Oral evidence: Pre-legislative scrutiny of the government’s draft legislation on energy, HC 776Wednesday 09 March 2016

Oral evidence, 9 March 2016.

Witnesses

Chris Bennett, Project Director, Integrated Transmission Planning and Regulation, National Grid, Tony Glover, Director of Policy, Energy Networks Association, Frank Mitchell, Chief Executive Officer, SP Energy Networks, and Chris Veal, Managing Partner, Transmission Investment, gave evidence.

Chair

Thank you. Could witnesses please again state their names and organisations for the record, again starting on my left?

Chris Veal

My name is Chris Veal. I am the Managing Partner of Transmission Investment.

Frank Mitchell

Frank Mitchell, SP Energy Networks.

Tony Glover

Tony Glover, Energy Networks Association.

Chris Bennett

Christopher Bennett, National Grid.

Chair

Thank you very much, panel. The Government and Ofgem suggest that competitive tendering for offshore transmission could lead to significant savings and benefits, particularly for customers. What is your view?

Frank Mitchell

Can I start, Chairman?

Chair

Yes, indeed.

Frank Mitchell

From SP’s transmission business we were recognised in view of Tier 1 as being the most efficient transmission business in the UK. We support competition because we think there is an opportunity for us in doing that, but we are mostly minded that it is only there to ultimately reduce the cost and the benefits for our customers. One of our concerns here is this primary legislation is very high level. There are a lot of financing questions that typically you could argue could be answered through the next level of consultation, but I am very concerned that I see time skills have been set already to achieve that, ambitions by 2017, but I don’t give significant weight to the amount of detail that has to be thought through in this area. I will elaborate on that later on, Chairman, if you don’t mind.

Tony Glover

Yes, the Energy Network Association, as I am sure the Committee know, represent all the electricity and gas network operators in the UK, I might add, including my colleagues to either side. From our perspective, on behalf of all the network operators, we have been very actively involved in facilitating the discussions around onshore competition and, in fact, we currently preside over and chair a working group bringing together the key players, both from within the networks and of course from the OFTO community and others with an interest. That is working alongside DECC and Ofgem. To be absolutely clear, we are extremely keen to facilitate competition where it is to the benefit of the consumer. I think the key point here—and reiterating what Frank has said—is that it has to be to the benefit of the consumer. Competition is not an end in and of itself. It is a process to deliver the interests of the consumer, and that absolutely has to be at the heart of this. From our members’ perspective, while as I say we have been working very actively in this area, we have serious concerns about the level of detail currently available in this. The fact that distribution networks have been added to the show at a very late stage, without any kind of impact assessment, we have some uncertainty issues around that. We are also concerned that this lack of detail means that when this legislation comes to Parliament—and, as Frank says, the timings are pretty tight and looking at when the Queen’s speech is likely to be and when this legislation is likely to be before you—we would like there to be a proper primary legislative debate of some of these key issues, and we cannot just wait for them all to come when we hear about the secondary legislation.

Chair

Thank you, Tony. Any other panel members wish to comment on that point?

Chris Bennett

Yes. We absolutely support competition where it is in the interests of consumers, but I think it is important to recognise that those savings are deeply reliant upon the development of the detailed regime. One of the things that have not been mentioned yet by the other panel members is how important robust impact assessments are, to make sure that benefits are delivered to consumers. In terms of the impact assessments at the moment they have relied heavily on the offshore regime. I think it is important to recognise the differences between introducing competition into the onshore regime compared with how it was introduced in the offshore regime, so I think it is important when we introduce the legislation that we have full and proper impact assessments. I notice Paul in the last session from EDF expressed views from EDF, so I think the voice of generators is going to be important. We cannot afford, as part of this legislation, to delay any new generation coming on to the system. I think that is going to be an important factor. It was an important factor, when the offshore regime was brought in, that the voice of the generators and their potential concerns associated with potential delays to the project was an important factor that was taken into account, so really robust impact assessments to understand the costs, the benefits and the potential risks. I am absolutely not saying that some of these risks will definitely materialise but understanding the potential risks, I think, and robust impact assessments are crucial.

Chair

Thank you. Transmission Investment, National Grid and the Energy Network Association said there are a number of differences between the offshore and the onshore regimes, including a lack of construction risk with onshore transmission. Has the potential onshore competition and the potential savings been overstated?

Chris Veal

No, I don’t think they have and I would probably argue that they have been understated. I would say that is because the savings that DECC has put forward have been based on the operational cost savings and have not included construction cost savings. I think the evidence both from the UK in terms of the competition in offshore transmission and the innovation that is brought into that sector, is that competition does drive down costs. There is no reason to think that would not happen in construction as well as in operation. I think the evidence from around the world as well, where competition in the construction of onshore transmission has been introduced—and it has been in countries like Brazil for probably 15 years now—has shown that there are very significant savings in construction costs to be made as well. While I agree with much of what my colleagues have said, in terms of it has to be introduced in the right way, it has to be done where the benefits to consumers are going to be realised, it has to be done in a way that is sensitive to projects that are in flight, so it doesn’t need to delay as a generation project, I think all that is very true and obviously we have to be very mindful of that as it introduces the regime. But I think the benefits are really there.

Chair

What changes do you think the Government needs to make to draft proposals to ensure cost effective competitive onshore transmission?

Chris Veal

What changes should they make to the current draft legislation?

Chair

Yes, in their draft proposal.

Chris Veal

I read through the legislation and, again in common with my colleagues, it is enabling legislation, it is primary legislation, and it is very high level. A lot of the detail will be in the secondary legislation. The legislation is essentially just extending the enabling powers that Ofgem and the Government have for offshore and extending those onshore. To that extent I think it works. I don’t think there are changes required for that. I think a lot of the detail, as my colleagues have said, will be in the secondary legislation and that will require a lot of consideration and a lot of scrutiny to make sure that that is right as well.

