Oral evidence: Pre-legislative Scrutiny of the Government’s Draft Legislation on Energy, HC 776Tuesday 22 March 2016

Oral evidence, 22 March 2016.

Witnesses

Lord Bourne of Aberystwyth, Parliamentary Under-Secretary of State, Department of Energy and Climate Change, John Fiennes, Director, Energy Strategy, Networks and Markets, Department of Energy and Climate Change, and Daron Walker, Senior Responsible Owner, Smart Meters Programme, Department of Energy and Climate Change, gave evidence.

Chair

Can I thank the second panel for coming this morning? Your attendance is appreciated. Can we ask you to state your names and organisations, please, for the record?

Lord Bourne of Aberystwyth

Lord Bourne, Minister for Energy and Climate Change in the House of Lords.

Daron Walker

Daron Walker. I am the Senior Responsible Owner for the Smart Meters Programme.

John Fiennes

I am John Fiennes, the Director of Energy Strategy, Networks and Markets in the Department of Energy and Climate Change.

Chair

Can I being with the issue relating to smart metering? The Department says it is necessary for the Secretary of State to continue to be able to intervene in the smart meter programme, in licensing and industry codes, to drive the timely combination of rollout of smart meters and delivery of benefits during early operations once rollout is complete at the end of 2020. The industry has significant concerns about this so we are looking for some reassurance. Can you reassure them?

Lord Bourne of Aberystwyth

About the delivery date?

Chair

Yes.

Lord Bourne of Aberystwyth

Certainly I can. I meet with Big Six suppliers on a regular basis, and indeed other suppliers beyond them, and we are firm on the 2020 date. The rollout is proceeding at that pace. We now have more than 2 million smart meters in store and that will ramp up during the course of this year and particularly next year, so we do think it is on course. Obviously with any project of this size it does not come without risks. That is clearly the case with a national programme like this but we are alive to that and we do everything we can to address those risks as and when they arrive.

Antoinette Sandbach

There were particular concerns about the Secretary of State extending her powers beyond 2020. If you are on target, why do the powers need to be extended beyond that period, even though the industry accepted that the Secretary of State has never inappropriately used her powers to date? Is it reasonable to extend the Secretary of State’s powers beyond 2020?

Lord Bourne of Aberystwyth

I think it is. If I may say so, there is a conflating of two different things there, the 2020 date and the date when we need the ability to address things that have arisen in the course of the programme. Delivery will be completed in 2020 but a year after that we undertake to review the whole programme to see how it is affected. There will be an issue like people who have refused smart meters, and we accept there will be some of those who may have changed their minds, who may want to revisit that. We will need to address things like that. There will be things that will help us progress to smart grid, like peak load shifting and so on. These are issues that will arise after 2020 so we will need to continue to have the power of the Secretary of State to keep driving the programme to make sure we get maximum benefits. Our best estimate of how long that should go on is towards the end of 2023.

Antoinette Sandbach

It is about an outcomes-based approach? The requirement for that additional period is about driving the outcomes from smart meter rather than the delivery of the smart meter rollout itself?

Lord Bourne of Aberystwyth

Yes. I think you have put it much more crisply than I did. That is true.

James Heappey

I would like to move on to some of the issues relating to switching and settlement, in particular Ofgem’s powers to modify codes. EDF says the current process, involving a neutral code administrator and independent panel members, is more transparent. How do you respond?

Lord Bourne of Aberystwyth

I think the essence of the powers in the draft legislation in relation to Ofgem being able to drive the process on switching and settlement is very much to making it a more streamlined system. At the moment that process, without this legislative backing, could take two and a half years. With the short circuiting of some of that process, if I can put it that way, it will still take a year, so it is still quite a long process. Given that the Government believe and I am sure consumers do, that switching and early settlement are very good things, we don’t want it to be subject to unnecessary delay, which a major code review could be. So that is what is behind the thinking.

James Heappey

A recent paper co-authored by Professor Catherine Mitchell recommended code governance be placed in the hands of a dedicated code management body rather than Ofgem so that Ofgem can concentrate on the economic regulation. How do you respond to that?

Lord Bourne of Aberystwyth

I think the Government believe that Ofgem is the appropriate body. We do not see the need for great growth of additional bodies and additional regulators. Ofgem do a very good job. We are convinced that they are the appropriate body. We do look at alternative views on that but so far as we can see they are the appropriate body for carrying this forward.

James Heappey

Given the Government’s statement in last week’s Budget Red Book that it wanted to ensure Ofgem could focus on its core functions of economic regulation and promoting competition, does the idea not have some merit?

