House of Commons Energy and Committee

A European Supergrid

Seventh Report of Session 2010–12

Volume I Volume I: Report, together with formal minutes, oral and written evidence

Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/ecc

Ordered by the House of Commons to be printed 7 September 2011

HC 1040 Published on 22 September 2011 by authority of the House of Commons London: The Stationery Office Limited £15.50

The Energy and

The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.

Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)

The following members were also members of the committee during the parliament:

Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West)

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume.

The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are Nerys Welfoot (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant) and Nick Davies (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]

A European Supergrid 1

Contents

Report Page

Summary 3

1 Introduction 5

2 Background 7 What is a supergrid? 7

3 The benefits of an integrated solution 10 Helping the UK meet its renewables targets 10 Offshore wind ambition 10 The advantages of an integrated approach 11 Renewing the onshore grid 12 Landscape and transmission assets 13

4 The benefits of increased interconnection 15 Balancing intermittency 17 Reducing the need for backup generation: reserve sharing 18 Economic opportunities 19 UK comparative advantage 20

5 Barriers to the development of a supergrid 22 Technological barriers 22 Interoperability 23 Supply chain constraints 26 Costs 26 Construction costs 27 Anticipatory investment 27 Cost sharing 29 Price arbitrage 31 Regulatory challenges 32 Political commitment and timeline 35 Conclusion 37

Conclusions and Recommendations 39 Barriers to the development of a supergrid 40

Annex I: Terms of Reference 43

Annex II: Different supergrid proposals and work streams in 2011 44 The North Seas Countries’ Offshore Grid Initiative 44 The All-Island Approach 44 The UK-Baltic Cooperation 44 The Irish-Scottish Links on Energy (ISLES) study 44 45 Greenpeace proposals 45

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Formal Minutes 46

Witnesses 47

List of printed written evidence 47

List of additional written evidence 47

List of Reports from the Committee during the current Parliament 48

A European Supergrid 3

Summary

In July 2011, contrary to the advice of the Committee on Climate Change, the Government increased its ambition for the deployment of offshore wind generation by 2020 from 13 GW to 18 GW. This is part of a plan to meet the UK’s commitment to generating 15% of energy from renewables by 2020.

This strategy is a big gamble. On the one hand, the encouragement of offshore wind makes sense. is vital for climate change mitigation and the UK has a potentially huge resource that could amount to the equivalent of a billion barrels of oil each year. However, offshore wind is also a notoriously expensive and intermittent source of electricity, which could end up reducing the reliability of our electricity supply and imposing an unacceptable cost on consumers. The Government is banking on reductions in the cost of offshore wind and improvements in efficiency to make the numbers add up.

This report shows that to make the gamble pay off, it would help if an ambitious transmission system was developed to match the ambitious plans for offshore renewables. This system could deliver electricity efficiently onto the grid, help to balance out intermittency and provide a route to export when supply is abundant. Only this way will our electricity system be able to cope with increasing penetration of intermittent renewables, situated far from where the electricity is needed.

At the moment, the UK is virtually an electricity island. While the rest of is increasingly interdependent, sharing electricity resources across borders, in the UK we continue to rely on our own power plants to produce our energy and our own transmission system to deliver electricity to where it is needed. The Government has only just begun to consider the options for interconnection and creating an offshore grid. It must agree to meet European targets for interconnection and set out further plans for the period up to 2050.

We demonstrate that immediate action will be necessary if the kind of offshore grid required to connect up new renewables and interconnect with other electricity systems is to be developed. While we applaud the Government’s involvement in negotiations such as the North Seas Countries’ Offshore Grid Initiative, these make no concrete commitments to new infrastructure. The Government must pursue the development of an integrated grid in home waters and begin bilateral negotiations to create new shared infrastructure with our European neighbours. The development of a methodology for sharing costs is particularly urgent.

At the moment, we use point-to-point connections from a single offshore to the land, but this approach will reach its limits in the near future. It is costly, inefficient and requires a huge amount of infrastructure, particularly where electricity cables come ashore. By sharing transmission assets, we can save money and reduce the environmental impact of network reinforcements. The Government must undertake to calculate the environmental and social savings that could be made through offshore grid reinforcements and set this against the costs of construction. By integrating these lines with , we can sell electricity when supply is abundant and import it when

4 A European Supergrid

demand is high.

Such a network brings its own risks. We believe that the cost of creating a European supergrid will be very high indeed. The Government should analyse carefully if the benefits are sufficient to justify the costs before proceeding down this route. We also recognise that reaching international agreement about the necessary regulatory and market frameworks will be extremely difficult.

If we do not build as much offshore wind as we expect, new transmission systems built in anticipation of this generation could be left stranded at considerable cost to the consumer. This means that investment is unlikely to be forthcoming for the early stages of an integrated offshore grid. The Government must give certainty to investors about the long- term support on offer for offshore wind. It must also consider how to encourage early investment in offshore grid infrastructure, either through regulation or improving access to public finance for pioneer projects. To ensure that early investments do not become redundant, the Government must analyse how offshore networks can be combined with future “” and electricity storage technologies and how early assets can be made “supergrid ready”.

In 1933, the “national gridiron” began operating as a series of regional grids with interconnections for emergency use. By 1938, these separate systems were linked up to form a truly national system. The national grid was, in its time, a model for the world. In the 21st Century, however, the UK is moving toward a system where major intermittent sources of supply are concentrated offshore, in the north of the UK and abroad. We can no longer afford to be an electricity island.

A “supergrid” is an international network of electricity cables, which integrates offshore renewables generation into the transmission system, as well as allowing electricity to be traded across borders. It is extremely unlikely that a full-scale European supergrid could be developed by 2020 and very uncertain whether such a system could be economically justified. However, we believe that there is a strong case for working quickly to achieve much more interconnection and integration of offshore networks, the building blocks of a supergrid. This kind of network will not develop by itself and the current approach has left the UK electricity system one of the least interconnected in Europe. The Government must end its laissez-faire approach to offshore transmission and set out a plan for developing an interconnected, integrated offshore network in time to make the most of our renewable resources.

A European Supergrid 5

1 Introduction

1. The role of transmission networks in deciding the future of Britain’s energy system is often overlooked. Before 2020, billions of pounds of investment are needed to renew and reinforce the pipes and wires that deliver energy to our homes. The way we make those investments will affect every aspect of our energy future, influencing costs, sustainability, security, our landscape and the mix of generation itself.

2. In our work on the UK electricity sector, the Committee has identified a number of serious challenges:

• First, there is a need to reinforce existing onshore transmission assets with new lines and cables in order to deliver electricity from areas of excess supply to where it is needed. This could cost at least £32 billion by 2020 and change our landscape.1 In Chapter 2, we look at the potential for a supergrid to reduce the need for new transmission assets, thereby saving money and reducing the impact on landscape and ecosystems.

• Second, we need to address the problem of intermittency, as an increasing amount of renewable generation is added to the electricity mix.2 In Chapter 3 we explore the ways that an integrated offshore grid could help to balance out the problem of intermittency by integrating a broader range of renewables, while added interconnection could help to balance supply and demand.

• Third, there is an urgent need for decarbonisation. We believe that it will be necessary to reduce emissions in the electricity sector to about 50gCO2/kWh by 2030 in order for the UK to meet its climate change targets.3 In Chapter 2, we demonstrate that incorporating offshore renewables in an integrated offshore grid can maximise our renewable resource.

• Fourth, we are very aware of increasing costs to consumers, caused by volatile energy costs and problems in the , which will be exacerbated by the need for new investments to be funded by the major energy suppliers.4

3. It has been suggested that a supergrid could help to address these issues. In this inquiry, therefore, we investigated the possibility of investing in integrated offshore transmission networks, which could combine international interconnection with national grid reinforcements and offshore renewable generation technologies. This kind of project— often known as a “supergrid”—has the potential to contribute to decarbonisation, cost- reduction and in a way that minimises the visual impact of transmission assets on our natural environment.

1 Energy and Climate Change Committee, Third Report of Session 2010–12, The revised draft National Policy Statements on energy, HC 648 2 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742 3 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742 4 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem's Retail Market Review, HC 1046

6 A European Supergrid

4. The current approach to connecting offshore wind generation encourages the installation of single user point-to-point (radial) sub-sea connections to each individual wind farm. Equipment is designed and installed sufficient to allow access to the market for 100% of the potential output from the windfarm, but remains unused when there is no wind.5 A more integrated approach would involve linking interconnection to overseas sources of electricity directly with offshore renewables generation. We have heard that a system that integrates a meshed offshore grid with interconnection offers a range of potential benefits, including:

• Increased competition and cross-border trade, leading to lower energy prices;

• Increased security of supply;

• Access to a greater amount of renewable resources;

• More rapid decarbonisation;

• Access to lowest cost low carbon generation wherever it occurs within Europe;

• Increased reliability of the connection for the wind;

• Increased overall utilisation of the assets by sharing them for wind connection and cross-border trade; and

• A route for the UK to become a net electricity exporter, creating economic growth.

5. All of these potential advantages must be balanced against the considerable cost of a supergrid and the uncertainties associated with such an enormous project. Chapter 4 sets out the range of costs associated with potential supergrid projects, but also how this may possibly be balanced by savings.

6. The idea of a supergrid is still in its infancy. Many technical questions remain about the viability of using High Voltage Direct Current (HVDC) undersea cables to link up different countries with our offshore renewables. The costs of such a project are highly uncertain, but are likely to be very high. The regulatory system needed to underpin multilateral transmission projects would be extremely complex.

7. In this report, we look at the uncertainties that surround the development of an offshore integrated grid, its prospective advantages and the next steps that the Government should take to ensure that the transmission system we build for the 21st century is as efficient and ground-breaking as the National Grid was for the 20th.

8. Our terms of reference for the inquiry are set out in Annex I. We held three oral evidence sessions, with industry experts, national and European regulatory bodies and System Operators and, finally, with the Minister of State for the Department of Energy and Climate Change. A full list of witnesses can be found on page 47. We also received 29 written submissions which are published with this Report. We are very grateful to everyone who gave evidence to our inquiry.

5 Ev 68 (National Grid), appendix

A European Supergrid 7

2 Background

What is a supergrid?

9. The term “” was first used to describe the unified British national electricity transmission system over fifty years ago. The concept of a UK supergrid is defined in the British as a transmission system operating at voltages above 200 KW. In the 21st Century, however, the term “supergrid” is used to describe a number of different kinds of interconnection between international electricity systems, often incorporating generation assets as part of the system. In other words, the same transmission lines would connect up different countries’ electricity systems as well as a variety of power generators such as offshore wind farms. Ideas range from a more integrated offshore grid in the North and Irish Seas to a network of “super highways” across Europe and into Africa and Asia.

10. A supergrid was defined by the Friends of the Supergrid as an electricity transmission system, mainly based on high voltage direct current (HVDC), designed to facilitate large- scale sustainable power generation in remote areas for transmission to centres of consumption, one of whose fundamental attributes would be the enhancement of the market in electricity.6 As well as enabling the transmission of electricity from areas of excess supply to where it is needed, a supergrid could also enable wider access to physical electricity storage options, such as pumped storage in Scandinavia and the Alps. This could help to balance out fluctuations in intermittent renewables supply with affordable, low- carbon generation.7

11. Friends of the Supergrid have set out suggestions for Phase I of a supergrid, which would integrate the UK’s offshore renewables resources with interconnection with and .

6 Ev 68 (Friends of the Supergrid) 7 Ev 47 (DECC), section 17; Ev 56 (Ofgem), section 1.12

8 A European Supergrid

Figure 1: Friends of the Supergrid, Phase 1

NORWAY

UK

GERMANY

Munich

Source: Ev 68 (Friends of the Supergrid), section 3

12. A supergrid could represent a revolution in the scale and ambition of interconnection and offshore grid integration. At the moment, national electricity systems remain largely separate, each state providing for its own supply to meet demand. The UK is particularly insulated from its neighbours. A supergrid implies that a much greater degree of interconnection between national electricity systems would be possible, allowing them to draw on shared resources to meet demand. John Scott, of the Institute of Engineering and Technology, told us that whilst the UK currently had a 2 GW link with , a 20 GW link could be possible.8 He suggested that “you have to think of [a supergrid] as a system, not as a series of electrical pipes. It has to become a system, which means that it has to be balanced in real time between generation and demand”. 9 In other words, a supergrid could be a complex transmission network, potentially coordinating dispatch and supply of electricity across several jurisdictions.

13. However a supergrid is not just about increased interconnection, it is also about integrating offshore renewable generation into the transmission system in order to optimise the output of technologies like offshore wind, marine and tidal energy. At the moment, these resources are connected to the onshore system individually by “radial” or “point-to-point” connections.10 A supergrid could integrate these connections into the transmission system itself, saving money, reducing the need for new connections and enabling more efficient sharing of resources.

8 Q 2 [John Scott]; Ev w32 (), section 14 9 Q 2 10 Q 1 [Eddie O’Connor]

A European Supergrid 9

14. Stuart Cook, from Ofgem, explained that a supergrid could entail different mixes of interconnection and integration of offshore renewables within the transmission system:

The range of options that the transmission companies in Europe have looked at span from, at one end, something that simply is point-to-point, which is more or less the way that the system has evolved so far; to a system that involves optimisation of the onshore connection; to a system that involves the optimisation of the onshore connections and the interconnections across countries; to something that, at the extreme, is a meshed system looking like a grid on the sea.11

15. In this Report, we will refer to an offshore grid, integrating renewable generation and interconnection, as a kind of “supergrid”. Further details of the different visions for a supergrid currently under development can be found in Annex II.

11 Q 62

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3 The benefits of an integrated solution

16. This chapter looks at how the integration of generation assets in a grid system—a “meshed” grid—can help to reduce the amount of new transmission assets that are required and maximise access to renewable generation resources.

