Oral evidence: Oral evidence: Low Carbon Network Infrastructure, HC 613

Oral evidence, 12 April 2016.

Witnesses

Maxine Frerk, Acting Senior Partner, Networks, Ofgem, and Andy Burgess, Associate Partner Energy Systems, Ofgem, gave evidence.

Chair

Thank you, panel, for coming this morning. You are both from Ofgem. Would you state your names and positions at Ofgem for the record, please?

Maxine Frerk

Maxine Frerk. I am the interim senior partner for networks.

Andy Burgess

I am Andy Burgess. I am associate partner for energy systems.

Chair

Thank you. We are here to discuss how regulations can help develop low -carbon network infrastructure. I will begin with your network innovation stimulus, which in evidence to this inquiry has been widely praised, you will probably be pleased to know. Do you accept, however, that there remains an unfunded gap between trialling and commercialisation?

Maxine Frerk

I do not accept that. Our innovation funding mechanisms have a number of different elements, as I think you have probably heard through the course of your inquiry. We have network innovation allowances, which are for small projects that can be quite early on in the research cycle. We have network innovation competitions, which provide bigger sums where capital investment is needed to start development and demonstrate projects in the field. We have an innovation rollout mechanism for the companies who have something they believe is demonstrated to be of benefit to consumers and who need additional funding in this price control to roll those out. Across that, we see funding giving support across all the different stages of development of innovation. There are some real examples, as we discussed in the last session, of companies taking innovative projects that have been funded through our innovation allowances, and turning those into business as usual, whether it is around active network management or flexible grid connections. I do not see a gap in support for network innovation.

Chair

I like confidence, and I am pleased to hear that. I would appreciate it if you could give us some examples in writing after this. I think it would be useful. Before I go on to Tom Blenkinsop, Rushanara Ali, do you want to follow up on anything here?

Rushanara Ali

I had a question about the fund. We understand that £245 million of the £400 million has been used so far. Could you explain the underspend? Is that because you do not have sufficient numbers of organisations taking up the innovation challenge?

Maxine Frerk

We have a maximum amount that we can give away in any one year, and it is dependent on what projects come forward. We do not always award funding to all the projects that came forward. Last year, there were two projects that came forward that we felt were not quite developed enough in their thinking to be confident that they would give benefit to customers. We are dependent on companies coming forward with enough projects. Some years, we are oversubscribed, if you like, and some years we do not get enough.

Rushanara Ali

What could you do to try to drive the agenda further, so that more companies come forward and there is more awareness of the possibilities and the opportunities? It seems you could potentially do more to attract new innovators.

Maxine Frerk

One of the things that we are keen to do as part of that is bring in more third parties as partners for the network companies. Many of the ideas will come from third-party companies who think they have some way that they can help. ENA run a portal for companies who have an idea and want to find a network partner, and we are doing some work at the minute. We have a consultation out that is just closed, trying to find out what more we can do to involve those small third parties who might have innovative ideas; how we can better bring them into the process, as you say, to help make sure that we are getting as many good ideas as we can.

Tom Blenkinsop

Should storage be classified as a distinct asset class rather than just generation? I know my view, but what do you think?

Andy Burgess

It is probably best if I answer this one. Storage is one of the five priority areas we are looking at in a piece of work on something called flexibility in the energy system. What we are trying to do is look at how storage is treated, and make sure it can compete on a level playing field with other forms of flexibility. Defining it as a specific asset class might be the answer, but from the analysis we have done so far that is not the immediate solution. It is a question of making sure that storage is a viable option in all the relevant markets; making sure that people understand where it fits in; looking at how it is charged to make sure that there is no double charging of storage; looking, with our colleagues in Government, at environmental levies, to make sure storage does not pay them twice; and making sure it fits into the overall system. We will, together with DECC, be issuing of a call for evidence, a joint document, which will include questions on storage. One of the questions we will be asking is about licensing and asset categories. It might be that a modified generation licence is the best option, but we think that the priority is to make sure that storage can compete in relevant markets, and that those who want to invest in storage, because we think it has quite a big future, have a bit more certainty about how it can operate, and what sort of markets it can be active in.