Lord Bourne of Aberystwyth

It is right to say that we are trying to give more focus to what Ofgem do. E-Serve will come within the Department because we think that sort of advisory function is more appropriate for the Department but with something of this nature, given Ofgem’s experience here, we believe they are the appropriate body to take this forward.

John Fiennes

Perhaps I could add one or two things to that. We had the Competition and Markets Authority come out with its provisional decision on remedies very recently and it did cover code governance in that. I think it is quite clear that they are seeing that as a system that is absolutely at the heart of how competition operates, which is why it has addressed it in its provisional decision on remedies. It thinks the current system limits innovation and it fails to keep pace, and its conclusion was that Ofgem should be given powers to take “substantive control as appropriate”. It plainly sees that as the direction of travel that we should be going in for competition purposes. I think it is wrong to see the operation of the codes as something that is somehow peripheral to how the markets work. It is absolutely at the heart of how the markets work and, therefore, should be core functions of what Ofgem does. It will always be the case, of course, addressing your point on transparency, that Ofgem will want to work very closely and very transparently with experts from industry, and this is way in which the powers are framed to enable the powers to achieve the movement that consumers need in the expectation that will unlock co-operation and work with industry while not losing out for the consumer. That is the balance we are trying to strike.

James Heappey

Let’s say the argument is won and Ofgem does this, we have heard concerns that Ofgem does not have the expertise to draft and implement major code changes. Have those concerns been raised with you? If so, what do you intend to do to address those perceived shortcomings?

Lord Bourne of Aberystwyth

We will certainly be speaking to Ofgem about that but the indications that we have is that they do have the requisite expertise. I do not think there is any doubt in our minds that they do. I have heard such concerns, but I think they have the appropriate expertise.

James Heappey

Finally, just on the right of appeal, why doesn’t the draft legislation provide any appeal rights to licensees or code parties over and above standard judicial review proceedings?

Lord Bourne of Aberystwyth

Of course there is an appeal to the Competition and Markets Authority in relation to any variation of licensing, but otherwise the appeal is by judicial review and we think that that is appropriate.

John Fiennes

I think you only have to read the CMA’s provisional decision to see the extent to which they see the importance of Ofgem being able to make swift progress. We are trying to strike the right balance here between the right checks and balances for the parties concerned but also defending the interests of the consumers. This is something that has been well argued over through the CMA process and I think you can see where they are ending up.

Antoinette Sandbach

Do you have evidence of the Big Six using their current appeals process inappropriately?

Lord Bourne of Aberystwyth

I would hesitate to say that they would use it inappropriately. I don’t think we have evidence of that.

John Fiennes

I don’t think I am saying that. We would say that the experience of the significant code review has been that those move very slowly and too slowly to defend the interests of consumers adequately, and I think that is where the CMA are as well. But it is not that we are pointing to a particular instance now and saying, “That was plainly the wrong thing to do and that was a tactical move”. The thing about the codes is that they are, as the previous question implied, quite extensive and quite complex. How do you know—

Antoinette Sandbach

Sorry to interrupt you. What I really want to know is are you attributing delay to the appeals process as part of that extended timeframe in terms of the code reviews?

John Fiennes

I think we are recognising that the significant code review process is overall too slow and it needs to be faster at every stage, which is why we have a set of proposals that address it in the early stages, giving Ofgem the power to intervene, and a proposal to limit it to judicial review when those code decisions have been made at the later stage.

Antoinette Sandbach

I don’t see what problem you are trying to remedy though if the appeals process has not been used inappropriately and has not led to delays.

John Fiennes

I don’t want to say this is what has happened but if it were the case that industry who wished to slow things up felt they could do that through the initial stages of code development, then maybe they would not need to place so much onus on the appeals process. If the early stage moves faster then it may be the latter stage become more tactically important.

Antoinette Sandbach

The draft proposals that you have brought forward empower Ofgem to enable or require half-hourly settlement. British Gas suggested before the introduction of any mandatory settlement there should be full cost benefit analysis of mandatory half-hourly settlement to understand the impact on different types of consumers. Do you agree with that?

Lord Bourne of Aberystwyth

First of all, we very much anticipate that Ofgem will be consulting with the suppliers and with other interested bodies before this is implemented, so we accept the need to do that. In terms of a full impact assessment, I think we would be expecting to see something.

John Fiennes

Our approach is do elective first with the barriers removed by early next year and then make a decision on the timing of mandatory. I don’t know exactly what the plans are. We can write to you with that, but I would be extremely surprised if there was not a lot of information about why that decision was made at the time.