Helping the UK meet its renewables targets

Offshore wind ambition

17. The UK’s renewable energy generation targets are very challenging; we are committed to achieving 15% of energy from renewables by 2020.12 In 2009, renewables supplied just 6.6% of , 1.6% of heating and cooling energy and 2.5% of transport energy. In total, renewables provided 3% of total energy consumption.13 In its Renewable Energy Roadmap, published in July 2011, the Department of Energy and Climate Change increased its ambition for the rollout of offshore wind generation to 18 GW by 2020 in order to help meet our targets.14 has ambitious targets of its own to source 80% of its electricity demand and 20% of all energy consumption from renewables by 2020.15

18. Currently there is 1.3 GW of operational offshore wind capacity in the UK, with almost 6 GW more in the planning process.16 The Crown Estate announced the winners of their Round 3 tender process on 8 January 2010, with leases awarded for sites for an additional 32 GW of offshore wind, on top of 8 GW planned from previous rounds.17

19. The Committee on Climate Change (CCC) recently concluded that the previous level of ambition for offshore wind (13 GW capacity installed by 2020) remained appropriate given uncertainties about the feasibility of increasing ambition on other lower-cost options. However, they argued that a reduction in 2020 offshore wind ambition would reduce the costs of meeting the Renewable Energy Directive target.18 They also recommended committing to further investment in the 2020s given the long-term importance of offshore wind.19

20. We believe that a supergrid must be considered in the context of the UK’s renewable energy objectives. National Grid told us that an integrated offshore grid was key to the UK meeting its renewable targets and that it sees “a very big potential for offshore wind [amounting to] 16 GW of offshore wind by 2020, rising to some 37 or 38 GW by 2030”.20

12 Council Directive 2009/28/EC 13 Department of Energy and Climate Change, Digest of Energy Statistics 2010, July 2010, Table 7.7 14 Department of Energy and Climate Change, UK renewable energy roadmap, July 2011, p 42 15 Ev w44 (Scottish Renewables) 16 Department of Energy and Climate Change, Renewable Energy Roadmap 2050, July 2011, section 3.53 17Department of Energy and Climate Change, Offshore wind farm leasing, http://www.decc.gov.uk There have been three rounds of leasing for offshore windfarms carried out by The Crown Estate, the landlord of the seabed. 18 Committee on Climate Change, The renewable energy review, May 2011, p 15 19 Committee on Climate Change, The renewable energy review, May 2011, p 26 20 Q 56

A European Supergrid 11

Daniel Dobbeni of the European Network of Transmission System Operators (ENTSO-E) agreed that without new offshore grid transmission assets “Member States will not achieve their [renewable energy] target. You cannot have one, the new energy mix, without the other, more transmission capacity”.21 The Minister of State for Energy and Climate Change also believed that an integrated offshore grid “is a critical part of being able to develop the offshore wind sector”.22

The advantages of an integrated approach

21. The present system for connecting offshore wind generation encourages the installation of point-to-point connections to individual wind farms, designed to allow access to the market for 100% of the potential output from the wind farm, but which remains unused when there is no wind.23 This often leaves up to 60% of the offshore grid connection unused with a simple grid connection to the offshore wind farm.24

22. This has implications in terms of cost and in terms of the sheer scale of transmission assets that would be required if point-to-point connections continued to be made. According to National Grid, an integrated network for the UK’s offshore wind delivery could provide a 25% discount for the UK consumer on the capital cost compared to connecting each offshore wind farm with a dedicated radial connection.25 By integrating the offshore wind farm grid connections with interconnectors, when the offshore wind farms were not generating at full rated output, the available capacity on the grid connections could be used to trade electricity and other services. The Crown Estate expected that this kind of connection could be used up to twice as heavily as conventional wind farm connections.26

23. Daniel Dobbeni, President of the European Network of Transmission System Operators (ENTSO-E), anticipated that between 80 and 280 wind farms were likely to be constructed in the in the next twenty years. The cost and size of these new assets would be prohibitive if single connections to the shore were made.27 Alberto Pototschnig, Director of the Agency for the Cooperation of Energy Regulators (ACER), agreed.28

24. The future of the electricity transmission system must be considered within the context of the Government’s renewable energy objectives. If it hopes to deliver its aspirations at all, let alone in a cost-effective way, it will be necessary to develop a transmission system commensurate with the scale of offshore renewables expected. A more efficient way of connecting wind needs to be planned for generation further offshore and the increased volumes of wind expected. It makes sense to develop new means of connection to support those developments before the capacity has been

21 Q 107 22 Q 130 [Charles Hendry MP] 23 Ev 68 (National Grid), appendix 24 Ev w7 (The Crown Estate), section 3.3; Offshore wind have capacity factors of 40–45%. 25 Q 64 [Alison Kay, National Grid] 26 Ev w7 (The Crown Estate), section 3.3 27 Q 98 28 Q 99

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developed. The Department of Energy and Climate Change should therefore undertake to assess the advantages of a meshed offshore grid as opposed to radial connection within the next two years.

Renewing the onshore grid

25. As the UK develops its offshore networks, we must also update its onshore transmission assets to deliver electricity from supply centres to where it is needed. An offshore supergrid could play an important complementary role to onshore regeneration by helping to reduce congestion in the system.29

26. Today, the national grid is struggling to cope, because so much of our electricity is produced in remote areas, especially the north, and our transmission systems do not always have the capacity to deliver power to where it is needed. The problem of congestion is already costing the consumer as generators are sometimes paid to stop producing electricity. In May 2011, for example, six Scottish wind farms were paid to stop producing electricity on a particularly windy night as the National Grid was overloaded. Their transition cables did not have the capacity to transfer the power to England and so they were switched off and the operators received compensation. One operator received £312,000, while another was paid £263,000.30 While congestion also leads to other generators being asked to reduce their supply, the problem is exaggerated in the case of wind because there are no savings on fuel costs and there is the extra cost of lost renewable obligation payments, which mean that operators need to be paid extra to curtail their supply.

27. Transmission tends to run from the north (where most energy is produced) to the south (where consumption is highest). An offshore grid which had multiple links between offshore generation assets and large, shared connections to the onshore grid could provide alternative transmission routes from areas of excess electricity supply to areas of high demand. This option would be enhanced by the use of High Voltage Direct Current technologies, which allow large amounts of power to be transported across long distances with relatively small losses.31 We also heard how, during periods of excess supply, electricity could be transported to storage “hubs” such as hydro reservoirs in Scandinavia and the Alps and called upon at times of low supply.32

28. However, National Grid emphasised that an offshore network would not be a substitute for ongoing onshore reinforcement. ENTSO-E agreed that offshore grids would not altogether replace the need for new onshore transmission lines.33

29 Climate Policy Initiative [ESG 02] described congestion as the situation when technical constraints (e.g., line current, thermal stability, voltage stability, etc.) or economic restrictions (e.g., priority feed in, contract enforcement, etc.) are binding and thus restrict the power transmission between regions; congestion management aims at obtaining a cost optimal power dispatch while accounting for those constraints. 30 “Wind farms paid £900,000 to off for one night”, The Telegraph, 1 May 2011 31 Ev w4 (Alstom) 32 Ev 47 (DECC), section 17; Ev 56 (Ofgem), section 1.12 33 Q 119

A European Supergrid 13

29. Congestion is also a problem for trading electricity across borders, when intermittent renewables in one jurisdiction are producing so much electricity that transmission capacity to other countries is exceeded. Congestion costs across the most congested interconnectors in Europe are currently estimated to be €1.3bn each year.34 According to E3G, if only half of the estimated requirement for inter‐regional transmission capacity was built, the result would be that 15–20% of renewable power generation would have to be curtailed off the system because of transmission bottlenecks, at a cost significantly exceeding the cost of the transmission capacity.35 In other words, the cost of development of offshore grid assets could be partially or wholly offset by savings on curtailment costs from a constrained electricity system.

30. The UK electricity transmission system needs to be updated. It is no longer good enough to patch up the old system. The Government must produce a new plan for electricity transmission that includes interconnection and integrated offshore assets and the development of a supergrid could help achieve this. In particular, it is utterly unacceptable that large costs are incurred by the System Operator and consumers to curtail wind supply because the system cannot deliver the electricity to where it is needed. The problem of transmission is turning a potentially profitable resource into a potential liability. Unless this problem is addressed there is a risk that public scepticism about renewable energy and wind in particular will grow. The Government should commission an assessment of the most efficient way that offshore connections via a supergrid could be used to ease onshore congestion.

Landscape and transmission assets

31. The creation of an integrated offshore grid could also help to reduce visual and physical impacts on the landscape. When north-south reinforcements are made onshore, National Grid’s current policy means more overground electricity lines, towers, poles, new substations and other above ground installations. The National Policy Statement on electricity networks infrastructure (EN-5) recognised that these developments would involve environmental and social costs.36

32. An integrated offshore grid could reduce the amount of intrusive overland assets that will need to be built and also reduce the effect of bringing power from offshore renewables and interconnectors onto the onshore grid. Ofgem has estimated that £32bn of investment in transmission assets will be needed by 2020. The footprint of new transmission assets could be particularly intrusive if new offshore wind assets all bring their electricity ashore in separate radial connections. These converter stations are twice the size of a football pitch.37 National Grid estimated that a supergrid could reduce the number of necessary sites by half.38

34 Ev w52 (WWF-UK), executive summary 35 Ev w47 (E3G), section 24 36 Department of Energy and Climate Change, Appraisal of Sustainability for the revised draft National Policy Statement for Electricity Networks Infrastructure (EN-5), October 2010, para 3.2 37 Q 59 [Alison Kay, National Grid] 38 Q 59

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33. The Campaign to Protect Rural England (CPRE) added its advocacy for a supergrid “where this reduces the need to construct new onshore transmission lines and supports the wider decarbonisation of the power sector”.39 CPRE noted that an integrated solution would require around half the number of substations and one quarter the distance of overhead lines compared to a traditional connection regime.40

34. Moreover, the number of acceptable landing points appears to be limited. Dr Harrison of the Institution of Engineering and Technology told us that landing sites were a “really scarce resource” and argued that “finding landing sites for cables that are environmentally and socially acceptable is increasingly difficult”.41

35. The need to transmit electricity from north to south and from offshore to onshore could have a very damaging effect on the landscape. An integrated offshore grid could minimise the environmental impact of new transmission assets. We recommend that the Government should produce a cost estimate of the value of the social and environmental savings made by reducing the intrusion of onshore transmission assets and publish its assessment of the relative costs of different transmission options: overhead lines; undergrounding; and offshore High Voltage Direct Current lines.

39 Ev w28 (CPRE), section 1 40 Ev w28 (CPRE), section 3c 41 Q 16

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4 The benefits of increased interconnection

36. Some witnesses identified the integrated offshore grid as the most important part of early offshore transmission developments. Others, such as RenewableUK, highlighted the importance of interconnection and emphasised the economic case for increasing linking between national electricity systems.42 In this chapter, we look at the economic and energy security rationale for building increased interconnection into an offshore grid.

37. In 2002, the EU Council set the target for all Member States to have electricity interconnections equivalent to at least 10% of their installed production capacity by 2005. In 2010, nine Member states still did not meet this target including the UK where total interconnection amounts to around 1.5 GW compared to around 85 GW installed capacity.43 The UK has proportionately less interconnection capacity than all the other main European electricity markets, partly because of the higher costs of sub-sea interconnection compared with links between Member States on the Continent.44

38. The Minister told us that the UK “should be taking forward bilateral negotiations on some strategic interconnectors to begin with: to Norway, potentially to Iceland, to , additionally to France”.45 The UK is also one of the signatories to a Memorandum of Understanding on delivery of an integrated offshore grid in the North Seas [see Annex II]. However, the National Renewable Energy Action Plan for the United Kingdom (required under the Renewable Energy Directive 2009) and DECC’s Renewable Energy Roadmap 23050 included no explicit targets or plans for interconnection.46

39. In the past, the UK has been able to achieve a balanced electricity supply independently: enough reserve capacity has been available to meet fluctuations in demand and supply. While the rest of the continent is becoming increasingly interconnected, the UK only has a few gigawatts of interconnection to the Continent and : a) Interconnexion France-Angleterre (IFA) (2 GW); b) The Moyle (between and Scotland) (0.6 GW); and c) British- interconnector (Britned) (1 GW).

40. Balancing the UK’s electricity system in isolation has been possible because the system has been based largely on predictable and flexible fossil-fuel and nuclear supply. In future, however, the increased proportion of intermittent renewables needed to meet the UK’s targets will mean greater fluctuations in supply and demand.

42 Q 38 [Alex Murley, RenewableUK] 43 Department of Energy and Climate Change, Revised draft overarching National Policy Statement for energy (EN–1), October 2010, paras 3.3.22 and 3.3.7; Ev w52 (WWF-UK), executive summary; EU Commission, DG Energy, The Internal —Time to Switch into Higher Gear, Non-paper,2011. 44 Ofgem, Electricity interconnector policy, ref 12/10, January 2010 45 Q 131 46 National Renewable Energy Action Plan for the United Kingdom, pursuant to Article 4 of the Renewable Energy Directive, Council Directive 2009/28/EC

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41. A supergrid could provide a much wider range of opportunities to export excess electricity when the wind is blowing and new routes to import electricity at times of low- supply. Dr Harrison of the Institution of Engineering and Technology told us that coverage across time zones could exploit time differences in demand across different parts of Europe.47

42. A supergrid could also contribute to security of supply. John Scott of the Institution of Engineering and Technology explained that “an interconnected mesh […] is much more secure against shocks, like severe events or geopolitical disruptions but, more than that, it is strategically much more flexible for the long-term”.48 Eddie O’Connor of Mainstream Renewable Power argued that a link with Norway, which has a substantial hydro resource, and another to Germany (a large demand centre and source of wind energy) and the Alps—where the Swiss are developing pump storage—would further enhance minute-by- minute security.49 Iceland, , , and are potential partners for interconnection.50 Such links could provide access to a number of different kinds of renewable generation—including wind, solar, geothermal, marine and hydroelectric—as well as access to more conventional generation such as gas, , oil and nuclear.

43. However, complex regulatory arrangements would be needed to ensure equitable access and prevent nationalistic behaviour. Moreover, in times of supply shortage, imports from further afield (such as North Africa) could increase geopolitical risks.51

44. Furthermore, increased interconnection through a supergrid would not guarantee supply at times of . Alex Murley from RenewableUK drew a comparison with gas interconnection, arguing that “when you call upon an interconnector, there is no guarantee it will supply you any power at your time of need.” He gave the example of “the gas interconnection between Netherlands, GB and , where quite often at times when our system needs—it gets very cold in the UK; it is also very cold on the continent— the gas isn’t there”.52

45. However, WWF noted that it was unlikely that exports from the UK electricity market would occur unless there was sufficient capacity. At times of high demand and low supply, there would be “a price barrier preventing export of electricity out of the UK system”.53

46. The UK is far behind the EU’s targets on interconnection. The Government should agree to meet European targets for interconnection by 2020 and we recommend that in its Response to this Report that it sets out its own expectations for interconnection up to 2050.

47 Q 2 48 Q 5 49 Q 6; Ev w52 (WWF-UK), executive summary 50 Ev w11 (Association of Electricity Producers); Ev w30 (DONG Energy) 51 Q 6 52 Q 48 53 Ev w52 (WWF-UK), section 2

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Balancing intermittency

47. Intermittency—when a particular source of energy is not constant and may well be unpredictable—will be one of the major risks to security of supply in future, as an increasing proportion of variable generation such as is added to the system.

