Official Report 338KB pdf
Good morning again, colleagues. We come now to the public part of our fifth meeting of the Economy, Energy and Tourism Committee in 2009.
Hello there. I head up the energy team for Highlands and Islands Enterprise. I thank the committee for inviting me back and for giving HIE a further opportunity to inform the committee's inquiry.
Good morning. I am transmission development manager for Scottish Hydro Electric Transmission Ltd, which is part of the Scottish and Southern Energy group. I am concerned with planning the transmission system in the north of Scotland and its integration as part of the wider Great Britain grid.
Hi. National Grid owns the high-voltage transmission network in England and Wales and we operate the transmission network here in Scotland. Over the past year, we have spent a lot of time looking at the renewables targets of the United Kingdom Government and of the Scottish Government. We have worked with the Scottish transmission owners to see how we can best facilitate a grid that gets those renewables connected. We recognise Scotland's huge importance in the renewables game. My primary purpose today is to explain what we have been doing and to listen to what others believe we can do to better facilitate the connecting of those renewables to the grid.
Hello. Thank you very much for the invite to speak today. I am the chief executive of Scottish Renewables, which is the trade association for the renewables industry in Scotland. We have more than 240 members, most of which are involved in, or want to be involved in, generating electricity from renewable sources.
Good morning. I am the regulation and trading arrangements manager for Scottish Power energy wholesale, which is the generation part of the business.
I thank you all for your opening remarks. I will start the ball rolling with a general question before inviting my colleagues to join in. Does the present statutory and regulatory framework within which the transmission network operates encourage or hinder the development of renewables in Scotland?
Does the present statutory framework hinder or promote the development of infrastructure in Scotland? There are two ways to look at it. From our perspective, it is all about getting access to networks and making an appropriate charge for the use of those networks.
I could reiterate a fair amount of what Jason Ormiston said, but I will be brief. I would reverse the order of the points that Jason Ormiston made. We feel that the biggest block to getting renewables online in Scotland is the planning regime. The Scottish Government has done a huge amount to try to unblock some of the problems, which will release an awful lot of the renewables projects that are currently stuck in the queue.
I will speak about the statutory framework and the pending changes to it. From the perspective of an entity that is seeking to build transmission, we welcome the proposal to designate grid reinforcements as a national development under NPF 2. I believe that the committee discussed that last month, when you heard from my boss, Mike Barlow. That is welcome, and we are pleased that such good progress has been made. That designation will help to smooth the path for what could be a difficult thing to achieve. Much of the work that is designated or that it is proposed to designate in the north of Scotland comprises the uprating of existing routes on existing towers. The analogy that I sometimes use is that if we nipped out and did it in the dark, the next morning people would not notice that anything had changed. That indicates the degree of work involved in the uprating.
To pick up on what Paul Neilson said, from our perspective, the issue for developers is the uncertainty in terms of connection and of the charges that they will incur, particularly in the island areas. There is an urgent need to resolve that, but under the current framework it has not been cracked yet.
I agree with almost all that has been said; I will point out where we disagree.
We will come on to discuss transmission charging in more detail in a moment, but Rob Gibson has a specific follow-up question.
We talked about the national planning framework and the identification of the grid upgrades. I live about a quarter of a mile from the line that runs from Dounreay to Beauly. The panel seems to be falling between several stools. Who is going to make the decision to let people know when the upgrade to that line is going to take place, how it is going to be funded, and who is going to have access to it? There are so many projects along that line that there are commitments to 2018. Without going into the details about the islands, can any of you tell me who is going to give that certainty in the connect and manage proposals? Who is going to say that the line is going to be upgraded at a certain time? Who is going to say to us and to the public that a structure exists that is fit for purpose in this day and age? That is not clear to me at the moment.
Under the connect and manage proposals that SSE supports—I believe that there is also support elsewhere for them—the users of the system would not necessarily need to understand the intricacies of what needs to be upgraded and when, when it is deferred or the ins and outs of the engineering; they would simply know that, once they had put their money down, the transmission licensees would optimise the system as their licence requires them to do and, in accordance with however they are incentivised, make their own judgments on the trade-off between investment and compensation of generators. Generators and users of the grid would see an infinite grid from their point of connection, and the optimisation and timing of investments would be a matter for the transmission licensees, the system operator, the owners and the regulator.
Who should give you certainty?
Under the current mechanisms, our licence includes arrangements on the volumes of generation that will trigger and justify investment. We are currently in discussions about how they can be modified so that the transmission owners are able to apply greater judgment and can potentially be incentivised to progress the upgrades ahead of when they might be required. However, I am not sure how that will shake out.
Perhaps Alison Kay ought to say something about that, taking the example of the Dounreay to Beauly line, which is one of our national planning framework priorities. When will National Grid be able to tell us about that?
All the studies that we have done on achieving the 2020 renewables target with everything that we know is in the background have provided absolute certainty that the Beauly to Denny line is a prerequisite to achieving the target. That is very much within the domain of SSE and SP and, as such, the signal for investment is up to them. However, having worked hard with the Scottish companies over the past year or so, we know that the Beauly to Denny line is needed in all circumstances together with much more reinforcement.
We are well aware of that and know where the planning is at. In the meantime, upgrades to the existing lines need to take place in order to feed into the Beauly to Denny line. We are talking about the one to the north of that. When will you be in a position to tell the public and the companies when that work will go ahead, given that we know the commitments for up to 2018 for electricity from the far north to the Beauly to Denny line? Is that not the kind of thing that we can know clearly? I am just baffled at the moment about where it falls.
I understand from Scottish and Southern Energy that some of the preparatory work for the Beauly to Dounreay line is already under way. That work has been started in anticipation of the Beauly to Denny line being granted consent and being built. There is no point in putting the extra wires on the Beauly to Dounreay line unless the Beauly to Denny line is constructed. To answer the question when the Beauly to Dounreay line will be built, we need to know when the Beauly to Denny line will be built. When it is built, it will be necessary to make some fairly strong predictions about when other lines will be completed based on our knowledge of the planning system. The first thing that we need to sort out is the planning.
It has not done so directly, but it has approved the advance engineering of the line, which is the facility that we are making use of.
Ofgem approves the funding, and management of access to the line is the responsibility of National Grid and the transmission operators. That can be done in a fairly managed and measured way, which should provide some certainty. However, the planning system will give the strongest signal about when the line will be completed and when people will be able to connect to it.
Someone said earlier—I do not know who it was—that if the planners knew that there was a commitment in our structures to progressing projects, it would be easier for them to assess whether they could give them the go-ahead. You have said that there is a planning problem, but it seems to me that there is another problem. The structure that you are talking about simply does not send a clear signal to the planners.
The second national planning framework gives a pretty strong signal to the planners that the line will be reinforced. It is discussed in some detail in that framework.
I want to ask a question on that subject before I come to transmission charging. In his introductory remarks, Jason Ormiston said that the expectation was that the Beauly to Denny line would be approved last year. That clearly did not happen. When will a critical point be reached at which failure to approve the line will add extra delays not only for the additional lines that we have talked about but for direct access to that part of the grid?
I will clarify what I said. It was expected that projects would be able to connect to the upgraded Beauly to Denny line in December 2008. We expect the Scottish ministers to take a decision on the line this year—I hope that a decision will be taken in the first half of the year. That could allow Scottish and Southern Energy to start building probably in the early part of next year, so the line would be commissioned in 2013. If there is further delay, we foresee a hiatus in capital investment in renewable and other generation in the north of Scotland. We are talking about £1.5 billion of capital investment being delayed as a result of a delayed decision.