Antoinette Sandbach

Utilita told us that industry administration charges were a deterrent to half-hourly settlements and that if these were removed there would be less need to mandate it. Have you considered that point?

John Fiennes

I am sorry, I missed the question. Do you mind it saying it again?

Antoinette Sandbach

Utilita told us that industry administration charges were a barrier to half-hourly settlement. Have you looked at removing those because that would encourage much more half-hourly settlement? Have you considered that point?

John Fiennes

Ofgem is doing the detailed work on the barriers that need to be removed to enable elective first and subsequently mandatory. I am sure it will have had that point and is considering it, but I can’t comment on it today from a DECC point of view.

Mr Carmichael

Moving on now to competitive onshore tendering and the draft legislation essentially enabling and the detail is going to come in secondary legislation. Indulge a recovering Whip here on some points on parliamentary procedure first of all. We understand you still have quite a lot of work to do on the detail of the onshore tendering regime. How are you going to be working with stakeholders to ensure that the regime is workable, efficient and clear?

Lord Bourne of Aberystwyth

First of all, you are right, there is certainly still work to do and this is in a sense enabling. We have the experience of the offshore competition, which has been successful, we feel, so we build on that. There are alternative models in terms of how we do the sale, whether it is an early or a late model, which will need to be considered and it could be that it is a mix of those. We come to that very much open-minded but we will want to talk, obviously, with all interested parties about this. Based on the experience, we believe it will drive down costs, it will be good for consumers, so we will want to talk about the details, you are absolutely right, but this is in a sense an enabling power to enable all of that to happen and we will have the experience of the offshore.

Mr Carmichael

The evidence we had from SP Energy Networks is that the criteria for triggering competitive tenders should include more detail including “a specific pounds million value for assets”. Are you going to do this with negative resolution procedure?

Lord Bourne of Aberystwyth

I wouldn’t have thought so.

Mr Carmichael

That is what it says in your explanatory notes.

Lord Bourne of Aberystwyth

On your question about the size of assets, I think we are clear that they have to be substantial. We are thinking in terms of £100 million is the sort of figure we are looking at.

Mr Carmichael

But that is not appropriate for negative resolution. There needs to be more scrutiny than that, doesn’t there?

John Fiennes

I think it depends how you are seeing this legislation.

Mr Carmichael

We will hardly see it at all if it is negative resolution.

John Fiennes

But this is the point. We have in Ofgem an expert regulator who takes a lot of decisions about what networks are to be supported and the mechanism by which they are supported. It does that in an independent way. The DECC challenge on this, the DECC task, is to define the legislation to allow that regulator to take those decisions in a proper way. This legislation is an expression of something that I don’t think many people would disagree with, that in the right circumstances having a competitive process gets you better price discovery than elsewhere and we believe that ought to be a tool that the independent regulator should have in their armoury to be able to respond where they think that is the right thing. That is a different question from how tightly does Parliament wish to scrutinise the decisions that the independent regulator takes. Part of the point about the independent regulator is that investors know that there is not detailed ministerial and parliamentary oversight of all their decisions. That is what underpins confidence in the regime, low cost of capital and, therefore, consumer benefit. What I would say is you need to satisfy yourselves, I would suggest, that this is an appropriate tool for the regulator to have and then to think carefully about how much intervention you wish Parliament to have, recognising that it may have countered any disbenefits if it looks like we are politicising a process that has not been political up to that point.

Mr Carmichael

You set it up using negative resolution. Ofgem then go ahead and develop the details of the tendering regime and they submit these details back to the Secretary of State. It looks to an outside observer as if you are trying to cut Parliament out of this whole process.

John Fiennes

From memory—my team will doubtless correct me with a note in a moment—is that this is the process that was already agreed for the offshore regime and at that stage people—

Mr Carmichael

Do you think that just because it worked offshore it is necessary to transfer it to an onshore regime?

John Fiennes

I don’t think that argument necessarily follows, but in this instance we think that it does. We think the assets are sufficiently similar and the process will be sufficiently similar to justify the same treatment.

Mr Carmichael

If you are wrong about that, how do we know about that in this building?

John Fiennes

I am sure you will wish to scrutinise the operation of the onshore regime just as you have on the offshore regime previously and we will be here answering for it.

Mr Carmichael

Would you look again at the question of the negative resolution?

Lord Bourne of Aberystwyth

Yes, bearing in mind that even on negative resolutions there are powers for both Houses to call those in. It is not as if there are no powers in relation to negative resolutions.