48. Intermittency poses two problems: first it will increase price volatility; second it will damage grid stability, increasing the challenge of system balancing and system reliability.54 Renewable energy has prompted additional demand for reserve and response operations in order to balance out unpredictable peaks and troughs in supply. This will be expensive and present challenges in terms of achieving adequate supply when it is needed. This trend will get worse as EU member states increase the deployment of wind power and other intermittent renewable energy sources to deliver the 20% renewable target formulated in the European Renewables Directive of 2009.55

49. The Committee on Climate Change has argued that the challenges presented by intermittency should not be overstated. It has suggested that aggregate intermittency from geographically dispersed sources will be lower than intermittency at individual sites due to different wind patterns at offshore wind sites near shore and in deeper waters and that different intermittent renewables have different availability patterns. This would reduce overall variability in a diverse portfolio.56

50. A supergrid would be able to contribute to achieving a diverse portfolio of renewables by linking up different kinds of renewables across a wider geographical area. Eddie O’Connor of Mainstream Renewable Power illustrated the advantages of linking up UK renewables not only around the UK but with other countries such as Germany for the management of intermittent capacity. By connecting up with 25 GW of wind in Germany there could be 1,500 miles in the system—enough to overcome the problems of localised intermittency.57

51. Increased interconnection with European and Scandinavian systems could offer scope for flexibility, given that load factors for renewable generation and storage technologies were likely to vary significantly across systems. We heard that interconnection could provide 16 GW of flexibility by 2030 and 35 GW by 2050.58 A supergrid could help to take advantage of geographical and technological diversity, providing a natural risk mitigation measure by ensuring that wind generation was spread across wind zones and weather systems—some kinds of renewables would be likely to be generating somewhere whenever they were needed.59

52. However, other witnesses argued that a supergrid would not be a complete solution to the challenges associated with intermittency. Pöyry, the consultancy firm, recently assessed the impacts of intermittency based on the level of renewables set out by European National

54 Ev w21 (RWE ), section 4.1 55 Ev w1 (Climate Policy Initiative), section B 56 Committee on Climate Change, Renewable energy review, May 2011, p 55 57 Q 3 58 Q 128 [Daniel Dobbeni, ENTSO-E] 59 Q 114 [Daniel Dobbeni, ENTSO-E]; Ev w21 (RWE npower), section 4.1

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Renewable Energy Action Plans (NREAPs). Its report concluded that “in Northern Europe the overall output of the renewable generation will be highly variable, and will not average out because of weather and geography”.60

53. WWF, however, argued that the Pöyry report only considered the situation in Northern Europe and therefore failed to consider the benefits of interconnection with the vast renewable and especially solar resources of Southern Europe and Northern Africa. WWF also argued that the report under-estimated the benefits of an integrated European market model and that it did not look at the effect of aggregating demand patterns across Europe.61

Reducing the need for backup generation: reserve sharing

54. Up till now, the typical way of dealing with the variability of intermittent supplies (and other volatility in supply and demand) has been to call upon flexible backup capacity to fill the gap when the wind is not blowing and the sun is not shining. As the amount of intermittent renewable generation increases as a proportion of total installed capacity, it will be necessary to maintain increasing amounts of backup or “peaking” plant that can be dispatched quickly to meet demand when renewables are not generating. Currently installed capacity in the UK is considerably greater than peak demand, because quick to operate, flexible generation is needed to respond to fluctuations in demand.62 This backup generation is usually gas-fired or coal-fired.

55. Sharing electricity across Europe could reduce the amount of back‐up generation required in each Member State, reducing costs and emissions. Pöyry argued that in periods of low wind generation across Europe, substantial backup would still be required to meet demand.63 Other witnesses were more optimistic. For example, the European Climate Foundation Roadmap 2050 report found that increased interconnection could limit the “” (or utilisation rate) of back‐up plants to 5% in an 80% renewable energy scenario and reduce total reserve requirements by 35–40%.64 E3G estimated that this could save €34.3 billion in backup generation across Europe.65 In a 100% renewable energy scenario, load factor of back up plants could be reduced by up to 8%.66

56. At the moment, battery technology for electricity storage is expensive and inefficient. The availability of hydro facilities in the Alpine region and in Nordic countries was highlighted for its potential for electricity storage.67 Pumped storage, which can be topped up when electricity supply is abundant and cheap during sunny, windy periods, offers a

60 Pöyry, The challenges of intermittency in North West European power markets, March 2011 61 Ev w52 (WWF-UK), section 3 62 Ev w1 (Climate Policy Initiative), section B 63 Pöyry, The challenges of intermittency in North West European power markets, March 2011 64 Ev w52 (WWF-UK), section 5 65 Ev w47 (E3G), section 24 66 Ev w52 (WWF-UK), executive summary 67 Ev w52 (WWF-UK), section 7

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low-carbon and flexible resource that can be called upon quickly to meet peaks in demand.68

57. According to WWF, a European supergrid was the key physical pre-requisite for improving electricity resource sharing across Europe and that new infrastructure could allow substantial savings in the long‐run by substantially reducing the amount of “back‐up” peaking generation required to support an increasingly higher share of renewables.69

58. We recommend that the Government investigates more thoroughly the potential impacts and costs of intermittency on maintaining the when there is more renewable generation and analyses the contribution that increased interconnection could make to evening out intermittency.

Economic opportunities

59. One of the key advantages of promoting integration and interconnection through a supergrid would be the economic opportunities associated with exporting technology and electricity. The offshore renewables resource around the is potentially vast. This includes five main technologies: offshore wind with fixed foundations, offshore wind with floating foundations, tidal stream, tidal range and . According to National Grid and the Offshore Valuation Group, the UK’s offshore renewable resource has the potential to transform the country from a net energy importer to a net energy exporter over the next four decades.70

60. The Offshore Valuation Report (commissioned by DECC) found that in harnessing 29% of the practical offshore renewable resource by 2050 the electricity equivalent of 1 billion barrels of oil could be generated annually, matching and gas production and making Britain a net electricity exporter, generating around 145,000 jobs and £62bn of annual revenues for the UK. The report estimated the UK’s full practical renewable energy offshore resource at 2,131 TWh/year, which is six times the current UK electricity demand.71 WWF argued that a European supergrid was key to unlocking this electricity generation potential and the benefits it could provide to the UK economy.72

61. In general, witnesses agreed that an integrated offshore grid could help the UK to maximise access to its potential offshore resources and that increased interconnection could help to export the large amount of electricity produced. National Grid argued that “it is likely that, for the UK, somewhere around 10–15GW of interconnection would enable the UK to transition to a low carbon energy mix in an affordable and secure manner”.73

68 Ev 47 (DECC), section 17; Ev 56 (Ofgem), section 1.12 69 Ev w52 (WWF-UK), section 3 70 Ev w52 (WWF-UK), executive summary 71 The Offshore Valuation Group, The Offshore Valuation: A valuation of the UK’s offshore renewable energy resource, 2010, p 6 72 Ev w52 (WWF-UK), section 2 73 Ev 68 (National Grid), section 10

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62. Moreover, the opportunities to export electricity would be an important aspect of the investment case for new offshore renewable technologies, offering a route to market when UK demand was low or when power could not easily be delivered ashore in the UK. As the ISLES Project put it, “a key driver for investing in harvesting a renewable bonanza is export”.74

UK comparative advantage

63. The second element of export potential associated with the supergrid is the ability to capitalise on technological developments in the offshore transmission sector. The UK has a well developed offshore oil and gas sector, with substantial engineering know-how which could be transferable to other offshore industries, particularly as output from the oil and gas sector continues to fall.

64. Some key technologies for offshore grids are in their infancy, particularly HVDC transmission technologies. However, large scale demand for these newer technologies is still expected as other countries move toward a low-carbon economy. IMarEST argued that an integrated AC/DC grid could be a template for what will be needed later in the rest of the world, particularly in US and China.75

65. We heard that investment in offshore transmission could create 775,000 jobs in Europe by 2020 and add €19bn to European GDP by 2020, compared to growth under a business‐as‐usual scenario. By 2020, we were told, the offshore industry could create 50,000 new jobs in the UK alone. Alex Murley from RenewableUK suggested that:

[…] we have significant engineering capacity; we have the ability to have half of the global market for the next 10 years in our country. If we can develop the level of annual deployment that encourages manufacturing to take place, and companies like Siemens and GE to come and put their factories here, for the short term it will grow to provide export opportunities across Europe and the world. I think the have recently been doing a piece of work for BIS, for DECC, for the Technology Strategy Board, in terms of where to focus strategic R&D investment, and they are positive that, by 2050, the global market for offshore wind is going to be worth £170 billion annually. If we can just get 10%, 20% of that, that is creating 250,000 UK jobs by 2050. We suggest that by 2020, with the levels of deployment that we foresee in offshore wind, with 24 gigawatts generation by 2020, that jobs could be upwards of 50,000.76

66. The UK has already missed an opportunity to become a major manufacturer of onshore wind turbines. Alex Murley of RenewableUK, for example, commented on the failure in the UK to develop the onshore wind industry. He argued that “we failed to develop manufacturing and export opportunities, and therefore the jobs, because we did

74 Ev w60 (), section 3.1.3 75 Ev w36 (IMarEST), section 10.2 76 Q 46

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not support our indigenous market at the very outset of that technology. All the jobs now exist in Denmark, Germany and Spain”.77

67. The UK is experiencing a reduction in its energy independence as North Sea oil and gas supplies are depleted. The offshore renewables resource is potentially vast and offers an important element of a future energy mix. The Government should set out its expectations for the development of the offshore renewables resource detailing support measures and expected capacity out to 2050.

68. The UK currently enjoys a real comparative advantage in the offshore technology sector, but this advantage may be short lived. The Government should develop a plan for supporting the scaling-up of the offshore technology sector to ensure that the UK’s expertise does not vanish overseas.

77 Q 46

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5 Barriers to the development of a supergrid

69. Despite the potential economic, energy security and environmental advantages of a supergrid, there still remain very substantial obstacles to the construction of a European integrated offshore grid. In this chapter, we consider the technical, economic and political challenges that would need to be overcome before a supergrid could be developed.

Technological barriers

70. Matthew Knight of Siemens told us that “everything that we need [to develop a supergrid] is available now or certainly within the lifetime of a project”.78 However, the development of a supergrid would entail a number of technical challenges, including the development of “missing technologies”. Witnesses to the inquiry thought that these could be brought forward by the industry provided there was a perceived demand for them.79

71. Most witnesses agreed that a supergrid would need to employ High Voltage Direct Current (HVDC) systems with multiple points of connection (referred to as multi-terminal schemes).80 According to Dr Harrison from the Institution of Engineering and Technology, there are many examples of very large point-to-point connections using HVDC technology, but “what we don’t have at the moment are large meshed DC systems [...] that is something new”.81

72. A HVDC transmission system uses direct current for the bulk transmission of electrical power, in contrast with the more common (AC) systems. For long-distance transmission, HVDC systems may be less expensive and suffer lower electrical losses.82 For shorter distances, the higher cost of DC conversion equipment compared to an AC system may be warranted where other benefits of direct current links are useful. In 2012, the longest HVDC connection is likely to be the Rio Madeira link connecting the Amazonas to the São Paulo area. The length of that DC line is over 2,500 km.83

73. A HVDC supergrid would be a “low inertia” system. This means that within milliseconds a fault within the DC network would give rise to a very large fault current. According to Alstom, it would be necessary to develop very fast detection techniques to operate the correct DC at the correct time. Whilst such protection methods exist today for point‐to‐point HVDC converter schemes, for a complex, meshed, HVDC grid there are likely to be challenges in terms of detection and discrimination.84

78 Q 7 79 Q 119 [Alberto Pototschnig, ACER]; Ev w21 (RWE npower), section 1 80 Ev w9 (E.ON UK), section 1 81 Q 10 82 Q 12 [Matthew Knight, Siemens] 83 “Rio Madeira: the longest transmission link in the world—2,500 kilometres”, ABB, http://www.abb.com/industries

84 Ev w4 (Alstom)

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74. Cables at the required rating and other technologies such as voltage source convertors are not yet in service, but this technology is already in development, and orders have been placed for 1GW cables and associated convertors. National Grid did not believe this development would be significantly challenging, a view in which they said was supported by all major European manufacturers.85

Interoperability

75. At the moment, a rapid roll-out of offshore wind and other renewables technologies is taking place in several Member States and each is developing its connection regime differently. Construction of a supergrid would require common technical standards to be agreed and implemented to ensure that all component parts work together, even if provided by different technology providers.86

76. At present each HVDC project constructed is specified in a way that maximises the investor’s return on investment. Hence, each HVDC interconnection is bespoke. According to Alstom, one of the largest companies supplying transmission technologies, for a supergrid to become a reality there would need to be some level of standardisation in the specification of HVDC equipment to ensure that equipment from different suppliers could operate together, allowing for competitive bidding at each stage of the development of a HVDC supergrid.87 However, Alstom also warned that too much standardisation could lead to stranded assets if current installations were rendered obselete. 88

77. In Europe there are at least 27 kinds of power system transmission and distribution networks. Transmission System Operators now have the opportunity, whilst working towards supergrids in the sea and electricity highways, to define commons standards. This could significantly reduce the overall costs of a supergrid as well as encouraging greater competition in the supply of components.89

78. Greenpeace emphasised that options for a future supergrid should also take into account expected developments in smart grids and electricity storage technologies (see Figure 2). The benefits of this could be: a) smart management could work with big electricity users, spreading out their peak demand to a different part of the day, evening out the load on the overall system; and b) electricity from renewable sources could be stored and dispatched to where it was needed in a number of ways, using advanced grid technologies.90

79. Friends of the Supergrid agreed that new elements of smart grid technologies could form an important part of a supergrid system. For example, smart technologies may be able to respond to changing supply across the system by implementing demand-side

85 Ev 68 (National Grid), section 24 86 Ev w30 (DONG Energy), section 3 87 Ev w4 (Alstom) 88 Ev w4 (Alstom) 89 Q 111 90 Ev w19 (Greenpeace UK), section 3

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responses.91 The use of smart technologies could also help to enable large scale electricity storage as part of a supergrid, so that electricity produced at times of peak supply can be called upon when supply is reduced.92

80. So far, DECC has mentioned that more interconnection would be needed as a supply option but has given no detail on how interconnection or an integrated grid would be able to contribute to “smart” functions such as demand-side management.93 However, in the Electricity Market Reform White Paper the Government committed to develop an electricity systems policy in 2012, “looking at the future system framework and focusing on challenges around balancing and system flexibility”. This would include clarifying the role of demand side response, storage and interconnection, and the development of a smarter grid.94

91 Ev 68 (Friends of the Supergrid), section 4.1; Ev w47 (E3G), section 12 92 Ev w52 (WWF-UK), section 4 93 Department of Energy and Climate Change, Smarter grids: the opportunity, December 2009, p 14 94 Department of Energy and Climate Change, Planning our electric future: a White Paper for secure, affordable and low carbon electricity, July 2011, section 42

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Figure 2: The integration of smart grids, storage, and a supergrid

North Sea wind turbines and offshore supergrid

North Sea wind turbines CITY and offshore supergrid

SMART GRID CITY

SMART CITY GRID CITY

SMART SMART GRID GRID

existing AC system NEW HVDC SUPERGRID

CITY CITY

SMART SMART GRID CITY GRID CITY

SMART SMART CITY GRID GRID

SMART GRID

Smart grid using micro grids and virtual power plants

DISTRIBUTED GENERATION GRID 3 x 20kW 90kW 2 x 60kW wind turbine solar PV gas turbine power grid

APP MINIGRID CSP in Southern Europe and Africa 1kW vertical 30kW gas 23kW 64kW test minigrid wind turbine turbine solar PV load bank control room

VIRTUAL MICROGRID 16kWh 1kW 1kW wind battery bank solar PV turbine

+ -

site loads Source: Energynautics.

