulation initiatives there, but also people are now looking to alternative technologies as well to provide their own source of heat and power.

Q143 John Robertson: Why do you think that is? Do you think it is something to do with the fact that everybody talks about renewables and they don’t talk about gas, and yet we have already been saying today that we expect basically a second Dash for Gas? Do you think there might be a change in attitude when people start seeing that there is more gas being used and, therefore, your predictions may be wrong, and if they are wrong how can you change them?

Steve Edwards: I think that is why we said we are looking to support the kind of no regrets decisions and that is why you are not seeing, probably in any of the gas distribution networks, huge expansion plans over the next 10, 20 years, but a lot of the investment is to ensure the maintenance of the infrastructure and the viability. I don’t know if there will be a second Dash for Gas, but what I do know is that it has been the fuel of choice. It is reliable. It manages our peak demand effectively. I think as the previous discussion went ahead you are now not talking about the most cost-effective investment, you are talking about the investment that is acceptable within the policy guidelines and the environmental targets.

Nick Winser: Your question probably goes to gas transmission, really, because most of the power stations get their gas through the transmission system. Like Steve, in fact all of our networks go through periodic reviews with Ofgem on the transmission systems, on gas distribution starting 2013 right through to 2021. So we are all putting together those plans. Yes, you are right, it is a long period, it is a very uncertain period, but I think Ofgem are absolutely right to push us to put forward plans. Just because it is uncertain it doesn’t mean you can’t plan for it. In fact, part of what we will do in those plans is plan for the uncertainty. So we will put forward things that we know are "no regrets" but also flexible options, depending on how it looks like the energy scene is evolving over that period, which particular investments should we then bring forward, and we will be catering for all of that uncertainty in our plans.

In terms of burning gas in power stations, we have two things going on in terms of gas transmission over this period: we have the continued decline of UKCS gas, so I think we will see more gas coming in through LNG and other of the newer importation facilities. We will also see probably that intermittency from renewables reflecting through on to the gas system, because when the wind doesn’t blow we will see gas-fired power stations starting up to replace that wind. We are also seeing a much more volatile set of suppliers for gas that change from day to day, depending on whether they come from Norway, from Milford Haven, from Grain, from UKCS, from interconnectors. So, from a gas transmission system point of view, it is about catering for all that uncertainty and building not only the right capacity but a more flexible gas transmission system that is able to react more quickly to those changes that are going to be imposed on to it.

Q144 John Robertson: Will that flexibility be built into your future plans?

Nick Winser: Yes.

Q145 John Robertson: And you do have a long-term plan?

Nick Winser: Yes, we will be submitting to Ofgem, among many other things, a plan for producing a more flexible system, some extra investment that enables us to move gas around more flexibly and respond more quickly to changing needs for gas and changing sources of gas on a UK basis.

Q146 Dan Byles: We are all aware of the enormous investment challenge that is required to ensure the resilience of our networks going forward. How confident are you that that investment is going to come through in the timeframes that DECC are assuming?

Nick Winser: This is a great time to ask this question, for exactly the reasons that we were just discussing. We are just about to engage fully with Ofgem on all of our plans for the next eight years. That is something we are paying huge attention to. It is absolutely up to us to demonstrate very clearly the need for that investment and give Ofgem the confidence in providing funds for that investment. That is a critical moment, and we look forward to that debate going through to the end of next year.

The other key thing that I would focus the Committee on would be planning. A lot of the investments on the transmission system are significant. We are in the early stages engaging with the planning process laid out in the Planning Act 2008, getting timely decisions on what is the right balance between the various different ways that we can connect up these low carbon sources of generation, and indeed building gas pipelines. That is going to be very important. We know that legitimately these are significant investments; they have significant impacts on society and on individuals and communities. We know that we must have a deep and serious discussion with individuals and communities about that balance between the good of the overall energy system and the impacts we will have. That takes time, and that time should be allowed and it is allowed, and we will do that very professionally. Having gone through that, we will need timely decisions because the timescales that we may face to build major new links start to get into a length that if they dragged on we might not be in time. So we can easily see timescales of five years to get major new links built, to go through the planning process and then to go through construction. You can imagine that starts to be towards the longest you could tolerate that being in the decision-making and construction process.

