Memorandum by National Grid plc
INTRODUCTION
1. National Grid plc owns and operates the
high voltage electricity transmission system in England and Wales,
and as Great Britain System Operator (GBSO), we operate the Scottish
high voltage transmission system. National Grid also owns and
operates the gas transmission system throughout Great Britain
and through our low pressure gas distribution business; we distribute
gas in the heart of England, to approximately 11 million offices,
schools and homes. In addition National Grid owns and operates
significant electricity and gas assets in the US, operating in
the states of New England and the state of New York.
2. In the UK, our primary duties under the
Electricity and Gas Acts are to develop and maintain efficient
networks and also facilitate competition in the generation and
supply of electricity and the supply of gas. Our activities include
the residual balancing in close to real time of the electricity
and gas markets.
3. Through our subsidiaries, National Grid
also owns and maintains around 18 million domestic and commercial
meters, the electricity Interconnector between England and France,
and a Liquid Natural Gas importation terminal at the Isle of Grain.
4. National Grid is pleased to have the
opportunity to contribute to this inquiry. Our submission will
focus on:
— Projected costs of reinforcing and
upgrading the transmission systems to accommodate the renewable
sources needed for the 2020 target.
— Challenges of connecting new renewable
generation, including management of system access, existing regulatory
regime particularly on proposals for managing offshore connections
and planning delays.
— Developing technologies that could
serve to contribute towards meeting the target that include smart
metering technologies and biogas injection.
5. With the significant increase in the
proposed offshore generation, it is essential that a proactive
approach to investment based on judgement of requirements is taken
as opposed to developers' commitment. This will ensure that the
infrastructure is in place when new renewables are ready to connect.
Ongoing work investigating the level of investment required estimates
the cost of onshore network reinforcement at about £3.5 billion
to meet the 2020 target. The offshore developments require co-ordination
with the onshore work as it is clear that whatever is built offshore
will have a significant impact on what is needed onshore. Along
changes to the regulatory regime to facilitate investment, National
Grid is also looking at ways to reform the way generators connect
to the system to speed up renewables connections to the grid.
We are committed to support the Government and BERR in the delivery
of any regime that they choose.
THE ROLE
OF RENEWABLES
IN BRITAIN'S
ENERGY POLICY
6. National Grid welcomes and supports Government
policies to facilitate investment in renewable energy and we take
a proactive role in contributing to the debate on the subject
amongst decision makers. The EU wide 20% target for all energy
to be generated from renewable sources by 2020 is expected to
translate to around 15% for the UK. To achieve that target, it
is estimated that around 40% of electricity will need to be generated
from renewable sources in the UK by 2020. This is due to doubts
over whether heat and transport can make a significant contribution
in this timescale. The current GB generation mix is heavily reliant
on carbon-based fuel of coal and gas which provide over 70% of
the primary fuel source for electricity generation. Electricity
sourced from renewables account for only around 2%, this highlights
the magnitude of the challenge ahead.
7. The emphasis of Government policy is
currently on promoting renewables from electricity generation.
However, work on developing renewable heat and transport is required
in order to meet the climate change targets in the future. This
is particularly relevant to domestic and commercial heating which
account for nearly 50% of the UK's total emissions. Policies around
the decarbonisation of heat need to be developed in order to continue
progress towards the UK Government's target of a 60% reduction
in CO2 emissions by 2050.
8. National Grid has a key role to play
as Great Britain System Operator and has a significant responsibility
in delivering any offshore transmission regime, as well as many
other key programmes which will be critical to the achieving the
UK's renewable energy targets.
INVESTING IN
THE TRANSMISSION
SYSTEM TO
MEET THE
UK RENEWABLE ENERGY
TARGETS
9. If we are to have 40% of UK electricity
coming from renewables by 2020, we will need to change the locations
where electricity is generated. In other words, the locations
where electricity needs to be transported from will change. In
areas where renewables especially wind are most abundant, the
network either does not exist, or has only been built to serve
small amounts of generation, such as the Highlands and Islands
of Scotland. Significant investment in the transmission system
will be required, to both connect new generation and upgrade the
wider system to accommodate larger flows to demand centres.