Would there be a month-for-month delay? In other words, if ministers delayed a decision until Christmas, would there be a six-month delay down the line for additional—
This is meat and potatoes for Paul Neilson. People would have to wait until the warmer summer months before they started to do some of the work. However, Paul Neilson will be able to give chapter and verse on that.
The current situation is that if we can get on the ground by June this year, October 2012 is achievable for the commissioning of the Beauly to Denny line. In order to be on the ground in June, any planning conditions associated with a consent that may have come forward in March, for the sake of argument, will need to have been purified. I do not mean to be facetious, but let us say—again for the sake of argument—that consent was given for what was applied for, but no shovels could be used. Fulfilling that planning condition would be very difficult. Although consent had been granted, that would not necessarily enable people to get on the ground in June 2009, and if a window was missed then, a whole cycle would be missed thereafter for commencing works in the next outage season.
So a decision must be made early enough this year to allow work to be started this year, or there will be a year's delay in completing the work and connecting the projects.
Exactly.
That is quite a significant focus for ministers in thinking about their priorities.
There are other projects—there is the work on a substation at Knocknagael outside Inverness and on the Beauly to Dounreay circuit. We are scheduling and planning our work to make best use of the intervening time if there are delays in the completion of the Beauly to Denny line so that they do not have a knock-on effect. We want to infill as we go, do as much as we possibly can and ensure that nobody is sitting on their hands. However, there are funding issues associated with doing that and second-guessing the outcome of the consent process.
That is helpful.
I would like to follow up briefly on what has been said.
You must be brief, as we have to cover a number of other issues. We have spent some time on the issue that we are discussing.
I will be brief.
It is difficult to say. We are looking to make the best use of all the time that we have. Resource is a big constraint in terms of the number of people we can have on the ground doing stuff, as is the extent to which we can compromise the system by removing portions of it to do the work that we need to do. When we are, for example, reconductoring routes, we can compromise the system only to a certain degree without compromising its security. There are limits to what we can do, and we need to make best use of the time that we have so that we can continue the reinforcement of the north of Scotland transmission ring through the Beauly to Denny line. That is what the islands and circuits from Dounreay will link into.
The optimum outcome would be to get permission in time to allow you to start this June.
Yes.
A lot has been said about transmission charging today and in the submissions that we have read. Perhaps the only group that has put a number on the cost to Scottish consumers of a change to a postage-stamp system is E.ON. It argues that the existence of differential charging between different regions of Great Britain means that generators in the north of Scotland pay more but consumers in Scotland pay less and estimates that Scottish consumers would pay £56 million more in electricity costs if there were a transmission-charging system that was based on the Scottish Government's proposal.
The proposal that we agreed with the Scottish Government, SSE and Scottish Renewables is to change the methodology for generators only, and to leave the methodology for consumers the way it is. There would be no impact on Scottish consumers whatsoever. The impact would be that southern generators would pay more and northern generators would pay less. However, all generators would pay the same amount for accessing the GB transmission network.
Alison Kay, could you tell us whether that system, which has one system for generators and one system for consumers, is manageable in relation to National Grid's licence obligations and the current statutory framework?
We have to ensure that any change to the framework better meets the relevant objectives that are set out in the charging methodologies, two of which are to charge on a cost-reflective basis and to facilitate competition.
I understand that point, but am I right in thinking that there is nothing in principle that would prevent an alteration being made to the charging methodology for generators while retaining the current charging methodology for consumers.
There is nothing in principle, subject to the cost-reflectivity objective being satisfied. As Alex MacKinnon said, generators in England and Wales will bear more of the charges. We agree with E.ON's figure of £56 million for the current subsidy, which becomes £101 million if we add on the £45 million hydro benefit. We would then see a bigger skew towards England and Wales. However, there is no reason in principle why consumers and generators would both be required to shift from one methodology to the other.
I am slightly confused about what you said about cost reflectivity. I cannot work out how it can save National Grid money if English generators put electricity into the grid. In effect, that is what happens at the moment. If they are paid to put electricity into the grid, how is that cost reflective? There must be some cost to the transmission system when any generator puts stuff into the grid. It seems to me that there is a cross-subsidy from Scotland to England, not cost reflectivity.
No. We divide the country into zones, and the further one is from the centres of demand that want to use the generation, the more one will pay, and therefore the bigger the costs will be. To incentivise generators to come into areas of high demand, we will pay them. As more generators come into those areas, the negativity will cease and the zones will go into positive charging, but that is the signal that will entice people to come into those areas.
You call that an incentive. I call it a cross-subsidy.
I want to explore a couple of other angles, but I think Dave Thompson has a question about the matter that we have been discussing.
The point was made that generators in England and Wales end up paying a bit more and those in Scotland pay a bit less. I understand that the cost of the grid and so on is about 3 per cent at the moment. By how much would that change? Is it 0.1 per cent, or 0.001 per cent? How much more would generators in the south have to pay? It must be a tiny proportion of the 3 per cent.
I do not know, but I can certainly find out. I do not know whether Alex MacKinnon knows the answer.
The locational charges do not recover much money. This year, the northern generators—that is, generators from Yorkshire northwards—are paying in just over £180 million, and the southern generators are being paid £120 million. Therefore, only £60 million is recovered. That compares with the total costs that the National Grid recovers, which are about £1.2 billion. That is one of our main arguments against the system. It does not collect significant costs. It is just a signal. We have always asked how it can be cost reflective for northern generators to pay southern generators.
Can I ask about the system balancing charge? Another point that has been put to us is that the system transmission charge is variable depending on location and that, in relative terms, it penalises Scottish producers. The system balancing charge is done on a postage-stamp basis and it brings significant benefits to Scottish producers. Do the witnesses agree with that analysis? Is it an accurate description, or is the balancing charge more of a mixed picture than that?
The balancing charge is paid equally by generators and suppliers across the whole country on the basis of the amount of generation. We think that that is the most sensible approach. There will be times, such as now, when there is more generation in Scotland than can get through the interconnector to England and Wales. That is because the interconnector is being upgraded. It was out for 30 weeks last year and will be out for 30 weeks this year. Once it has been upgraded, and with further upgrades, there will be sufficient capacity for generation to flow down.
Is it logical for the balancing charge to be calculated on a different basis from the transmission charge? That appears to be the case at the moment. From National Grid's perspective, for example, does that make sense, or can it be argued that they should be calculated on the same basis?
There is an argument that they should be calculated on the same basis. It does not seem to make much logical sense. I alert the committee to the fact that in the next few weeks we will be asked by Ofgem to examine the basis on which we charge for those balancing services. Locational balancing services charges probably work well. There was a very constrained system pre-BETTA—the British electricity trading and transmission arrangements—in 2005. We now need to consider locational charges to see whether they can be made on the right basis.
One's view of this issue depends on where one thinks the illogicality lies. Scottish Renewables thinks that the illogicality lies in the transmission charging regime, which is volatile, unpredictable and excessive. We have talked about the costs, but the unpredictability and the volatility are real problems too. The further away someone is from what is called the centre of demand, the more volatile, unpredictable and excessive the charges are.
I would be interested in hearing the witnesses' views on an issue that Alex MacKinnon highlighted from Scottish Power's perspective. An argument for changing the transmission charging regime—and one that Jason Ormiston has made very clearly in the past—is that incentives and disincentives for the locations of power stations are not particularly relevant to renewables generators, which are located where the resource is. You cannot choose to build them somewhere else. However, that clearly does not apply to thermal stations. Is there a difficulty in arguing for a change that covers thermal as well as renewables? If the purpose of the existing system is to incentivise the location of thermal stations close to market, is that issue separate from the issue of the connection of renewables? Would it be too complicated to have different regimes?