Tom Blenkinsop

Could you foresee any problems if you had a modified asset class for storage?

Andy Burgess

If you have a modified generation licence, that is not particularly a problem. If you create a new licence, then it is a question of what goes with that licence. You would need to amend primary legislation to create a new licence category. We would need to check that whatever we were doing was consistent with wherever European law was going, because storage is quite an important issue at European level. There are no fundamental obstacles. I guess the big question is whether that is the solution or whether it is more about how storage fits into different markets. I think storage sometimes is generation, sometimes is demand. The important thing is to treat it in the right way depending on what use it brings to the system.

Tom Blenkinsop

The National Infrastructure Commission has recommended that network companies be allowed to own and operate storage. What do you think about that? What do you think the pros and cons are on that?

Andy Burgess

Our principle is that we want to see competitive markets develop—generally competitive markets and flexibility—and storage is part of that. Procuring storage is fine, and using storage is fine. Owning and operating storage immediately raises some issues about whether you can develop a natural competitive market for storage if you allow natural monopolies, particularly with regulated income, to start playing in those markets. Therefore our principle is that the network companies should not own or operate storage. We recognise there might be some exceptions to that based on particular circumstances or needs, or where you define storage as something where you just could not develop a competitive market. However, we think if you want competitive markets to develop it is important to keep the regulated monopolies out of them.

Tom Blenkinsop

The National Infrastructure Commission has also called on Ofgem to start on an immediate review of the regulations and commercial arrangements surrounding demand flexibility. Will you be doing that? What exactly do you think needs addressing?

Andy Burgess

We are already doing a major piece of work on flexibility. We published a document on 13 September last year. We have five priorities: storage is one, and aggregators and the role of industrial and commercial customers in demand-side response are two of the others. The move to the DSO and DSO-TSO relationships is another one, and charging is another one. We are also working jointly with DECC on a broader piece of work on flexibility. That would be subject to the call for evidence that I mentioned earlier. To go back to demand-side flexibility, I guess our focus is primarily on what might be impeding the larger customers, the industrial and commercial customers, from offering demand-side response more. The reason we are prioritising that is that all the available research shows that for domestic customers it would take quite a lot to engage them in demand-side response. I think many domestic customers are still trying to get to grips with the existing market, let alone demand-side response. For the industrial and commercial side, there ought to be natural economic incentives to try to save money, so we are interested in what might be impeding them from acting in this market. Part of it is the same as with domestic customers. It is about confidence, about knowing what they are buying and having confidence that their bottom line will not be affected adversely if they get it wrong. Therefore we are engaging with industrial and commercial customers. We have issued a survey to them to try to understand better the challenges they face. We are also very interested in National Grid’s power responsiveness campaign, which is trying to do the same thing—to increase engagement of industrial and commercial customers, which we think is a very positive step in the right direction. On aggregators, it is a bit like storage, in that they are a new entity, and we want to see how they fit into the system, but they are another source of demand-side response, as are a variety of third parties who could come into the market. We are very interested in new business entities who might want to come into this market, and making sure that the rules in the sector allow third parties to operate and, in this case, offer more demand-side response.

Tom Blenkinsop

On the impediments you talk about, do you think the slow pace of change in regulation to do with technological changes has been an impediment as well?

Andy Burgess

I would not say it has necessarily been an impediment so far. If we do not do anything, it could be an impediment, so we are very conscious that the existing market rules were written for an old world that is rapidly changing. What we do not want is for some of the existing regulatory or commercial rules to be the barrier to something happening, so we are very actively trying to identify what the barriers are and then remove them if they are unnecessary.

Glyn Davies

I want to ask you one or two questions about distribution system operators. The National Infrastructure Commission is recommending that enabling the transition to more actively managed local networks should be a Government priority. Does that equate to establishing distribution system operators? Do you agree with that?