Transmission system investment costs
10. National Grid is undertaking a joint
study with the Scottish transmission system owners to work out
costs and options for achieving the 2020 target. Analysis on possible
costs and energy flows discussed in this response is based on
preliminary findings of this ongoing work.
11. The demand and supply profile in 2020
is likely to contain heavy flows from North Scotland through to
Upper North England, high volume of offshore wind farms off the
East Coast and potential contribution from Central Wales renewable
generation as shown on the diagram in Appendix 1.
12. As stated in paragraph 25, National
Grid believes that a regulatory regime needs to be put in place,
in order to facilitate more strategic investment ahead of firm
commitments from customers. National Grid estimates that capital
investment to reinforce the onshore transmission networks across
the GB market to accommodate the 40% target of renewable electricity
will cost around £3.5 billionn.[1]
13. Our analysis explores a number of strategic
investment schemes to connect offshore wind on the East Coast,
onshore windfarms in Wales and options for connecting Scottish
renewables that would all together deliver the targets 2020 targets.
See Appendix 2 for more details.
System operation costs
14. In addition to the network reinforcement
costs outlined above, there are also system management costs to
be taken into account especially as most renewables by 2020 will
be wind. This is due to the fact that wind requires flexible generation
with stored fuel to be available on standby for low wind days.
15. On a "business as usual" case
where the electricity market continues to maintain sufficient
generation capacity to meet peak demand (including sufficient
backup capacity for low wind days), we estimate the additional
short-term balancing costs arising with wind providing circa 40%
of electricity in 2020 to lie in the range £500 million to
£1,000 million per annum.[2]
These balancing costs represent an additional £6 to £12
per annum on average consumer electricity bill of around £390.[3]
16. The cheaper end of this range of balancing
costs represents a scenario with reserve generation and balancing
performed as today and with the market prices of the various balancing
services remaining constant (despite the larger volumes required).
The higher end of the cost range includes network constraint/congestion
costs which might arise if there are delays in establishing network
capacity or if there is significant network capacity sharing.
BARRIERS TO
THE GREATER
USE OF
RENEWABLE ENERGY
17. Since the introduction of the British
Electricity Transmission and Trading Arrangements (BETTA) in 2005,
unprecedented number of applications to connect to the system
have been processed. National Grid, as Great Britain System Operator
has made around 180 offers to connect to the system with connection
dates to 2015 and beyond. Throughout Great Britain, we are currently
managing 16GW of signed connection contracts for new renewable
generation projects—7GW of which is in England and Wales
and 9GW is in Scotland. In total 49GW of new generation have signed
connection agreements with National Grid compared with the 77GW
of generation capacity currently connected to the transmission
system.
Planning
18. Delays in securing planning consent
are the most significant block to the timely connection of projects
and the development of network capacity to enable this. Of contracted
wind projects in Scotland, only 17% have consents. Across Great
Britain, only 23% have consents. National Grid supports reform
of the planning regime and in particular the Government's proposals
to provide for greater certainty in reaching decisions.
Transmission Access Review
19. Transmission access arrangements dictate
the transmission capacity available for a generator to use. As
wind in particular does not require access when the wind is not
blowing, National Grid is committed to developing new transmission
access arrangements to better facilitate the connection of renewable
generation. The changes being proposed aim to make better use
of existing capacity while incremental system reinforcements are
underway by introducing options and flexibility for generators
in the way they connect to the system.
20. We are playing a pivotal role in driving
this forward with BERR and Ofgem within an industry wide discussion
on reform of the current transmission access arrangements. There
are three broad models of access reform which National Grid is
leading the industry in developing.
21. The existing "invest then connect"
system requires generators to make the required financial commitment
but waits until full network reinforcement for the required capacity
is complete before they can connect. Under the first of these
referred to as "connect and manage", generators will
be able to connect ahead of wider transmission system reinforcement
to accommodate their required capacity.
22. The second proposal involves short-term
access commercial arrangements that would allow for some reallocation
of existing transmission capacity to new entrants. The third option
aims to bring in a system of auctions for long-term capacity rights.