Q147 Dan Byles: How resilient are these plans to the possibility that it simply might not be an attractive investment for international capital? People who are looking to invest tens of billions of pounds in these sorts of projects might rather put their money in India and China and Brazil; why would they come to the UK? We have discussed this quite a lot. We know that DECC are confident that they will attract this level of investment, but it seems to me that it is a huge risk in our plans going forward, that if even a small part of that investment does not come forward we are not going to be able to do a lot of these infrastructure changes that we are saying we have to do.

Nick Winser: Just narrowly, on the transmission and distribution systems, of course they are regulated assets, so as long as we can mobilise the supply chain in time, we can get through planning and we get sensible discussion and decisions from Ofgem, we should be able to deliver our part of that. The broader question you are asking, which is one about, "So, Nick, you may well have built the link but the power stations hasn’t turned up", that is all about market reform and making sure, as the Government are at the moment, that we have a commercial system that encourages international capital to come and be deployed on these projects in Great Britain.

Steve Johnson: I will perhaps add to that. I think there are two aspects to funding, certainly from a distribution point of view. One is, quite rightly, a discussion with Ofgem about the funding requirements and the investment we need in our network, and I touched a little earlier on the reinforcement needs, certainly on the distribution networks. We are going to have to change the way we look at that. Quite rightly at the moment we have to demonstrate to the regulator that this system is fully loaded, if not overloaded, before we get investment to upgrade the network. If that continues I can see certain parts of our network being a bottleneck, in terms of people wanting to bring on extra load or perhaps even distributor generation. So we need a debate with Ofgem about perhaps funding some reinforcement slightly ahead of need and a new mechanism to make sure that that is still done efficiently. It has to be done efficiently.

I think the point you are making is that, once we have agreed with Ofgem what our funding requirements are, we still have to access the debt and equity markets to make sure we can fund our investment. Again, we are having those debates with Ofgem. I think some of the early discussions when they were first looking at RIIO, we had some concerns that perhaps this regulatory environment wasn’t going to be as attractive to the equity markets as perhaps it should be. I think your point is absolutely right. There is going to be huge investment in infrastructure right around the world in the next 10, 20 years, and certainly the investors that look at our kind of business are global investors; money does move. So I think, first and foremost, we have to make sure that appropriate returns are there for debt and equity investors and it is appropriate so that we can compete for that scarce resource on the international market.

Steve Edwards: If I could echo the comments that Steve made on the distribution side. The new form of regulation is about delivering outputs and, quite rightly, a greater stakeholder engagement, which we welcome, but for that we must have an appropriate rate of return because, as Steve has said, like ourselves our investors are global and they have choices.

Q148 Dan Byles: I believe that the Government’s ongoing Climate Change Risk Assessment is due to report in 2012. Have you had any input into that, and in your view are they dealing appropriately with the risk to energy security from climate change and the impact that climate change is going to have on the resilience of the systems?

Nick Winser: Yes. We are certainly involved with that process, assessing all of our assets from essentially two things: flooding risk and higher temperatures. Those assessments are going on. Our systems are built with some redundancy and resilience included in them anyway. There will certainly be things for us to think about in the future design of the system, and we are incorporating those but we would expect to fully account for how we see those risks and how we expect to respond to those in the discussions that are going on as part of that process.

Steve Edwards: To add to Nick’s point: one thing that we clearly look at in climate change is a change in behaviours winter to summer. So if the weather is going to become more peaky in the winter and the new boilers require a different start up, then we are clearly trying to keep an eye on localised changes in that behaviour to make sure that our system is capable of dealing with those changes.

Steve Johnson: Similarly, clearly, we look at local changes in demand, depending on what the weather patterns are but, like Nick, our main focus has been on the impact of flooding. We have been looking at that for some time and during this five-year period we are already investing in flood prevention measures. I am sure that, along with the rest of the industry, we will continue to look at that and the discussions we have had with Ofgem to date on that have been very useful.