Source: Greenpeace, ‘Battle of the grids’, January 2011

81. The UK has agreed substantial development of offshore wind. Connections for these and other developments will need to be compatible with any future grid initiatives. In its electricity systems policy DECC must set out how plans for offshore grid developments and interconnection will be coordinated with “smart” improvements. We recommend that the Government considers how offshore generation could be integrated with electricity storage technologies.

82. The Government should ensure that Offshore Wind Round 3 grid connections are super-grid compliant to avoid locking out potential future electricity sales to Europe. Working with Ofgem, the Crown Estate and other stakeholders, it must identify the minimum requirements for ensuring that present developments could be connected into a future offshore grid.

26 A European Supergrid

Supply chain constraints

83. More pressing than the problems of underdeveloped technologies are potential problems with supply chain constraints. The delivery of the large HVDC cable currently in design between Hunterston in Scotland and the Wirral is expected to take up the UK supply capacity for high capacity HVDC cables for at least three years.95 Timely signals will be required to ensure sufficient supply chain capacity is available and asset standardisation is developed.96 If this capacity is not developed, the construction of offshore transmission systems may be delayed, or significant imports of components may be required.

84. Daniel Dobbeni, President of the European Network of Transmission System Operators (ENTSO-E), of argued that recent policy decisions in Germany, Switzerland and Italy—where politicians were moving faster towards a new energy mix—would affect manufacturing capacity among the companies who would have to deliver those new grid products. He was sure that there was not enough manufacturing capacity today to answer all of Europe’s needs, “because we should not expect China or other countries on this planet, to stop investing in their networks”.97

85. The technological challenges associated with the development of a supergrid are not insurmountable. The basic kit is available and the industry is confident that other solutions will become available once a market is clear. To unlock the private sector investment the Government needs to decide whether the supergrid project will go ahead and, if that is its intention, it should make a public commitment to it.

Costs

86. Whilst the economic opportunities associated with a supergrid may be large, there are also tremendous uncertainties about the balance of costs and benefits, especially for UK consumers who may have to bear the cost of investment. Centrica in particular warned us that “the total costs of a supergrid may outweigh the benefits”.98 Others were more confident about the overall benefits. RWE npower suggested that although costs would be high, “the benefits of providing energy stability, price control, capital cost savings from integrated infrastructure and realising long term renewable energy targets whilst ensuring security of supply outweigh these costs”.99

87. Daniel Dobbeni argued that the decision to go down the renewables, decarbonised route in the EU meant that “you need to tackle measures in terms of how to ensure that the power system will work with the same reliability with this new energy mix. In that sense, the cost issue is to be linked to the political decision to move towards renewable energy sources”.100

95 Ev 68 (National Grid), section 18; Ev w32 (Centrica) 96 Ev 68 (National Grid), section 25 97 Q 106 98 Ev w32 (Centrica), section 11 99 Ev w21 (RWE npower), section 3.1 100 Q 97

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88. At a time when there are still significant doubts about the economic viability of huge expansion of offshore wind, it is clearly essential that these are resolved before huge extra investment in transmission capacity is undertaken. We recommend that the Government commissions and publishes an updated analysis of both the costs of offshore wind and of the costs and benefits of early investment in transmission networks compatible with the eventual construction of a supergrid.

Construction costs

89. DECC has estimated that the cost of connecting our renewables resources in the North Sea could be in the region of £15–20bn over the next decade, but has not made any assessment of the costs of a more integrated grid including interconnection.101 Eddie O’Connor of Mainstream Renewable Power claimed that the costs of “phase 1” of the supergrid, suggested by Friends of the Supergrid, would be about €28bn.102 The EU Commission referred in its Infrastructure Communication to the Offshore Grid study which estimated that offshore grid development in the North and Baltic Seas would cost €32bn by 2020 leading to a total of €90bn by 2030 with radial connection of offshore renewables, which could be reduced by €15bn (to €75bn) with clustering of wind farms.103 We heard that the additional cost of integrating future generation in a coordinated grid in the North Sea could range from €63bn to €70.5bn depending on the design. The cost of these projects is expected to be borne by the industry developing them, and then passed on to consumers.

90. Some witnesses suggested that since transmission costs represented only a small proportion of consumers’ bills—around 4% to 6% or 7% across the EU—the impact of offshore grid developments would be less than current volatility in electricity prices.104 WWF and E3G agreed that transmission investments would amount to a small part of total infrastructure spending.105 However, in our work on Ofgem’s Retail Market Review, SSE blamed rising transmission costs for increases in consumer prices.106

Anticipatory investment

91. One of the main cost risks associated with the development of a supergrid is that in order to achieve a coordinated grid, some investment would need to be made in transmission assets before generation assets are ready. There is a serious risk of “stranded assets” if investments are made in cables which are not used because the offshore industry does not develop as expected. There is a particular risk that offshore assets will be left stranded if the offshore wind sector does not expand as rapidly as anticipated. Building

101 Ev 47 (DECC) 102 Q 4 103 Ev 47 (DECC), section 14 104 Q 120 [Daniel Dobbeni, ENTSO-E] 105 Ev w52 (WWF-UK), section 3; Ev w47 (E3G), section 23 106 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem’s Retail Market Review, HC 1046, Ev 96

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cables capable of transmitting large amounts of electricity that never gets developed could leave generators and consumers exposed to major financial liabilities.107

92. Certainty in the Government’s intentions for the offshore sector would reduce the risks associated with anticipatory investment. According to the Committee on Climate Change “firm commitments on support for offshore wind and marine generation through the 2020s should be made now”.108 As our inquiry came to an end, DECC announced that it would establish an industry Task Force to set out a path and action plan to reduce the costs of offshore wind to £100/MWh by 2020 and announced its intention to provide up to £30m of direct Government support for offshore wind cost reduction over the next four years.109 However, DECC has not committed itself to levels of support through the 2020s as recommended by the CCC.

93. The Minister of State for Energy and Climate Change recognised the difficulties associated with anticipatory investment because developers would potentially have to carry that extra cost without getting any benefit for it. He told us that DECC had “asked National Grid to help on this; Ofgem are helping on this; DECC is doing its work on this; so it is actually getting the building blocks in place in the right order”.110 However, this work will need to be undertaken quickly, if it is to match the anticipated development of offshore wind.

94. Greenpeace argued that the development of international transmission projects where the individual business case does not sufficiently reflect the wider economic benefit would require innovative financing mechanisms, as well as demonstration projects led by the .111 SSE also considered that there is currently little incentive for utilities to consider developing strategic connections rather than point to point interconnectors. SSE explained that creating assets that could form part of a wider grid “carries technical and commercial risk which needs extra support to become attractive” and suggested that “a compromise might be for some pre-investment in ‘hubs’ which would facilitate later connection of other offshore grids”.112

95. Certainty could reduce the risk of anticipatory investment in transmission assets. If the Government decides to pursue a rapid roll-out of offshore wind, coordinated development of an offshore grid would help to maximise the economic benefits of accessing that resource. A half-hearted approach to developing an offshore network may lead to inefficiencies. If the Government wants to minimise the costs of building a supergrid, it should adopt the advice of the Committee on Climate Change and make firm commitments on support for offshore wind and marine generation through the 2020s in order to create the confidence necessary for anticipatory investments.

107 Ev w32 (Centrica), section 12 108 Committee on Climate Change, The renewable energy review, May 2011, p 11 109 DECC, Renewable energy roadmap 2050, July 2011, p 6 110 Q 134 111 Ev w19 (Greenpeace UK), section 1 112 Ev w26 (SSE supplementary)

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96. We recommend that the Department of Energy and Climate Change consults on options for “oversizing” transmission assets in order to create the building blocks of a future offshore grid and sets out plans for anticipatory investment in its forthcoming electricity systems policy.

Cost sharing

97. One of the most intractable problems associated with the development of a supergrid appears to be the issue of dividing up the costs of shared transmission assets between different countries. The Minister did not believe that cost-sharing was a problem, pointing out that infrastructure investments would come from individual companies, so there should be no costs for the development of an offshore grid from the British Government.113 To us, this seems over-optimistic and completely ignores the fact that the substantial extra costs involved will eventually be borne by consumers. As our recommendations indicate, we believe that there will be some need for Government to provide a framework and some funding if a supergrid is to get started.

98. Many witnesses highlighted the considerable difficulty of cost-sharing. We heard concerns about how the costs (ultimately be borne by electricity consumers) could be allocated across Member States, especially when benefits are uneven.114 On behalf of the Agency for the Cooperation of Energy Regulators (ACER), Alberto Pototschnig told us that when infrastructure provides benefit for two or more jurisdictions there is a problem 115 about how costs are allocated. He explained that ‘‘there is in operation in Europe, an interim inter-TSO compensation schemes since March 2002’’. However, Mr Pototschnig believed that this regime may need to be modified to take into account benefits that are not necessarily reflected in energy flows, such as ‘‘wider benefits of integration, of sustainability 116 and security of supply’’. He pointed out that cost-sharing considerations for shared infrastructure usually came down to ‘‘What does this mean for country X?’’.117

99. There is enormous uncertainty about how transnational interconnection infrastructure will be financed and, in particular, how the costs would be allocated between Member states, transmission system operators (TSOs), taxpayers or consumers.118 Electricity infrastructure in Europe is generally built on the basis of “user commitments” following agreement between Transmission System Operators and regulators in each jurisdiction. Electricity networks are therefore financed through regulated tariffs that are collected from users of the network to recover the original investment costs—the “user pays principle”.119 Usually, countries that are net importers ultimately pay those that are net exporters via a centrally administered fund.120 International transmission lines may also be built through

113 Q 184 114 ESG 18 [Centrica], section 19 115 Q 101 116 Q 123 117 Q 124 118 Ev w52 (WWF-UK), executive summary 119 Ev w52 (WWF-UK), section 3 120 Ev w32 (Centrica), section 21

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the “merchant interconnector” model, in which operators may profit from the difference in electricity prices between countries.121

100. To date in the UK interconnectors have been developed as stand-alone projects outside the price controlled transmission business. The developer is fully exposed to the market demand for the capacity and the price determined via auctions. In other Member States, it is more common for interconnection to be developed by national transmission companies with revenues underwritten by consumers.122

101. Witnesses highlighted difficulties with both options. For example, price convergence may discourage further development of merchant interconnectors and make them unviable. The regulated tariff model may run into challenges where regulatory rules vary, benefits are more regional than national, or where a link between two countries primarily benefits a third country, or where projects are very risky.123

102. In order to overcome these difficulties, public financing support may also be needed in cases where market failures prevent the required investment taking place.124 At European level, there are already several sources of public support for network investment, including the Trans‐European Network for Energy (TEN‐E), Structural Funds, and the European Energy Programme for Recovery (EEPR). However, SSE argued that the current system of designating projects to be of “European Significance” must be revamped to allow non-TSO led projects to be included. They considered that early stage development funding must be channelled to help projects in the first months of their development and fund technical studies, as the current TEN-E funding scheme has project maturity as one of its key criteria, but once projects are “mature” they may not need extra funding support.125 The European Commission is currently considering a new financing and regulatory instrument on energy infrastructure.126

103. We do not share the Minister’s confidence that cost-sharing between European Member States will not be an issue. We believe that this view is mistaken and complacent, as the costs will be high investments by companies and by Transmission System Operators will ultimately be paid for by consumers in different countries, who may not benefit equally from the development of new infrastructure. The Government must work with its European partners to develop a methodology for cost sharing that is transparent and fair and takes into account how costs are passed on to consumers, not just government spending.

104. Public subsidy may be needed in order to overcome market failures and additional for investment in the first stages of a supergrid. The justification for such a subsidy needs to be examined carefully. At the European level, the Government should suggest that the European Commission changes its criteria for funding selection to include the

121 Ev w47 (E3G), section 26 122 Ofgem, Electricity interconnector policy, ref 12/10, January 2010 123 Ev w47 (E3G), section 27 124 Ev w47 (E3G), section 29 125 Ev w24 (SSE) 126 Ev w47 (E3G), section 31

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early stages of projects and projects that are not being developed by the Transmission System Operator. In home waters, the Government should consider whether to promote integration of offshore networks through a combination of public finance and standards for shared capacity in new transmission assets.

Price arbitrage

105. For markets where prices are consistently lower than those in neighbouring markets it is possible that prices could rise with increased interconnection. On the other hand, markets with higher prices could see prices fall. DECC argued that, in reality, it is rare for prices to be consistently lower or higher, but instead differentials tend to fluctuate over years.127

106. Generally, in the EU-15, electricity prices (including tax) are higher than in the UK at the moment. The Minister told us that “If you look at the EU15 [...] we are fourth lowest in electricity prices across those and our prices are, on average, 20% below the median prices”.128 However, prices in key partners such as Norway tend to be lower than UK prices. At least in the short term, then, it is not clear what effect interconnection would have on UK prices. Theoretically, interconnection should result in more efficient use of resources across the EU and, in aggregate, reduce costs to consumers. Therefore, overall there should be benefits from joining up individual Member State markets, though these need to be weighed against the costs of more interconnection.129

107. James Cox of Pöyry explained that in several of Pöyry’s models for interconnection between the UK and Norway, energy prices had risen in both countries. He suggested that Norwegian prices were usually low because of the large amounts of hydro power available, so linking with UK markets would tend to raise prices. However, UK prices could also rise because, “if you assume there is a lot of wind in the UK, you start to get a lot of low-price periods where the price is zero or negative”. In this scenario increased interconnection could result in higher prices.130

108. We have previously raised concerns that effect of UK policies that distort the price of electricity may lead to perverse outcomes in the case of increased interconnection. For example, the Carbon Price Floor and a future capacity mechanism could increase the price of electricity in this country, potentially causing UK suppliers to import more electricity.131 Centrica shared our concern about the interaction between Electricity Market Reform and transmission policy options, saying that “it is not clear whether adequate consideration has been given to interconnection and market price convergence through a form of market coupling”.132

127 Ev 47 (DECC), sections 19–20 128 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem’s Retail Market Review, HC 1046-ii, Q 191 129 Ev 47 (DECC), sections 19–20 130 Q 51 131 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742,16 May 2011 132 Ev w32 (Centrica), section 34

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109. We also heard that a supergrid could help to reduce the volatility of electricity prices. As intermittent renewables constitute a greater proportion of generation capacity, electricity costs may be subject to more variability as output varies. In order to balance supply and demand, the System Operator may be obliged to call on relatively expensive flexible options. However, aggregation of demand and supply patterns through a European Supergrid may result in much lower overall volatility, leading to lower costs for dealing with both daily and seasonal fluctuations of intermittent generation.133

110. The effect of interconnection on consumer prices is largely unknown. We recommend that the Government undertakes further analysis of the expected effect of increased interconnection on consumer prices. It should set out parameters for the acceptable effects of price arbitrage on consumer prices and how they weigh those changes against expected reductions in price volatility.