In the period before additional long-term transmission capacity
can be provided, long-term access rights could be obtained through
the auction process. Given the support mechanisms in place for
renewable generation, this could allow for the reallocations of
existing capacity rights to renewable generators.
23. Consideration of these issues by the
entire industry through the appropriate governance arrangements
is essential. We have put forward modifications to the relevant
industry codes, and final fully developed and assessed amendment
proposals could be delivered to Ofgem for determination by the
end of 2008, with the aim of implementing the selected reforms
by April 2010. Such improvements to the access regime would allow
for the more efficient use of the existing transmission system,
and facilitate the connection of additional renewable generation.
However, it is important to recognise that achievement of the
very challenging targets for renewable generation will still require
the delivery of significant additional transmission capacity.
Connection agreements and financial securities
needed for grid connection
24. National Grid operates under a licence
condition that ensures the company does not discriminate between
individual generators or types of generation. At present we offer
connection to generations in the order in which they approach
us. Some projects at the front of the connection queue do not
have planning permissions and are holding capacity which could
be utilised more quickly by projects which do have permissions.
We have implemented a more vigorous management of connection contracts
in an attempt to weed out those projects which are not progressing
as contracted via the use of project milestones, quarterly progress
reporting and by taking a less flexible approach to project slippage.
In order to reduce any barriers for small projects, we have also
introduced changes which reduce the amounts of financial securities
required from customers as well as giving them more choice in
how they provide them.
25. National Grid recognises the level of
commitment required from generators wishing to connect to the
system under the current regulatory regime would be a barrier
to renewables. Investment in the transmission system still needs
to be carried out in the most economically efficient way to ensure
that consumers are protected. This is especially relevant in light
of other developments within the market—for example, wholesale
energy prices are rising. However, given the scale of the challenge
and the short time that the industry has to deliver solutions,
new approaches are needed. One example could be "no regrets
investment", whereby the Regulator and network companies
consider what network developments are likely to be required ahead
of definite and confirmed customer needs to upgrade and reinforce
the network. Such an approach is rare but not without precedent.
National Grid is in active discussions with Ofgem around different
regulatory models to ensure that the required investment is made
in order to help deliver renewables and ensure security of supply
is maintained. One key issue to be worked through is the effect
any changes may have on the risk and reward profile under new
regulatory models and how this impacts upon the wider market and
upon consumers.
COMPARISON OF THE CURRENT REGIME AND PROPOSED
CHANGES TO ALLOW FOR STRATEGIC NETWORK INVESTMENT
Offshore Transmission Regime
26. Due to limited space and planning considerations
onshore, the bulk of the renewables needed to meet the EU target
will need to be accommodated offshore. It is, therefore, critical
that the Government get the offshore regime right. Ofgem and BERR
have proposed a competitive tender approach to appoint Offshore
Transmission Owners, ie the companies that will make investments
and build transmission infrastructure to connect offshore windfarms.
This approach aims to deliver a regulated solution that introduces
competitive benefits to end consumers. This will encourage single
radial links for windfarms, rather than co-ordinated offshore
networks to develop. At the time this decision was made this was
an appropriate solution and fit for purpose, however the need
to develop renewables offshore has changed significantly since
then, most significantly with the EU targets for c 40% renewable
generation by 2020 and BERR's announcement of their aspiration
for around 33GW of offshore renewables to be in place by 2020.
27. As Great Britain System Operator, National
Grid is committed to support Government policy to facilitate connection
of renewables. However, National Grid is not currently persuaded
that the proposed regulatory regime for offshore transmission
is the best way to deliver the UK Government's aspirations. The
proposed regime appears overly complex with many areas of the
regulatory arrangements still uncertain and undecided. There remains
questions on the consumer benefits in terms of cost reductions
that the proposed regime will produce. In National Grid's view,
the deployment of simple, co-ordinated, regulated transmission
build as demonstrated by the diagram below is a more effective
approach to help meet the significant challenge which is ahead
of us in the next 12 years. The quickest, simplest and most effective
option is to extend the current regulated onshore transmission
franchises offshore, but other options are available.