Chair

Thank you. Antoinette and James have brief questions before we move to the next section with Matthew.

Antoinette Sandbach

I just very quickly wanted to come back to you, Mr Glover, about the late inclusion of the DNOs. My understanding was that this process would extend to the 400KB network. Are you saying it applies to the 400KB and 132?

Tony Glover

This is one of the concerns we have, I think, the lack of clarity about who this will apply to. What we have basically been told by DECC is that this is forward planning, putting in something that we will not have to worry about or consider for a little while. However, the clarification on that has not been made clear to us, and we would like to have a clarification on that. We would also specifically like to have a clarification that this will not apply within the current price-control period that we are currently in. RIIO-ED1 is underway and will continue to 2023. Obviously we do not want that to be impacted by a level of uncertainty for something that was not considered as part of the companies’ business plans when that price-control process was underway. That is our concern. The reality is that we have had competition in connection providers at distribution level for 10 years now, and in fact we have seen an increase over the last four or five years of independent connection providers of about 14% up to 32%. It is not something we are against.

Antoinette Sandbach

Sorry, I am going to interrupt you there then. Does that mean that the practical result of the late inclusion of the DNOs is very little, if there is already that competition in that sector?

Tony Glover

I think late introduction is an issue if it is not clarified as to how it will apply in terms of the type of project, and indeed, as said, whether it will apply within the current price control. The current framework that exists is the pre-control process that we operate within. This has not been considered as part of that.

Frank Mitchell

Tony, I would only add that the confusion also is how this sits beside existing legislation that is already placed on distributors. It has to facilitate competition today. That is not clear when you ask questions about how that is going to sit in the context of existing legislation that is already on the shores.

James Heappey

Two questions, first, Mr Veal, it is reassuring to hear that there is evidence of savings in construction costs. Is there also evidence where this has been done elsewhere of increased innovation in the way that electricity is transmitted?

Chris Veal

I am sure there is, but I couldn’t point you to it straightaway. Certainly in terms of what we do, I think we have found that there are things that we do that are innovative in the operational phases of the projects. An example of that is we have a project that has been part funded by Ofgem through the Network Innovation Competition. We are looking at converting a telecom-cable repair vessel that is on 24/7 standby to repair telecoms cables so that it can also repair power cables at a moment’s notice. That should reduce the repair times and costs for offshore power cables greatly and ultimately save consumers a huge amount of money.

Frank Mitchell

Sorry, can I make one point in that context? I would just be minded that the Committee reflect on the standards of service in South America and the quality supply that South America achieves through this in the context of any competition transmission. Maybe that is worth investigating, the quality of supply by those transmission networks, in the context of what happens in the UK. That is one point of concern. Secondly, the preferred option that has been professed by DECC and Ofgem is what is called the late CATO option. That means that we have to already have a design set. You have to have gone through consenting. We have to make sure we understand how it is being constructed, to get all the appropriate consents to allow you to build the construction routes, and so on. What is left at the end is very little. What are left at the end are the construction cost and then some operating costs. Currently in our market place we tender 90% of our construction work already in a very competitive tendering process. The other part, the operational costs, Ofgem themselves say these projects have very little operating cost exposure on them relatively so, therefore, it is a marginal issue.

James Heappey

That is very interesting. The product of this legislation may be that there is some saving in the construction costs, but we are not going to see companies bidding with different types of pylon technology, some people trying to go under the sea, some people trying to go under the ground?

Frank Mitchell

Unless you understand them through the whole consenting and planning process, again, which effectively will add to the process.

James Heappey

Okay. Which leads me to, Mr Bennett, you seem to understand Paul Delamere’s concern on the previous panel over the Hinkley pylons from EDF’s perspective. What impact does this legislation have on them?

Chris Bennett

I don’t think it is just for Paul, it is for all generators, any generators who currently have a contracted date. One of the questions that I think is recognised through the development of the regime so far is it will add time to go through the competitive tendering exercise. Under the current regime, existing transmission operators would often do pre-engineering and start construction work early. The key question, I think, is a project-specific question, whether it can overlay the 18 to 24 months of the competitive tendering exercise? Can you do that without jeopardising dates that generators already have.

James Heappey

Although it is somewhat rich for EDF to criticise you for introducing uncertainty in a project’s timeline, given the uncertainty they are introducing into the project.

Chris Bennett

The point, the generic one, in terms of generators, whether it is generators in Scotland, whether it is other nuclear generators, is basically—

Frank Mitchell

Maybe just referring to that issue widely from a generator point-of-view, we have in Scotland another 5 gigawatts of contracted generation still to be connected. This process has no ability to work under Scottish planning legislation the way it has been headlined.

James Heappey

I think we are coming to that later, so we will interrupt you and—

Frank Mitchell

We will maybe do that, but there are significant delays, and people are concerned about that, given the lack of thought process in their network to date.

Chair

I am intrigued to hear that time might become a pressure at Hinkley, but never mind. Matthew Pennycook.

Matthew Pennycook

Thank you, Chair. I was going to start by asking whether you were content with the fact that the measures in the Bill with regard to competitive onshore tendering were largely enabling legislation, but you have been quite clear on that. Could I ask you connected with that, and with the risk of going slightly off on a small tangent: what do you think lies behind the timing of these provisions being in this Bill? We have just had an Energy Bill go through Parliament. I was on the Committee, it is pretty thin gruel. Given this is long-frame enabling legislation, why was this not brought forward earlier?