Andy Burgess

Again, it is part of our work on flexibility. A distribution system operator is essentially a more proactive, creative, dynamic network operator. Having active network management and having a range of options in managing the system is part of the move to a distribution system operator, and that is something that we think needs to start to happen now. In fact, it is already happening. We have been telling the distribution network operators that it is for now and not for the future, and we have been looking at how the role might develop over time and how you might start to see more of a blurred line between distribution and transmission, and who makes decisions on what. We would agree with the recommendation. It is an important area, and we expect the network companies to respond to it.

Glyn Davies

Are we moving quickly enough in this process? Some of our written evidence calls on Ofgem to make provision for DSOs now, before the RIIO-ED1 ends in 2023. Is that possible? Is it something we should be pushing for?

Andy Burgess

There is nothing to prevent the DNOs from becoming DSOs now, or at least the early stages of DSOs. Being more creative about dealing with a particular problem on the network; having an interruptible contract for a new generator; trying to have more demand-side response; trying to use storage—there is nothing in the current system that prevents them doing that. The incentives on expenditure to avoid artificial incentives to invest in infrastructure point them in the direction of doing the most efficient thing. The key question is how far you go in having decisions at local level, and there needs to be quite a big discussion and quite a lot of analysis about how the future system develops. That is something we are actively looking at.

Glyn Davies

There is some criticism that it has been too slow. RenewableUK said that Ofgem have completely squandered the opportunity to make provision for DSOs when introducing RIIO-ED1. Why did Ofgem not make provision? I am repeating the point that RenewableUK were making. Why did you not act quickly enough to deal with it? People outside are being critical of the pace that Ofgem have operated at.

Andy Burgess

First, the framework incentivises them to do the right thing and to do the efficient thing. As you heard, there is revenue sharing, so if they can deliver the outputs more efficiently by spending less and using more flexible resources, then the network companies will be rewarded for that and consumers will also be rewarded. So the framework is right, but then also, in our ED1 price control we assumed a certain level of benefits from smart initiatives and we took money away from the network companies. So it is a bit unfair to say we were not on the case, because we very much were.

Glyn Davies

Are you learning from what is happening in other countries where distribution system operators already exist? Denmark would be one example. There are probably other examples around the world. Are you actively going out and looking at how other countries are promoting this development?

Andy Burgess

We are working very closely with all the other countries in Europe. We are also interested in what is happening outside Europe. I spend a fair bit of my time with other European regulators in a distribution-systems working group. We published a document on the future role of the DSO in July last year, and we are doing more work on the DSO-TSO relationship and on other important aspects of the DSO role. We are trying to learn from other people’s experience. It is fair to say that there is no world leader in distribution system operation. Most countries around the world are facing the same challenges at the same time. Yesterday, I was talking to someone from Australia who is trying to address the challenge of DSOs; he is interested in the work that we are doing. Everyone is facing the same issues, which is quite a good thing in a way, because we can share experience and ideas and test different ways of doing things.

Glyn Davies

Am I right to assume that you do not see any reason why a distribution system operator should not be the same company as a DNO?

Andy Burgess

In principle, we think it probably makes sense for it to be the same company, because you introduce an extra complication if you separate it out. That is partly because of the number of distribution networks. We have 14 distribution network operators in this country. Would you want 14 independent distribution system operators, or would that just be an undue complication? We see it, essentially, as the same company, but the important thing is to make sure that the monopoly DSO does not impede competition, that there is the right level of regulatory control over what markets it can be active in and, as far as possible, that we have competitive markets providing services, rather than the DSOs.

James Heappey

Do you agree that the National Infrastructure Commission’s recommendation that enabling transition to more actively managed local networks should be a Government priority? Does this equate to establishing distribution system operators?

Andy Burgess

I agree it is a priority. I am not sure it is a Government priority. I see it as a priority for us as regulator, and as I have just been saying, the move to DSOs starts now. It is something we want to see. We want to see more of it. We are doing some thinking on the scale of it and how far people should go. I think it is a priority in terms of getting the best out of the future energy system and having the right result for consumers.