Mr Carmichael

Could you give us a flavour of how you think Ofgem is going to go about this work? National Grid says it is critical that all relevant stakeholders are fully engaged in the decision-making process as to whether an asset should be contested. We explored some of this with Ofgem in our earlier session. How do you expect it to engage with people to determine the details of the bidding process and this point about whether it is going to be competitively tendered or not?

Lord Bourne of Aberystwyth

Once again, we have the experience of the offshore competition to draw on. We have the fact that there has been considerable consultation, talking to industry and potential bidders, already in terms of the way this will operate, but clearly what we are looking at here is an enabling power. It is not as if this is all going to roll out very quickly. There will be time to look at this in more detail and I don’t think we have any of the detailed consideration in mind as yet, I think is is fair to say.

John Fiennes

I understand that you asked Ofgem earlier what would it do if it didn’t want to run tenders any more. Exactly as the Minister says, this is enabling legislation that uses “may” rather than “can”, so it provides a tool that Ofgem has the scope to do it where it thinks that makes sense for the consumer and for the assets but there is not an obligation for them to do that.

Chair

I am interested in these thresholds for the strategic wider works and I note that there is £500 million for England and Wales, £100 million in one part of Scotland and £50 million in another part of Scotland. It might seem strange but as an SNP member I am a bit concerned that consumers in England might not end up getting the benefits of competition as early as the Scots are getting the benefit of this competition. Why are these thresholds different and what do you think the effect on consumers might be?

John Fiennes

I was sitting at the back when I heard you questioning Ofgem about that and I think they explained the position than I can. The thresholds were volunteered by the companies concerned in the knowledge that there may be assets to which the competitive process may be applied. The benefits to consumers are in two ways, one of which is the financial savings that may come if we have better price discovery or an innovative way of solving a transmission or a distribution problem in future. The second way in which you may get benefits is if innovation in the process or the technology applied actually provides a better service to the generators concerned.

Chair

Do you share my concerns that the good people of England and Wales might not see the benefits as quickly as the people of Scotland?

John Fiennes

I was coming on to that. The financial benefits, it seems to me, should be shareable through the transmission regime more generally. Of course then there are the innovative benefits of different technologies and if someone is able to complete a connection north of the border using a different technology and as a result the Scottish generator gets connected a little bit faster than a generator in England, that is the way the cookie crumbles.

Chair

Let’s say the project is valued at £200 million. The Scottish consumer could see benefits at a level that the English consumer and Welsh consumer could be disadvantaged at under these thresholds.

John Fiennes

I think the answer to your question fits into two parts. The first part is who is seeing the financial benefit of the competition. If the consequence of the competition is that the national GB system of transmission costs are lower then it is not clear to me that that benefit is limited only to Scotland. Again, my experts will correct me if I have got that wrong. In other words, if we can drive cost out of the system wherever it is on the transmission system because of the way the regime operates then there should be a more general sharing of that benefit. That does not mean that there is not a generator in England who says, “If you had completed this asset and they had used the technology then I would have got my connection faster and that would have been better for me”. That is the way that it is and that is a consequence of the different companies taking a different view of these thresholds through the RIIO process. But in a way that would be a very nice problem to have. If this competitive process exposes a lot of new, different and better ways of building transmission assets and generators wherever they are in Great Britain bang on the day and say, “We want a slice of that”, that will be a terrific success. I am sure Ofgem will be the first to come back to us and say in that circumstance, “Can we widen this and can we apply it more generally?” We are not there yet. We think there is enough evidence to show that we should give this a good go. We think Ofgem have developed this patiently over a number of years and now is the right time to move on it, but we will cross that bridge when we come to it.

Chair

If the Ofgem assumption is correct that competition drives innovation, innovation will be driven furthest and first in Scotland if indeed that is true.

James Heappey

I do not know if this panel was in the room when I was asking the last panel about the planning issues around the early and late models. We have heard that the late CATO model for onshore competitive tendering will mean potential operators have less opportunity to innovate in design, to engage with communities and to save on costs. Why do the Government prefer the late CATO model?

Lord Bourne of Aberystwyth

I think we are neutral on this. There are advantages to the early system and there are advantages to the late system. The early system, as it suggests. probably means that some of the benefits accrue more quickly although it has to be said that we may be able to attach late models to some systems that are already up and running where you could not get the early ones. Broadly speaking, it may be that there is a delay in the benefits coming from the late one. On the other hand, with the late one it does seem to create potentially more of a level playing field. It enables people who are not the incumbents perhaps to have a longer look at this, so we feel there may be consumer benefits, but it is horses for courses. The evidence from the offshore is probably that late is working there. That does not necessarily mean that it is appropriate here and it could be a mix of the two.