Frank Mitchell

I do not know. There is lack of clarity on why people are rushing through this. I have asked the questions. There seems to be a political will to get it in, but people are well aware, and policy makers are well aware, that if this is done incorrectly it is going to be counterproductive to the UK consumer. It is going to cost the UK consumer money with what we see in constraint costs. At a time where generation reserves are at their lowest ever and transmission assets are going to be critical from a security-supply point of view, any delay and uncertainty to go on and build some of the core transmission capability we need across the chief areas of concerns—that is why the detail has to be correct. I see no need to rush in to do something by 2017, and I can see no rationale for that being the case.

Tony Glover

Indeed, we have had, as I have said before, a lot of constructive discussion. Chris sits on the group that we co-ordinate, and this has been very positive working with DECC and working with Ofgem. Let’s be absolutely clear, I do not want to reiterate the point, but we are not against the principle. It is, as Frank says, getting that detail right. Of course, this is enabling legislation, but at the end of the day we have an impact assessment that does not have the level of detail required in order to test some of the policy points. We also have a lack of detail in some of the key areas that we are talking about that could cause delays. If we cannot meet the ultimate test of meeting the consumer interest then we will have failed.

Chris Veal

Can I just add to that, I am not sure why it is being seen as being rushed through, given that competition in onshore transmission has been muted for probably five to seven years and Ofgem’s ITPR project has been running for most of that time, which has looked at the option of how to deliver the onshore transmission network. I think one of the reasons why Ofgem and the Government have not brought forward these proposals earlier, and it is me surmising, rather than anything else, but I think they wanted to bed down the competition in offshore transmission and demonstrate that that works and delivers savings before extending that into other parts of delivery of transmission.

Matthew Pennycook

Just so I am clear from the panel, is it practical to suggest that the criteria for triggering competitive tenders could be laid down in primary legislation?

Chris Bennett

I don’t think all of the detail can appear in the primary legislation. I think that is absolutely recognised. As I said at the beginning, the savings are going to be dependent on the detail of the regime, and the detail is not there at the moment. I think one of the things that could be considered in the legislation is to include project specific impact assessments, because again, I think the impact assessments to date have relied on the offshore regime. We need to remember the offshore regime to date, all of the assets have been built by the generators and they have not built by a competitive CATO doing the work. There are significant differences. Going back to the generator point, for a specific project, understanding the cost benefits and the risks is important. There was an independent report we commissioned with Frontier Economics, and one of the statistics they put forward was, in the event that a nuclear power station was delayed for a year, for whatever reason, the cost to consumers could be £1.5 billion. So understanding the risks, and making sure that in developing the regime we understand how to mitigate those risks, and deciding which projects we compete, given the need to not disincentivise generators to get out to massively important issues.

Mr Jamie Reed

Is it your view that DECC does not understand the risks?

Chris Bennett

I have had conversations with DECC and they have recognised for the projects, once it has determined which projects meet the criteria for competition, that there should be a process to assess the costs, benefits and risks. But at the moment the impact assessment is a generic one, and within the impact assessment it assumes that none of the risks will materialise.

Frank Mitchell

The only thing I would add to that is there is a general sense of, “Trust us, the secondary legislation will take care of all your concerns”, without any fundamental answers to fundamental questions being available just now. It goes to the point, I think, of how well thought through has it been coming in here. Ultimately we support it, because we think we can have an opportunity to do it. That is why the late CATO model does not work for us, because the biggest prize for us is for the UK consumers to allow us to innovate at the design stage. That is where you make the most influence to it. That being knocked out has fair limited the ability you have to go there. Ultimately my concern is not that we will not have a chance to consult, and debate, and get this right, it is if the timescales of 2017 are set in stone, that ambition is out there, we are doing right-to-left planning with areas that are really difficult to work through and have many stakeholders. I am sure we are going to talk about planning issues, and everybody knows how tough the planning issues are. This is not something that can be dealt with lightly. I think it is important that we recognise that there is a lot of work to be done, and it can be done as long as we do not have some false deadline set in front of us.

Matthew Pennycook

This is specifically to Mr Bennett; you said it is critical that all the relevant stakeholders are brought into the decision-making process around whether a specific asset is contested. Do you think the Bill as it is could be amended to cater for that, and if so, how?

Chris Bennett

Yes. I think my earlier reference to potentially having a project-specific impact assessment, so it should be consulted upon, would be one of the mechanisms to do that. If that suggestion was taken forward within the project-specific impact assessment the generator who might be connected would be part of that process, as would the local communities. I think that is a potential vehicle. We, in advance of Ofgem consulting on onshore competition, spent a lot of time making sure our stakeholders were aware of the proposals. At the back end of last year there was not a great deal of understanding, and we engaged with local communities, the National Trust, as well as the generators, to make sure they were engaged in the debate and responded to Ofgem’s consultation. If you look at the responses to those consultations, people do want to engage on this. Therefore, I think we do need to find a way to make sure that all the relevant stakeholders are engaged on this to make sure there are not unintended circumstances that arise through legislation.

Matthew Pennycook

The last question from me, the explanatory notes that we have seen with the Bill state that the Secretary of State has to consult Ofgem, and if appropriate, licence holders and others, before making regulations down the line. Does that go far enough in terms of the consultation you would want to see on secondary legislation about who was brought into those discussions and who was consulted?

Frank Mitchell

My concern is that we end up with a false timeline against this, the ability to do that with due process, and due consideration, and involve the stakeholders, who include communities, local planning authorities, as well as industry players and generators, to give them the due time and ability to have the opportunity to really get their heads around this and work through some of the issues. I think it is a timeline issue for me, rather than that legislation.