Thermal stations must take environmental considerations into account as well. I know that committee members have visited Longannet power station and have been told about the plans for carbon capture and storage. That might be the best location for carbon capture and storage in the UK, to link into the North Sea, but the charging regime might be discriminatory and might favour locating carbon capture and storage in the south of England.
Under the current regime, we would have difficulty in charging differently for thermal generators and renewables generators. However, the Government already has the power to put in a different charging regime for renewables. It has had that power for three or four years, but it has not chosen to exercise it. The Government could do so, if it really believed that what is inhibiting renewables from coming into the system is the regime of transmission charging. National Grid sees no evidence that the regime is preventing renewables from coming into the system. On the contrary, a huge queue is waiting to connect but is caught up in the planning regime. I reiterate that point, and stress that the Government already has powers.
That is an important point. Does any witness know of a project that has not proceeded because of the transmission charging regime?
Our members have told us privately—I am afraid that I cannot give the details—that some good projects have not got off the drawing board. The economic case has not been made, because of the high cost of transmission. In some cases, those costs can represent as much as 25 per cent of the annual turnover.
I understand, but why can you not tell us about the projects?
It is private and confidential business information that the developers would not want to divulge. Because of the competitive nature of the business, they would not want to talk publicly about the projects.
Given Alison Kay's point, it might help the debate if developers of such projects were able to tell us about them.
I sympathise with that point.
We have invested more than £200 million at Longannet power station in fitting flue gas desulphurisation. Other investment is required there, but it has been hindered by transmission charges.
We might not have a specific case of a project not proceeding because of transmission charges, but I emphasise that they are another factor that creates uncertainty. In the current economic climate, people are a bit more careful about what projects to invest in, and the uncertainty factor could be the tipping point for whether a project is progressed. We are trying to avoid that. The powers to which Alison Kay referred could cap charges for island areas; the UK Government has consulted on that for some time, but we still do not have a definitive view on it. The fact that there is such a measure indicates that the current regime is not appropriate for renewables. Enforcing a cap could give some if not full certainty, but we have not had a UK Government decision yet on whether that measure will be implemented in island areas.
Witnesses have told us, today and in previous sessions, about the huge scale of investment that will be required for conventional energy and offshore wind and marine energy. Given the concerns about security of supply and declining gas supplies, what is your view of the impact of the current economic climate? Will it have an impact on the infrastructure investment that is needed?
It certainly does not help, but we are committed to going ahead with the Scottish transmission owners and getting the infrastructure built. In my opening remarks, I spoke about strategic investment and investing ahead of a signal. The economic climate will possibly come into play when we consider, with Scottish transmission owners, building in advance of the signal because we need to be confident that people will come forward. Before we strategically invest, we need to know with some certainty that renewable and other types of generators who want to connect to the system will appear. So, the economic climate does not have a direct effect on transmission owners' ability to upgrade and build new lines, but we have to look into the background when making decisions to see what will happen to the generator population.
The renewables industry is certainly not immune to the current economic situation. From the generation side, the issue is who builds a project. I could be challenged on this, but I would argue that utilities may find it easier to raise finance for their projects. Independent developers or developers who are not part of the utility network have a little more difficulty, not in creating a viable project, but in putting together the consortia of finance that are required to progress a project. That situation is not a show-stopper for us at present, but it means that it takes longer to get closure on finance.
Let us consider the example of a transmission investment of £100 million. The competitive procurement process requires us to invite tenders from across Europe, so we do that and establish that the investment will cost £100 million and that there are risks associated with managing the environmental impact, the holes in the ground and so on. The cost as seen by the users of the transmission system is the risk that the transmission investor attaches to the revenue associated with making the £100 million. So, his perception of how risky the revenue stream is that covers him for the £100 million investment dictates the generality of users' perception of how expensive the transmission is.
At the moment there is a shortage of international capital, which is impacting on our grid side and on our generation side. I hope that that situation will not continue for many years, but it is inevitable.
Basically, Paul Neilson is saying that we should move to a connect and manage approach.
SSE's position is that connect and manage would reduce, manage and ameliorate a lot of the frustration that Mr Gibson expressed about people not knowing whether they will be able to connect to the system.
What do National Grid and Scottish Power think about the connect and manage approach?
It is included in one of the amendments that have gone to Ofgem for determination under the transmission access mechanism. There is an approach called—not very helpfully—alternative connect and manage, which allows people to come on to the system by a defined date and addresses the issue of certainty that Paul Neilson raised. We need to balance that with the cost to consumers of allowing everyone to come on to the system whenever they want and not having the necessary infrastructure in place to do that. We believe that some form of connect and manage is appropriate, but there needs to be targeting of costs back to generators if they come on early and cause constraints. The alternative connect and manage approach that we have proposed is now before Ofgem for determination, along with a suite of other modifications.
In general, we support connect and manage, but we are concerned that developers will be discouraged by the costs that will be incurred under some of the options that are being considered. Under some options, the charge of connecting will be so high that developers will be put off.
Members will not be surprised to hear that generators would like to have the certainty that connect and manage brings. It allows them to get projects on to the wires when they need to, not when other people are ready to connect them.
I will move on to price differentials between different payment schemes. There is a move towards social tariffs, but the evidence that we have received and anecdotal evidence from our constituencies suggests that the poorest people—those who are fuel poor—pay more, especially through prepayment metering. What is the impact of price differentials on the fuel poor?
My side of the business does not cover that topic, I am afraid. I gather that Mr Paterson appeared before the committee to talk about that.
I would have to take the question to other colleagues in the group, I am afraid. I could certainly send you our position in writing, if that would be useful.
So no one on the panel can give us any information on that question?
I am afraid that, while Scottish Renewables is interested in the area, we do not work in it, so I am not qualified to talk about it.
We will follow the point up with Ofgem when it comes before the committee shortly.
I am no expert in the area, but our fuel poverty report was submitted in earlier written evidence. It looks at renewables and fuel poverty, and makes a comparison across European Union and GB countries. Highlands and Island Enterprise and the local authorities commissioned the report in early 2008. We could resubmit that, although it might be slightly dated now. It looked at whether there is a correlation between the fuel poor and high levels of renewables penetration and concluded that there is none.
I was going to ask about distributing a decentralised power supply.
Distributed generation and energy efficiency are very important, but if we have renewable technology and renewable sources that are distant from the centres of demand, we will need a transmission network. Also, if we opt for things such as clean coal, we are talking about large plant and will need a transmission network. However, yes, we agree that the requirement for that could be minimised through maximising what exists locally and efficient use of the energy that is produced, however it is produced. Those issues are being addressed but, even with those things, we will still need an expanded transmission network.
I agree with everything Alex MacKinnon said. We are looking hard at the 2020 targets. Bolstering the transmission system is only part of the solution, although it is what we are focusing on today. All the things that you have talked about—combined heat and power, all forms of distributed generation and the provision of incentives to encourage people to insulate their homes—are absolutely key if we are to reach the 2020 targets. We are looking at that side of the equation. The key is to ensure that the right incentives are in place to encourage people to do those things. They may not work across the board, but if we are to reach the 2020 targets we need a bolstered transmission system, renewables, non-renewable energy and distributed generation.
What if the low-consumption alternatives are such that the global demand for transmission systems declines? Can you then justify investment in those systems? It strikes me that there is a paradox at the centre of this. If we do all the insulation, low-consumption light bulbs and so on, there will not be a rising demand to cater for. You are shaking your head, Lewis. Are you privy to information that I do not have?