John Fiennes

I think they do different things for you. If you can see you have a need you wish to meet and you do not know if the answer is a wire of one sort or a wire of a different sort, or maybe even a wire combined with a battery or something we have not even dreamt of, then the early competition is the way to do that because that maximises the innovation in the system. If you have a situation where the technical solution is pretty clear-cut, that what you are wishing to do is to see whether someone can surprise you about the efficiency with which they can put that asset in place or the way in which they can finance it, then the late model makes quite a lot of sense because the nature of the competition is more about the financing and the delivery of the thing. In different situations these could be good for consumers in different ways. You will have seen the National Infrastructure Commission’s report on smart energy recently, which explains the extent to which the power system is changing and will continue to change with technology. That is the sort of world in which the early model is particularly important because it may be that in a world of more flexible demand and more storage the old dinosaurs of big overhead lines going from big power generator to a supplier may not be the most appropriate solution. We see allowing the prospect of early competition as being one of the enabling ways of getting new thinking into that.

James Heappey

Why constrain yourselves by plugging for the late option in this draft legislation?

John Fiennes

I don’t think we do constrain ourselves.

Lord Bourne of Aberystwyth

I don’t think we do.

James Heappey

So the early option is as much in your thinking right now as the late option? We are likely to see legislation come forward that means that for projects that are currently in the pipeline, so where the planning consent has already been given, the late option will be applied and there will be competition for who can build that plant the cheapest but for all other things coming forward in the future the early option will be applied and, therefore, there will be competition over concept not just construction price?

Lord Bourne of Aberystwyth

I think it is fair to say that both are in play. We are open on this. We can see advantages, as has been indicated, from both systems according to the circumstances. We wish very much to keep open that element of any—

James Heappey

I am sorry but I was quite specific in my question. There is a late model for those projects that are already in the pipeline, which I understand was a consideration, but that for any projects that have not yet started out there will be an early model applied and there will be competition over concept not just competition over construction costs?

Lord Bourne of Aberystwyth

When you say early model applied, I think it is open for an early model.

John Fiennes

Subject to parliamentary time. Of course, we don’t know when these clauses will be included in any Queen’s speech. We expect to bring proposed legislation that will allow Ofgem to adopt the appropriate, the best answer for the consumer in the particular circumstance. I would not expect it to be sufficiently firm to say it is early model in all these circumstances and late in those circumstances.

James Heappey

Why not?

John Fiennes

Well, because we do not believe in tying the regulator’s hands. It is an independent body, best placed to take those decisions.

James Heappey

What would Ofgem’s riding instructions be for choosing in which circumstances to apply the early model and which circumstances to apply the late model?

Lord Bourne of Aberystwyth

They have to consider elements like the benefits of innovation and benefits to the consumer, but I think it is going to be much more on a case-by-case basis than the generalised position that you are suggesting, that it is 90% one and 10% the other. I think we are looking at it being more flexible than that.

James Heappey

Can you reassure that the application of the competition over concept, the early model, will have just as much in mind the visual impact and the impact on the environment of certain transmission systems over others. My experience, as you heard earlier on, is the Hinkley project and what worried me is when you said where there is a clear technological solution. In National Grid’s view there was only ever one solution for that connection project, which was overhead. I would like to see a competitive process that yields both a saving to the consumer through making the planning and construction costs cheaper but also a competition over concept so that we can deliver transmission in a way that is less environmentally damaging, wherever possible, also.

Lord Bourne of Aberystwyth

Just as on Hinkley, we do not override the planning legislation. That would be a relevant consideration for planning purposes.

James Heappey

We are talking about what comes in the future and your ability to facilitate, to learn from mistakes at Hinkley and other projects besides. There is a danger that unless it is made clear that there should be competition over concept, the easy technological solution, which is overhead, will be taken more often than not. There is a real opportunity here to achieve both savings for the consumer and a change in the way we do transmission. I suspect it needs a lead from Government through legislation rather than just leaving it to Ofgem.

Lord Bourne of Aberystwyth

With respect, isn’t that a consideration for planning law? I don’t accept that we did make a mistake in relation to planning on Hinkley, but if there are considerations like that it opens up a whole new area of planning law. It isn’t specific to this issue of an early and late model.