Chris Bennett

It is another example of where it is different to the offshore regime. The majority of the offshore infrastructure is, by definition, under sea, whereas the major infrastructure that we are talking about here does absolutely go through local communities, and there are very difficult discussions to be had with communities to get the right balance of visual amenity versus cost. Another difference between onshore and offshore regime is the interaction with communities, not only in deciding what work is required in the first place, but during the construction activities. On land you are engaging with communities for several years in building these projects.

Tony Glover

If I may, Chair, just briefly, another key issue of course is the interrelationship, another difference, if you like, with the offshore regime, which we seem to be greatly relying on here. That is the interrelationship between the existing networks onshore and these projects. The reality is obviously that is not the case offshore. Onshore you will be connecting into National Grid and Scottish Power’s network, you will be connecting into distribution networks, and the impact that that can have. A particular issue for us has been around the performance issues. If there is a problem with the CATO asset, how does that impact on the neighbouring network, and analysing the impact of that and ensuring that the fault for that is clearly aligned? So the CATO asset owner is very important in terms of the very strict performance standards that networks currently exist under. That should be taken, I think, into consideration, and we have raised it and it has not been thus far. I think another example of rushing forward without considering some of these key concerns.

Dr Poulter

Do you accept that any Governments drafting legislation, particularly with some of the issues to do with the industry we are talking about here, but there needs to be a degree of flexibility and future proofing of legislation, and that is where secondary legislation has a role? I see nodding, which is good. In terms of bringing a little bit of greater clarity to and reinforcing the consultation process and the effectiveness of that secondary legislation to make sure that it does deliver what it is intending and it is engaged properly with stakeholders, what would you like to see? If you could see something put into the face of the Bill that would improve that consultation process, that would improve the development of secondary legislation, what would you want to put in?

Chris Bennett

I think the single one thing would be impact assessments. So the need to run an impact assessment engaging with stakeholders consulting on it, and following that process of an impact assessment, deciding whether the likely benefits were likely to outweigh the costs. I think that is right. I think that would be a potential addition to the legislation.

Chair

Would the rest of the panel agree with that one aspect?

Tony Glover

Yes.

Chris Veal

Unsurprisingly, I don’t think I would. I am not quite sure what this project impact assessment is going to do that a normal consenting process is not going to achieve in terms of what the impact of a development on a range of stakeholders is going to be. What we are talking about here is who is going to deliver the project, which is typically something that does not have a big impact on the stakeholders as to which particular party owns the asset at the time. I think there is a risk that if you require another consultation on another aspect of this project some of the risks that we talked about earlier, about delays and introducing extra time into this process, means that this process is more likely to delay the project as a whole, rather than speed it up.

Chair

Mr Bennett, come back and help us.

Chris Bennett

If I go back to the independent report from Frontier Economics, if there are delays associated with introducing a new process, which by definition will take time and will introduce additional hand offs, one of the statements was £1.5 billion if it was a nuclear station a year late. The other one was the potential impact on the financing of a generator. Even if the delay does not occur, if there is a perceived risk to investors of an increased risk that could impact on their project, that equally could have a cost as well. There is a real example here. The offshore regime, it was the generators who were really worried about delays to their projects that led to the changes to the rules there that enabled the generators to build the assets themselves. There is real precedent here that people, generators, investors, are worried about delays, and there is real evidence that if delays did occur the cost to consumers could be quite large.

James Heappey

The leftward glances when National Grid were talking about consultation with communities and visual annuity that suggest that you know I have some experience in this area. It seems to me, Chair, that the Government might be missing an opportunity to—because the employment of the different types of pylons means that you have different runs of cable between those pylons. Therefore, different companies might be coming forward with different technologies for the same solution, and the competition should come ahead of the planning process with a competition of concept, and price, and impact on the environment. Otherwise I fear that, as we have just seen with the Hinkley connection project, National Grid will state the requirement using their own blinkered, not listening to anybody way, as we have seen in Somerset, and then others will be invited to build the line that they have chosen to prescribe. You are not going to agree, but I—

Chris Bennett

I am not going to agree with the Hinkley example. What I will agree with is we have said in our responses the Early model, rather than the Late Model, which would have the system operator saying what the requirements are but not doing the detailed engineering and getting consent, does open up more scope for innovation and opens it up more to the market to put forward alternative solutions. The Early model I personally believe is where the value would ultimately be to consumers.

Chris Veal

Can I just come in? I think I would agree that the Early model does give much more scope for innovation and for value to be added. But I think as may have been said, this is a new regime, there are always uncertainties associated with introducing something new. I think what Ofgem and the Government are proposing is to start with a Late regime, to introduce it in a slow fashion, and move into an Early regime as things get bedded down. I think that is a very prudent approach.

Frank Mitchell

Let me bring it back to communities. For all the reasons we think the Early approach is the best approach for the value for the British consumer, to get the best value of innovation, equally for communities they all know who they are dealing with. They all know who they are dealing with, and they will look them in the whites of the eyes, and what that means for the communities, what that means for mitigation, what that means for construction, what that means for villages, what transport is going through it, all your vehicle plans, they will be dealing with the people who ultimately deliver it. Under the Late Model it will be very difficult for anybody and they actually do not have this capability, because it is not part of their core competency to do this work, to talk to villages and say, “This is what we think should happening, but of course we are not the ones who are ultimately going to construct it.”

James Heappey

That is a very interesting point, because the devil was absolutely in the detail in the Hinkley connection project consultation, and that sort of detail, the construction detail, the planning inspector spent months agonizing over. I am not quite sure, for all that you say, Mr Veal, about the prudence of going forward tentatively, surely you prolong the planning process by there being the initial statement of requirement, and the environmental assessment, and presumably some sort of consent order to proceed with that, and then a further planning process that will need to be scrutinised in some detail by the planning inspector over the detail of the construction and the impact that will have. That seems unworkable to me.