I would like to hear what the witnesses think.
I do not think that any of the scenarios that we have modelled have shown demand seriously dropping off. As time goes on and an electric vehicle fleet emerges, people will have to charge electric vehicles and what is netted off will come back on through the charging of those vehicles. We can see a world in which there is a plateauing of demand, but I do not see it decreasing. Certainly, nothing that we have modelled shows a decreasing need for the transmission system even if we encourage the growth of much more decentralised generation—which, I hasten to add, we are doing.
It is true to say that it is not a case of either/or in relation to transmission and distribution. I am concerned that we pay too much attention to the transmission question and not enough attention to the distribution issues. There are alternative scenarios to those that are being put forward in terms of the European supergrid. I am not arguing against the European supergrid, but we should highlight the fact that there are alternative scenarios based on distributed generation with interconnection at a lower level than perhaps has been envisaged by others. Ofgem commissioned a study entitled "Long Term Electricity Network Scenarios (LENS) Project". The study was conducted by Strathclyde University and considered three scenarios, one of which was what the grid would look like if we focused on distribution. It would be worth looking at that.
Not even in Peterhead, where there is a power station bang in the middle of a fairly large town.
Indeed. However, we should recognise examples of smaller-scale distribution networks such as the electrification of the Isle of Eigg, which was supported by Highlands and Islands Enterprise. The island has its own source of electricity, which was up and running last year, and it does not have to ship in diesel. Unst in Shetland has gone down a similar route using the hydrogen economy.
I will provide Mr Harvie with some examples. Part of facilitating that type of embedded generation involves enabling the distribution systems to be operated to acknowledge the active components that are embedded within them. We are currently running a trial of an energy storage device, which is part of the smart grid concept, in the north-east of Scotland and Scottish Hydro Electric Power Distribution is closely examining the technologies, some of which are being trialled, that are associated with facilitating that type of active generation component within the distribution system. That can reduce the requirement for distribution reinforcement between the storage site and the transmission system.
It is worth highlighting the work of Community Energy Scotland—previously the Highlands and Islands Community Energy Company—in trying to encourage local generation, ownership and utilisation of power, which is important in terms of gaining general public acceptance for renewables and increasing local understanding and knowledge. HIE continues to work closely with Community Energy Scotland on that and on the projects in Shetland to which Jason Ormiston and Paul Neilson referred.
I will make a general, reflective, point. When one has been geared up to a system of large-scale power generation and the transmission networks to go with it, during a period of overall manufacturing rundown in the country, the chances of producing the local wee man in the overalls with a micrometer in one pocket and a file in the other—such men kept Clydeside industry going—at the density at which those men are present in a remaining big industrial area such as Baden-Württemberg, which has Daimler-Benz just up the road, are fairly low. Have we locked ourselves into a position in which we lack such local adaptability through trained manpower—or womanpower—and the like? Are we plugged into the technology that we have, although we feel that it will be extremely inefficient in the longer term? For instance, we have not constructed the passive houses that the Germans have, which require no heating. Our best housing achieves about grade C on the EU scale of thermal efficiency. The solution must embrace technology at that fairly intimate level, too.
That was a statement as much as a question. Does anyone on the panel wish to add anything?
I have told the committee before that we should not let up on energy efficiency and on building properly insulated houses so that we minimise, or even reduce to zero, heat requirements. That is vital for progress towards the 2020 target and the 2050 climate change target.
As Ofgem will speak to us next, it might be useful to consider now its comments that the renewables obligation scheme should not be banded by technology and that the subsidy should be inversely linked to wholesale electricity prices. What are your views on that and on the alternative of feed-in tariffs, which are widely used on the continent?
The point is kind of academic; the renewables obligation exists and all the investment decisions about renewables are being made now and are being based on what we understand the market for renewable electricity will be. A change in any system would create huge confusion, huge uncertainty and an investment hiatus that we can ill afford, given climate change targets.
Within renewables, there are marine renewables and onshore developments.
Banding the renewables obligation is sensible. On any objective measure, costs are high for emerging technologies such as wave and tidal energy, so they deserve extra support. Several mechanisms, such as banding the renewables obligation or providing grant support, can be used to supply that support. The Scottish Government has had the marine supply obligation scheme. We must recognise that the costs of early technologies mean that additional support is required through a finance or grant support mechanism. Banding will provide that and we will make that work.
We welcome the proposed banding of the renewables obligation to facilitate and accelerate the development of new technologies, particularly in marine energy. If banding were implemented, it would create certainty about income for the longer term. As Jason Ormiston said, now is not the time for a wholesale change to the process—we want to take renewables development forward.
I am sorry, but given where I sit in SSE—on the wire side of the business—the question is not on my subject. However, I can provide the committee with a written response from SSE on the issue.
We agree with the banding, particularly to encourage emerging marine and tidal technologies, and we are against a significant change in the funding mechanism for renewables. I agree with Jason Ormiston that that would discourage investment. Yes, plenty of projects are emerging, but we will need a lot more to achieve the targets for 2020 and beyond. A change at this stage would discourage investors.
Everyone is talking about stability, which is obviously better for the industry. However, could the issue be linked to the major argument about providing security of supply in the long term? That favours renewables, because there is widespread acceptance of renewables throughout the world. Once we get past the development stage of the marine technologies, they will provide a steady-state production system.
That is a fairly long way ahead. In Scotland, we have about 600MW of onshore wind capacity. Last week, when the temperature in Glasgow was about -3°C, the output that we were getting from onshore wind was 3MW. For a secure supply, we must have thermal back-up for the intermittent renewables technologies.
I was thinking about the other definition of security of supply. We have had the arguments about the mix of generation that is required; we will, no doubt, come back to that. I will leave the point just now, as it is probably a diversion.
I have a quick question for Paul Neilson, who said that, even with the Viking Energy project for 540MW of wind power in Shetland, there will still be a need to replace the thermal power station there. Why?
We have identified that the most economic solution for a cable link with Shetland is a single link. The economics do not justify 100 per cent redundancy; they point strongly to a single link being the optimum solution, so we are progressing on that basis. Inevitably, a single link will not always be available. It will be required to be out for maintenance and we have to assume that it will, at some point, be subject to a fault. In those circumstances, there must be a facility in place.
In essence, that is the same point that Alex MacKinnon made about security of supply.
It is about security of supply. We will find the optimal solution for the station, rather than have a lump of metal sitting there that is used only when the link is unavailable. It will be better if the station can pay its way as far as possible, hence the exploration of tie-ups with Shetland Heat Energy and Power Limited—the district heating scheme—and other appropriate sources of revenue to make the station as economic as possible.
One issue that has been raised in relation to energy efficiency measures is the potential for microgeneration of renewable energy to assist with that. This week, the Scottish Government has announced that it does not believe that it is in a position to introduce planning changes to enable microgeneration of wind power or air-source heat pumps. Is that a justifiable delay in a planning decision?
The previous Administration and the current one have for two years been working on general permitted development rights for microrenewables. It is unfortunate that air-source heat pumps and microgeneration by wind have not been included in the current list of permitted developments, while solar power, biomass flues and other technologies have. It is unfortunate that two technologies that are important to the Scottish economy have been left out—air-source heat pumps are also important to tackling fuel poverty—and that we will have to wait a year before the Scottish Government can gain confidence in the matter.
Is there anything else the Scottish Government should be doing to address fuel poverty and provide access to cheaper electricity for consumers?
There is a link between fuel poverty and electricity, but the major link is between fuel poverty and heat. To pick up on Christopher Harvie's point about insulating, it is important that we have good-quality housing. Where there is a limit to what you can do by way of retrofitting existing housing stock, you might want to start thinking about using domestic-scale microgeneration to help tackle the problem.