John Fiennes

I would make three observations in response to your question. The first is that whatever solution people come up with will need to comply with planning law in the normal way, and so the protections will apply. The second observation is I believe you are right to say that having the potential for an early model of competition can help to widen the range of things that are considered, some of which may be more acceptable in planning terms and for local communities than others, and that is a relevant consideration. The third observation is that we know or we can see that the early model may advantage the incumbent providers in this market more than new entrants. Particularly if an incumbent is able to deploy its engineering and history here you may find that the early model of competition does not meet the hopes that we may have for it. Suppose in five years’ time we have this legislation. We have had one or two bids for the early model but the power of the incumbents has shown that it is incredibly hard to make that stick. At that stage is it possible that Ofgem will be saying, “Here is an asset that, although I would have liked to do it through the early model, I am not convinced there will be sufficiently strong competition from the incumbents and it is better for consumers to adopt the late model of competition so we can at least drive out a competitive benchmark for the financing and delivery costs of these assets that, by the way, we can then apply to all the other assets onshore”? It is not impossible. I hope we don’t end up there. I hope that if we have early competition there will be this vibrancy. I suspect there will be but it is not impossible and we certainly would not want to write into the law something that makes it so rigid.

James Heappey

Siemens, for example, were chomping at the bit to be able to bid on the Hinkley project. They felt very much that National Grid were overstating the costs of going another way and they felt that they would have been able to do it better and in a cost effective way. My instinct is that what we may see is that other utility providers elsewhere in Europe will come forward with different concepts and different costs, but I am keen that this legislation fully harnesses that opportunity rather than stopping short and allowing the bailout of the late option because it is the more risk averse.

Lord Bourne of Aberystwyth

I think the points are well made. I would come back to the very basic point that this is an enabling power and there is an awful lot of work to do before it is made good, but the points are well made.

James Heappey

On the risk of delays to projects, stakeholders have raised concerns about potential delays of up to 24 months in projects caused by the introduction of competitive tendering. Will it be possible to mitigate delays by running the planning and tendering processes in parallel? What if one impacts on the other?

Lord Bourne of Aberystwyth

First of all, we have obviously seen these concerns. We do not accept that there will be this sort of delay. We would anticipate that this is streamlined. I can’t see why the two could not run together, to be honest. I don’t think there is any potential hazard there.

John Fiennes

I think that is right. We believe there is scope for parallel processing on the development consent order. We think there is scope for parallel processing on the supply chain engagement that you need to do for these last projects as well. Of course, there is also the test in which you are putting confidence in Ofgem that they will pick assets for which this is a sensible way forward. They have certainly been clear to us that they are not going to be picking assets where this is going to introduce massive new delay in a way that is going to cause problems. It is partly in the selection of projects and it is partly in working with the bidders or, if it is the late model, the person who is doing the early development in order to make sure it is as streamlined as it can be. We hope that with innovation and new ways of doing things we may also be able to shave some time off the delivery of these projects as well if we get those right. The wonderful thing about auctions and competitions is that you don’t know until you have tested it what people are going to be able to do, and that is really at the heart of the policy that we are proposing.

James Heappey

Projects that are already up and running and a connection date is set are excluded from this?

Lord Bourne of Aberystwyth

Yes, that is right. We hope to get this moving 2017, I think, in relation to transmission but in regard to those projects on distribution that are already up and running, clearly we will not want to affect those and will not affect those.

James Heappey

Witnesses have suggested that the legislation does not sit well with the planning regime in Scotland as it is going to be more difficult under that system to amend planning orders once granted. Do you agree that the draft legislation needs to be amended to ensure any potential negative impacts on Scotland, such as delays to a project, are avoided?

Lord Bourne of Aberystwyth

We are aware of the potential for the different legal systems operating in different ways. Officials are already talking to Scottish officials about how this will pan out, so we are keeping a watching brief on that. It is nothing that can’t be fairly readily overcome, I think, but of course the legal systems are different and have been for a long while, so we are conscious of that. As I say, officials are working together to iron out any potential problems.

Chair

Talking about the Scottish legal system, a former practitioner Alistair Carmichael.

Mr Carmichael

Not just a recovering Whip but a recovering lawyer as well. There is a lot of recovery to be done. I would like to look at the scope of competitive tendering and in particular the extension of competition to distribution. We have heard quite a number of witnesses giving evidence expressing, shall we say, a degree of surprise at the inclusion of distribution in the proposals for competitive tendering. Is this just future proofing?

Lord Bourne of Aberystwyth

We certainly are future proofing this. I come back to the point that on the distribution we will not be affecting existing arrangements so the timescale is obviously different from the transmission, but we are working through on the details to make sure that it is sound. It is very much future proofing to have it there in the legislation. We would have to follow up with more legislation.