Q149 Laura Sandys: In many ways the last session and this session is all very concerning, not from your perspective but from where this country’s energy security lies. We have a long-term investment model and in many ways an energy supply sort of vision, which is low carbon, high renewable, and so on. From our investigations, not just on this particular subject but right across the board, there is this problem about the next 10 to 15 years, whether CCS comes on board, nuclear, and so on. I am very concerned that we have a long-term investment objective, which is specified by the Government at £200 billion, right across the whole of the energy sector, but that it looks as if we are going to have to make an additional, very short-term investment on Dash for Gas, securing some of your transmission processes, making the current model robust enough to get us through for the next 15 years. Do you see that that short-term investment will undermine, in many ways, the long-term investment and that the cost of uncertainty is also going to impact the investment profile in the UK?

Nick Winser: In terms of the amounts we will have to spend on our transmission and distribution systems, there was an amount in the £200 billion that related to that.

Laura Sandys: £32 billion?

Nick Winser: Yes. So whether that is a good number, it is probably-

Q150 Laura Sandys: The question in a strange way is that £32 billion is about the big vision, is about this low carbon, totally new and innovative system of energy security and energy supply.

Nick Winser: Yes.

Laura Sandys: What strikes me is that we have this interim period that will also require investment. It is a step change but it will absorb investment, it will take focus away from the bigger vision and, as my colleague Dan Byle says, is that money there ready for, in some ways, the sellotape that we need for that 15-year period, or will that be seen as in many ways redundant investment?

Nick Winser: I think that the assessment of £200 billion-I very much agree with your point-included how to get in a straight line towards our goals, and that was a sensible assessment. Picking up on the previous panel, to the extent that we can’t roll out, as an industry, nuclear, wind, CCS in the timescales that most of the models predict, it is difficult to see what will replace that, other than more burning of gas for electricity generation, and that is what we would expect. There is a very substantial amount of gas-fired CCGTs that already have connection agreements that can come forward and are going through the planning process. To the extent that we need to do a dog leg on our way rather than a straight line, and there are a lot of gas builds that will involve extra spend on the network because we will be connecting up plant that ultimately is not the plant that is going to meet the targets all the way through, part of our job with politicians, the industry, is to try to minimise that dog leg and try to move as smoothly and efficiently as we can to the set of assets that we need right through 2020, 2030, 2040 and 2050.

Steve Johnson: Certainly from our perspective, we do tend to look at things I guess in the next 10 years and then 10 years beyond, and as far as the distribution companies are concerned there is quite a bit of work that is going on now that is planning for the future. So Ofgem established the Low Carbon Network Fund as part of this current price review, and that is extremely useful because it enables network companies to look at smart networks, whatever that may mean in the future, look at innovation, planning for 2020 and 2030, but it is discrete projects. The learnings from those projects will be shared right across the industry and will enable us to plan the investment in the next five, 10, 15 years. So I don’t think that is sunk investment; that is very sensible investment in innovation and new thinking.

As Nick said, the move to a low carbon economy will not happen overnight. It is going to take some time. So I think we do have a little bit of time, certainly as far as the network companies are concerned, to get it right and to think about what smart technology means. I think some of the issues we do need to think about are, as I mentioned earlier, the demand-side management, and how do we actually start talking to our consumers about what it might mean for them in the future to have the smart technology. Again, there are trials that we are undertaking at the moment to try and think about that. The vast majority of our investment over the next five to 10 years will be the traditional type of investment that we have always done. It is just these trials are going to be very important for us and will start to lay the foundation for the investment that needs to come in the next 10, 15 years, as we start to see the introduction of the move to a low carbon economy.

Nick Winser: There are some elements that are not already deployable, which are worth thinking about and I think worth the Committee considering. We have a traditional model of research, development, demonstration, deployment, and we focus a lot on deployment, but part of minimising the regrets and moving as smoothly as we can to the right sort of plant is making sure we are paying attention to things that need research now to bring them through, things that need development, things that need demonstration. So the current discussions around trying to build demonstrators for CCS are terribly important. That technology isn’t yet mature enough for deployment. It needs demonstration. That is how we will prove the economics of it and find out whether it is going to play its part in 2030 onwards, which is probably where that technology will significantly help us get to the targets.