James Heappey

Forgive me, I went off on the wrong track there, and I apologise profusely. It has been frequently observed, including by this Committee, that there are potential conflicts of interest in National Grid. You heard their response to those questions earlier on. How do you monitor these, and how satisfied are you that National Grid is doing as it should in this regard?

Maxine Frerk

As you have already picked up, there is the potential for conflicts of interest, and that comes from their role as SO owning the interconnectivity, and also their role as SO owning network investment. We have had to grapple hard with how you deal with those conflicts of interest. Particularly when DECC introduced EMR, they thought about the conflicts of interest involved there. When we put new obligations on Grid to do its network options assessment as the SO, effectively saying what additional network investment was needed, we thought about conflicts of interest there. We are thinking about them again in the context of onshore competition for networks, where we would like Grid to take on a bigger role. As you heard, they have a number of obligations in licence, and they have to submit an annual report to us that sets out how they have complied with those strictures in licence about legal separation, building separation and employee separation. They have a number of specific rules that they have to abide by, and they report to us on what they are doing on that front. In our general market monitoring, we would expect to pick up if there was something where the SO was taking some balancing action that looked odd to us in that context, and we could follow that up. I am sure industry would be quite quick to come knocking on our door as well if they felt there was something going wrong. We are confident that, at the minute, we are able to manage those conflicts, and that there are not any issues. Clearly, as we want to give Grid a bigger role going forward as we have onshore competitive, and we would like them to be taking some of the roles that we are not technically competent to do—evaluating tenders, for example—the bigger the role you give them, the more those conflicts arise. That is why we have this debate now going on about the need for even greater separation of the SO role, which goes with a desire to give them bigger responsibilities.

James Heappey

What are the mechanisms by which you can hold them to account? What are the mechanisms for when you can say, “We think that you are doing something here that is not quite right”, right the way through to sanctions if you are convinced that they have wilfully blurred the line?

Maxine Frerk

As you say, there is clearly a spectrum between a conversation and ultimately taking enforcement action if they were in breach of their licence—these things are set out in licence. That involves being able to impose financial penalties on them, up to 10% of turnover, so we have a big stick if we need it, because they are set out in licence in that way.

James Heappey

If the Government were to create an independent system operator, would it be best for this to be directly under DECC control, or would you want to control it, or should it be an entirely separate public entity?

Maxine Frerk

The importance of having an independent system operator, in our view, it that it is independent of Government, as well as independent of National Grid. So if there were an ISO, we would expect it to be a licensed entity that we regulated in the same way as we regulate Grid.

James Heappey

Presumably you prepare for such an eventuality. I am keen to understand what you would like it to be; a completely standalone entity, or something that comes under DECC, or—

Maxine Frerk

At the minute we are part of the conversations. This will ultimately be a DECC decision looking at whether we need to go all the way to an ISO model or whether some greater separation now would be sufficient. I was answering your question by saying that if we were in the ISO world, to us that means we would want it to be independent of Government as well. That is an important part of maintaining confidence in the whole energy infrastructure regime—that you have somebody who is independent and taking decisions in customers’ interests. The way that we would expect to do that would be that it would be a licensed entity, as the SO is now. It would just be separate from Grid rather than part of the Grid organisations.

James Heappey

Thank you, and apologies for the false start.

Matthew Pennycook

I have a few questions about gas and heat networks and then a couple on the whole-systems approach. Time is pressing, and I hope we can rattle through these pretty quickly. First, on the gas networks, we heard in the last session about the increasing use of biomethane, or the consideration of biomethane, and hydrogen, and the ease of plugging that into the system. What support do those networks receive from Ofgem in terms of the innovation fund? What do you do to share information, ensure that these gases are injected at safe levels and monitor performance where this is taking place?