Another issue that was raised when we discussed fuel poverty a couple of weeks ago was the carbon emissions reduction target scheme. The scheme operates Great Britain-wide, but Scotland appears to receive between 5 and 7 per cent of the expenditure, which is below what would be proportionate to our share of energy-inefficient housing stock. Should we consider regulatory changes that would make a difference to CERT and to the investment by the energy companies in improved insulation and measures to deal with inefficient homes?
You will appreciate that our organisation looks at generation of energy. Energy efficiency is not our area of expertise. We understand the links between the two, but how CERT operates to support insulation is, perhaps, an issue to raise with others.
One issue that arose when committee members visited Brussels in the past couple of days was the legislation that the European Union is considering on competition and potential unbundling within the electricity market. As we understand it, there is a difference of views between the Council of Ministers, which seems to be promoting a proposal that would protect the composition of Scottish Power and Scottish and Southern Energy, and the European Parliament, which seems to be promoting a proposal that would have implications for those organisations. Do the witnesses have any thoughts on what the implications could be for the future development of, and investment in, the transmission network in Scotland if the European Union adopted either of those two options in the next few months, which I think is the target?
My understanding of the third energy package is that it allows three alternatives for compliance. We are satisfied that it will allow for the current arrangements to continue as they are, with Scottish Hydro Electric Transmission Ltd, within Scottish and Southern Energy, being an authorised TSO—which, confusingly, stands for transmission system operator, even though in Great Britain the term "system operator" has a unique meaning. The issue is the clarification of the domestic processes by which the UK bodies support the authorisation of SHETL and, in Scottish Power's case, Scottish Power Transmission Ltd, in respect of the outcome of the third energy package. We do not expect that that will upset the apple cart. Our understanding is that the framework will enable us to continue on the current basis.
My understanding is that what you have said reflects the view of the Council of Ministers, but that the European Parliament takes a different view. A decision on that is subject to further processes. There is some concern that if the European Parliament's will prevails, that will have an impact. If you are not in a position to talk about that at the moment, perhaps you could write to us.
Obviously, a degree of conciliation and negotiation is going on at the moment. The European Parliament's position, as part of its commitment to energy liberalisation and the promotion of competition, is that it is good to separate generation from transmission. That is why it is committed to unbundling in principle. It goes without saying that Scottish Power and Scottish and Southern Energy would not favour that option. It will be interesting to hear Ofgem's view on that. Do Alison Kay and Jason Ormiston's organisations have a view on whether unbundling in the energy market is an appropriate way forward?
We would favour an unbundled system. We have an unbundled system in England and Wales and we think that there are better incentives between generation and transmission if they are separate, as opposed to being in separate ownership under the same organisation. That said, the key issue is certainty. The committee has highlighted that there is a difference of opinion between European ministers and the European Parliament. If we are to meet the 2020 targets, the last thing we want is a big structural issue hanging over the heads of transmission owners in Scotland. That is a key point, but you will not be surprised to hear me say that we probably favour the unbundled option.
We need the system that promotes quickest investment in the transmission distribution networks. I do not see there being a significant issue on land, but offshore, where we have to connect an awful lot of generation around the British coast, the current system allows the people who own the generation to build and own their own wires back to the mainland. That approach has been challenged somewhat since the growth in interest in offshore wind in the past couple of years. A bit of a rethink is now going on about whether that is the most appropriate approach and whether we should look to more strategic and co-ordinated approaches. In those circumstances, we often look to utilities to take the lead. As long as they can do that in an efficient way and at the most appropriate cost, that is what we would be looking for. We must get those projects connected quickly. A discussion around unbundling is useful in respect of long-term strategic thinking, but it should not undermine the current investment plans of the transmission operators in the UK.
In 2001, under business separation, Scottish Power and Scottish and Southern Energy separated out their generation business from their transmission business. When BETTA came in in 2005, National Grid became the Great Britain system operator. The key to the European package is that it wants to ensure that the transmission owner is not expanding its system to benefit generation that is owned by the same organisation. I thought that we had persuaded Europe that the system in Scotland was as independent as the ones that it proposed under the title of independent system operator, because in Scotland investment in the transmission network goes through National Grid and through Ofgem, so other bodies approve the investment.
Audrey MacIver and the Highlands and Islands Enterprise submission mentioned the effects that code amendment proposal 167 will have on island communities and the whole Highlands and Islands—and, I suspect, the whole of the north of Scotland, including the north-east. The proposal would reduce the output of permitted projects that can access the grid from 10MW to close to 0MW, with consequent cost implications. Having heard the concerns that have been raised by HIE, I would like to hear National Grid's view before we ask the same question of Ofgem, which I am sure we will do in the course of the morning.
The CAP 167 proposals have just gone to Ofgem for determination. There is an increasing issue to do with the impacts on the transmission system of the number of small-scale generation projects that are connecting at distribution level. It is for Ofgem to determine whether it thinks that has a significant effect. National Grid's view is that 10 10MW projects have as great an effect as one 100MW project. They pose as much of a problem and there currently seems to be a slightly arbitrary megawatt distinction. We would favour a system whereby we were notified when much smaller generation projects connect to the distribution system. I realise that there are contrary views and that there would be some up-front costs for the connecting generator. Nevertheless, we are seeing significant effects on the transmission system and we are anxious to have an industry-wide debate on how people think it should be taken forward.
CAP 167 will affect all generators in the UK, so it is an issue for the whole of Scotland. We have been involved in trying to find a solution whereby there is an assessment of the proportionate costs of the impact. Unfortunately, the illogical conclusion of the arguments is that a 1KW micro wind turbine on a house may be assessed as having an impact on the transmission network. If you follow the argument through to its illogical conclusion, that is what you will find. The unintended consequence is that if there were 100,000 micro wind turbines operating in Scotland, that would provide 100MW. That is the kind of situation that we are in, so we must be sensible and proportionate in our approach to understanding the issue.
I echo Jason Ormiston's point that it is an inappropriate distraction at the moment and should be held over until the transmission access review has run its course.
That concludes our questions for the panel. It has been a useful session. I thank you all very much for your frank answers to our, hopefully, equally frank questions. You have given us some interesting food for thought prior to our taking evidence from Ofgem.
Meeting suspended.
On resuming—
Our second panel—if one person can be said to be a panel—is Steve Smith, from Ofgem. I invite him to make some opening remarks, after which members will ask questions.
Thank you for inviting me to give evidence this morning. I am the managing director of networks at Ofgem and an executive member of the Gas and Electricity Markets Authority, which is the statutory body that takes the decisions, Ofgem being the administrative and office function. My role covers all the networks in Great Britain—gas and electricity, transmission and distribution—and I am happy to speak on those areas. Prior to becoming the managing director of networks, I was the managing director of markets for four years, and you will be pleased to hear that I am happy to talk across Ofgem's portfolio. Members of the previous panel were unable to give you answers to some of your questions because they are not experts. I hope that I can furnish you with some answers from Ofgem's perspective.
Thank you. That leads me into my initial question. You mentioned the need for Ofgem to look at how it operates as a regulator. Does the current statutory remit give Ofgem sufficient flexibility to balance the needs of today's energy industry, which are perhaps different from those that applied when Ofgem was originally set up, when the big issues were competition, pricing and regulation? Does Ofgem's remit give it enough flexibility to consider issues such as sustainable development, renewables and how to tackle fuel poverty and encourage energy efficiency? Does the UK Government need to review the remit to update it to deal with current and future needs?
