Low carbon network infrastructure Contents

Conclusions and recommendations

Distributed generation

1.We call on the Government to establish a cross-departmental working group to investigate and report on improving the integration of the connection and planning-consent processes in England. This investigation should include an assessment of mechanisms—such as heat maps and centralised, standardised connection applications—that could simplify these processes and better inform generators about them. (Paragraph 17)

2.We support anticipatory investment in principle: it is likely to improve networks’ speed at connecting distributed generation. However, it also bears the risk of creating stranded assets at bill-payer expense. Anticipatory investment must therefore be accompanied by up-to-date modelling to minimise this risk. (Paragraph 22)

3.Ofgem should carry out further impact assessment on systems of cost recovery for anticipatory investment; this should include analysis of who bears the costs of stranded assets, so that relevant decision-makers are properly incentivised to avoid them. (Paragraph 23)

Network charges and connnection costs

4.Cost-reflective charging should account for the reality that many renewable-energy sources are location-specific and distant from demand sources, particularly as UK transmission charges remain high by EU standards. DECC should investigate the disadvantage UK generators may consequently face against other European generators as Great Britain becomes more interconnected, and the impact this may have on development of domestic renewable generation. (Paragraph 31)

5.Ofgem should analyse the costs and benefits of levelling connection costs across Great Britain. (Paragraph 33)

Smart grids

6.We are concerned that the roll-out of smart meters is not progressing quickly enough to achieve the necessary mass to truly create a smart energy network. (Paragraph 41)

Gas and heat networks

7.Ofgem should build on the promise of green gases by continuing to investigate and clarify safe levels for their injection. Both the Government and Ofgem should set indicative targets for biomethane and hydrogen deployment, and consider what support might be needed to deliver consequential changes to network infrastructure. (Paragraph 46)

8.The Government has rightly set an ambitious target for district heating—one which requires significant private-sector investment. A regulatory investment framework for district heating, similar to those for other networks, would aid this. It would also complement existing voluntary schemes in providing independent safeguarding for consumers. Ofgem should be required by the Government to regulate district heating networks, and the Government should seek to make whatever legislative changes are necessary to enable this. (Paragraph 51)

Storage

9.Further large-scale storage, such as Pumped Hydro and Compressed Air Energy Storage, could be of great value in managing variable generation, but there is uncertainty as to the potential for future deployment. We recommend that the Government commissions a study on the future of large-scale storage in the UK which includes consideration of potential sites and what support such projects would need to be viable. (Paragraph 56)

10.The current regulatory conditions for storage are hindering its development. We welcome the Government’s consultative approach to this matter, but hope it will proceed with a sense of urgency. We urge the Government to publish its plans, as soon as possible, for exempting storage installations from balancing charges, and from all double-charging of network charges. (Paragraph 64)

11.Storage technologies should be deployed at scale as soon as possible. We support network utilisation of storage: this helps balance the system, and provides storage operators with a revenue stream that encourages its development. Allowing networks to operate and procure storage, especially in the short run, could also facilitate these benefits. However, we have concerns about network ownership of storage. In the long run, we do not want networks to have vested interests in particular technologies that discourage them from switching where more cost-effective solutions emerge; we are also concerned about any expansion of networks’ monopoly power more generally. DECC and Ofgem should analyse the long-term risks of network ownership, operation and procurement in their work on storage. (Paragraph 67)

Demand Side Response

12.The promised review of Demand Side Response (DSR) by Ofgem is a sensible first step towards clarifying and unlocking the potential for DSR technologies and business models. However, we maintain the views of our predecessor Committee that the Government needs to set out a more detailed strategy for DSR. This strategy and any work on this issue by Ofgem must also pay close attention to the risks of DSR for vulnerable customers, and how best to mitigate these. (Paragraph 75)

Interconnection

13.Significant interconnector expansion will help balance a low-carbon network, and we support it for that reason. We note that Great Britain is likely to be a net importer of electricity; development of interconnection should be accompanied by a strategy to develop sufficient low-carbon generation capacity for export. (Paragraph 82)

Innovation

14.We strongly support Ofgem’s commitment to network innovation, but feel there is room for improvement. Ofgem must collect standardised trial data to optimise learning from projects. Furthermore, it should allocate proportionally more funding to later-stage development, and seek opportunities to leverage other sources of funding to achieve project commercialisation. A stronger role for non-network companies in using Network Innovation Stimulus could also balance DNOs’ propensity for risk aversion in the short term, while counteracting it in the long run. (Paragraph 96)

System operation

15.The benefits of Distribution System Operators (DSOs) seem near-universally acknowledged, yet there is no clear Government road map to their implementation. The Government should develop and publish a road map for DSO introduction, identifying future legislative and regulatory changes needed. The road map should include a plan to require small-scale generators to provide real-time information to DSOs. The relationships across DSOs and between DSOs and the Transmission System Operator must also be clarified. (Paragraph 101)

16.The evidence favours Distribution System Operators (DSOs) being run by the same companies as the corresponding Distribution Network Operators (DNOs), at least in the short-term transition to DSOs. However, DSOs are an extension of DNOs’ monopoly power, and Ofgem are right that this should be appropriately regulated. Given risks to consumers from accumulation of monopoly power, DECC and Ofgem should be prepared to review the governance of distribution networks as DSOs’ functions develop, and to separate distribution networks’ operation from their ownership if their conjunction proves to have a negative impact on consumers. (Paragraph 103)

17.We recommend creating an Independent System Operator (ISO). Despite strong efforts by National Grid itself and Ofgem to mitigate the potential for conflicts of interest, it seems intractable and growing. Unnecessary asset development, or giving interconnectors an unfair advantage over existing and emerging balancing tools, could dilute the impact of other efforts to develop low-carbon network infrastructure. We note these concerns may also arise for Distribution System Operators in future. The Government should set out its intentions regarding an ISO as soon as possible, and consult on a detailed, staged plan for their implementation, so as to avoid injecting uncertainty into the energy sector. In particular, it will be important to act in a fashion that retains National Grid’s considerable technical expertise. (Paragraph 115)

18.Implementing a whole-systems approach could produce better solutions for the kinds of challenges discussed throughout this report. We note Ofgem’s concerns regarding a systems architect, but believe the Government should take any proposal from the Future Power Systems Architecture group seriously, and look for opportunities to work across silos and departments in the meantime. We will continue to investigate the whole-systems approach in our ongoing inquiry into 2020 renewable heat and transport targets. (Paragraph 119)

Flexible policy for a flexible energy system

19.We understand the complexity of energy systems and of the policy framework to meet them. We would not want DECC, Ofgem, National Grid or any other body with strong influence to make rushed and consequently poor decisions. However, sometimes making no decision on a rapidly-moving issue is worse than an imperfect one. The timescales for important decisions regarding the regulation of connections, storage, Distribution System Operators and an Independent System Operator—to pick but a few of the issues covered in this report—have often been neither efficient nor transparent, and this undermines confidence in the Government’s ability to support an evolving UK energy system. Networks are transforming. We recognise that this presents challenges for the Government, but it has been slow to present a clear, holistic plan for the evolution networks need; instead, it seems to have disconnected policy ideas at varying stages of implementation. Our overarching message to the Government is to take seriously the criticisms about its speed of delivery, as expressed in this report and elsewhere, and to learn lessons from its approach to energy networks that can be used to improve its change readiness in future. We will look deeper into the Government’s adaptability to emerging technologies in our ongoing inquiry into Energy revolution. (Paragraph 122)





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15 June 2016