Regulatory challenges

111. In order to overcome difficulties such as cost-sharing, interoperability and coordination of infrastructure planning, coordination at the European level may be necessary. Witnesses agreed that regulatory obstacles posed some of the biggest barriers to the development of a supergrid. Matthew Knight of Siemens told us that at the moment, “to make the business case to build any part of that network, you are trying to cope with nationally focused energy incentives in each country and trying to find a way to make the right thing fit what we have”.134 He argued for more harmonisation in regulation and in markets across Europe.135

112. There are several initiatives underway to develop regulations for future offshore grids. The North Seas Countries’ Offshore Grid Initiative (NSCOGI), The All-Island Approach and The UK-Baltic Cooperation are all investigating the potential for an integrated offshore grid [detailed information on these initiatives can be found in Annex II].. The was proposed by the European Commission in the Second Strategic Energy Review, published in November 2008. Its purpose was to promote the “development of a blueprint for a North Sea offshore grid, interconnecting national electricity grids and plugging in planned offshore wind projects” as an energy security priority.136 According to the European Commission, the North Sea Offshore Grid should become one of the building blocks of a future . 137

113. It would be necessary to make sure that the access regime for shared infrastructure was consistent and equitable.138 An effective European supergrid would also require harmonised network codes governing generation dispatch rules, safety requirements as

133 Ev w47 (E3G), section 16 134 Q 2 135 Q 2 136 Q 97 European Commission, EU energy security and solidarity and action plan: second strategic energy review, MEMO/08/703 137 European Commission, EU energy security and solidarity and action plan: second strategic energy review, MEMO/08/703 138 Q 101

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well connection charging issues.139 The ISLES study (which is investigating offshore links between Scotland and Ireland) has identified challenging regulatory, territorial and political hurdles, and a complex patchwork of powers in three jurisdictions, including: a) a mix of offshore generation and regulatory frameworks; b) a mix of onshore grid capacity and regulatory frameworks; c) a mix of interconnection and networks; d) a mix of transmission pricing and market regimes, e.g. BETTA in the UK and the SEM on the island of Ireland; e) a mix of subsidy/incentive and charging, and capital cost recovery schemes; and f) a mix of sovereign state interest contributing to different targets—mutual and individual.140

114. To take one possible example of regulatory barriers, work in the North Seas Countries’ Offshore Grid Initiative has revealed that there is a significant difference at the moment in the regulatory regime applicable to connection of wind generation. We heard conflicting views about the appropriateness of the UK regime for offshore developments. The number of Offshore Transmission Owners (OFTOs) is potentially a problem for coordinating investments with European counterparts.

115. In most other EU countries, the building of electrical connection and interconnectors is the responsibility of the national Transmission System Operator (TSO). Uniquely in Europe, the current UK regime prevents the National Grid from building transmission assets offshore. Instead, the TSO is limited to building the necessary onshore equipment associated with the offshore assets.141 National Grid saw this as a problematic issue:

As you know, throughout most of the rest of Europe, the TSOs have been mandated to build their onshore network offshore. We believe [...] that there are some real benefits in allowing people to get on and do that. It then comes down to who is going to take the decisions on what the size of the link should be, and the TSO is very well placed to do that.142

116. The UK regime for the construction and operation of offshore transmission assets is designed to provide flexibility for generators in terms of who constructs the assets as well as cost-effectiveness to consumers from the competitive nature of the regime. Generators have a choice of constructing the transmission assets themselves or to opt for an Offshore Transmission Owner (OFTO) to do so. If they construct the assets themselves, then the generator must transfer the assets to an OFTO post-construction and pre-operation. OFTOs are selected on a competitive basis through a tender process. Ofgem, the energy

139 Ev w52 (WWF-UK), executive summary 140 Ev w60 (Scottish Government), section 3.3.2 141 Ev 50 (National Grid), appendix 142 Q 88

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regulator, estimates that such a competitive approach will result in savings of £350m to the consumer in relation to the first £1.1 billion of transmission assets tendered for Round 1.143

117. DECC and Ofgem have launched a project to undertake further work on coordination in 2011, to consider whether additional measures might be required within the competitive offshore regime to encourage the sharing of transmission assets within and across different offshore development zones in UK waters and, if so, how these measures might work in practice. The Offshore Transmission Coordination Group has been set up to assist DECC and Ofgem with this work.144 National Grid argued:

One of the problems that we do foresee is, when we are trying to co-ordinate around our transmission system operator colleagues around Europe, there will be 11 or 12 of them around the table, and with the current regime that we have, we could have 11 or 12 transmission system operators from the UK sitting around that table too, because we could have many transmission system operators offshore in the UK.145

118. DECC, however, suggested that any move to significantly change the offshore transmission regime between now and 2020 could provide unwelcome uncertainty.146 This was reinforced by E.ON who believed that clarity was important to the owners/operators and for generators who may want to connect to the supergrid.147

119. E.ON said that companies would also need to understand whether their offshore assets fell under the legislative framework of one or other Member State, as this could impact on the legal requirements that the plant has to meet, as well as the tax burden on it.148 They would need to understand the regime in which their plant would be operating, and would need to know who to approach for a connection, and be able to make a reasonable estimate of the likely costs of connection. Similarly, businesses wanting to trade across an interconnector would need to understand the regulatory arrangements of the connected systems and the charges that they would be expected to bear.

120. Centrica pointed out that it was unclear how an interconnector, that also connected an offshore windfarm, would be treated.149 To develop an integrated grid in the North Sea, it may be necessary to have consistent regulatory frameworks on all sides: “firstly, because that will make the development easier; secondly, because you don’t want to give spurious incentives for locating the capacity not where it is economically optimal but where there is a more favourable regulatory regime, for example, when it comes to access charges and connection charges”.150

121. It will be necessary to resolve regulatory issues in the next two to three years if work on an offshore grid is to begin in the 2020s. Without advances in these areas there is a risk

143 Offshore networks development, Department of Energy and Climate Change, http://www.decc.gov.uk 144 Offshore networks development, Department of Energy and Climate Change, http://www.decc.gov.uk 145 Q 88 146 Ev 47 (DECC), section 12 147 Ev w9 (E.ON UK), section 13 148 Ev w9 (E.ON UK), section 15 149 Ev w32 (Centrica), section 22 150 Q 102 [Alberto Pototschnig, ACER]

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of lock-in to an inflexible and sub-optimal infrastructure that could be detrimental to meeting energy policy aims.151 Witnesses suggested to us that “to enable maximum benefit for the UK, the Government should play a proactive role in driving this system forward and provide resources to enable the initiative to undertake detailed energy system modelling”.152 Several were keen to emphasise that the first stages of offshore grid development would be able to evolve from the bottom up, without waiting for the completion of regulatory processes. This would need to be balanced against the advantages of a planned approach.153 E.ON UK believed that a “big bang” approach to the development of a European supergrid was probably not achievable. Instead, they argued, “consideration should be given to a more gradual approach, perhaps with clusters of offshore generating plant connected in phases, but in a way that will allow the supergrid to be expanded and extended later as demand for it arrives and the economic case is demonstrated for each extension”.154

122. The regulatory aspects of offshore grid development pose huge challenges and work on addressing these is in its infancy. It will be important to share findings between the different forums undertaking work in this area. There must be continued involvement at Ministerial level in the North Seas Countries’ Offshore Grid Initiative and in bilateral negotiations. In the meantime, we believe that progress can be made through an evolutionary “bottom up” approach, that would allow ongoing development in the offshore sector while further work on regulation proceeded.

Political commitment and timeline

123. Clear political commitment is needed if the development of an offshore grid is to go ahead. We heard that the European Commission and other institutions were politically committed to the development of new European transmission assets, but we heard less certain evidence about the strength of commitment among national governments.155 The North Seas Countries’ Offshore Grid Initiative includes commitments to investigate regulatory and technical issues, but no actual commitment to develop an offshore grid.

124. Norway is likely to be a key player in a European supergrid, as a provider of renewable hydro-electricity. Diversity in the kinds of renewable energy connected to the grid would have advantages for balancing out intermittency and controlling costs. There is 30 GW of installed hydro capacity in Norway. An interconnector is already planned between Norway and the UK “North Connect”, which is being developed by SSE in a partnership agreement with three Norwegian power utilities and Swedish developer, Vattenfall.156

151 North Sea Offshore Networks; Enabling Offshore Wind and Balancing Power: Key messages from the UK-Norway Forum and Roadmapping Workshop, 6–8 June 2011, London 152 Ev w47 (E3G), section 34 153 Ev w11 (Association of Electricity Producers), section 4; Ev w32 (Centrica), section 4; Ev w24 (SSE) 154 EV W9 (E.ON UK), section 4 155 Q 107 [Alberto Pototschnig, ACER] 156 “Vattenfall, SSE join with three partners to explore UK-Norway link”, Utility Week, 1 February 2011

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125. However, in 2003, an interconnector was planned with Norway, which was vetoed by the Norwegian government after concerns about the effect on Norwegian electricity prices. Andrew Nind from Pöyry explained that:

The Norwegian Government stepped in 2003 and stopped it, because I think there was concern that Norwegian consumers would suffer as a result of the link. More recently, fossil fuel prices have been a lot higher and so there has been this assumption that the direction of flow would primarily be from Norway to Britain, helping British consumers, arguably at the expense of Norwegian consumers, but it all depends on one’s view of fossil fuel prices and also hydro conditions in Norway.157

126. James Cox, also from Pöyry, suggested that for Norwegian producers, for example, interconnection could be very lucrative as large amounts of low-carbon was exported.158 However, according to Pöyry’s analysis, new interconnection would still be likely to raise electricity prices in Norway and so a consumer backlash against interconnection via a supergrid may still be possible.159

127. The Minister recognised that Norwegian (and British) consumers needed to be persuaded that greater interconnection would not push up their prices and it was not going to be taking electricity out of their system at a time when they may need it themselves. He believed that “they have to be persuaded that this is a good deal for them as well and so this has to be on a voluntarist approach and carrying consumers with us is part of that process”.160 However, he did not share with us any detail about plans to “persuade” consumers in the UK or in Norway of the advantages of interconnection.

128. Alongside the issue of consumer engagement and public support, timing will be critical in developing a supergrid. The Scottish Government saw it as “critical for the UK Government, in partnership with its devolved administrations, to identify a number of priority energy corridors in home waters to help accelerate the development of an offshore grid”.161 Alderney Renewable Energy pointed out to us that the Channel Islands and the Isle of Man were potential partners in a supergrid project, but revealed that “Alderney has hitherto been omitted from broader European plans to create a European supergrid”.162

129. For the first steps to be made and for investors to begin working on the first building blocks of a supergrid, confidence in the Government’s intentions is fundamental. Transmission System Operators usually invest in offshore assets anticipating a lifetime of 25 to 40 years. Current investments will affect the power system in 2030, 2040 or 2050.163 But long term expectations are not yet established.164 Centrica agreed that in-depth work would be needed on regulations before developers would have the confidence to invest in

157 Q 53 158 Q 53 159 Q 51 [James Cox] 160 Q 139 161 Ev w60 (Scottish Government), section 3.1.1 162 Ev w22 (Alderney Renewable Energy), sections 2.1–2.2 163 Q 101 164 Q 101

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supergrid infrastructure, especially in the case of anticipatory investment.165 Daniel Dobbeni argued that manufacturers would “not invest unless they have more stable vision of the needs for the future”.166

130. We heard that the involvement of Ministers in the negotiation process at the technical level would be a “clear sign” of political commitment. The first European comitology process will be launched probably next year, “so we will have an immediate sign of how engaged the various ministries are and the various administrations are”.167

131. A powerful case has been made for an integrated offshore supergrid in the North Seas linking potential renewable sources of energy. Developing a North Seas grid may also prove to be a stepping stone to a much broader grid in future including other countries. As a first step, and in collaboration with the devolved administrations and the , the Government should set out plans for priority energy corridors in home waters. Crown dependencies like the Channel Islands also have substantial renewable energy resources and could benefit from interconnection and so they should be included in these discussions. The Government should consider options for ensuring that these developments will be “supergrid ready”.

132. The Government should not wait for multi-party European work-streams to come to an end before considering future interconnection and offshore grid collaborations. It should pursue bilateral cooperation with key partners, such as Germany and Norway, assessing these projects on their own merits.

133. Public confidence that the mutual benefits of interconnection justify the costs will be a necessary component of agreements contributing to the development of an integrated offshore grid. The Department of Energy and Climate Change must set out how it plans to inform the public in this country of the benefits of an offshore grid and how it will work with potential partners to pursue similar programmes in other countries.

134. Alongside public confidence, it is also necessary for potential investors to have confidence. The Government should bring forward a clear plan for interconnection and the creation of a meshed offshore grid, setting out which actions can be pursued unilaterally and which depend on agreements with other countries.

Conclusion

135. It is extremely unlikely that a full-scale supergrid will be developed by 2020. However, the Government’s ambitions for developing offshore wind resources by 2020 mean that the UK will need new kinds of electricity networks to deliver power where it is needed and take advantage of import and export opportunities. A market-led approach to transmission development is important for ensuring cost-effectiveness, but a strong political lead will be necessary from Government to overcome obstacles

165 Ev w32 (Centrica), section 15 166 Q 106 167 Q 126 [Alberto Pototschnig, ACER]

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such as the need for coordinated anticipatory investment in shared assets. Companies will not undertake these risky projects without guidance from the Government.

136. There is some preparatory work that needs to take place before the Government can set out its detailed plans: it must assess the economic and energy security impacts of increased interconnection; and it must evaluate the benefits of coordinated offshore grids for optimising electricity transmission and reducing the scale of reinforcement required. A fair solution to the complex problem of cost-sharing will need to be found with other countries. This information should form the basis of open political debate to ensure that the public has confidence in the Government’s plans for shaping the grid.

137. Preparatory work must be undertaken expeditiously and it must be followed as soon as possible by an expression of political intent, detailing interconnection plans as far as 2050 and a means of ensuring that network integration can be achieved step by step. This should set up the building blocks of a supergrid. The Government will need to seek similar undertakings from European partners on a bilateral and multilateral basis, to underpin the regulatory work that has already begun with firm commitments. This will be fundamental to ensuring that integrated, interconnected networks are developed and that offshore resources are harnessed in the most efficient way possible.