28. With the significant increase in the
proposed offshore generation, it is essential that a strategic
approach to investment is taken to ensure that the infrastructure
is in place when new renewables are ready to connect. This should
also be co-ordinated with the onshore developments as it is clear
that whatever is built offshore will have a significant impact
on what is needed onshore.
TECHNOLOGICAL DEVELOPMENTS
Smart metering
29. National Grid strongly supports the
roll out of smart metering. We believe that smart metering could
deliver significant energy efficiency and carbon abatement savings.
Smart meters are the next generation of electricity and gas meters.
Through remote two-way communication technology, much like that
used in mobile phones, they will bring about the end of estimated
bills and meter reads, provide the platform for the development
of a much greater choice in energy tariffs, and enable consumers
to be informed to make choices about how much energy they use.
30. National Grid is currently assessing
the potential contribution that a range of other smart technologies
could make in facilitating renewable generation once smart metering
is in place. For example, demand management technologies—that
allow electric appliances, such as refrigerators and air conditioning
units, to be automatically turned off or down in response to changes
in supply and demand—are now becoming available. These technologies
could provide a more efficient, and lower carbon, solution to
the intermittency associated with renewable generation than the
current approach of using conventional stand-by generation. Rather
than calling on stand-by generation, National Grid could remotely
and instantaneously reduce demand from these appliances in order
to dynamically balance supply and demand.
Grid injected bio-methane
31. As stated in paragraph 7, heat is a
key contributor to the UK's total emissions. Bio-methane is a
renewable energy source with similar properties to natural gas
produced from the anaerobic digestion or gasification of organic
material including waste. Bio-methane has significant potential
as a renewable energy source. Injecting bio-methane into the gas
network effectively would reduce the carbon intensity of gas and
can be used to convert existing gas fired power stations or domestic
central heating systems to a renewable source of energy. As bio-methane
is normally generated from locally sourced feedstocks it increases
the diversity of fuel sources as well as the security of energy
supply for the UK.
32. Due to Government subsidies in the form
of Renewable Obligation Certificates (ROCs), the production of
biogas from organic wastes is likely to expand significantly in
the UK. However this economic support mechanism requires the biogas
produced to be fed directly into an engine to qualify for ROCs.
If instead, the gas distribution network is used to convey the
equivalent amount of gas to a remote engine, this would not qualify
for ROCs. Therefore, this incentive is likely, in many cases,
to skew the market away from the optimum solution because it effectively
discourages the option to purify the biogas to bio-methane, and
move it via the gas grid to a more convenient location where the
energy (heat as well as electricity) is actually required and
can be used in the most carbon efficient manner.
To address this issue, the Government could
take one of two approaches:
(i) It could be made easier for bio-methane producers
to access mechanisms such as ROCs by making it possible to feed
in a certain amount of bio-methane to the grid at one location
and extract that same amount elsewhere to provide heat, power
or transport fuel.
(ii) A feed-in or production tariff could be
paid directly to the bio-methane producers.
33. It is important that whichever approach
is taken, that it appropriately rewards and incentivises grid-injected
bio-methane producers in proportion to the reduction in carbon
and methane emissions delivered by the technology relative to
other technologies currently receiving support. For further details
on some of the technical barriers to this technology, please see
appendix 3.
Hydrogen Enriched Natural Gas (HENG)
34. Hydrogen Enriched Natural Gas reduces
the carbon content of natural gas. National Grid is investigating
a technology which converts methane into solid carbon and gaseous
hydrogen. This is a form of pre-combustion carbon capture. The
hydrogen produced can then be combusted to create energy with
a sole by-product of water. The solid carbon can be used in various
manufacturing processes.
35. The technology is in its early stages
of development and there are several challenges to overcome. However,
National Grid envisages a number of potential applications of
the technology including enriching natural gas to be used in electricity
generation.
36. Although this technology is in the early
stages of development, National Grid wish to highlight the potential
of HENG to reduce the carbon intensity of gas in a similar way
to other renewables reducing the carbon intensity of electricity.
1 The amount quoted does not include local reinforcement
costs on distribution networks. Back
2
For reference, current total balancing costs are circa £530
million per annum. Back
3
Source: EnergyWatch website. Back
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