Examination of Witnesses (Questions 189-199)
Mr Steve Smith
28 APRIL 2008
Q189Chairman: Thank you very much indeed for
coming. I apologise for casting you last, as our committee is
depleted from other pressures. Would you be kind enough to introduce
yourself.
Mr Smith: My name is Steven Smith. I
am Ofgem's Managing Director of Networks.
Q190 Chairman: I think it would be
helpful to the committee if you could perhaps make one or two
introductory remarks, perhaps focusing specifically on how Ofgem
might be able to respond to the submissions or pressures coming
from, for example, National Grid in terms of permitting some of
the investment cost of improving the potential supplier of renewable
energy to be financed?
Mr Smith: Certainly. I think if
we start with the main question. Are the targets achievable? I
think our answer would be, yes, and I would not demur from what
the previous witness said in terms of the sheer scale of the challenge.
I think the challenge is not just for the networks, it is also
for the generation sector in terms of the scale of investment
that will be required but also for the supply part of the industry
as well, in terms of some of the discussions you have heard about
smart metering and the need to innovate around tariffs and make
sure that customers actually respond if we have that much renewables.
In terms of what Ofgem can do, the recent price control reviews
for the three transmission companies in Great Britain, we allowed
more investment funding in those controls for the next five years
than the companies have collectively spent over the last 20 years;
so our view is firmly that the problem is not one of funding.
There are two main problems. One is planning in that one of the
big lines that we want to get built in Scotland, which will enable
a vast amount of wind to be connected, is currently stuck in the
planning system and I think the most optimistic view is that that
line will not be operational until 2012, the least optimistic
view is 2015. The second issue is actually the rules by which
you get access to the system. We have been asking and calling
for a number of years to say those rules need to be amended. Indeed,
Parliament passed primary legislation, going back to 2000, to
change the governance arrangements for those rules to allow changes
to be made, and the industry told us, including National Grid,
for a long time there simply was not a problem. I guess it does
not really please us that we have been vindicated, if you like,
and that there clearly is a problem and the industry is a number
of years behind in tackling that problem.
Q191 Chairman: Could you, for the
benefit of the committee, explain in greater detail what you are
referring to in terms of the rules to gain access to the system?
Mr Smith: At the moment National Grid
operate an approach that basically says they will not allow you
to connect up to the system unless they have built the wires to
accommodate you. Clearly, when a lot of this wind power comes
on it is not going to require additional transmission capacity,
it is going to displace some of what is already there. What the
current rules do not allow National Grid to do is look at renewables
and say, "We do not need to build more, we can allow them
to share the existing capacity", and so the example I would
give, it is a bit like when British Airways sells seats on a jumbo
jet: it knows it has only got 450 seats but it can sell 550 tickets
because it knows on most days a lot of people will not turn up.
You could adopt a similar approach in transmission, where you
could actually sell more capacity to the renewables generators
than you have got because you know if the wind is blowing there
are only so many customers at the other end of the system who
are using power, and therefore some of the thermal generators
would set aside. As I said, we have been calling for those reforms
going back to the year 2000. Unfortunately, the industry for a
number of years said there was not a problem and now finally,
belatedly, it has woken up to there being a big problem.
Q192 Chairman: So National Grid should
increase its plans to increase capacity, not only for reasons
of intermittency, coming from wind, but also to facilitate a better
supply of renewables either coming from the incentives provided
by the feed in tariff or genuine new innovations.
Mr Smith: That is absolutely right. National
Grid has the money, the Scottish companies have the money. They
could squeeze an awful lot more renewables on much more quickly—we
are talking gigawatts—if they changed, which they are now
belatedly starting to do, the rules through which they actually
allow people onto the system, but I think when you are thinking
about the 2020 targets, you are then looking at massive transmission
investment and I think one of the key issues there is the extent
to which whatever the Government does on planning does some of
that transmission investment action need to be made off-shore?
Obviously, a lot of the renewable resource would sit in Scotland
where you need the transmission lines across areas of staggering
natural beauty and you have to question whether planning will
ever be able to deliver the kinds of towers and wires that will
be required. I think one of the other things we need to start
thinking about now, which the transmission companies are, is about
the prospect of large subsea cables that run down the coast and
come in closer to where the electricity is actually used.