So it is not just about the deployment phase. It is about looking at all the phases of maturity of technology and making sure that those earlier phases are encouraged and there is money to take those phases forward, and that comes back to the whole question of funding and attracting capital, both into the regulated area and into the competitive area of the market.

Q151 Laura Sandys: Do you believe that we will attract the right level of investment, and what would be the energy security impacts if we don’t?

Nick Winser: Steve spoke eloquently of the need for Ofgem to make sure that the regulatory returns are attractive to international investors for the contestable part. It is about EMR and delivering a satisfactory package that will bring forward investment. That will tend to focus on the deployment end, though. There may well be the need for demonstration and research to get different types of encouragement, and of course we are seeing the Government come forward. I am very encouraged the Government is seeking to come forward with amounts of money to fund demonstration projects on CCS, which are outside of the EMR process.

Q152 John Robertson: I am interested in the problems of looking ahead and planning, which were referred to earlier. Can you tell me the cost for the Beauly Denny line when it was planned compared with where it is now, still not completed?

Nick Winser: That is obviously not our line, in that it is being built by SSE and SP. So I don’t have those numbers in my head.

Q153 John Robertson: I raise it simply because it is an example of where your planning goes out the window; something that was planned 10, 12 years ago, probably even more, and still isn’t in existence, and you meet a planning regime that stops you from building. So my question, and I am being a bit parochial here, is does devolution help you or does it hinder you when it comes to doing the grid itself? We have more than a fair share of wind farms in Scotland and Mr Salmond has made a big thing about how we are going to be the renewable capital of the world, and yet I don’t know where the money is coming from to get this renewable energy on to the grid to where people need it. Who is paying for this and have you planned for it?

Nick Winser: There are some curiosities around how to plan across Great Britain.

John Robertson: Curiosities; we have been talking about them for years up our way.

Nick Winser: So we remain supportive of the Planning Act 2008. It applies to England and Wales.

John Robertson: Yes, but it doesn’t apply to Scotland.

Nick Winser: Scotland has its own planning framework that does similar but slightly different work, and I wouldn’t seek to compare the two.

John Robertson: Okay, but remember that Scotland is an exporter of energy to the south of the border. You would quite like that energy to keep coming that way, so you have a vested interest in ensuring that it does.

Nick Winser: Certainly, I would like to see the planning regimes, both in England and Wales and in Scotland, work effectively, allow the right consultation and listening to individuals and communities, but then come to a timely decision and be delivered. I think that is in the interest of customers in Britain, so I would like to see them both work very well. There are other curiosities there. Although the Planning Act 2008 applies to England and Wales, it does not apply to specific sites in Wales so we still have to go out, separate from the IPC process, or what will be the MIU process, and look for consent at substations where our lines are switched with other lines. So we do have quite a complicated backdrop. From our perspective all of that can work but we need to see it work otherwise we will struggle to deliver the infrastructure.

Q154 John Robertson: I would be interested to know how much money is wasted on fighting planning applications. How much money do you spend on that and how much time is wasted on planning applications that are opposed and then eventually go forward?

Nick Winser: It is difficult to say how much is wasted, in a sense, because I think the sense of that word is if we put something forward and it is rejected that that was wasted, which I would not immediately agree with. I think it is very important that we take part in this process where the needs of the overall system can be balanced against the needs of individuals and communities. So sometimes, I am afraid, we do have to accept that the answer will be no and we need to regroup and come back with a different set of proposals. I am not being facetious but I think there is bound to be-

Q155 John Robertson: Let me interrupt you there, because you are now getting into the same game as our previous speakers got into, "Let’s prevaricate as much as we can". You know that the locals will object to a set of pylons because they don’t want to see it and they don’t want it there, and you know if you put it underground they will accept that but it will cost more. How much money do you spend in the planning process to fight these objections, whereas if you put in the higher cost grade cable in the first place you might have saved money? Do you ever look at that and think of these things? We are talking billions and billions of pounds here, and yet I can bet you that is not part of the money that has been put aside in that £200 billion.

