Examination of Witnesses (Questions 432-439)
Mr David Halldearn
5 JUNE 2008
Chairman: Mr Halldearn, thank you for
coming. We have agreed that we will finish the session at a quarter
to five, so I would ask colleagues to try and be concise. I have
explained the background to our report. As a courtesy, we will
quickly go round the table and explain who we are and if you would
be kind enough to tell us what your responsibilities are. I am
going to ask Lord Bradshaw, who has asked a number of questions
in our evidence sessions on regulation, whether he will be kind
enough to kick off. Then I am going to ask colleagues by exception,
in other words if they have a question could they catch my eye.
Lord Powell of Bayswater:
Charles Powell, Independent member of the House of Lords. Originally
a civil servant, more recently a businessman.
Lord Paul: Swaraj Paul, a Labour member
of the House of Lords. My experience has been in the manufacturing
industry.
Lord James of Blackheath: David James,
Conservative. I had some time in the North Sea and oil development
at the outset of the North Sea period.
Lord Mitchell: Parry Mitchell, Labour,
high-tech entrepreneur.
Lord Bradshaw: Bill Bradshaw, Liberal
Democrat. I have a background in transport.
Lord Walpole: Robin Walpole, Independent.
Farmer, landowner and environmentalist.
Q432 Chairman: I am a Conservative
life peer, former minister. This is our specialist adviser, an
academic from Imperial College.
Mr Halldearn: I am David Halldearn. I
work for Ofgem, the British regulator, but I am here today representing
CEER and ERGEG. I must apologise because, as I think he is now,
Lord Mogg was hoping to be here, but, unfortunately, he simply
cannot and sends his profuse apologies.
Q433 Chairman: Would you like to
say a word about the European Regulators' Group because we have
taken evidence from Ofgem?
Mr Halldearn: You see this rather complicated
title of CEER and ERGEG. CEER and ERGEG are actually two organisations.
CEER is a group of European regulators that come together voluntarily
to discuss things that regulators like to discuss, which is principally
co-operation on regulatory issues. ERGEG is a body which was set
up by the European Commission using a Commission Decision and
its role is to advise the European Commission on energy market
issues. The key thing I want to say is most European regulators
do not have statutory responsibilities for sustainability issues.
In that regard, Ofgem is the exception rather than the rule. CEER
and ERGEG's principal functions are about developing competitive
markets rather than promoting sustainability. Nevertheless, we
do see a very strong role for European regulators in helping to
achieve the targets that are set down in the Commission's proposals
because we do have responsibility for trying to make sure that
the markets work, that the networks operate properly, and we see
some huge difficulties that need to be overcome if we hope to
achieve these rather challenging targets.
Q434 Lord Bradshaw: May I start by
asking you what the huge challenges are, please?
Mr Halldearn: From our perspective, we
see the challenge as a huge change from networks which are based
around largely thermal plants which use a transmission network
which is pretty fixed, to one where the network is responsive
to new developments. We need to think in terms of the way the
markets operate because the challenges that a move towards renewable
generation are going to bring mean that we will need more flexible
plant, and somehow that plant has got to be rewarded by the market,
people have to have incentives to have that plant there and have
it available so that the networks can operate securely and safely.
We see challenges through price because, of course, we do want
to send signals on price because carbon has a price, so that leaves
challenges for some consumers who are disadvantaged and we have
to find ways of addressing those. We see areas which have proved
to be quite difficult even in the existing world, and probably
will become even more difficult in the new world, things like
land planning where some of the difficulties we see, even today,
of building new wires and power plants stem from the fact that
it takes quite a long time simply to get land planning approvals.
Q435 Lord Bradshaw: I think we have
established that last point fairly clearly with a number of people.
So far as the remit of Ofgem is concerned, as I understand it
they have a remit relating to generation but they do not actually
have a remit relating to the grid, is that correct?
Mr Halldearn: Talking about Ofgem, Ofgem
has a remit to regulate the grid, but, if I might point to CEER
and ERGEG, European regulators typically all have responsibilities
relating to the regulation of the transmission networks and the
distribution networks. Not all of them have responsibilities relating
to the operation of the marketplace. Most do, but if one looks
at the German regulator, for example, they are principally a network
regulator rather than a markets regulator. It is true that the
responsibilities of European regulators looking right across Europe
do vary, but all of them have responsibilities relating to the
operation of the networks.