I will try to answer that, but I will start with the obvious premise—this might be a slightly boring answer—that, as a creature of statute, we are slightly uncomfortable commenting on what our remit should be. We very much take the view that that is for Parliament to decide.
I raised with the previous panel the impact on customers of a change to the transmission charging regime. Previous witnesses had said that there would be a cost to customers in Scotland, but this morning's panel was clear that the proposed changes were focused on generators only and would not have a direct impact on customers. National Grid confirmed that, from its point of view, that was a perfectly reasonable approach to take. Is that also Ofgem's view? Do you believe that your responsibility to protect customer interests would be equally well delivered under alternative transmission charging schemes, or is cost reflectivity a customer-based priority?
Before I answer that, I would like to establish the facts on transmission charging, because I think that there was confusion on the matter among some of the earlier witnesses.
Clearly, the challenges in generation and customer supply are a little bit different, in the sense that Government policy, and Ofgem's interpretation of it, on the generation side will seek to promote new forms of renewable generation where the location might be a result of the available resource rather than the generator's choice. Customer issues are slightly different, and I take the point about equity, but presumably lower customer charges would bring an economic benefit to the northern half of Great Britain, for example, which you would want to sustain.
That is a legitimate question. We must remember that, at the moment, we have subsidy support mechanisms for renewables. The question is where you want to pay them, because you already have to support them to get on the system.
You referred to balancing charges that provide constraint benefits for Scottish generators. This morning, we heard from other witnesses that you are asking National Grid to look at the basis for that approach. At the moment, it is done on a postalisation basis. What is your view of the consistency between the current system—however you might envisage it changing—and the current arrangements for the transmission charging system?
The ghost at the table in this discussion is the customer interest; it was absent this morning, except when you tried to bring it up. Customers are paying for all this at the moment.
I hope that the convener will indulge me by allowing me to pursue the numbers on this point. As the convener said, this week we were in Europe. In the European context, the first question is, who pays for transmission—both infrastructure and operating? What should be the split between consumers and operators?
The constraint payments to Scottish generators take their net contribution down to £30 million.
I took that figure down. You gave the figure of £250 million for England and Wales.
Yes. They pay £150 million in constraint costs.
So generators' contribution to the cost of the transmission is £350 million minus £380 million. The implication of that is that there is no net contribution from the generators. Is that correct?
Yes, in essence.
So generators pay in £350 million and get out £380 million. I accept that those figures will change in the future, but essentially there is no net contribution. However, you mentioned that consumers pay £1.5 billion in England and Wales and £50 million in Scotland.
The figures are £1.1 billion for England and Wales and £50 million for Scotland. The total figure is about £1.2 billion.
So the total figure is about £1.2 billion. What is the mechanism by which consumers make that contribution?
Basically, suppliers pick up the costs and pass them through. When people get their domestic bills, part of what their supplier has to do is ensure that it recovers the costs, so that it can pay them to National Grid.
Given that Ofgem's primary duty is to look after the consumer interest, what is your assessment of the system from first principles? You said that there is no net contribution directly from generators and that constraint payments are rising towards £300 million. Generators, whether in England and Wales or elsewhere, will get a subsidy back on the transmission side, but consumers will pick up costs approaching £1.2 billion. Before we get into the minutiae of the transmission access review, do you think that a system that involves charging for transmission is appropriate as we move forward?
The transmission access review, which we hope will bring in reforms from April 2010, is firmly on the table. It is considering the fairest way of allocating costs between generators and customers and between generators in Scotland and generators in England and Wales and so on. However, given the escalation in constraint costs, we have said that we cannot wait until 2010. I think that Alison Kay from National Grid referred to the fact that we will issue an open letter this week to National Grid saying that we expect it urgently to review costs because we want the industry to debate the alternatives and produce proposals. We might decide to do nothing or to do something, but we regard costs as a big issue that must be debated, given the rapid escalation in constraint costs and the impact on customers—we cannot just plough on as we are.
Indeed. There is an anticipated net contribution from connection going ahead, but there is no decision yet on how the net deficit, so to speak, will be covered.
If we made no changes to any of the arrangements and gave the companies the consents that they want to connect, we would see the constraint bill go up, which would feed directly through to customers, who would see it in their bills.
There is presumably a direct feedback loop, so that the £1.2 billion would adjust out accordingly and, by implication, rise to £1.6 billion on the basis that there is no one to hold the deficit, so to speak.
National Grid just passes those costs through. There was reference earlier to its incentive scheme, which is under negotiation for next year. Obviously, a big issue with that is what the level of constraint costs will be. As I said, they are currently forecast to be just shy of £300 million, but that assumes that there will be no new connection of renewables over that period.
I have a final question about that. What you have said is helpful because framing the debate in terms of the relative contribution of generators vis-à-vis that of consumers, rather than simply framing it in terms of geography, is a helpful way to think through the issues from first principles.
We have to get rid of the queue and the ridiculous situation in which a renewable or conventional generator that asks National Grid to connect them will probably get a date sometime between 10 and 15 years from now. That is, frankly, unacceptable, particularly on security of supply grounds. We are worrying about whether Britain will face a crunch in 2016. Anyone out there who is brave enough in today's investment climate to consider making an investment in conventional or renewable energy is told that there might be room in 10 or 15 years. That situation is not acceptable and it must go. A generator that wants to connect must be given a sensible timeframe for doing so that is consistent with how long it physically takes to build the plant.
Ultimately, the customer will pay anyway, even if you charge the generators.
If, for any reason, National Grid cannot deliver access to the system to a generator who has the right to access it—if there is a fault on the system or there is simply too much generation, for example—the generator can name its price and say, "This is the compensation I want for being unable to access the grid." That figure has two big drivers. First, there is a volume effect, in that we have to consider how much economical generation exists in Scotland that wants to generate versus the physical capacity of the system. That capacity varies. It is lower in the summer because that is when we do work to expand capacity—so circuits are out—and it tends to be higher in the winter. Secondly, there is an issue to do with the price.
I am still slightly confused about how the constraint costs operate. Is it that, when there is a demand for electricity but a generator cannot supply it because of constraints in the system, the generator can obtain a payment? Or is the payment for when there is imbalance between supply and demand?
It is purely because of imbalance in the system. With an infinite transmission system, if demand is 100, all of that 100 can be supplied from the most economical generators in Scotland. However, if the capacity on the transmission system between Scotland and England and Wales is only 50, only 50 can be generated in Scotland.
When the interconnector capacity between Scotland and England increases, is it likely that the constraint cost to generators in Scotland will reduce?
There are two big drivers of constraint at the moment. As you suggest, one is the interconnector between Scotland and England and Wales, but there is also a big constraint within Scotland—which is what the Beauly to Denny transmission line is designed to relieve. The line would cure half the problem but still leave the other half.
Thank you—that explanation was very helpful.
Thank you, convener.
I will try to answer the first part of that and then come on to the second. I cannot put it any less bluntly: companies are commercial enterprises, and transmission charging costs Scottish Power and Scottish and Southern a lot of money, so they will make the arguments that they need to. However, at present, something like 5GW of conventional generation is under construction in Great Britain. If our transmission charging were chasing capital investment away or were prejudicing the security of the supply, that construction would not be happening.
You said that there are currently 5GW of renewables resource up north, but you might be constraining the situation because it could be two, three, four, five or 10 times that amount if the infrastructure had been up to scratch in the first place and the charging regime had been more equitable. There could be an awful lot more resource. That there is only 5GW at the moment is not really an argument in favour of the equity of the charging system.