Nick Winser: The difference in the capital spend to do the job in the different ways that you have said, is very, very large. It costs an awful lot more money to put all those cables underground than to put them overhead-an amount that you could never spend on going through the planning process. You are comparing figures on some of the projects that we are looking at at the moment of £100 million plays £1 billion. It is absolutely right that we should have legitimate and sensible debate about what is the right way to balance the interests of local people with the overall interest of the system. What we need to do is then make sure that, having had that debate and done a great job of consulting and amending our plans to try to get the best balance, we then get clear decisions so that we can move on.

Q156 Chair: I think we are going a little bit further from the security issues than we need to. I have a lot of sympathy with the arguments being put by my colleague and have addressed these myself with National Grid from time to time, but could we come back more directly on to the subject of the inquiry.

Can I talk about intermittency for a little while? I think that all the Government’s plans seem to include a greater proportion of intermittent sources of renewable energy, notably wind. Would you like to say-I think this is particularly for National Grid-what effect this is going to have on how you have to balance the system in future?

Nick Winser: It is going to have a profound effect. The system will be a very different system to run. We are already looking at that, and have been looking at that for some time. We will have to change the way we run the system. I expect us to be able to do that. It is our job to respond to the need to accommodate very valuable low carbon energy on the system, but it will be a very different system to run. So if we do end up with 30 gigawatts of installed capacity of wind you could easily see variances on a day-to-day basis of 10 gigawatts, 15 gigawatts. We will need to be able to forecast clearly, very accurately, what are the wind conditions, and if there are other types of renewables what conditions are likely to pertain to them on the day, and make sure we deploy both our technical skills and our commercial skills to make sure that there is back-up plant that can run. So it is an issue for us, in terms of how we design our networks, to design in flexibility. It is an issue for our control room systems and it is an issue for market design, because the market design needs to make sure that the right elements, an appropriate amount of back-up, is available when the wind doesn’t blow as an example.

Q157 Chair: Let us be blunt, and you have said it is difficult to switch to underground transmission systems on grounds of cost, but the truth is that dealing with a huge percentage of intermittent sources is going to greatly increase the transmission cost.

Nick Winser: I didn’t say it would greatly increase the cost. I said it would be a very different system to manage.

Chair: It is going to be more expensive, isn’t it?

Nick Winser: I would expect balancing the system to increasing cost with the greater amount of intermittency on the system. That does not necessarily mean that that is not the appropriate and economic solution to providing security of supply and hitting the low carbon targets. That will be a cost of hitting low carbon targets.

Q158 Chair: I understand that, but you have explicitly rejected the opportunity to prevent environmental blight on communities by overhead transmission lines on grounds of cost. But you are saying that it is okay to accept much more expensive transmission cost because of the need to cope with intermittency?

Nick Winser: No, we haven’t explicitly said that we won’t underground lines. As I think you know, that is not what we have said at all. What we have said is that we will go through a process of consultation, as we are obliged to do, rightly, under the Planning Act 2008; we will look at sites of environmental sensitivity; we will listen to individuals and communities and their views and, with Government, we will try to strike the right balance between individuals understandably not wanting their visual amenity affected and the costs, which are quite significant, of undergrounding. We haven’t been through the whole of that process on any of our proposed lines, including the one close to your heart. That will play out over the next couple of years and we will try to do a very serious and responsible job to get the right answer for society.

Q159 Chair : I accept all that, but I am interested in the comparison between these two things. You have said we have to go through all this process to decide whether it is okay to spend a bit more money on undergrounding, but we appear to be assuming, taken as a sort of given, that because we are going to have more wind, particularly offshore wind with all the intermittency that that implies, that we are going to accept without any debate at all the fact that costs much more to transmit.

Nick Winser: We have binding environmental targets for the UK that we are doing our part in trying to hit. Part of the reason that you will see consultation papers coming out from National Grid, as well as from DECC, on the future design of the market and how to balance the system is that we are seeking views from stakeholders as to what are the right ways of balancing the system. For example, in National Grid we have just commissioned the new interconnector to the Netherlands, which will provide the opportunity for power to flow in and out, to try to balance. We have three other plans to connect, again to France, to Belgium, to Norway. They form a great opportunity in themselves to provide balancing services, perhaps at a cheaper level. So it is important not just to look at low utilisation fossil plant as balancing, but to look at demand management, to look at greater interconnection, to potentially look at energy storage, and so minimising those costs you are talking about is absolutely something you should expect us to be doing.