Chair

I am going to leave that lengthy question hanging there at the moment, and we will come back to that later. Glyn Davies.

Glyn Davies

Yes. I want to hear something, but I am being a bit repetitive in terms of what we are asking generally, the Government having taken an approach where they want to eliminate delay, and it is featured in one or two aspects of what we have been asking. Clearly from some of the answers you are not content about some of the issues that might cause delay. The Government’s view tends to be that innovation will bring the price down. There are people giving evidence suggesting that the delays can cause the price to go up. Are you content with the position the Government is taking on this, or do you think there should be some fundamental change in the general approach?

Chris Bennett

I don’t think you can say there will not be delays. I don’t think, likewise, you can say there definitely will be delays, and you cannot say that an existing transmission licence is immune from delays to projects as well. Yes. These are inherently major projects with risks associated with them. I think my main point is we need to really understand the potential risks of delay, and it is that assessment and understanding of that—these are material sums, if risks do materialise, that there needs to be that assessment. I don’t think you can say that there will not be delays associated with this process, and as the discussion just said, in terms of the scope for innovation, under the Late Model the majority of the thinking, and the design, and the consenting has already been done before you go out to tender. The scope for really driving innovation and quickening up the time I don’t think exists in the Late Model. It might exist in the Early model, but the sheer fact that you are introducing a competitive, tendering timeline that is sequential in approach will, by and large, increase the time to deliver projects.

Frank Mitchell

I was just going to add, even under the Ofgem consultation document, under both models they do talk to an 18 to 24-month tendering process. They think that can be mitigated in some planning approach that we can talk about under planning issues, but there is an 18 to 24-month process that Ofgem have in their processes that is not there currently. If it ultimately drives benefits, if it ultimately drives things we are looking for, then I think that is good. Under their prescribed processes that is what they have outlined as built into both the Early and the Late process.

Chris Veal

I think it is important to realise that is not a sequential process, that you do the planning, then you do the Ofgem tendering process. They are run in parallel. It is not an 18 to 24-month delay.

Glyn Davies

Can we learn anything from the offshore competition process we had? Can you learn any lessons when we are transferring the offshore transmission competition to onshore?

Frank Mitchell

Tony sits and chairs. We work and we work on the OFTO scheme. It is an initiative to facilitate that, but the current schemes were not built under this regime. They were built under generators not wanting to put the risk of their connection under this competition regime. They built them, and then there was a financial selloff of those assets later on in the project. Depending on where you were on cost-a-day, where your borrowing costs were as far as where you raise capital, then you could take a position on how much you wanted to pay for those assets to get a revenue stream. That model may exist coming here, but all I would say is the offshore construction that was done typically all have one customer. These are onshore, they will have multiple connections, and they will have communities depending on them. They are a different beast as far as the actual construction engineering-wise of what you would have for an offshore model.

Glyn Davies

One can see the difference there, but what lessons would you learn from the experience of offshore?

Frank Mitchell

You cannot directly apply the offshore model to what you are doing onshore, because engineering-wise it is different, and ultimately the financing of it was done at a time that just suited the project that was going on.

Chris Veal

There are a couple of things. There are many differences and it is not exactly the same clearly. There are some things that you can read across. There are two points I would make. It is not on the financing side; yes, the cost of capital depends on when you are trying to raise it but I would say that in the 15 competitions that we have had for OFTOs to date they have all gone to new entrant investors. It has been the new entrant investors that have been able to raise the lowest cost gap. Some of the incumbent TOs have sought to take part in that process but they have not been competitive. New entrants will drive down costs in capital. The other point I would make is that the incentives you put on these new transmission licensees are very important. In the offshore regime the incentives are on making sure the availability and the connections are as high as possible. These incentives have worked very well. Our assets have an availability of over 99.9% and we have had some assets for over five years now. So getting the incentivisation is right. That is true both for the operational phase but also in the delivery phase. Getting incentivisation right to deliver things on time is important as well.

Glyn Davies

Can I just ask National Grid? I do not know whether you think there is any need for clarification in the onshore tendering position that you are in but if there is any need for some clarification is that likely again to lead to delays?

Chris Bennett

I am not sure what else to add in terms of what I have already said. There is clearly potential for delays. One of the areas I have already mentioned is the potential of extending the timelines. So I am not sure there is much more—

Glyn Davies

The role of the systems operator; does that need to be looked at? Is there any need for clarification of that?

Chris Bennett

Yes. In terms of particularly the Late Model, the Late Model is looking at putting new obligations and new roles on the system operator. Frank has already mentioned under the Late Model it would be the system operator within National Grid that would be doing the pre-engineering, would be doing the consent, so we need to make sure we have the capabilities to do that. We would also need to make sure that any commitments that we made during the consenting process, there was a way to make sure that those were followed through during the construction phase. Under the Late Model—the devil is in the detail on this—within the detail there is probably quite a lot of additional activities that the system operator would be undertaking. The system operator would have to do that and have to make sure we do not take our eye off operating the system and all the challenges associated with operating the system in the future as well, so plenty of challenges to overcome. Just to be clear, we are supportive of developing the detail of the regime. We have been proactive with ENA. We have been working with Ofgem and Government to try to overcome these challenges. We see our role as hopefully being constructive in putting on the table what the cost benefits and risks are. We proactively undertook—got Frontier Economics to do a CBA analysis specifically looking at the onshore regime because we had concerns we were relying too heavily on the offshore regime. So lots of these things, the industry, through the ENA working with DECC and Ofgem, can work through these issues. The question is: how quickly is this going to go into primary legislation and licences? It is more important to us that this is right and introduced quickly.