I am sure that Scottish Renewables and others would back this up: there is no evidence that there is any onshore renewable resource that is not already under development or being looked at, given the constraints of what the planning regime is likely to allow in onshore penetration. We are already in train to do as much onshore as can possibly be done to hit the 2020 target.
We are working hard at this issue, but it is a valuable one. I paraphrase Steve Smith's point when I say that he regards Scottish Power's and Scottish and Southern's transmission charging interest as one of commercial special pleading, if I can put it that way. I will let that point lie on the table.
If we hit the EU commitment that we have signed up to, by 2020 at best between 30 and 40 per cent of our electricity will come from renewables, which means that 60 per cent—close to two thirds—will still have to come from non-renewable sources. A range of low-carbon technologies are competing to fill that gap, and there is a huge amount of uncertainty. We could have big centralised power stations with carbon capture and storage, or we could have more local distributed heating and microgeneration.
We get to the nub of the issue. Let us assume that the most optimistic scenario, in which 60 per cent of generation remains conventional, comes about. You suggest that locational signals are meaningful for that 60 per cent, although, as others have pointed to, if CCS works it will have a locational dimension, too. Even leaving that aside, the other 40 per cent of generation—the renewable capacity—will have locational constraints, albeit in the broadest terms, so it is hard to argue that a system with built-in locational signals will help to optimise capacity.
That is an empirical question. I put it to you that locational pricing will help to optimise the system. At its simplest, if 40 per cent of electricity comes from renewables and the bulk of that generation needs to be in Scotland because that is where the resource is—that may well be the case—we need to tell people that it will become expensive to site our conventional generation there, too, because, on the days when everything runs, we will need a lot of transmission capacity. That does not mean that the conventional generation capacity will not be built in Scotland, but there is a question about how much we want in Scotland and how much we want in the south-west of England. The answer from optimising the system may be to have all generation in Scotland—because that is the cheapest way in which to remove the CO2—and to build a large transmission system.
We have given that issue a fair airing. We got a lot of useful information, on which I am sure that the committee will reflect later.
I want to raise a couple of issues. Ofgem's view that renewables obligation schemes should not be banded by technology and that the subsidy should be inversely linked to the wholesale electricity price was raised earlier. Why have you taken that position?
The renewables obligation has been terrible value for money since its inception. It is one of those classic schemes that was a good idea in theory—we supported it at the time—but practical experience has shown that it is just very expensive. You do not link the levels of payment to what is going on in the wholesale market, so you end up paying too much when prices are too high and too little if the recession prices go too low. More important, under the renewables obligation certificate scheme, if people cannot build because of planning or grid-access issues, customers still end up paying. Compared with a scheme where you pay people only for what they deliver and what they need to come on to the system—you pay the difference between what they need and what the wholesale price is—any form of renewable obligation scheme, even with banding, will cost customers billions more than it needs to. We have been saying that for a number of years. Given the state of the macroeconomy and the problems that business and domestic customers face, can we really afford a subsidy mechanism that just recycles a lot of customer money but does not deliver renewables?
Surely that flies in the face of the issue of the costs of meeting climate change adaptation and so on. In the wider sense, it will cost more to do that. The sooner we get on with the job, the less it will cost. You seem to be proposing that we continue with a scheme that does not incentivise the bits of kit that, within 10 to 20 years' time, will provide a big proportion of our energy needs in Scotland and Britain, on the basis that you support the current funding mechanism.
Perhaps I was not being clear, but that is not our position at all. We have no problem with the idea that, under a differential support scheme, the price might need to be £40 for onshore wind and £80 for marine and tidal. That is fine. We are saying that there should not be a scheme that pays people irrespective of whether they deliver and pays them a level of support that is not linked to what is going on in the wholesale market. What needs to be paid to people must be worked out and guaranteed as a revenue stream only if people deliver and produce. If the wholesale price goes up, the level of support should be reduced so that people will still get the same income line. In the previous oil crisis and major recession in the 1970s, there was a big consumer backlash against things such as energy efficiency. My big fear is that that will happen again. Unless we can demonstrate to customers that the schemes that are in place are value for money—that although stuff may be expensive, more of their money is not being spent than needs to be—there is a real risk that customers who are faced with difficult economic times will want the baby thrown out with the bath water.
Okay. Would a feed-in tariff system be more beneficial to customers?
It would certainly be cheaper than the ROC scheme. The fundamental difference between a feed-in tariff system and the ROC scheme is that it will pay only if you deliver. At the moment, the ROC scheme pays, irrespective of whether you deliver. The suppliers' commitment is either to deliver a certain percentage of energy or pay a fine. At the moment, suppliers simply cannot deliver that percentage because of grid access and planning constraints.
Would a feed-in tariff system be better than a ROC scheme for the development of marine renewables in particular?
As things stand, through the banding, those involved in marine technology need to take a view on what the ROC price will be and the level of support that will be obtained. A feed-in tariff system would involve a much simpler calculation because people would simply be told what was on offer. There are many different ways of providing support to meet the needs of marine renewable energy other than banded ROCs. Our position is that we should not narrow our options: rather, we should consider a wider range of options and work out what is best.
Is there a practical difference between ROCs that are based on a fixed price, and a feed-in tariff, or are they roughly the same thing?
The ROC price is uncertain, and the Government has had to make various changes to prop it up. The scheme can be extended in time, and concepts such as a ski-slope mechanism, and other things that even I do not pretend to understand, could be introduced. People talk about simplicity. If I were a renewables developer and someone said to me that if I built a particular type of technology, I would be guaranteed a price of X pounds per megawatt hour for the next 15 years, that would sound to me to be the simplest approach. It would be simpler to understand than being told, "There's a ROC price that's likely to be this level and then there are all these complex mechanisms and things in the future." I struggle with the arguments, as I have worked in the industry on the other side of the fence. If I were looking to invest, I would find something much easier to understand.
Indeed. I would like to consider another aspect. The customer is your primary concern. The lack of a fair share of funds in Scotland from the CERT scheme surely represents something of a failure on Ofgem's part.
There may be a misunderstanding. We are simply a CERT scheme administrator. I know that that sounds like a weaselly answer, but we are that because of the nature of the legislation. We have no control or influence over how things are doled out or over how the suppliers respond. The statute sets things out and the Government decides what happens. We simply implement the provisions. We issue certificates and ensure that the suppliers do what the regulations require. The situation is odd. Ofgem has control and decision-making powers in most policy areas, but we have not had such powers over the CERT scheme, the energy efficiency commitment before it or the ROC scheme. We simply have an administrative function. Essentially, we dole out certificates.
Do you offer any views on the matter?
We have done so, but the kindest way of putting things is that they have been studiously ignored every time the arrangement has been considered. We have said to the Government that the scheme falls between two stools, because it has a social element and an energy efficiency element. We think that it probably does not get the best bang for its buck on either element because of how it is designed. You can look at what has happened. We have submitted public responses to all the consultations. We think that there are better ways in which to organise things. I think that the previous review was 12 or 18 months ago. In fairness, I do not think that we picked up then on the issue of whether the allocation of funds to different regions is fair, but we have certainly submitted critical views in the past, which the Government has not picked up on. Our voice has been only one among many.
So how do you suggest that Scotland gets its fair share?
If I knew the answer and if I knew how to have influence on that question, we would have done so by now. You simply need to put the arguments. You can make the arguments to us, we might find them persuasive and we might, in future consultations, make them ourselves, but I am not sure that that will necessarily result in the outcome that you want. You will have to go directly to DECC, which is the department responsible.