Q160 Chair: I agree with all that, but as a consumer one might think if there are reliable sources of low carbon electricity, as opposed to intermittent sources-and by reliable sources we might include nuclear, we might include some forms of energy from waste, we might include tidal, all seem to be reliable-that we should, at the very least, factor in any extra transmissions costs that may be caused by relying on intermittent sources, that the extra transmission cost should be thrown into the overall equation.

Steve Johnson: I guess it is not just the transmission costs. It follows on from what Nick said. If the future is far more renewables and far more wind and intermittency, there will be a whole strategy to mitigate that. It might be low fossil fuel plant waiting to come on line; it may be storage; it may be interconnection to Europe; it may be demand-side management. I guess when we look at the future strategy for energy security in the UK, all of that needs to be taken into account and there will be a cost overall of moving to a low carbon economy.

Chair: Many of those sensible strategies do involve a cost.

Steve Johnson: They do.

Chair: I am saying we should factor in that cost, which would not arise if we built more nuclear or more energy from waste, or maybe even tidal. That may be at the moment more-

Nick Winser: That is being done, of course, because as Ofgem looks at their Project TransmiT, which is all about allocating transmission charges and who should pay, those types of costs are obviously able to be looked at as well as the costs of just providing the hardware, and have been looked at a number of times.

Q161 Chair: Is it the case that National Grid have recently paid wind farms not to generate power on very windy days?

Nick Winser: Yes, it is. Over the years we have paid gas-fired plant not to generate at some times, coal-fired plant not to generate at some times and nuclear plant not to generate at some times. That has been happening for the last 21 years. That is the way that the market has existed for that period. Built into the market arrangement there is a compensation where you can’t generate because of a lack of transmission infrastructure. We work very hard to minimise those amounts by investing sensibly but vigorously in the transmission infrastructure, and those amounts of money have been managed very, very vigorously over the 20 years and we have driven those down very strongly. It is right, ultimately, that an economic balance is struck between building a completely unconstrained transmission system, where every bit of generation could operate at any time in any combination, which costs money itself to build more lines, and occasionally paying generators to not run when, for a period, there is not enough transmission capability. That is an economic balance that should be struck and is struck.

Q162 Chair: Nevertheless, would you not agree that the public might think that to pay offshore wind farms a huge extra subsidy to make it worthwhile generating and then to pay them again, if it is too windy, to pay them not to generate, is a lunacy that borders on the Common Agricultural Policy?

Nick Winser: We are vigorously tackling that. We have brought forward, through anticipatory investment with Ofgem, plans to substantially reinforce the transmission system from Scotland, building new transmission links from Scotland to England and Wales. We obviously have the Beauly Denny being built. We have plans beyond that to reinforce the network to make sure that it can always shift the low carbon resources that are going to be so valuable for us. So we are working very hard to increase our investment on the system to make sure that those valuable low carbon megawatts can be used as much as they can. Of course, interconnecting more to Europe also gives the opportunity for some flexibility, that when we have more low carbon energy than we can use it can be absorbed into Europe and displace fossil plant in Europe .

Q163 Dr Lee: As it stands at the moment, there is a possibility that we could be paying the wind farms not to generate at the same time as importing gas?

Nick Winser: Yes.

Q164 Chair: Is there anything the network operators could do to alleviate this situation?

Steve Johnson: This particular situation?

Chair: The problem we are talking about: excess power and paying people not to produce it.

Steve Johnson: It would be difficult because I guess it comes down to constraints on the transmission network that Nick is talking about, and of course we are on the distribution network. So I doubt in this case the distribution networks could help with that particular issue.

Q165 Laura Sandys: Would increased storage capacity assist?

Nick Winser: Certainly energy storage is a very attractive option.

Q166 Laura Sandys: Should we not be paying to create that storage rather than paying them not to generate?