John Fiennes

Exactly the same arguments apply as a matter of principle. Some distribution assets are extremely high value. As I mentioned, the National Infrastructure Commission has underlined the extent to which the distribution power system will change with demand-side response and storage. Therefore, we think that is a really interesting area for the innovation that we have been talking about. The current distribution settlement runs to 2023. We would definitely engage with industry, as Ofgem would, before we did any of this and there will be a control point for Parliament at the time when regs will be laid about those things. From the general point of principle, the notion that should the regulator have the ability to tender large, separable, high value assets in order to drive innovation and improve the benefit for the consumer, we think the answer is yes.

Mr Carmichael

The problem comes exactly from the very point that you just touched on there. It is when you are future proofing in 2016 with a control mechanism that is designed to last until 2023, the RIIO-ED1 I think—this may be a question more for the Minister—can you confirm that there would not be a competitive tendering process for distribution while that price control period is still there?

Lord Bourne of Aberystwyth

Yes, we can. That is very much our judgment.

Mr Carmichael

There would also be a new impact assessment for the provisions on the distribution were they to be initiated?

Lord Bourne of Aberystwyth

I think that is reasonable. I don’t think we have actually said that but I can say that now.

Mr Carmichael

It is difficult to see how you would survive a JR if you didn’t.

Lord Bourne of Aberystwyth

I think that is a very fair question and I hope a fair answer: we would do that.

Mr Carmichael

On the question of allowing generation companies to develop transmission links, it has been suggested to us that enabling generators to develop transmission links as part of a wider network could lead to adverse impacts on other generators. What view do you take of that? Can you tell us why that was not included in the impact assessment?

John Fiennes

We believe there is value in having a full range of tools for Ofgem, but this is an area where we are keen to get views from industry through the process that you are undertaking and we will be thinking very carefully about the points that they have made. I think we are more open-minded on this than on other points. The impact assessment is an interesting endeavour because, of course, we are trying to take a sense of how much competition of what sort might be made at points in the future and it goes from zero up to a lot, and we have illustrated all that. If people feel that having a generator temporarily owning this transmission is a serious problem for competition then of course we would factor that into the final decisions that we make. I personally think that is hard to see. It is not as if the generator owns this asset and will be able to push other generators off the asset that they own, for example. My guess is this will be a positive asset that—

Mr Carmichael

You say that, but we have had evidence from Spain, from National Grid, from SSE, all in their own different ways expressing concerns about this. It is not fanciful, is it?

John Fiennes

What I would be really interested in is a pure generator worried about what the consequence would be if there was a generator build option elsewhere. You need to ask yourself when these comments are made, are they being made from SSE as a generator or are they thinking about other elements of this problem. This is an area where we are very interested in the views that come out and I am not going to say where we are going to end up in the light of the comments that have been made to you.

Mr Carmichael

You are still some way from having a coherent strategy on the use of competitive on distribution, aren’t you? I can see lots of tactical uses of it here and there but an overall strategy?

Lord Bourne of Aberystwyth

We are certainly some way from that on distribution because, as we have said, we have the price control period. It is interesting that if this law were put in place what that would do to the behaviour of the distribution companies. They would probably know that competition was coming and maybe that will mean we could move more swiftly once this distribution price control is over. For the transmission elements, we think we have a pretty good model on the offshore side. By the time this Bill comes before the House, parliamentary time permitting, I would have thought we will have made more progress on that, but we think we have a good model that we are seeking to develop. As you say, there are some points of detail where we are very interested in the views of this process.

Mr Carmichael

How many years in the last 10 have we not had an energy Bill in a Queen’s speech or at some point in the session?

Lord Bourne of Aberystwyth

I have not been here for 10 years in post so I wouldn’t know.

Mr Carmichael

I struggle to think of any, seriously. It is all very well to say you are future proofing and you do not know when you will get parliamentary time. You have never struggled for getting parliamentary time in the past.

Lord Bourne of Aberystwyth

I am not sure that would necessarily be true. First of all, we don’t know that it will be this session and we don’t know it will be in an energy Bill. It does seem to make sense to us. I am sure we would have been attacked from the other side if having done this in a Bill, let’s say it does happen in the coming session, we then came back a couple of years later and tried another one on distribution assets. You probably would be here saying, “Why on earth didn’t you do this two years ago?” It is future proofing. We have the time to look at it. There are points that obviously need addressing but with regard to the general principle of competition and opening the market up and the benefits for innovation and consumers, we are convinced that it is the right thing. But there is still work to do, that is certainly true.