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Conclusions and Recommendations

The benefits of an integrated solution

1. The future of the electricity transmission system must be considered within the context of the Government’s renewable energy objectives. If it hopes to deliver its aspirations at all, let alone in a cost-effective way, it will be necessary to develop a transmission system commensurate with the scale of offshore renewables expected. A more efficient way of connecting wind needs to be planned for generation further offshore and the increased volumes of wind expected. It makes sense to develop new means of connection to support those developments before the capacity has been developed. The Department of Energy and Climate Change should therefore undertake to assess the advantages of a meshed offshore grid as opposed to radial connection within the next two years. (Paragraph 24)

2. The UK electricity transmission system needs to be updated. It is no longer good enough to patch up the old system. The Government must produce a new plan for electricity transmission that includes interconnection and integrated offshore assets and the development of a supergrid could help achieve this. In particular, it is utterly unacceptable that large costs are incurred by the System Operator and consumers to curtail wind supply because the system cannot deliver the electricity to where it is needed. The problem of transmission is turning a potentially profitable resource into a potential liability. Unless this problem is addressed there is a risk that public scepticism about renewable energy and wind in particular will grow. The Government should commission an assessment of the most efficient way that offshore connections via a supergrid could be used to ease onshore congestion. (Paragraph 30)

3. The need to transmit electricity from north to south and from offshore to onshore could have a very damaging effect on the landscape. An integrated offshore grid could minimise the environmental impact of new transmission assets. We recommend that the Government should produce a cost estimate of the value of the social and environmental savings made by reducing the intrusion of onshore transmission assets and publish its assessment of the relative costs of different transmission options: overhead lines; undergrounding; and offshore High Voltage Direct Current lines. (Paragraph 35)

The benefits of increased interconnection

4. The UK is far behind the EU’s targets on interconnection. The Government should agree to meet European targets for interconnection by 2020 and we recommend that in its Response to this Report that it sets out its own expectations for interconnection up to 2050. (Paragraph 46)

5. We recommend that the Government investigates more thoroughly the potential impacts and costs of intermittency on maintaining the energy supply when there is more renewable generation and analyses the contribution that increased interconnection could make to evening out intermittency. (Paragraph 58)

40 A European Supergrid

6. The UK is experiencing a reduction in its energy independence as North Sea oil and gas supplies are depleted. The offshore renewables resource is potentially vast and offers an important element of a future energy mix. The Government should set out its expectations for the development of the offshore renewables resource detailing support measures and expected capacity out to 2050. (Paragraph 67)

7. The UK currently enjoys a real comparative advantage in the offshore technology sector, but this advantage may be short lived. The Government should develop a plan for supporting the scaling-up of the offshore technology sector to ensure that the UK’s expertise does not vanish overseas. (Paragraph 68)

Barriers to the development of a supergrid

8. The UK has agreed substantial development of offshore wind. Connections for these and other developments will need to be compatible with any future grid initiatives. In its electricity systems policy DECC must set out how plans for offshore grid developments and interconnection will be coordinated with “smart” improvements. We recommend that the Government considers how offshore generation could be integrated with electricity storage technologies. (Paragraph 81)

9. The Government should ensure that Offshore Wind Round 3 grid connections are super-grid compliant to avoid locking out potential future electricity sales to Europe. Working with Ofgem, the Crown Estate and other stakeholders, it must identify the minimum requirements for ensuring that present developments could be connected into a future offshore grid. (Paragraph 82)

10. The technological challenges associated with the development of a supergrid are not insurmountable. The basic kit is available and the industry is confident that other solutions will become available once a market is clear. To unlock the private sector investment the Government needs to decide whether the supergrid project will go ahead and, if that is its intention, it should make a public commitment to it. (Paragraph 85)

11. At a time when there are still significant doubts about the economic viability of huge expansion of offshore wind, it is clearly essential that these are resolved before huge extra investment in transmission capacity is undertaken. We recommend that the Government commissions and publishes an updated analysis of both the costs of offshore wind and of the costs and benefits of early investment in transmission networks compatible with the eventual construction of a supergrid. (Paragraph 88)

12. Certainty could reduce the risk of anticipatory investment in transmission assets. If the Government decides to pursue a rapid roll-out of offshore wind, coordinated development of an offshore grid would help to maximise the economic benefits of accessing that resource. A half-hearted approach to developing an offshore network may lead to inefficiencies. If the Government wants to minimise the costs of building a supergrid, it should adopt the advice of the Committee on Climate Change and make firm commitments on support for offshore wind and marine generation through the 2020s in order to create the confidence necessary for anticipatory investments. (Paragraph 95)

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13. We recommend that the Department of Energy and Climate Change consults on options for “oversizing” transmission assets in order to create the building blocks of a future offshore grid and sets out plans for anticipatory investment in its forthcoming electricity systems policy. (Paragraph 96)

14. We do not share the Minister’s confidence that cost-sharing between European Member States will not be an issue. We believe that this view is mistaken and complacent, as the costs will be high investments by companies and by Transmission System Operators will ultimately be paid for by consumers in different countries, who may not benefit equally from the development of new infrastructure. The Government must work with its European partners to develop a methodology for cost sharing that is transparent and fair and takes into account how costs are passed on to consumers, not just government spending. (Paragraph 103)

15. Public subsidy may be needed in order to overcome market failures and additional for investment in the first stages of a supergrid. The justification for such a subsidy needs to be examined carefully. At the European level, the Government should suggest that the European Commission changes its criteria for funding selection to include the early stages of projects and projects that are not being developed by the Transmission System Operator. In home waters, the Government should consider whether to promote integration of offshore networks through a combination of public finance and standards for shared capacity in new transmission assets. (Paragraph 104)

16. The effect of interconnection on consumer prices is largely unknown. We recommend that the Government undertakes further analysis of the expected effect of increased interconnection on consumer prices. It should set out parameters for the acceptable effects of price arbitrage on consumer prices and how they weigh those changes against expected reductions in price volatility. (Paragraph 110)

17. The regulatory aspects of offshore grid development pose huge challenges and work on addressing these is in its infancy. It will be important to share findings between the different forums undertaking work in this area. There must be continued involvement at Ministerial level in the North Seas Countries’ Offshore Grid Initiative and in bilateral negotiations. In the meantime, we believe that progress can be made through an evolutionary “bottom up” approach, that would allow ongoing development in the offshore sector while further work on regulation proceeded. (Paragraph 122)

18. A powerful case has been made for an integrated offshore supergrid in the North Seas linking potential renewable sources of energy. Developing a North Seas grid may also prove to be a stepping stone to a much broader grid in future including other countries. As a first step, and in collaboration with the devolved administrations and the Republic of Ireland, the Government should set out plans for priority energy corridors in home waters. Crown dependencies like the Channel Islands also have substantial renewable energy resources and could benefit from interconnection and so they should be included in these discussions. The Government should consider options for ensuring that these developments will be “supergrid ready”. (Paragraph 131)

42 A European Supergrid

19. The Government should not wait for multi-party European work-streams to come to an end before considering future interconnection and offshore grid collaborations. It should pursue bilateral cooperation with key partners, such as Germany and Norway, assessing these projects on their own merits. (Paragraph 132)

20. Public confidence that the mutual benefits of interconnection justify the costs will be a necessary component of agreements contributing to the development of an integrated offshore grid. The Department of Energy and Climate Change must set out how it plans to inform the public in this country of the benefits of an offshore grid and how it will work with potential partners to pursue similar programmes in other countries. (Paragraph 133)

21. Alongside public confidence, it is also necessary for potential investors to have confidence. The Government should bring forward a clear plan for interconnection and the creation of a meshed offshore grid, setting out which actions can be pursued unilaterally and which depend on agreements with other countries. (Paragraph 134)

22. It is extremely unlikely that a full-scale supergrid will be developed by 2020. However, the Government’s ambitions for developing offshore wind resources by 2020 mean that the UK will need new kinds of electricity networks to deliver power where it is needed and take advantage of import and export opportunities. A market- led approach to transmission development is important for ensuring cost- effectiveness, but a strong political lead will be necessary from Government to overcome obstacles such as the need for coordinated anticipatory investment in shared assets. Companies will not undertake these risky projects without guidance from the Government. (Paragraph 135)

23. There is some preparatory work that needs to take place before the Government can set out its detailed plans: it must assess the economic and energy security impacts of increased interconnection; and it must evaluate the benefits of coordinated offshore grids for optimising electricity transmission and reducing the scale of reinforcement required. A fair solution to the complex problem of cost-sharing will need to be found with other countries. This information should form the basis of open political debate to ensure that the public has confidence in the Government’s plans for shaping the grid. (Paragraph 136)

24. Preparatory work must be undertaken expeditiously and it must be followed as soon as possible by an expression of political intent, detailing interconnection plans as far as 2050 and a means of ensuring that network integration can be achieved step by step. This should set up the building blocks of a supergrid. The Government will need to seek similar undertakings from European partners on a bilateral and multilateral basis, to underpin the regulatory work that has already begun with firm commitments. This will be fundamental to ensuring that integrated, interconnected networks are developed and that offshore resources are harnessed in the most efficient way possible. (Paragraph 137)

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Annex I: Terms of Reference

• What are the technical challenges for the development of a European Supergrid?

• What risks and uncertainties would a supergrid entail?

• How much would it cost to create a supergrid and who would pay for it?

• Will a supergrid help to balance intermittency of electricity supply?

• Will a supergrid reduce energy prices for consumers and businesses?

• What are the implications for UK energy policy of greater interconnection with other power markets?

• Which states are potential partners with the UK in a supergrid project?

• How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

• Would new institutions be needed to operate and regulate a supergrid?

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Annex II: Different supergrid proposals and work streams in 2011

The North Seas Countries’ Offshore Grid Initiative

In December 2010, 10 European Member States (the UK, Germany, France, Belgium, Netherlands, , Ireland, , Denmark and Norway) signed a Memorandum of Understanding launching the North Sea Countries Offshore Grid Initiative (NSCOGI). NSCOGI is a collaboration to create an integrated offshore energy grid which links wind farms and other renewable energy sources across the northern seas of Europe.

The aim was for governments to work together with energy regulators, the Commission and industry, to tackle the technical, regulatory, market and planning barriers to different approaches to co-ordinated development of offshore grids in the North and Irish Seas. The project will also investigate costs and benefits. Detailed work will be carried out in three particular areas: grid configuration and integration; market and regulatory issues; and planning and authorisation procedures.

NSCOGI plans to identify a set of plausible scenarios for onshore and offshore grid infrastructure for 2030 and develop proposals to overcome barriers to the development of these potential grid configurations by December 2012. By this date, the project also aims to develop proposals for regulatory and market design for a coordinated offshore grid while also proposing methods for tackling issues such as cost allocation and anticipatory investment.

The All-Island Approach

On 20 June 2011 Ministers from the British Isles, Ireland, The Channel Islands and the Isle of Man pledged to cooperate on exploiting the wind and marine resource in and around the islands. The states involved agreed to co-operate in the “All Islands Approach” to energy.

The UK-Baltic Cooperation

Following the UK-Nordic-Baltic Summit in January 2011, DECC has proposed to continue cooperation in key areas of mutual interest, including identifying ways of accelerating the transition to a low-carbon economy. The partners are considering a high-level meeting in the next few months to discuss concrete ways of making progress on this shared agenda, building on the North Seas Initiative and a similar initiative in the Baltic region, the Baltic Energy Market Interconnection Plan (involving Denmark, Estonia, Finland, Germany, Latvia, Lithuania, , Sweden and Norway).

The Irish-Scottish Links on Energy (ISLES) study

Supported by the EU’s INTERREG IVA Programme, ISLES is a collaborative project between the Scottish Government, Northern Ireland Executive and Government of

A European Supergrid 45

Ireland. It is assessing the feasibility of creating an offshore interconnected transmission network and subsea electricity grid to connect and transport electricity created from renewable energy sources in the coastal waters linking Scotland, Northern Ireland and Ireland. By delivering a credible and ground-breaking evidence-based assessment of the practical steps, challenges and opportunities to accelerate infrastructure development for 2020 and beyond, ISLES will investigate the steps needed to develop possible offshore interconnected grid networks.

DESERTEC

The DESERTEC concept aims to promote the generation of electricity in Northern Africa using plants, wind farms and the transmission of this electricity to the consumption centres. The first region for the assessment and application of this concept is the EU-MENA region (Europe, Middle East, Northern Africa). Electricity would be transmitted to European and African countries by a super grid of high-voltage direct current cables. According to the Desertec Foundation, it could provide a considerable part of the electricity demand of the MENA countries and provide continental Europe with 15% of its electricity needs.

Greenpeace proposals

Greenpeace has developed two models of Supergrid: a “Low Grid” model focused on the centre of Europe; Germany, Netherlands, Belgium and France and a “High Grid” model incorporating North Africa.168

168 Greenpeace, Battle of the grids, January 2011

46 A European Supergrid

Formal Minutes

Wednesday 7 September 2011

Members present:

Tim Yeo, in the Chair

Dan Byles Christopher Pincher Barry Gardiner John Robertson Ian Lavery Laura Sandys Dr Phillip Lee Dr Alan Whitehead

The following declarations of interest relating to the inquiry was made:

Tuesday 14 and Thursday 30 June 2011:

The Chair declared the following interest: Director of Groupe Eurotunnel SA (non-executive) (of which Eurotunnel plc is a wholly owned subsidiary); company managing the Channel Tunnel.

Thursday 30 June 2011

Sir Robert Smith declared the following interest: Stakeholder in Shell Transport and Trading

Draft Report (A European Supergrid), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 137 read and agreed to.

Annexes and Summary agreed to.

Resolved, That the Report be the Seventh Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

[Adjourned till Tuesday 13 September at 10.00 a.m.