Nick Winser: Siting energy storage next to wind farms is, in my view, a very attractive option. There are some great technologies that can be brought forward, and are being brought forward, to allow low carbon energy that is not either needed at a particular time or able to be transported to be stored and then released. I think when we see the investments out on the Dogger Bank for offshore wind, if we have an integrated system out there, rather than point-to-point links, we should very much expect to see the incorporation of very substantial energy storage. That will minimise the amount of transmission links we can build. It will make sure that we get absolutely maximum value out of those low carbon megawatts. So, energy storage is going to be a very important part of the picture.

Q167 John Robertson: Some of the things you said there are just unbelievable; to pay something to buy from somebody else seems absolutely ludicrous to me. Are we not throwing a lot of money into this wind stuff, just purely throwing bad money after bad in a product that doesn’t even give us much of a supply? During the coldest spell in Scotland this year we got less than 1% of power coming from wind, and yet we were supposed to be getting at that point in time something like 17%. Is this not a waste of money and do we want to put all this money into this basket, where we have a future where we may be somewhat short of gas when we are going to need it? Should we not be looking at storage for gas, should we not be looking at the transmission from gas power stations and from the new power stations that hopefully will come along? A lot of the new power stations will need new transmission because they are much bigger than the old ones that were built in the past. I know it is flavour of the month that we talk about renewables and everybody wants to be nice and carbon friendly, but-and I declare an interest as Chair of the Nuclear Energy Group in Parliament-I find it absolutely ludicrous, absolutely ludicrous that we are spending this kind of money on something that, when we really needed it, didn’t work. It is not the first time it hasn’t worked in cold spells when we have been desperate for energy, and nearly got to the stage of putting the lights out. I just find it absolutely crazy that companies such as yourself are not using the power that you obviously do have, and put it in places where it is absolutely needed and where you are going to get a return for your money.

Nick Winser: In my view it isn’t ludicrous at all. I believe that the picture that we have described, of very substantial increases in energy efficiency, substantial increases in distributor generation and then a blend of renewables, nuclear and CCS, is absolutely the right target for us. Renewables definitely, in our view, have a significant role to play. In our view, it is likely that it will be about a third, a third, a third. The great thing about renewables is that this is something that is deployable that we can move on now. There are obviously significant timescales and barriers to overcome to deploy nuclear and CCS. So building a significant amount of renewables now seems to me to be a very rational response to getting secure, affordable and low carbon sources.

I think we have to change our mindset about intermittency. We had a mindset, because we relied so substantially on fossil fuel, that we only admired a particular way of creating energy if it was necessarily going to be there at the peak. That, in my view, is an old fashioned mindset and we need to move on from it. In the future we need to recognise that low carbon energy is going to be very valuable; we need to adapt our systems to have enough transmission, enough energy storage to change the characteristics, enough ability to flex demand, so that we can get the best out of sources of low carbon energy, which may not be there on the peak. We need to move on; we need to change our mindset.

John Robertson: People have been known to disagree with me, I do appreciate that, but I have to tell you this: the taxpayer has to foot the bill here and has to pay, and what you are requesting and what you are saying I don’t believe we can afford.

Q168 Dan Byles: We are moving towards a much greater electrification of the heat and energy sectors. What is the impact of that likely to be on the transmission systems and the distribution networks?

Steve Johnson: I think I alluded to this a little earlier, and certainly from the distribution network point of view it is going to have a significant impact. If we look at the DECC work that has been done in the past, there is perhaps up to a doubling of the electricity consumption in 20 to 30 years’ time. Certainly from the distribution network’s perspective, that brings a profound change to the way we operate. We have been operating, I guess for the last 100 years, a fairly passive network. We are going to see a distributor generation connected to that network; we are going to see electrification of transport, more electric vehicles; perhaps electrification of heat, as I alluded to earlier; and that significantly increases demand on our network. So there are a couple of responses to that that we need to think about.