Antoinette Sandbach

Minister, can I come in on particular problems in relation to rural consumers? Very often their access to those competitive offers is limited because they are off grid, effectively, in terms of gas. They can’t access dual fuel deals. If DNOs are imposing high connection costs for alternate technologies, particularly renewables then they are in effect facing a penalty in trying to adopt that technology. The current RIIO-ED1 price period locks in that unfairness. In terms of the overall strategy in approaching 2023, will there be an approach that looks at the particular problems facing rural areas. It seems inherently unfair that those who can’t access the cheapest deals in effect face a double whammy in terms of connection costs from the DNOs.

Lord Bourne of Aberystwyth

A couple of points, if I may. First of all, on a more general point well beyond the Bill, we have indicated, as Government, that we are going to be looking to rebalance the costs of gas and electricity over time, and that will particularly help rural consumers who are off gas grid. I think that is good news. We are well aware of the problems for many rural consumers, particularly deep rural who are off gas grid, getting some of the benefits. It is the sort of thing that we would want to look at in the run-up to 2023 to see how we design that. Having said that, the Chairman indicated how Scotland may be getting benefit and a lot of those parts are deeply rural, just as they are in parts of Wales and England.

Antoinette Sandbach

It may be something that needs to be looked at in terms of a single connection cost, whether you are in an urban area or a rural area, in order to minimise that inequality.

John Fiennes

I was going to add to what the Minister said. Of course, things cost what they cost, to some degree. If there is an urban or a rural area where a connection involves a very large new asset then that will mean it will be more costly for the person who wishes to connect. That is not a purely rural issue. There are places where the network is pretty full in urban areas where people are saying, “I would like to have a full connection but I am facing a higher cost”. Why do we do that? We do that because having an economic signal in the system ensures that capacity is used efficiently on the network where it can be and that people only invest facing the full costs as far as possible. Overall we think that is better for the consumer. The same debate happens on should we have a postage stamp system for transmission charging. The answer is we can see the arguments for fairness but equally we can see the arguments for low cost for the consumer, which involves having price signals in the connections, and there you have it.

Antoinette Sandbach

But in effect you are entrenching the inequality that exists, particularly in rural areas where transmission networks are, by definition, more remote.

Lord Bourne of Aberystwyth

I am not sure I would go quite so far as has been suggested that we would not need to consider the interests of rural consumers. I am sure that will be something that will be taken account of. It is right to say that there is a general benefit to consumers across the piece that will be felt in rural areas as well as urban, but we do need to ensure that we take this forward in a way that is fair to everybody in the country. There are clearly parts of the country that are off gas grid and we need to see how we do take measures that will help them.

Chair

A final question from me to this panel. We are scrutinising pre-legislation here and I wanted to see how likely it is you could add further bits to the Bill, maybe a further amendment on storage. As we know, storage is something that is suffering by the power of the pen at the moment, because storage pays to store and then it pays when that power leaves storage as well. Storage needs to become a new asset class, not treated as generation or as something that it is not. How likely is it that the pen might move to enable storage to perhaps start to fulfil some of the potential that some of its proponents say it could fill and it is only held back by red tape or the lack of movement of a pen? I would imagine you would be sympathetic to that, particularly with future proofing in mind.

Lord Bourne of Aberystwyth

Yes. First of all, thanks for the general point about stuff that is not in here and I perhaps should mention before I come to the specific, Chair, that there is going to be something that is relevant to DECC in a Cabinet Office bid for legislation on data sharing, which is not here because it is Cabinet-led. This is in relation to fuel poverty, which I think we touched on last time. For the sake of completeness, I should set that out there as being part of a much larger Bill but it is something that we very much welcome. In relation to storage, if we are talking battery storage here, this is something clearly of great significance. The Department is working very hard on this across Government, with DfT in particular; it has issues. We are aware of the potential. It is not oven-ready for legislation yet but it is something that we are working up. Within this Parliament certainly, and I hope earlier rather than later, we will be doing something on this.

Chair

I think the argument is that you should only pay once for storage, which on the face of it seems quite logical to many people. It does not seem very complicated, to me.

Lord Bourne of Aberystwyth

No. That is just one aspect of it, I think, and it links in with smart grids and so on. I think we perhaps want something a bit wider than that. I take that point, but I think there are quite a lot of things we could be doing on storage. We are looking at those with a view to bringing something forward but, as I say, not for the next session.

Chair

Does anyone in the panel have any further questions or can we end this panel now? Thank you, panel, for coming along. I believe we have another panel that some will be remaining on and some will be leaving on. Thank you for the moment. Oral evidence: Pre-legislative Scrutiny of the Government’s Draft Legislation on Energy, HC 776 6