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Witnesses

Tuesday 10 May 2011 Page

Eddie O'Connor, President, Friends of the Supergrid, Matthew Knight, Siemens Energy, Dr Simon Harrison, Institution of Engineering and Technology, and John Scott, Institution of Engineering and Technology Ev 1

Alex Murley, Head of Technical Affairs, RenewableUK, Andrew Nind, Director, Pöyry, and James Cox, Consultant, Pöyry Ev 10

Tuesday 14 June 2011

Stuart Cook, Senior Partner, Transmission and Governance, Ofgem, Martin Crouch, Partner, European Strategy and Environment, Ofgem, and Alison Kay, Commercial Director for Transmission, National Grid Ev 17

Daniel Dobbeni, President, European Network of Transmission System Operators (ENTSO-E), and Alberto Pototschnig, Director, Agency for the Cooperation of Energy Regulators (ACER) Ev 25

Tuesday 30 June 2011

Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and Sue Harrison, Head of European Energy Markets Ev 35

List of printed written evidence

1 Department of Energy and Climate Change Ev 47 2 National Grid Ev 50 3 Ofgem Ev 56 4 The Institution of Engineering and Technology Ev 61 5 RenewableUK Ev 65 6 Friends of the Supergrid Ev 68 7 Pöyry (supplementary) Ev 75

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/ecc)

1 Climate Policy Initiative Ev w1 2 Alstom Grid UK Ev w4 3 The Crown Estate Ev w7 4 E.ON UK Ev w9

48 A European Supergrid

5 Association of Electricity Producers Ev w11 6 EDF Energy Ev w14 7 Greenpeace UK Ev w19 8 RWE npower Renewables UK Ev w21 9 Alderney Renewable Energy Ev w22 10 Scottish and Southern Energy Ev w24, Ev w26 11 Campaign to Protect Rural England Ev w28 12 DONG Energy Ev w30 13 Centrica Ev w32 14 Institute of Marine Engineering, Science and Technology, Offshore Renewables Special Interest Group Ev w36 15 Mainstream Renewable Power Ev w39, Ev w44 16 Scottish Renewables Ev w44 17 E3G Ev w47 18 WWF-UK Ev w52 19 Scottish Government Ev w60

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2010–12 First report Emissions Performance Standards HC 523 (807) Second report UK Deepwater Drilling–Implications of the Gulf of HC 450 (882) Mexico Oil Spill Third report The revised draft National Policy Statements on HC 648 energy Fourth report Electricity Market Reform HC 742 (1448) Fifth report Shale Gas HC 795 (1449) Sixth report Ofgem's Retail Market Review HC 1046 First Special Report Low carbon technologies in a green economy: HC 455 Government Response to the Committee's Fourth Report of Session 2009-10 Second Special Report Fuel Poverty: Government Response to the HC 541 Committee's Fifth Report of Session 2009-10

Third Special Report The future of Britain’s electricity networks: HC 629 Government Response to the Committee’s Second Report of Session 2009–10

Energy and Climate Change Committee: Evidence Ev 1

Oral evidence

Taken before the Energy and Climate Change Committee on Tuesday 10 May 2011

Members present: Mr Tim Yeo (Chair)

Dan Byles Christopher Pincher Dr Phillip Lee Sir Robert Smith ______

Examination of Witnesses

Witnesses: Eddie O'Connor, President, Friends of the Supergrid, Matthew Knight, Siemens Energy, Dr Simon Harrison, Institution of Engineering and Technology, and John Scott, Institution of Engineering and Technology, gave evidence.

Q1 Chair: Welcome to the formal meeting of the regulator would help. We then need harmonisation of Commitee. Could you start by explaining what the markets for energy because self-evidently difference is between a supergrid and a series of interconnecting Europe is a good idea. It has to reduce straightforward interconnectors? the cost of energy to customers all over Europe. At Eddie O'Connor: If I might, I would like to say that the moment, to make the business case to build any what we have been doing up to now has been building part of that network, you are trying to cope with a series of point-to-point interconnectors. The nationally focused energy incentives in each country assumption made is that the world is composed of and trying to find a way to make the right thing fit individual national grids and that it will remain so into what we have. We need more harmonisation in the future. The supergrid goes beyond that concept regulation across Europe and more harmonisation in and says we will finish up generating a huge amount markets across Europe to allow the right thing to of electricity offshore, that we are unable to do that happen. with the current technology—that is alternating Dr Harrison: I think also there is a need for vision current—so we need to build a new grid. It is a step and buy-in across Europe. There are all sorts of change in technology that would be built around DC; possible supergrid concepts. There is the North Sea that is direct current. It will involve the supernodes, supergrid, which I suspect we will spend much of our which will allow for electricity to be routed and traded time talking about today. There is the so-called across Europe. Of course, most of that electricity will DESERTEC initiative, which is all about north/south finish up being generated in British waters or in waters transfers of renewable power from North Africa and that are quite close or certainly closer to Britain than elsewhere. There are possibilities to look east/west to any other country in Europe. exploit time differences in demand across different The supergrid is a meshed grid as distinct from a parts of Europe. There are all sorts of options and one series of point-to-point interconnectors. We will finish has to start somewhere and get going, but there is also up probably building 1.5 million megawatts of a need to think about what an endgame might look offshore wind in Europe, and we will probably finish like, or the different scenarios for an end game, and up with the same amount of solar in the south. This that is something that needs to be considered at new supergrid will connect up both of those and make European level. Europe energy independent and completely pollution John Scott: May I add one more? I agree with all that free. has been said this morning. You were asking about the characteristics of a supergrid, what makes it Q2 Chair: In terms of how you will design it, what different. I think it is important to recognise the huge are the options about which way it goes? scale of this. At the moment, we have—measured in Matthew Knight: The option if we leave things as gigawatts—a two gigawatt link across to France. We they are at the moment is that we struggle to build are probably looking here at something more like 20 even interconnectors, because you need two gigawatts. I think at the moment from Spain up into jurisdictions to both serendipitously come up with the France there is about a 1 gigawatt link, while some same market need at the same time and then two sets other studies are showing a need for 30 gigawatts. of regulators and two sets of consenting regimes to Now this is huge, and if you do that not only do you allow this to happen. What we need is a wider vision, need to form this interconnected grid but then that because a supergrid makes sense of both individual grid really begins to be a significant presence on the countries’ sustainable energy policies but it also gives power system, so you have to think of it as a system, the opportunity for a sustainable Europe in a way that not as a series of electrical pipes. It has to become a we will not get to piecemeal. So what we need are the system, which means that it has to be balanced in real standards for the technology; we need some time between generation and demand. There is no real harmonisation of the way grid is regulated across storage in the system. It becomes a grid system, so Europe. That is not necessarily equivalent to a single whatever is built has to integrate, has to conform to regulator but it is certainly harmonisation and a single some standards; there has to be an architecture. Even Ev 2 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott if that is implemented through a liberalised market, it supergrid, looking at things like wind variability still has to have an architecture or it will not work as across Europe and suchlike, there is significant study a system. activity still needed. There are options that need to be traded in sizing the supergrid around the amount of Q3 Chair: Given that you have set out several peaking power it is worth building in the UK, for alternatives about north, south, east, west, and so on, example, to deal with when the wind is not blowing is there a priority ordering? You do not want to do all versus the benefits of sharing peaking power across of these things at the same time, so do you have a Europe versus the costs of building the supergrid. All preference as to when it would start? those things I think need further work and some of Eddie O'Connor: Yes, we have a very definite the urgency now is about pushing that work forward preference and it is based on the needs of Great to gain enough understanding to allow us to properly Britain. Great Britain has awarded 50,000 megawatts size, scale, cost and then work out how to build the to various developers for offshore plant. It proposes supergrid. to build somewhere between 25,000 and 30,000 megawatts offshore by 2020. Now, in collaboration Q4 Dan Byles: We have heard quite a lot, we have with National Grid, we have come to the realisation read quite a lot as well, about the potential benefits of that you cannot model a scenario without the supergrid. I am particularly interested about the supergrid. You cannot build 25,000 megawatts potential impact on the UK’s renewable energy targets offshore in Britain without the supergrid. Just think and on our security of supply. I would be very about it: it is 500 miles long; the supergrid of Britain, interested in your thoughts on those two issues in basically in the shallow part of the North Sea, would particular. have to be 500 miles. A big system of air is wider Eddie O'Connor: I don’t mind taking that question. It than and has a bigger diameter than 500 miles, so in is a game changer for the UK, in effect. It allows you fact you are going to suffer from all the variability of to tackle the greatest energy resource that Britain has wind if you just build a set of connectors into Britain. ever had. There was a report published last year, On the other hand, if you link via a supergrid into which I am sure you have seen, which said that when Germany, connect up with the 25,000 megawatts of we get this plant built out in the North Sea it will be wind in Germany, and take it all the way down to the equivalent of a billion barrels of oil per year. It is Munich, we then have 1,500 miles in the system. an enormous resource that we are tapping into here, Here you are getting to a stage where the very extent and the supergrid is the only effective way of getting of the supergrid begins to balance out because the that deployed quickly. wind is always blowing somewhere. It also allows you It also has a very big impact in terms of the cost of to piggyback on the spare capacity that is in Germany, electricity because you tap into a free resource. The so Germany will have hundreds of generators that will wind is free. In fact, the payback period on the first not be in use all the time and Britain does not have to leg of the supergrid at €28 billion, which is a very build that extra balancing generation capacity if you large number, but actually if you don’t build the have the supergrid. So the supergrid is absolutely supergrid and you build it for gas, the payback period necessary for Britain to be able to meet its targets, for that leg of the supergrid is about seven years which it has voluntarily set for itself and is now because that is what you will pay for your gas at embedded in European law. normal prices to build that first leg. What this gives That is why we say Britain has a bigger vested interest Britain is a capability to be number one in the world, here and for a lot of other reasons as well, in terms of to develop new technologies, to tap into a free power the employment, in terms of the new ports, in terms source, which is the first stage of a very much larger of the new ships that would get built here, in terms tap-in going forward from 2020. Rather than get into of the eventual exports that will happen from British the big, long-term numbers, which are the relevant waters. The DESERTEC proposal is very interesting, strategy, you must cast everything that you do now so but I notice that they are talking in terms of it that you don’t finish up with a bunch of stranded happening some time around 2030 to 2050. We are assets after 2020. If we do go down another pathway talking about this first leg of the supergrid being in like betting on fossil fuels, I fear then we are going to place by 2020. To do that, we have to have all the soft find ourselves with very expensive electricity that is side organised. Who owns it? Who regulates it? To constantly varying in price. what standards will it be built? How do you protect the customer? How is it to be planned for, and how is Q5 Dan Byles: What about energy security in it proposed to be operated? All those soft questions particular? What will be the impact on security of have to be answered within the next three years. So, supply of the supergrid? whereas there are many proposals, this one has been John Scott: Could I respond on that. I think one of very carefully thought out as to its necessity. the attractions from a broad—and a power systems Dr Harrison: I think I would agree that the North Sea person’s—perspective is that if you move to an supergrid is probably the right first step towards the interconnected mesh, instinctively that is much more development of a fuller European supergrid, for much secure against shocks, like severe events or the same reasons that Eddie has outlined. I would, geopolitical disruptions but, more than that, it is though, suggest that in scaling that supergrid, in strategically much more flexible for the long-term. working out exactly how it is going to be used, what size it is going to be, and so on, and in balancing the Q6 Dan Byles: Are there any dangers? For example, benefits of that with the costs of deploying the you have mentioned us tapping in to Germany’s Energy and Climate Change Committee: Evidence Ev 3

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott excess capacity; therefore, not building some capacity mentioned at all is the evolution in parallel across here that we might otherwise build. Is there a danger Europe of smartgrids and the ability to manage we might get lazy, start relying on other Europeans to demand, which is a very key part of the same story build the generation and assume we are going to be and we should not underestimate that. able to buy it? Dan Byles: I think we will probably be asking a few Dr Harrison: Potentially, yes. The regulatory questions on that shortly. arrangements would need to ensure equitable access so there was not nationalistic behaviour if there were Q8 Sir Robert Smith: You mentioned earlier times of shortage. If you were to import from North Betamax and VHS. Is the technology there now for a Africa, say, you would have geopolitical issues supergrid and is it a question of installing it, or are attached to that, which would need to be handled and there missing technologies that still need to be maybe that would have an impact on the scale of what created? you would want to import from outside the EU. Those Dr Harrison: I think in general, yes—but sorry, issues would all need to be handled, and I imagine Matthew, please, you are the technologist. one would want to strike some balance about Matthew Knight: On behalf of my own company and indigenous versus imported. However, there is a also our competitors, who build the technology for the large—albeit, relatively high cost—resource in terms supergrid, the answer is an emphatic yes, the of offshore wind, not uniquely but substantially technology is available now. To build the first stages available to the UK and for the UK to export. It is of the supergrid, as is described in the Friends of the relatively easy to envisage a scenario where the UK Supergrid paper, we can use the concept of the is a net exporter, overall, while some times importing supernode. Everything that we need to be able to do to deal with the variability issue for offshore wind. that is available now or certainly within the lifetime Eddie O'Connor: One of the key things is that, first of a project. of all, the wind around Britain belongs to Britain and Going forward, if we get to future wholly DC cannot be taken away. It does not matter what sheikh networks we need some new technology. My own comes to power in some sheikhdom in the Middle company—and I am sure our competitors have the East or anywhere else in the world; it does not matter patents in place—knows how to build something like what the geopolitical relationship between China and a DC circuit breaker. What we need is the the United States is, once Britain has tapped into this standardisation agreement across Europe of what resource—as my colleagues have said—this is it for voltage does it need to operate and what current does good. You build a wind farm offshore, it is probably it need to interrupt. That is being worked on at the good for 100 years. You will replace the blades maybe moment. There is a pan-European group called every 25 years. The fact is it has an enormously CENELEC and there is a working group that will positive impact on Britain’s security of supply, but via report in November this year. All of the manufacturers the supergrid, if you link up with Norway, which has are involved in that and some of the transmission this great hydro resource, and then you go down to system operators as well. I would commend, as a Munich and you link up with the Alps—and the Swiss quick win for something like the North Sea’s grid are very keen on the idea as well because they will initiative, to adopt the output of that standards body’s build pump storage—you are then linked up, with the work as its first template for interoperability and ability to turn on and off electricity that we enjoy now, harmonisation of the future. which will further enhance minute-by-minute security. Chair: Any other views? If you are linked up to very switchable hydro John Scott: I don’t know whether you are aware of resources this gives you added tactical security of the way this industry works, but of course we have supply, whereas we have already guaranteed the highly competitive major players. It is well strategic security of supply by tapping into this big established that there is a sense of co-ordination and resource, which will always be ours, cannot be co-operation at the beginning of creating a new interfered with and is free and sustainable. market to get standards in place. People work together. So you do end up with a market that is Q7 Dan Byles: You do not see there being a danger, enormously helpful for the purchasers of this provided we get the regulatory system right, that at equipment in the future, because you have so-called times of tight supply—should there be for some interoperability, open systems, by complying with reason a time of tight supply—we would be standards and developing standards and then you let effectively outbid? Suddenly we would be trying to the market compete from there on. The important compete in a European-wide market for energy, thing is to try and accelerate through the because we were not producing everything we need standardisation process at the beginning of a new ourselves and we might suffer for that. technology. Dr Harrison: If the regulatory environment is as it Dr Harrison: Overall, the IET believes that should be, that remains an issue even if you have technically this isn’t all that hard, it is just a very large plenty of generation in the UK because it works the project. So there are a few new technologies that need other way round. You need to be able to manage that to come along but they are in development. The type of situation with adequate peaking plant, project is on a very massive scale indeed, and there wherever it is in Europe, to provide the backup for needs to be a step up the game in terms of supply situations where you are short of maybe wind and sun chain capacity to deliver all this within the time. That at the same time or something. That whole problem is going to need confidence among manufacturers, and would need to be solved. The dimension we have not so on, which needs to come from the right regulatory Ev 4 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott environment creating the right incentives for people date. In the decade that we are talking about to go out and do this so that people will invest in discussions in Europe and setting up the first leg of manufacturing capacity, and the like. the supergrid, China is actually building something equivalent in size and scale. Q9 Sir Robert Smith: The standardising of Dr Harrison: China has a habit of beating the target technologies: who is producing those standards and is dates that it sets as well, so I think the experience it in place to happen? gained there will be very valuable in Europe. Matthew Knight: Yes. This CENELEC group is an international standard-making body. We went Q11 Sir Robert Smith: Is there any added problem knocking on the door just over a year ago and said, with fault detection on a supergrid and the “As the manufacturers of this kit, we need to come up management of faults? with some standards”, but obviously manufacturers on Eddie O'Connor: That is an interesting question their own getting together is not what is wanted; that because, classically, the answer would have been, yes, looks too much like a cartel. We knocked on the door that if you get a breakdown you can’t fly off in your of CENELEC and other standards-making bodies and helicopter and see where the overhead line has fallen said, “Would you like to invite us all in?” They invited down. This is a radically new idea, this supergrid, and in ENTSO-E and one or two other transmission the new cable will be festooned with fibre optics. It is system operators—I think National Grid is a profound trading tool; the supergrid is a profound represented for the UK—and that work is well trading tool. To return to the question about whether advanced. It has defined the areas that need Britain will run out of supply because the power will standardising and by November it will have come up flow elsewhere, what will happen is that the price will with the outlines of the standards. Technology is not adjust according to the need and the power will flow going to be the issue for this; it is all about regulation in the direction of where it is going to get the best and markets. price. The new cables will be different from all the Eddie O'Connor: I would just like to point out this is cables up to now, in that they will contain a lot of happening because the Friends of the Supergrid got information within them. So I don’t think it is outside together a couple of years ago and said, “The most the bounds of technical possibility to be able to put in important thing we have to lay down here is not a cable with a number of fibre optics as part of its cartel-driven, not a recipe for charging high prices to structure, where you bounce a light signal down and customers, but bringing together the various elements it tells you how many miles out the thing has broken. of the industry”. The industry is not just about It is one of these technical issues that we will deal manufacture. It is about development of things. It is with and solve. about the operation of these issues. It is about the Matthew Knight: It is something we are already ownership of these assets. All these people have been brought together to consider engineering a set of doing. On offshore wind farm connections we already standards, and now they are all working together. have distributed temperature sensing, which allows us There was a meeting two weeks ago in Germany, to run the cable to the maximum capability, and fault which lasted for two days. They sat down for two full detection. The technology is available. days and, as Matthew says, we are having a report Dr Harrison: Historically, HVDC systems have been in November. extremely reliable even when installed offshore, provided it is done properly. I think one area that will Q10 Sir Robert Smith: Are there any examples in need some further thought is when you get into very the world of interconnection between very different large transfer capabilities, possibly using single electrical transmission systems at scale? elements, then one needs to think at the receiving end Dr Harrison: There are plenty of examples of very of what happens if you lose that particular circuit. At large point-to-point connections using high voltage the moment, there are limits on size of in-feed to the DC technology, which provide that type of UK system—I think it is 1,200 megawatts, isn’t it?— interconnection. What we don’t have at the moment that can all be lost in one go. Potentially, that could are large meshed DC systems, so that is something get pushed here to something rather larger and the new. I think the control technology is there, in system would need to have appropriate strategies to principle; it just has not had deployment. This would allow it to respond. We do not see that as being an be an early example of such deployment, but I think unsolvable technical problem; it is simply something we see this as a solvable problem. It is just we need that is going to have to be thought through and done to go out and do it. as we make the journey. John Scott: May I add that this is a moving Matthew Knight: In fact, again National Grid is marketplace, from the engineering perspective, and I already doing work on that. The single in-feed loss at think I am right in saying the largest DC link at the the moment is 1,320 megawatts, which is based on moment is being built in China? We say that the link the Sizewell Power Station being the biggest single across to France at the moment is two by one feed used on the system. They are intending to change gigawatts. There is a six gigawatt link being built in that to a higher number to allow for new nuclear build, China at the moment, an overhead line. and they are already discussing changing it to a Matthew Knight: China is an interesting example. slightly higher number, of around about two Albeit, that China is building its equivalent to gigawatts, to suit the size of DC grid connection in- supergrid onshore, it is building over 100 gigawatts of feeds that they are expecting by the latter part of this new transmission lines by 2019, I think is their target decade for Round 3 offshore wind projects. Energy and Climate Change Committee: Evidence Ev 5