Maxine Frerk

The first thing to say is that our statutory role covers gas going through pipes. It does not matter if it is hydrogen or if it is biomethane or natural gas; it falls within our ambit. What we are doing falls into perhaps three areas. There is a bit of business as usual, as you implied, in making sure that when new biomethane plants are connected to the network, that is done consistently with safety and gas quality regulations, and in encouraging companies through the RIIO framework to offer connections and proceed in a speedy way and help customers get connected. In the last year, we have seen a twelvefold increase in biomethane being connected to the network. That is something that is happening on the ground now as a part of our business as usual work. We then have the second strand, which has been alluded to—the innovation funding. We have funded a number of significant projects through that. There is a big project in Oban looking at the impact of different gas quality on the effective operation of appliances to help us make the case for allowing a wider spec of gas on to the network. This year we have funded some work on synthetic biomethane, Syngas, for one of the companies to look at how that could be used. NGN are using part of their network innovation allowance to look at the potential for hydrogen around Leeds. A number of different projects coming through the innovation funding are helping that thinking get going. Finally, there is a bit about helping to take that debate forward. Certainly biomethane is being connected now and is part of the mix. How far you can go with that is a question. Hydrogen is still at the early thinking stage but could be an important part of the mix. In fact, there are debates around the use of gas in transport, which is not necessarily low-carbon gas but is an alternative use of gas that is helping the general decarbonisation agenda, because it is lower-carbon than using fuel. Again, we had an innovation funding project looking at the use of gas in HGVs, trying to get that debate going. We have kicked off our own horizon scanning project recently, trying to look further out and help think about what the future landscape might look like. I think quite a lot of our pushing of the companies has led to National Grid publishing a report recently on the future of gas. The ENA are doing some work as well, so the industry is now beginning to coalesce and be a bit more proactive in thinking about what that future might look like.

Matthew Pennycook

Turning to district heating, the ADE has called for a regulatory investment framework. Do you think that is a good idea, and what would Ofgem’s role be in facilitating that?

Maxine Frerk

In contrast to what I just said on gas, we do not have a role more broadly in heat. We have not done any major thinking in this space. Following a discussion with your predecessor Committee, we committed to publishing some thoughts about what was needed in terms of additional consumer protection around all the various forms of off-gas-grid heating. We published that last December. That touched very briefly on the question about whether you should have network regulation within the heating market, but we have not done a significant amount of work in that space, because it is not within our remit unless we were asked to pick it up.

Matthew Pennycook

But you are aware of what is going on around the country. I have seven of these district heating schemes in my constituency. I did a survey of thousands of customers. The standing charge for the new plant kit varies widely, even in the same development. It is a very high standing charge per month. Even when someone goes on holiday for four months, they come back and they have a bill for a standing charge of £200. Do you think it is fair to say that these district heating customers are being used as guinea pigs, in a sense, for the roll-out of new infrastructure? They are paying for the roll-out of new infrastructure. Is that a fair comment?

Maxine Frerk

Our report published last December raised some of those same sorts of issues, and Which? has raised concerns about the very different levels of prices being charged. You have the problem that once you have a district heating system in place, it is a monopoly. Customers cannot change supplier. There are a number of different ways to address that. It does not have to be through network regulation. I think you are aware that there is a voluntary code in place. On whether that could be given more teeth, there is the EMA, and there are general consumer protection regulations that could apply in this area. There are a number of different ways that it can be addressed. I am not sure it is about them being treated as guinea pigs at this early stage. I think there is an inherent issue in the fact that it is a monopoly provision of a service that has a long infrastructure cost.

Matthew Pennycook

It is the consumer rather than Government paying for the roll-out of the long-term infrastructure. That is my concern. I have two questions on the whole-systems approach. There has been criticism that Ofgem fails to take a whole-systems approach. Do you think that is fair? I assume not. If not, what is being done by Ofgem to facilitate a whole-systems approach?