Antoinette Sandbach

I am quite interested because I have had the experience of the offshore and the onshore mainly through DNOs and also through Grid saying that they have to hold back capabilities. DONG Energy in North Wales brought an offshore project onshore. The complaints I had from constituents were absolutely minimal because they agreed straightaway to underground it. I have Scottish Power running a connection from an onshore wind farm to a substation where it took months, and there was a huge reluctance to underground, as a result of which lots of local residents were extremely upset. I have the same in Anglesey where National Grid effectively reserved a whole load of capability for potential offshore wind; that those licences were surrendered and is never going to be materialised. Do you think this Bill will maximise that opportunity, particularly for local people, in the impact of this infrastructure on local tourism businesses and local people? That is where the impact is although the electricity very often is being transported to big cities and in the case of the North Wales coastline it is into Manchester and Liverpool. Do you think this Bill will address those concerns and make sure, for example, that the DONG style thing where they could say, “We can come in and we can deliver that with minimal landscape impact”?

Chris Bennett

I don’t think this legislation will. On all major infrastructure schemes there is a balance to be made between visual amenity and cost to consumers. That is what we wrestle with in every project that we do and we are trying to get the right balance between the cost to consumers and the visual amenity. I don’t think under the Late Model anything changes in that regard. It would be National Grid’s role in the Late Model to make those choices of gauging with communities and then get through the planning process. In the Early Model, that is one of the debates is how much visual amenity is put in versus trying to drive down the costs. The challenges remain the same in this regime.

Antoinette Sandbach

The pricing, for example, there is one pricing used by National Grid for undergrounding but the reality is, it is the cost of delivering that in an urban area; it is very different from delivering it in a rural area. Your subcontractor was telling me that the prices used by National Grid were inaccurate in terms of what was being presented in consultation. Now if this kind of legislation lays that open and stops that kind of presentation being made then that must be a good thing because it minimises the impact on consumers and those that—it throws more transparency.

Chair

Will the legislation achieve that?

Frank Mitchell

I don’t think it will, certainly not in the Late Adoption Model. I do not know a specific case but ultimately, as our transmission operator get driven to a least cost solution for the GB customer and then you have to trade off visual amenity. I don’t think the synopsis of this issue, certainly not at a late stage, and what I would also say is that equally given that the—under the Late Model communities would not ultimately have a great deal with, it would be very difficult to achieve voluntary reliefs and you are going to drive yourself up through necessary reliefs and CPO much more because you just do not have that real information to give the communities that you are dealing with.

James Heappey

Clearly whether it is late or early to achieve that and the things that would have helped down in Somerset we should perhaps be pushing for a change to the Holford Rules as part of this legislation. Chair, those are the rules that govern the way that environmental impact is assessed when choosing where to site pylons.

Chair

Can I move on to the impact in Scotland. You were speaking earlier, Mr Mitchell, about the difference in planning. How can the draft legislation be amended to avoid any potential negative impact on Scotland due to that planning regime that you talked about earlier? I think Energy Network Association have also alighted on this point in evidence to the Committee.

Frank Mitchell

Why is that important right now? If you look at the thresholds that have been set for where this might apply. First, in case people forget, we think this is a good thing to do and we think it is a good opportunity for our business, and we want to work it right. But within Scotland the threshold for a project for hydro-transmission is £50 million, SPT is £100 million and for National Grid it is £500 million. That is set to 2021. That means the vast majority of projects are going to end up in Scotland in the early stages of this process. GB constraints are around about £332 million a year in new charges. That is a big cost to the GB customer. Two-thirds of that is due to constraints of transmission within Scotland, we have a very constrained network in Scotland dealing with the masses of generation that want to come on to it. When we look at what is being proposed and we try to work it through under the context of planning legislation in Scotland we cannot get very far. We cannot get very far in understanding how this is going to apply under section 37 Electricity Act, section 57 Town and Country Planning (Scotland) Act, environmental impact assessment, voluntary reliefs, necessary reliefs, compulsory purchase. We would not profess to be experts in this but I would refer you to the Scottish Government’s response where they quite clearly say this needs to be properly thought through in the context of the devolved planning legislation in Scotland. As it stands, planning will have to be reapplied for once the actual delivery companies are recognised because of not a way to—for much of what would have to be approved to transfer those rights. It has to be reapplied for. If you look at the Scottish Government’s own response to this issue, it points to we need to have a very detailed review, including many other stakeholders that are involved in this to make sure we get this right. Unless we are going to end up probably adding another 15-month to 24-month delay potentially and what that means for the constraint issues.

Chair

So given that we are at the moment engaged in the pre-legislative scrutiny of our Westminster Bill, what can be done to this draft legislation to address the problems that you have highlighted there?

Frank Mitchell

In some way I would like to say assurances that—broadly with the DCO in England and Wales obviously there are some concerns around what it means for communities, but it has to be a bit more structured and recognising there is devolved planning legislation in Scotland and whatever is happening in the context of this Bill has to recognise that and work within that context. I don’t think it addresses that at all. We have not seen anything that you addressed in the primary legislation, not even in any of the consultation to date addresses that substantively. That needs to be looked at in the context of this legislation.

Tony Glover

It appears it might have been overlooked. That is a serious concern.

Chair

An example of something I have some sort of knowledge of is an interconnected for renewable energy in the Scotland Islands would happen to be in the SSE area. Will this legislation enable you to tender for that and would you be interested in tendering for that, do you think that would bring some economies to that proposed link?

Frank Mitchell

Our preference would be to do that under an Early Model because that point we can get into the design of it and the capability to construct it in a way that most bring real value to the GB customer. Doing it under the Late Model ultimately you are down to whether you can competitively tender the construction piece a bit better than somebody else’s marginal benefit. I would encourage the Committee to focus on if we are going to put this in to get the benefit of the GB customer by focusing on the Early Model and we would be interested in doing that, to bring the efficiency benefits we deliver elsewhere.