Chairman: I am going to ask colleagues
to follow up. Lord Bradshaw.
Q193 Lord Bradshaw: Is the renewables
programme a good bargain for the taxpayer and are there better
alternatives which will reduce the amount of CO2?
Mr Smith: I have to say, I think it is
a reasonable bargain for the taxpayer, it is not a reasonable
bargain for the electricity customer and I think the existing
renewables support scheme has cost an awful lot of money and delivered
very little. Hindsight is always a wonderful thing. I think had
we not had the planning problems and the transmission constraints
we had, it would have been a marvellous scheme. When you have
transmission constraints and planning problems, it becomes hugely
expensive and I think part of the problem has been that sense
of what seemed like a sensible idea at the time has not really
been looked at in the light of the bitter experience of what has
happened; but I think alternatives like feed in tariffs, arrangements
where you only pay the generators when they actually deliver output,
of which feed in tariffs is a form, will be a much more cost-effective
way of providing renewables support. I think when you look at
support measures for 2020, the key thing is to learn the lesson
of the past, build a policy that is robust to delays, be they,
"We cannot get the turbines; we cannot get the transmission
capacity", and make sure you only pay people when they actually
deliver.
Q194 Lord Bradshaw: That is the second
thing I was going to ask you. When you consider the renewables
policy, is it fair to say that the protagonists of the renewables
policy have presented the case in a false and misleading way so
that they do not take account of the network costs and the backup
generation?
Mr Smith: I do not know that they presented
it in a false and misleading way; I just do not think there is
a great deal of honesty at the moment about how generous the existing
level of support is. We do have renewable generators suggesting,
for example, an area of questioning you are going to come on to,
that transmission charges are a problem for them. We have repeatedly
called over the last three years for any project to come forward
and demonstrate, based on the existing level of support available
to them, transmission charging is a problem and no-one has come
forward and suggested that. We have even gone and talked to the
developers on the Scottish Islands, and they have suggested that
at the moment they are easily financeable and it just does not
stack up with the facts. At the moment in Scotland you have 13
gigawatts of renewable projects seeking connection. If all of
those were to connect, that would provide 100% of Scotland's energy
use and about 10% of the UK's. So it is hard to see an idea that
at the moment this level of financial support is anything other
than more than adequate to cover all of those costs. I think you
get into different sets of considerations when you think about
2020 and you are talking about delivering 40% of our electricity.
Q195 Lord Mitchell: Ofgem is now
in the process of reviewing its rules for gas and electricity
grid regulation, with a view to encourage new investment and,
consequently, facilitate the growth of renewables. However, regulatory
changes are not expected until 2015. What is your feeling about
whether earlier changes are necessary?
Mr Smith: To set that in context, that
is a root and branch review of the way we regulate all networks.
I will not bore you with the technical details, but I do not think
its main focus are these issues. I think changes will have to
be made, particularly for the transmission companies, before then,
and we have already said we are happy to do that. What we are
trying to do is to work out for this investment that needs to
be made how do we get a fair deal between customers and the company's
shareholders, but we are going to have to encourage them to innovate
and to do more and to take risks, and really the debate we are
now having with the companies is how do we do that in a way, as
I said, that we can stand up to customers and say, "We have
got you a good deal", but we will have to deliver change
well ahead of that review.
Q196 Lord Whitty: In the 2004 Act
we made sustainable development a secondary objective of Ofgem.
There is now some argument that sustainable development should
be part of the primary objective of Ofgem. Do you have any views
on this, because it would have a bearing on how Ofgem helped to
deliver this particular target?
Mr Smith: Far be it for me to point out
to your Lordships in terms of the constitutional settlement. I
can answer the question in terms of giving you views on how we
might react, we take the boring position that as a statutory body
it is for this wonderful House and the Commons to decide what
we should do and then we will get on and do it. All I would say
is, if you focus on the networks, I genuinely struggle to see
what changing our duties further would lead us to do more in this
area. I spend most of my time as MD Networks focusing on issues
relating to removing the queue from transmission, changing the
current arrangements to get more renewables on and that is driven
by existing duties. So when you ask me the open question, which
is what would you do differently or what could you do differently
if we changed your primary duty, I genuinely struggle to see what
more we could do. If you look at other aspects of what we do,
the way we regulate the generators and supply market, potentially,
but networks, which is my primary focus, I think the changes you
did make in giving us a duty that related to sustainable development
has led to significant changes in the way we regulate the networks.