Maxine Frerk

If I can kick off on this, I might then pass over to Andy if he has anything to add. We absolutely recognise the importance going forward of a whole-systems approach, looking across gas and electricity together and increasingly looking at the boundaries between transmission and distribution, which are expected to blur. We absolutely see it as critical. In our last restructuring—so from the beginning of January—we created a new energy systems division, which was intended to respond specifically to that challenge. Andy is part of that division, so I don’t know if there is anything you want to add to that.

Andy Burgess

Just a couple of things. We recognise that it is important. As Maxine said, we put together various bits of the office designed to have a whole-systems approach. The part of the office that I am in, which is dealing with flexibility, storage and DSOs, is the same bit that also does the wholesale markets, so that we can look across the piece, and we also have a gas team so that we can look at gas and electricity and start to develop more of a whole-systems approach. We recognised in the review that we are conducting of our network innovation competitions that we don’t want to just have very narrowly focused innovation projects. We want projects that can benefit the system as a whole, and if necessary, we need to change the rules of the competition to make sure that happens. It is something we are very conscious of, and we hope to deliver some of the thinking in due course.

Matthew Pennycook

An easy one for me to finish on. Do you think there should be a systems architect, and if so, what would it look like?

Maxine Frerk

Again, the problem that the systems architect is trying to solve is one that we absolutely recognise, which is that needs to be joined up end-to-end. What I am not convinced of is the need for a new body in what is already quite a complicated landscape, with different responsibilities shared between what we do, what Grid does as SO and what Government does. There is the work that is being carried out by the Energy Systems Catapult and the IET, which is trying to go back and say, “What is the problem that we are trying to solve? What are the functions that need to be dealt with?” Then we can work out who is best placed to solve them, rather than starting with the answer being a new body.

Matthew Pennycook

You think greater co-ordination gets you there.

Maxine Frerk

Yes, I think greater co-ordination is vital, and that should be able to get us there.

Andy Burgess

I think it is about having coherent system architecture rather than necessarily having a single architect.

Matthew Pennycook

Thank you.

Antoinette Sandbach

That very neatly takes me on to generation connections, which is where we started this morning at 9.30 am.

Chair

The circle of energy.

Antoinette Sandbach

It is.

Antoinette Sandbach

We were exploring the quicker and more efficient distribution connections project. Can you update us on where that is at?

Andy Burgess

Yes. As you know, we have been looking at what we and the distribution network companies can do to speed up the process of getting a connection. Where we got to—I think we published something a couple of months ago—is that we think the distribution network companies can make better use of the existing capacity. That means looking at connection queues, because sometimes people get a connection offer and then they cannot get planning permission and they are effectively sitting on capacity. We want there to be a form of “use it or lose it” applied to connection queues. We have also been pushing the distribution networks to have more flexible contracts with generators, so that generators can connect quickly in return for having an interruptible contract, so that if there is a problem on the system the network company, or possibly the SO, can do something about that. I think there are examples in the south-west of England, where there have been lots of constraints on the system and the solution has been to have more active system management, including involving National Grid, to manage the problem and allow people to connect in the meantime. The other areas we have been looking at are more to do with anticipatory investment—how we strike the right balance between getting the network companies to plan ahead and protecting consumers’ money. If the network company invests and the investment is not needed, then consumers ultimately pay, so we want to get the right balance.

Antoinette Sandbach

I am glad to hear that. Earlier you were discussing the whole-systems approach. Often consumers in rural areas are hit from any which way. They cannot access dual-fuel deals because they are not able to access the gas grid, and because they are at the end of the line in terms of transmission, very often their connection costs are prohibitive for renewables. Looking at your whole-systems approach from a consumer angle, are you looking at the impact on rural consumers, and is that something you will take into account when looking at this potential new pricing mechanism?

Andy Burgess

We are interested in how the overall system benefits consumers in general, and what we will probably see in future is greater differentiation between different types of consumers. Some consumers who are further away from the grid will have more energy use options in future. If you start to think about having batteries at local level, people having their own generation of some sort and people having heat pumps, people could become more self-sufficient and less dependent on the grid. That could be a real solution for people in rural areas. We are also looking at what different scenarios might mean for the overall costs of the system and how that might pan out. If you have more and more people who are self-sufficient and not using the network, what does that mean for the overall costs of maintaining that network, which has a very high fixed cost? We want to make sure that is dealt with fairly as well. We are very conscious of the effect on different consumers, but I think there are also some real opportunities for people to be more self-sufficient and to get their heat and light in different ways than has been the case in the past.