Chair

Do you look forward to some of the opportunities this Bill can give you to do exactly that in areas you have not been in before?

Frank Mitchell

We were already recognised as the most efficient transmission business under RIIO-T1 by Ofgem and we think this gives us great opportunity to extend those efficiencies across GB. But it would be wrong to do it if the detail was not right, because ultimately it would be counterproductive to the industry and, more importantly, counterproductive to the consumers in GB because it would end up increasing prices rather than reducing them.

Dr Poulter

This legislation includes provisions to allow tendering for distribution networks. I think it is on the basis that there is effectively a blurring of the distinction in transmission and distribution in the future. What are your views on that?

Tony Glover

I said at the beginning that did come as quite a surprise to us that it was included and has been referred to by colleagues. ENA has been—

Chair

Does it appear to be an afterthought?

Tony Glover

We have been told that the inclusion of distribution assets is about future proofing the legislation, as I think I said earlier. There are no proposals to transmission and distribution assets in the near future. That is what we have been told. But it is the fact that we are all having this discussion and there is a lack of clarity about this that is a cause for concern. The cause for concern for our members is this should not impact on the current price control, which is underway. We already have elements of connection competition at distribution level and indeed, as ENA, we have co-ordinated a competition in connections code of practice to standardise the process so that customers can deal on a level playing field on a very straight national basis. That has been very well received by those we deal with and by Ofgem and DECC. That is a positive, but what we are concerned about is that there is a total lack of clarity about when this inclusion will be applied other than not in the near future. I think we need something explicit and in writing that is clear about the intentions of DECC and the Government in this respect.

Dr Poulter

You mentioned you want something in writing. Would you want something else put on the face of the Bill? Would you want that in the explanatory notes?

Tony Glover

Yes. I think it would be good to hear from the Minister.

Dr Poulter

The Minister’s word is only as good as what is said in the House. The legislation is what—

Tony Glover

Then we would like to see something in writing, yes, to that effect, within the explanatory notes.

Dr Poulter

What would you like to see?

Tony Glover

Something in the explanatory notes, something— Q95 Dr Poulter What do you want to see?

Tony Glover

I think we would like to see that this regime will not apply within the current price control process, which is RIIO-ED1 that is underway already and goes through into 2023, so certainly not before that.

Frank Mitchell

I don’t see why it is there at all. I don’t see any gap at all. There is already a section 52 under the licence where we have to facilitate competition. I think it confuses people. It is something that looks very speculative in nature and may be delaying the process because it has not been consulted on and I think it is just causing more confusion. I don’t see the need for it to be there at all. Rather than having to qualify it, I think there is no need to do it. That is not to say that at some point in the future it can’t come back on to the agenda but we can’t see any benefit in having that in there at all. It just causes confusion.

Dr Poulter

So you would like to see, at the very least, further consultation on this before something was firmed up in a full Bill?

Frank Mitchell

I think so but unless that can happen—and I am not aware of the timetable that is addressing that to do that properly. Rather than not do it properly, I would just remove it because I don’t think it really adds anything to the conditions that are already there. I can’t see what it adds.

Tony Glover

Despite the fact, as Chris will confirm, we have been having a lot of discussions with DECC and Ofgem and the key players over the last year or so, this has never been on the table. This has come on to the table at very much the eleventh hour. There has been no consultation, no discussion about this. At the very least, we have concerns, as I said, about the impact on the current price control period. Certainly looking at it, it seems to be something that the future proofing is not for the near future. It does seem slightly nebulous. Clarification on this is urgently needed and, as Frank says, if they cannot clarify that then it probably should be left for future legislation.

Chair

It has been put to me that the distribution should be included in the impact assessment. This was by representatives of Scottish and Southern Energy. Would you agree with that?

Tony Glover

Absolutely. It is not in there. That is the point. It is not in the impact assessment at all. We have talked about a few other overlooks and afterthoughts. This definitely seems to be an afterthought.

Chair

You are looking for no retrospective application either. You are aware of the period to 2023 and that should be left alone?

Tony Glover

Absolutely. That has to be.

Chair

A further point on retrospective. Anything retrospective could risk delays and undermine work that is already planned, and you also agree with that. I am guessing that any retrospective action would cause—

Frank Mitchell

On existing projects. There are a lot of projects underway just now before the regime but generally to try to apply a regime change halfway through a process is only going to be destructive. I think that is typically going to be an increase in cost and an increase in timescale and that is bad for GB customers and it is bad for the people who are depending on that infrastructure. For any projects that are in flight, you have to think about the context of whether this should be applied or not and in my view it would be no.

Chair

SSE said that the benefits to customers would be wiped from this and the cost, as you said, would go up and the cost would go to customers ultimately, which is ironic given what the Government say constantly about customers in the present time as opposed to customers in the future or whatever. You agree with that point, do you?

Frank Mitchell

I agree.

Glyn Davies

I just have one question I wanted to ask. It is part philosophical, part really addressing quite directly to this. What is wrong in principle with the idea of generators building, testing and operating transmission projects before they then transfer them to the operator; again, a competitive process? I suppose the part that drives this question or instigates this question in me is if National Grid has a major project it is in a monopoly position. It provides it and you take it or leave it. The process by which they do it is not subject to any sort of competition at all. If you think it is incompetent, it is dreadful, it is a waste of money—I am not saying it is—there is nothing you can do about it. It is just National Grid. I think the Government need to find some way of introducing competition into that process. We don’t think this has gone through a process of consultation but there has to be some way of dealing with and answering that kind of a question. You can’t just have a monopoly that can do what it wants.