Q197 Lord Whitty: Yes, but there
still tends to be an argument. I agree with an intelligence of
networks as against a supplier, but I think there still tends
to be an argument that direction on sustainable development is
actually a matter for the Minister, and that is the division the
legislation provides, and it is not for Ofgem to interpret that
in relation to their primary objective. This may be arcane and
slightly theological probably more so in the networks that it
is in terms of supply, but it does seem to a lot of people that
that means Ofgem is saying it is somebody else's duty to focus
on the sustainability of this outcome?
Mr Smith: Let me try and put a bit more
flesh on those bones. The Government at the moment has set the
support mechanism which will deliver huge volumes of renewables
if they can get planning permission. Our job, as we see it, against
our existing statutory framework is to make sure that all of the
output can get on the system as quickly as as possible and manifestly
at the moment I would describe the playing field as tilted away
from renewables, for some of the reasons I have explained, including
these rules, and we see our jobs as to level the playing field
and we think that, once that playing field is levelled, the financial
support that is there will make sure that all of the renewables
targets are met. What the sustainable duty has made us think about
in terms of the networks is how to make the networks themselves
more sustainable, so we have introduced incentives to cut the
carbon emissions associated with the networks and to look at ways
that, as well as connecting up renewables, you can actually make
the networks themselves have a lower carbon footprint and a lower
wider environmental footprint.
Q198 Chairman: Can I ask a question
about security of supply in relation to third country suppliers.
Is there anything that you think Ofgem should be doing to promote
security of supply in that regard?
Mr Smith: I think where we have looked
at this has primarily been in the gas market. What we discovered,
we did a big study as part of our response to the recent Government
energy review, was that actually in the gas market competition
has been very effective at forcing suppliers to think very carefully
about this question and at that actually Britain, despite being
Europe's largest gas market, had one of the most diverse sources
of supply. So suppliers naturally had said, "Let us go to
as many countries as possible, let us try and go to those countries
that are politically more stable", and if you were to compare
us, say, to Germany or France, where you have a single company
that had tended to put all its eggs in one basket, I think we
came to the conclusion that actually markets worked as well as
they could against a geo-political background of managing the
risk that was there and that was the most that we as Ofgem should
do. Obviously, there are then issues for government in terms of
the discussion it has with some of these large gas suppliers.
Q199 Chairman: Are there any other
issues that you have heard replied to or discussed by the other
witnesses? I think we have covered most of the questions that
we had in mind. Is there anything else that you would like to
add that has not been covered? I think there is one, on reflection,
and that is the connect and manage policy which has occupied our
attention in the past. Perhaps you could comment on that, and
then have we failed to elicit from you any great pearls of wisdom?
Mr Smith: I think I have done locational
pricing for you. I will deal with the question you asked later,
but on the intermittency question and security of supply more
generally, I think some of the discussion on security of supply
misses an element. I do not think we are particularly worried
about intermittency. This is an industry that is incredibly good
at dealing with those sorts of problems. The question is really
one of cost. I think intermittency can be dealt with; it is just
whether the cost of doing so is acceptable. One of the things
that is potentially missed on security of supply is the risk that
if you rush to a target that requires 40% power to be delivered
from renewables in a short space of time, there is a technology
risk, because it will require us to invest probably in single
types of turbine design, et cetera, and there is a risk then that
you meet the target and then discover that the technology you
have picked is not reliable or viable. I think that is one thing
that is missed. Even there, clearly, there is a benefit as well,
and that is the benefit of the carbon saving. So I think we should
be realistic about the impact on security of supply and accept
there are trade-offs. We are taking that risk because of the carbon
savings we will make. It is not a reason not to do it, but I do
not think we should be unrealistic with customers that moving
to such a dramatic renewables target may involve some additional
extra risk in terms of security of supply. Forgive me, your other
question.
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