Antoinette Sandbach

That does require a high up-front capital commitment from them to be able to access that, particularly for customers who are struggling with bills. At the moment we have very low oil prices, but it was not that long ago that oil prices were extremely high for off-grid customers. That had a big impact in rural areas. What I am asking is whether Ofgem will take rurality into account in delivering that systems approach, because otherwise you will see a whole section of consumers who are effectively penalised because they are remote.

Andy Burgess

We want consumers to be treated fairly and have the right opportunities, so we will do that.

Antoinette Sandbach

Our current understanding is that Ofgem remains committed to locational charging, meaning that remote renewables pay the full cost of their grid reconnections. Is this appropriate when renewables often lack the flexibility of conventional plant in choosing where to site? I guess that is speaking about the bigger projects rather than the smaller ones.

Andy Burgess

As you know, at distribution level we effectively have locational charging. It does not necessarily mean that the whole cost is paid by the generator—it depends on the circumstances—but a significant proportion of the cost is paid by the generating customer, because of the burden placed on the system. The alternative would be for consumers in general to pay. We think at the moment the current system is probably right. It is different at transmission level, where I think, based on an overall feeling that the overall system benefits from more generation coming on, there is a certain amount of what is called user commitment paid by the connecting party. But overall, more of the costs are borne by consumers in general. One of the things we want to do in looking at the whole-system approach is to compare the difference between the approach on transmission and the approach on distribution and think about what is right for the future. Because the old thinking behind the different distinctions between transmission and distribution is disappearing, we want to look at that kind of thing. I cannot promise anything, but we are trying to make sure there are not artificial differences between different types of arrangements for different types of network.

Antoinette Sandbach

You spoke earlier about queuing and the rush to grab a connection offer, which may well be because there is a substantial difference in price between the early connectors and the later ones in an area where there is, for example, wind farm development, where one connection may be £9 million or £10 million cheaper than another.

Andy Burgess

That is an area that we are looking at. As you might know, there are already some rules called the second-comer rules, which basically mean that if someone pays a cost up-front and then another customer comes along later, the first customer gets some money back. We are looking at whether those rules could be expanded, and that is in conjunction with DECC. We are also looking at the circumstances under which the distribution network might invest ahead of need and then get the money back later. One option is doing that by getting all the distribution network’s customers to pay. Another is by the distribution network itself paying up-front and then recouping the money later. Another option we are looking at is where third parties can all put a certain amount of money on the table, and then the distribution network company can invest in reinforcing the network. You can trigger more investment there without risking any unnecessary investment that might be borne by consumers.

Antoinette Sandbach

That is encouraging to hear, I have to say.

Andy Burgess

We have active trials of all those different areas.

Antoinette Sandbach

Finally, again considering again the cost to consumers, I don’t know whether you heard the earlier questioning in relation to charging around north Wales, where for historic reasons of east-west lines—obviously there is a devolved Administration now in Wales—the consideration of the charging is not looked at on a national basis but looked at in the way that the actual distribution lines run. Is Ofgem going to reconsider that and look at it on a national basis in the way that you can talk about Scotland as perhaps being an exporter of electricity? Those in the rural parts of Wales should not be paying more just because of a historical accident of the way that the transmission routes run.

Maxine Frerk

We do not have any specific plans at the minute to look at doing something different for Wales on charging, but as National Grid said, the way that the charging arrangements work for transmission—and it is the same for distribution—is that they can propose to us changes in the charging arrangements. The aim is ultimately for these things to be cost-reflective, and—

Antoinette Sandbach

It must be fair if you are a net exporter of electricity, which Wales is, particularly because of Wylfa. There is a total population in Wales of 3.5 million people, and an enormous amount of electricity generation that comes out of Wales. If the question is one of fairness to consumers, can I ask that you at least consider that or have it on your horizon when you are looking at your charging mechanisms in the future?