Frank Mitchell

Maybe some thoughts on that and then I will hand over to Chris. Right now there is nothing stopping a generator building a transmission connection. That exists just now. The point is it affects the backbone of the transmission network through this legislation and they can start to impact other generators by doing that. I think that is a conflict of interest that has not been resolved in this model and how that is going to work. If generators start to do construction work, that affects the backbone, affects other generators. Right now they can make that connection themselves and construct that themselves. Equally well, if we do a quote for a connection and anybody thinks that quote is that too high or unreasonable, they have the ability to appeal that quote and get it tested. That exists just now. Thirdly, the regime we have in the UK—and we can criticise all we want—has delivered the lowest cost grid in the whole of Europe. That was tested by this Committee and its predecessor Committee already and verified. We can be critical of it and, as I say, I think competition is a good exercise of bringing some new insight if we do it correctly. If we do it wrongly, it will be counterproductive, but I don’t think you should lose sight of the ability the generators have now.

Chris Bennett

I don’t think anybody is saying that there are not potential benefits in competition. It is about getting the regime right. In the debate we had earlier, the potential value here is probably in an earlier model that does open more of the chain for different innovative solutions. We are working with ENA, Ofgem and DECC. This is absolutely an area that we should be exploring to try to introduce competition to drive benefits to consumers but it needs robust impact assessments and it does need the cost benefits and the risk to be assessed, but where looking through that process there are potential benefits, then we are absolutely up for competition with Frank and the rest of—

Glyn Davies

What do you think inspired DECC to bring this forward? They are bringing it forward very late in the day. It has come as a surprise to many people. I know trying to imagine what drove other people’s thinking is a strange exercise, but what made them bring this in late?

Chris Bennett

I don’t think necessarily it is late. I agree with Chris that there have been conversations around it. The question is around the detail of the regime. As a principle of introducing competition, everyone agrees competition generally brings benefits to consumers. The concept of competition, trying to reduce financial monopolies are all absolutely valid areas and DECC did flag it up with Ofgem a while ago. At the moment, though, there is still a lot of work to be done on the detail of how these major infrastructure projects will be delivered under the competitive regime and it is through the detailed regime that benefits will occur to consumers. If we don’t get it right then those benefits won’t occur.

Chris Veal

Can I add on the generator point that I agree with my colleagues? It is not right that the generator builds part of the backbone of the system where other users might be using that same piece of transmission infrastructure because what the generator does could have an influence on other users of the system. I must admit, I don’t think that is the intention of what has been introduced here, but I agree it should be clarified. I think the intention is that generators would only be able to build sole use assets, assets that only they would use and not everybody else on the system. It is very much akin to what happens offshore where a generator builds the sole use link between the offshore wind farm and the onshore grid.

Chair

Thank you, panel. The afternoon has thinned out a little from the crowd we had at the beginning. As I did with the previous panel, I would like to ask if there are any final comments you might want to make on the draft legislation, or indeed any changes you would like to make. If you can be brief, that would definitely be appreciated.

Chris Veal

I will start. Just to reiterate what I have said, I agree that the major benefits of this should come with the early model eventually but because of the fact it is a new regime it makes every sense to introduce this in a measured way and for Ofgem to do the late model first and then extend it into the early as and when experience is gained on how to do this without causing any delays, for example.

Frank Mitchell

One area we did not touch on from the legislation was the key of last resort. I think that is worth looking at to make sure that if a project finishes or the company building it goes bankrupt—and I think there is concern by the policymakers in the middle of that—who picks this up, is an issue that has to be looked, owner of last resort and how that is properly dealt with. You can’t pick up something at a cost that was probably undeliverable to start with, so we need to make sure we address that in some of the legislation to clarify it. The lack of detail is a concern to me and we have touched on some of it, not all of it: issues to do with if you are replacing existing assets who bears the risk on that existing asset in supporting cities and towns out there; issues to do with how these things are going to operate together in the future; how that fits into the context of black start regimes. All these issues are very detailed and important and fundamental from a supplier’s point of view and also from a constraint point of view for GB customers. All I would encourage is that we move forward. We want competition, but we should give it sufficient time to iron out this detail and not be having false timelines put in front of us that ultimately will end up costing the GB customer more.

Tony Glover

I would reiterate all those point, but as I began I shall finish. We are strongly supportive of competition; we are facilitating; we have been working with the players for well over a year now. To answer the point that this has not come as a surprise, I think the problem is that there is a lot of detail racing up at the last minute that we have not looked at and we don’t understand because there is a lack of clarity around some of these proposals. I would say about competition that it is not an end; it is a means to an end. We need to remember that at the end of the day we are about meeting the interests of the consumer, in terms of costs and other issues around environmental impacts. Those considerations need to be what the end is all about. Competition has to facilitate that. If it does not, if it increases costs, if it increases delays, if it reduces consultation then it is not going to work, so we need to get that right. The one thing is, as they say, less haste, more speed. We need to go forward speedily but we need to not rush without getting that level of detail, and we don’t have that at the moment.

Chris Bennett

I am conscious of time. I agree absolutely with what Frank and Tony said. The only thing I would add is that it is worth considering project assessments, impact assessments. Some of these projects do need, on an individual basis, to understand the costs, the benefits and the risks. I think that is a potential amendment to the legislation to ensure that robust impact assessments do take place.

Chair

Panel, thank you very much. The purpose of this is to try to ensure that we get better laws and better information and people like yourselves who are stakeholders in this are hugely important in that process. Thank you for your afternoon today. Oral evidence: Pre-legislative scrutiny of the government’s draft legislation on energy, HC 776 26