Clearly, there is a lot of investigation going on at the moment into smart networks and how we manage the demands on our network and the different energy flows in a different way. Demand-side management-as I have mentioned a couple of times this morning-is going to be increasingly more important and we should not underestimate the challenges that will bring. We are running a couple of trials at the moment on demand-side management but it is with commercial customers, fairly easy to engage with and they are used to having discussions around their energy. When you talk about demand-side management with domestic customers, which we need to get to, that is going to be far more difficult. So some trials on that in the future will be very important. Then, of course, there is the reinforcement aspect that I have talked about a couple of times today. That is something that is going to have to be addressed over the next few years. The role of the distribution companies may have to change, in that we may have to look at some local balancing and managing of energy in a way that National Grid does on a national level. Those are all things that we need to think about over the next few years and things that we will be talking about with DECC and Ofgem as we go forward.

Nick Winser: From a transmission perspective, we have talked about some of the principal issues already: the need to invest, to make sure that that additional demand that is moving on to, hopefully, a low carbon electricity system can be met, and that the intermittency can be dealt with. The other thing to reference, which comes back to John’s point probably as well, is all about the role of gas in the system. We do see a significant continuing role for gas in the system, which will enable us, we think, to balance those low carbon sources economically, to continue to provide-to your point-a fair amount of the space heating through gas that will mitigate some of the cost that would come of electrifying all of that. It will mitigate some of Steve’s costs, in terms of not making him quadruple the size of the distribution system but perhaps just double it. Steve, you may want to pick up on the savings of costs that that would lead to.

Steve Edwards: Yes. You asked the question about the impact on the network and transmission. There is also the impact on the end consumer. That is exactly why part of our role now, we feel, is to make sure that we participate in the debate, provide transparent, open, costed scenarios going forward, as we did, to make sure that the policymakers have all the objective evidence to satisfy John’s questions, to make sure we are not selecting technologies that don’t provide value for money and the best solution in regards to the environmental targets, security and the cost to the end user. Quite clearly, full electrification would bring us a really big stranding issue for the gas distribution networks.

Our role is to try to bring the evidence to show what appropriate energy is appropriate for the right part of the country. There are many people just off the existing gas network, for example, on oil or coal, but the most appropriate solution, from environment, security and cost, is actually to slightly extend the gas network. For other communities who are well away from the network, quite clearly there will be a different solution. So I think part of our role is to make sure that we get the appropriate technology to the appropriate part of the country.

Q169 Dan Byles: What about the regulatory regime, is there going to be a need to change the way we regulate?

Steve Edwards: I think most definitely what we have seen obviously now is a move from the RPI-X basis, which acknowledges it is not just about squeezing cost; it is about encouraging investment, looking at the new obligations that both the regulator has and the networks have, looking at the environment, and looking at security. We do need regulatory commitment. We are engaging with our stakeholders to define the outputs-it is in its infancy-and we will find out now, over the coming weeks, months and years, whether the new regime will promote exactly the behaviours that we want.

Q170 Dan Byles: Do you think that industry and Government are engaging enough with the end users about the changes that are going to have to happen? When we talk about demand management, I sometimes get the feeling that Government and industry and academics are all very geared up for this but nobody is really having that discussion with Mrs Miggins at number 32 about the way she is going to have to manage her household.

Steve Edwards: The others will comment in a minute, but we have just gone through some stakeholder engagement and asked this kind of question, "What do you know about smart meters? What do you think about ground source heat pumps?" They don’t have a clue what is going on, and there is a lot more to be done in comparison to, say, the digital TV move. So I think there is a lot more to be done.

Steve Johnson: I think it is going to be one of our biggest challenges, to be honest, and we haven’t started yet to a large degree. I think the debate has all been about renewable energy and about generation. It is now moving on to what does that mean for networks. But, as we have heard quite a bit this morning, it is really going to mean a change in behaviours for the general consumer and it doesn’t just stop there. We have to have some consistency and some correct standards for vehicle manufacturers, for appliance manufacturers. We have to have smart appliances, because in the future if demand-side management is going to work, by and large once the customer has agreed that it can happen it should happen without their intervention. There is a lot of work we need to do as an industry and beyond the industry in thinking about that and, as I have said before, trialling some of these procedures and processes in the next few years.

Chair: I think we are out of time. Thank you very much indeed for some very useful answers and we look forward to continuing this debate with all of you.

Prepared 15th June 2011