You state in your submission:
We did a major probe into the retail market to ascertain whether it was working well for customers. We did so in a segmented way, not just with regard to customers in general, because there are different segments of customers, including the vulnerable and people using PPMs. Although we concluded that the market works well for certain customer segments—broadly speaking, those who run their accounts on a direct debit, who have access to internet sites and who are able to switch—it has not been working well for some other groups of customers.
Will you be able to take action quite quickly following the consultation?
Speed is one of the issues here. If the suppliers agree, the licence conditions can be operative within 28 days and we would have the full range of our powers, which are the power to take enforcement action and the power to issue financial penalties of up to 10 per cent of turnover. If the suppliers refuse, we will have to go to the Competition Commission. That would take six to nine months. If it voted in our favour, the powers would go live.
In our inquiry report, we will be making recommendations to the Scottish Government. What can the Scottish Government do to help the fuel poor?
On the one hand, it is a question of the quality of the housing stock, and the things that we can do on the energy efficiency side to reduce the need to consume as much energy as we do to reach a reasonable level of warmth. The other issue is that of income. It is a two-pronged attack. As I understand it, insulation and the quality of the housing stock are big issues, not just for Scotland but for Wales and certain parts of England.
You have talked about CABx, and about people getting advice on the best tariffs and energy suppliers. Is that programme reaching the most vulnerable people?
We are doing everything that we can to work with the organisations that are involved with those people to ensure that the programme reaches them.
Can more be done to speed up the installation of smart meters?
Again, that would help hugely in this area. One of the reasons why PPM is more expensive is that we are locked into some pretty duff technologies. Unfortunately, some of the former monopoly companies chose technologies that, with the benefit of hindsight, have proved to be rather unreliable. They are more expensive because they break down and people keep on having to be sent out to fix them.
I have a general point. At the beginning of the week, I re-read Fritz Schumacher's "Small Is Beautiful", which is now about 34 years old. What you are outlining to us about the operations of the market seems to be so untransparent that I was immediately reminded of an interview that we had about four months ago with an official of a certain bank who admitted that only three or four people knew how various instruments with which the bank was dealing worked. We have heard rather more about that since.
That criticism is good and fair. We have a set of arrangements that were designed for a world with large power stations and consumers who are completely passive in the process. Most people did not know where their meter was and, in the 1990s, when energy prices were falling and relatively low, most people, apart from the fuel poor, did not think about energy. The big challenge is how to move to a new world. Smart metering will be part of that. People will think much more about it.
I want to be clear on a point about CERT. Norman Kerr from Energy Action Scotland told us a couple of weeks ago that one reason why Scotland spends less per head than England and Wales on CERT is that the funding incentivises the insulation of large groups of homes with smaller cavities rather than homes that are harder to heat and less concentrated, and he suggested that the regulatory regime that Ofgem manages is critical to that. Do I take it from your earlier replies that you are operating a regulatory system that is handed down to you and which you did not devise?
Yes. Put simply, the Government sets out the savings that suppliers must demonstrate each year. Rather than just say how much energy must be saved, it says that a proportion must come from certain social groups or customers that it deems to be a priority.
That system is laid down for you and you simply operate it.
I make it clear that, in essence, we act simply as a bank account for that fund. We write the cheque to whomever the Treasury tells us to write it to. We stay well out of the debate. The money is there and what it was intended for is clear. It is for HM Treasury and the Scottish Government to resolve where that goes. Until then, the money will sit in our account earning interest. We will pay it out whenever we are told whom to pay it to.
You also act as banker for the fossil fuel levy surplus for other parts of the United Kingdom.
Yes.
If all the funds were called down at once, I presume that that would remove any knock-on effect. Is that right? Has interest been expressed in calling down the money south of the border for the purposes that I described?
I would like to take that question away for a written response, if that is okay. I want to speak to our chief operating officer, who runs the bank account, so that I can answer accurately.
That would help—thank you.
I will touch on the transmission access review and the short-term measures that you envisage. How many megawatts of new renewable energy generation have been connected in Scotland? How many megawatts does Ofgem expect to be connected in Scotland as a result of the short-term measures?
We have identified—I should give the credit to the three transmission companies, who identified it—450MW of generation in Scotland that could be put on the system in the next two to two and a half years. That would represent a 16 per cent increase on the existing amount. We are keen to ensure that all that generation gets on to the system—we have just to find a way of doing that that does not involve customers picking up a large tab. That is why we are writing the letter to National Grid. One reason for the urgent review is to consider how we put all that generation on the system and how we mitigate the impacts. If we added it without any changes, the constraint bill would be pumped up by £100 million. We must avoid that, but we are committed to putting that generation on the system.
I just wanted the amount to be put on the record.
In this rather long session we have talked a little about the network and future demand, which you outlined at the beginning, and we have talked a lot about the transmission access review, but we have talked less about the distribution price control review and about what Ofgem is doing to incentivise innovation by generators in distributed access and in heat. That is not covered at great length in your submission. Can you say a few words on it now, and perhaps consider providing us with a written submission? Our report will dwell on that particular area, with regard to the attempt to create a framework for the next decade or so.
As part of the most recent distribution price control review, we gave the companies incentives to connect more distributor generation—much of which we expected to be renewable—as well as two innovation incentives. We gave them a pot of money to spend on new technologies and on examining active networks and considering the things that they could do to make better use of combined heat and power.
It is not appropriate for our report to redesign the financial mechanism—that is a technical area for you to work on—but it is appropriate for us to flag up the potential here and there. It would be useful for our report if, prior to the end of April, you carried out a summary of the submissions that have been received so far, to try to identify the issues. That could be through another submission or through a review of the evidence that comes forward—we will leave it to you to design the precise incentive.
We are happy to do that.
That would be helpful, as otherwise the report will be unbalanced in its recognition of what our ambitions should be in that area.
I will conclude by raising the measures that are currently being considered by the European Union. You probably heard the questions that I asked earlier. Does Ofgem have any views on the approach that the Council of Ministers appears to be taking, which is largely to leave the situation in the United Kingdom unchanged, or on the proposal from the Parliament that would result in a requirement to unbundle the integrated companies in Scotland? What is your view on the way forward and the implications of those things?
The first best option is unbundling—there is no doubt that that is ideally what we want to achieve throughout Europe, and if that has consequences for Britain, so be it. The lack of liberalisation, which is driven partly by the lack of unbundling in Europe, is—if we consider it in a hard-headed way—costing British customers dearly, as it has done for a number of years. It is partly the reason for our gas prices being at their current levels, and we feel some of the effects of it on electricity. We need to take a broader view and reach the conclusion that it is a price worth paying. We will have cheaper gas and electricity if we make progress in Europe.
You have called for a competitive tendering process for offshore transmission arrangements. In your submission, you price transmission costs for offshore sites at about £2.5 billion. It is likely that current players in the field will apply. Why did you opt for that mechanism? Do you think that it will move us towards unbundling? It makes sense only if there is a profit to be made by those who tender.
The honest answer is that it was a compromise. We told the Government that we wanted what we described as a fully merchant approach, which would involve those who build offshore wind farms building the connecting cables. At the time, when we talked to engineers, they told us that the costs offshore are such—three times higher than elsewhere—that people do not want to build a network, just the shortest line from the generator to the coast. That was long before the 2020 targets were set—we were still focusing on our domestic targets.
Thank you for your robust responses to our questions this afternoon, as it now is. Could you produce a brief, non-technical note that outlines in more detail how the transmission charging system works? You spoke about that earlier, but it would be helpful for us to have the matter clarified as part of our evidence. I stress the word "non-technical".
I will do my best.
Thank you for your evidence, which has been very helpful.