Maxine Frerk

I think it is certainly fair to say you have made the point, so it is on my horizon.

Antoinette Sandbach

Good.

Maxine Frerk

As Andy has indicated, a lot of work will be done on charging in general, so I take your point.

Antoinette Sandbach

Thank you.

Chair

In areas that are generating a lot, quite often their consumers are costing a lot as well. Glyn, you wanted to come in.

Glyn Davies

Yes, just one question. It is helpful for me to try to understand something relating to investing ahead of demand—perhaps National Grid would be the best to answer this. My understanding is if a generator asks for a connection, National Grid are statutorily obliged to provide it. That is the position. So what you might finish up with is National Grid having a massive scheme and having to take it forward when there is no actual generator who has planning permission. That is a huge waste of money. Are there any rules, standards or proportions of grid capacity used up that justify the investment? Or can there be almost no actual planning permission, but the National Grid is required to spend a huge amount of money preparing the transmission system?

Andy Burgess

It all boils down to people putting money on the table. At transmission level, if someone wants a connection to the transmission system they have to make what is called a user commitment, which means that they need to put a certain amount of money on the table for National Grid to then consider investing in the infrastructure. The money needs to stack up for National Grid to invest. That will only normally happen if you have generators at the end of the line willing to put that amount of money on the table. Sometimes when there isn’t enough money on the table, it is a question of waiting to see whether circumstances change and there is enough money. At distribution level, there isn’t user commitment as such, but more of the cost is borne by the entity that wants to connect. There is an obligation on the distribution network to make a connection offer to that party, but then depending on where the party wants to connect, there is a certain cost that has to be borne, and the connection will only take place if the person wanting the connection actually pays.

Glyn Davies

What is interesting to me is that putting the money on the table is not beyond the financial capability of generators, because it probably does not have to be that great an amount of money. Of course, if you get enough money you have National Grid going forward and there is no planning permission granted at all. Then there is work on a stranded asset. There is pressure on the planning permission providers not to just leave a stranded asset and to deliver the planning permissions, otherwise they would not do so. Is that a fair reflection of the current system?

Andy Burgess

It depends. The bigger the investment in the infrastructure, if it is at transmission level, the clearer National Grid will be at an early stage about whether there is planning permission or not, and probably the work will not be wasted. There might be a slight amount of it. At distribution level that is where you get into the queue problem, which I mentioned earlier, where you get smaller generators who ask for a connection, put a certain amount of money on the table and then effectively hold capacity even though they do not have planning permission. That is where we want the distribution network operators to be more active in talking to the people who have the capacity and trying to use it for other purposes so that more people with genuine capacity needs can connect to the network.

Glyn Davies

Can I make just one brief point? When the public try to find out from National Grid what the trigger points are, they will not tell you. You cannot find out. The public cannot find out what the issues are. It is just something that is kept within National Grid. I obviously speak from experience, but it must be general across the country. There is a deep frustration among the general public that National Grid are taking massive decisions on their lives and they cannot even find out where the trigger points are.

Andy Burgess

I find that hard to believe that National Grid cannot tell people where the trigger points are. Distribution network companies have things called heat maps, where they have a map of their network and it shows which parts of the network are most congested. I don’t think those heat maps go down to street level, but they show an overall picture of where the networks are most congested, so I cannot really understand why National Grid could not do the same.

Chair

Thank you, panel, for coming in this morning and for sharing your information with us in this inquiry. It is very much appreciated. Thank you to both Mr Burgess and Ms Frerk for that. Oral evidence: Low Carbon Network Infrastructure, HC 613 19 [1] Subsequently corrected to £30 million, see Q255 below. [2] Subsequently corrected to £30 million, see Q255 below. [3] Subsequently corrected to £30 million, see Q255 below.