Q436 Lord Bradshaw: Does the British
model enable Ofgem to actually give directions to the grid operator
to connect at a reasonable speed for people who wish to generate
from renewables?
Mr Halldearn: Let me answer the question
in a way which brings out the challenges that we face. In Britain,
as well as in other countries, we face the prospect of a huge
amount of investment having to go into the networks, an enormous
amount of investment. We do not know exactly where new generation
is going to be sited. We need to make sure that the people who
do have the best understanding of where that investment is going
to be made are the ones who take the decisions. Ofgem is of the
view that we need to get the best information out there so that
the people who are responsible for the networks can come to informed
views about where to invest and build new lines. Ofgem is now
looking at ways to incentivise the network companies to make decisions
about these investments so that the investments can be made and
the risks fall in the right place, so we do not transfer all of
the risk and potentially the cost on to customers, so we end up
with a flexible and responsive network which is responsive to
the needs of the marketplace at the lowest cost we can for customers.
We are doing that through reforms on transmission access arrangements
and ways in which users of the network can provide information
by putting in place long-term commitments for capacity. We are
expecting industry to come forward with the right proposals and
changes to the necessary industry codes under the system we have
in Britain to make those become a reality. We think that by pursuing
those reforms we can achieve the balance of an effective and responsive
network at the lowest efficient cost to customers.
Q437 Lord Bradshaw: It does appear
to me that it should be possible for people who know about the
industry to make pretty informed guesses about where are the likely
sites of renewable generation. I am just wondering whether the
players are all waiting for the first one to move, or one another
to move. Is anybody driving this forward?
Mr Halldearn: The approach we have is
one where we have a lot of renewable developers and the people
who know where the sites are most likely to be are the renewable
developers themselves. The way to try and sift through the people
who are most likely to have their projects come to fruition is
to ask them for some financial commitment, put some money on the
table, to say, "Yes, we think we are going to be there".
Against that information background the network companies can
come to judgments about where to build. What Ofgem is trying to
do is to put in place the right incentive framework so that the
right people who can make the best decisions have every incentive
to do it. Ofgem is not an organisation that goes out and builds
wires, nor do we think it is our job to go and pick winners on
which sites we think are most likely to be the ones. We think
it is much better to put in place arrangements so the best information
becomes available and the people who then do make the investment
decisions make judgments about where the wires should be built,
and if they put the wires in the right place they can get a reward
for that. We think that is the right approach and good for customers.
Q438 Lord Bradshaw: The only thing
is, we are aiming for a 2020 deadline and the timescales are long
in this sort of investment. The Rail Regulator has just published
today the determination up to 2014, so we have not got long to
do this. I am just concerned that we may be in an elaborate quadrille
which will take us nearer and nearer the date without a lot of
action.
Mr Halldearn: If I might just respond
to that. One of the worries that Ofgem has is that if we end up
with the wrong people making the decisions on where to develop
we could end up putting an awful lot of customers' money at risk
and potentially waste it. I have a nasty suspicion that were I
to have the misfortune to come before this Committee when it was
inquiring about what happened to all that money you might have
some rather difficult questions for me to answer.
Q439 Chairman: We had evidence earlier
on today about the discussions on unbundling in the Energy Council.
As far as the 27 national regulators are concerned, is there a
uniformity of view that the ability to meet the renewables target
is best achieved through unbundling, separate ownership of the
transmission system from supply?
Mr Halldearn: Every regulator believes
that effective unbundling is the right answer in terms of achieving
competitive markets. Every regulator believes that having competitive
markets is the best route to have a marketplace which is responsive
to the needs of renewables and, in fact, other forms of generation
as well. I think every regulator is committed to the idea that
we need competitive markets. In fact, the regulators produced
a paper some time ago, I recall, which said that having competitive
markets is essentially a foundation stone both for achieving sustainability
targets and also for ensuring we have security of supply.
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