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott

John Scott: Could I just say that this is a good John Scott: The long link in China, which is 2,000 example of needing to regard this as a system, not as kilometres, is forecast at 5% losses, I believe. a series of elements. Perhaps a rather loose parallel is: if you had a road network with no motorways, when Q14 Dr Lee: Does the consumer pay at the point of you build the first kilometre what do you do with it, arrival or at the point of generation? because you will have a bottleneck at each end and it Matthew Knight: That is one of the disconnects is only when you put all the links together into a between the different regulatory arrangements in system do you start to move the traffic round? Now, different European countries. Even in the UK at the we have an issue here because if you built a six moment under the OFTO regime we have one gigawatt link across to France—move China’s treatment of losses, whereas with an interconnector technology, put it here—we couldn’t use it the losses are paid for in a different way. We already straightaway because we can’t accept the risk of a six have different kinds of asset on the British electricity gigawatt loss, but if you had a number of six gigawatt network whose losses are treated in different ways. If links and they were connected up at each end and it you are going to interconnect countries, you need to was part of a network, then, of course, losing one does have some rules about who pays for what. Generally not have the same effect. speaking, the point of the DC network is it is lower This is the need to think ahead, to have an architecture loss than the alternative of doing it AC. The benefits and have an investment confidence, because to start of connecting a wider group of systems are that, with you might put in assets that are only partly somewhere in Europe, you don’t need the next most loaded. Then you would have everybody raising their expensive power station to be built. The cost of power hands, saying, “This is stranded assets” or, “It is bad stations is usually—again, orders of magnitude— investment”, but it just needs the confidence of an different from the cost of the transmission network. overall strategic goal that would last for a number of Dr Harrison: Also, when you are building power years. stations to cover peaks, the economic choice of power station is usually one that is relatively inefficient Q12 Dr Lee: Firstly, I think our inability to progress thermally, so you need to look at the losses that will with these things is the price we pay for democracy. be incurred there when balancing against the total picture. Matthew Knight: I wasn’t suggesting that China— Dr Lee: It is a small technical point. How much energy is expended transmitting all of this electricity Q15 Chair: The supernode you referred to, is that around? My point being: I totally follow the logic of already commercial? when we are generating it we can push it into the Matthew Knight: The concept has not needed to be system, someone else can use it, and the intermittency built anywhere yet, but the bits of technology that go into the supernode are available and proven. I of wind, but it takes energy to transmit electricity. So mentioned this multi-level converter technology. We if it is being generated on Dogger Bank and it is going have a link in California, in San Francisco, which has down to Munich, how much of it arrives in Munich? been running for about a year now. That was new Matthew Knight: The reason for using direct current, technology but it was built and financed as a project DC technology, is to reduce the losses. There is a financed operation, so the banks are sufficiently conversion loss at each end. When you take AC confident of the technology to put money into it. electricity, which is what we have running around our main system at the moment, you convert it to DC. Q16 Chair: I am trying to get what the function of Using a modern voltage sourced, multilevel converter the supernode is. technology, you are looking at a conversion loss of Eddie O'Connor: Having thought up this concept—I about 1% and you lose that at each end. Once you am an engineer by background and I have been in the have converted to DC, you do not have the—what are electricity business all my life—the idea came to me called—reactive losses of a conventional AC cable. It from a router in IT, because a router takes information means you can send power over a much greater and it directs it in various directions. What we needed distance and also, as that power is transmitted, it has to do with this offshore grid was find a methodology much, much lower losses, order of magnitude lower of being able to take wind power, wave power, any losses so it makes long distance transmission other power out at sea, and to be able to route that in economic. The break point for that is somewhere a trading manner to wherever the price was the between about 70 and 100 kilometres at the moment. highest. So we came up with this concept of a node, If you want to push power more than that distance like a router. It collects all the power from the local you either have to have lots of substations along the wind farm—and some of these wind farms offshore way, which is what we have with the onshore network, are going to be very big; we could be talking about or alternatively if you just want to send it long 2,000 megawatts each—and it takes that power, distance on one cable, you have to use DC. collects it, transforms it into DC, and then routes it into the direction where it is most needed, and that Q13 Dr Lee: What percentage is lost? Is there like a “most need” is expressed in terms of price. per kilometre loss of energy? Once you have that supernode concept in mind, now Dr Harrison: It is a per kilometre figure, but if you it is a question of the design philosophy: what were talking about a long distance, large capacity reliability do you want to build in? This system HVDC link of that type, including the losses at each offshore, this supergrid system, is going to have to end, I think it is about 4%. mirror, in its customer friendliness, in its customer Ev 6 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott reliability, what we supply to the customer already in demand on the grid. That becomes very attractive if onshore grids. So there is an N minus one system. I you are harnessing a variable energy source, like am not an electrical engineer, I am a chemical wind. You begin to think about balancing the grid by engineer, but an N minus one system of reliability varying the demand, not just by varying generation, means that you can have a failure on one leg and still which is what we do at the moment. the customer gets the benefit. In fact, it seems to me If you begin to think this through, of course, it takes likely that that is what we are going to come up with you into the world of the end customer, to smart offshore, that you will design in enough redundancy— meters, which we know are very much on other that is spare capacity—into your supergrid system, so agendas and projects. Smart meters take you into that should one leg come down because of bad energy displays, awareness of price. We were talking installation or because a submarine lands on the just now about selling the energy where the market bottom and drags it, or puts out an anchor or needs it. Are we going to just do that at a big something and drags a cable, that can be identified and supranational level or are we going to be in a position repaired before it manifests itself as a lack of supply to in a few years’ time where, as end customers, we vary the customer. our behaviour; we run our domestic appliances or we So that is where the supernode concept came from. It charge our electric vehicles at different times of the is absolutely integral to the whole idea of the day depending on the price? There is a lot of work supergrid—imagine a series of supernodes that are going on separately looking at that in different linked together in this meshed grid and which link up countries around the world, but I think if we are with the onshore grids. We are not going to make the talking about the supergrid being a big system, the onshore grids obsolete. We have to work in absolute richer agenda is one that looks at it as a smartgrid for harmony with them. There will be some minor Europe as well. upgrades to the onshore grid to work the supergrid, but look at the alternative. I have seen figures coming Dr Harrison: The smartgrid problem is at least as big from ENTSO-E suggesting that something like 40,000 as the supergrid problem. The smart metering kilometres of onshore upgrades are going to have to programme that is being started in the UK at the be done if we don’t do the supergrid. So we are moment is a very small step along the way to looking at a huge upgrade to our existing onshore smartgrids and will not provide that functionality by systems. itself. I think it only goes to emphasise the scale of Dr Harrison: I think if I may add a couple of things transformation that is going to be needed for on the concept: firstly, there are clearly also going to decarbonisation, not just in generation but in networks be resilience issues and dealing with terrorism threats, as well. and all that kind of thing, that will have to be engineered in so that one could lose a supernode or Q18 Dr Lee: In view of all the complexity and the alternatively that supernode is detected or otherwise negotiations between countries and everything else, divided so that it can’t be lost entirely. That is one might it not be better just to have one relationship area that would need to be thought about really quite with Norway? carefully. Eddie O'Connor: With Norway? Another area that is very interesting when you are Dr Lee: I mean in view of the fact— looking at bringing a lot of power onshore is that the Eddie O'Connor: No, not really because Norway has really scarce resource is landing sites for cables. five million people and Britain has 63 million people. Finding landing sites for cables that are Dr Lee: Of course. environmentally and socially acceptable is Eddie O'Connor: They will never have enough plant increasingly difficult. If you are seeking to bring very to be able to deal with— large amounts of point-to-point connected offshore wind power ashore, those sites are going to become a very difficult and scarce resource. One thing that the Q19 Dr Lee: Well, first of all, they are already self- supernode concept does do is help ease that problem. sufficient. It is totally carbon neutral. It is a battery: you press a button, it comes on; you press a button, it Q17 Chair: What about the relationship with the goes off. There is no storage needed. They haven’t smartgrid that we want to develop here? Is there any over-developed their hydroelectricity. There are some implication on that? local political issues with regards to putting it in, but John Scott: Could I pick up on that? I have been they have much more capacity. They are close by, so wondering when to try and raise that one because you transmission becomes more straightforward. Yes, it seem to have quite a big agenda already with just a would push upon us a need to become more energy supergrid. I think you are absolutely right that there is efficient and generate our own energy, but I wonder a bigger picture here, which is the smartgrid for whether that would be a cheaper way of doing things Europe. That is beginning to be developed in different in a more secure and geopolitical sense, not tapping ways: smartgrids within Member States, smartgrids into North Africa, and so on. Is that not a simpler across Europe. I think the difference or the added concept or is it totally unviable? dimension is to think around the behaviour of Eddie O'Connor: With the greatest of respect, I think customers. For example, the ability to send a signal to it is totally unviable. If you are thinking of the two million electric vehicles and reduce their charging variability in wind and you have 25,000 megawatts from boost charge to half charge would be like giving out there, it may go flat calm, and that can happen the system operator a huge control lever to vary the over 500 miles. Energy and Climate Change Committee: Evidence Ev 7

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott

Q20 Dr Lee: Yes, but they would not open their okay, we might end up with cheaper power but it is dams, would they? actually not cheaper, is it, because we don’t have an Eddie O'Connor: I visited there recently and I saw economy, we don’t have an industry. We have had to they are importing electricity from Holland. There subsidise up front. I am wondering whether the whole will be times when they will be able to supply a very package is the right package for us, for UK plc? large balancing amount of power, but there will be Matthew Knight: For the UK, the first thing to say is other times when they will have to import power. If that of the three large manufacturers of high voltage one of their times coincides with a time when there is DC systems, two of them are centring their northern not an awful lot of wind blowing, then you don’t have Europe operations in the UK. My own company is enough oomph in Norway; you don’t have enough based in Manchester and because of our success in the megawatts. On the other hand, if you link with UK’s offshore wind programme to date, that is where Germany—80,000 installed megawatts of capacity— we have built the competence in these sorts of systems then a mixture of generation, all kinds: you have and that is where we are going to do projects not just nuclear; you have brown coal; you have coal; you for Great Britain but also in the Netherlands, Poland have gas; you have oil even, and you have the same even. Just down the road in Stafford, is where Alstom in Britain. So in the period to 2020, which is the have their headquarters. There is a tremendous critical rollout period for the first phase of the opportunity here. For lots of reasons, Britain needs to supergrid, the sound bit is to link with Germany. If be the active starter of this process, and Germany is you had only one nation you could link with, then the another key country but Britain stands to gain most, important one would be Germany. if we get going nice and early, in terms of the jobs and the skills because of our current position. Q21 Sir Robert Smith: May I ask one technical What we have seen from offshore wind is that the jobs thing: is your vision of the supergrid connecting the go where the industry gets going in a sustained way existing grid or will it run through it? Will you run a first. The UK is already benefiting from that and if we DC cable all the way from our shores to the Alps or can get over the existing hiatus that we have in will you run a connecting cable and then use their grid offshore wind, we will benefit more from that. This is as part of the supergrid? a really tremendous opportunity for UK plc to export Matthew Knight: The first leg that is proposed by this technology. Friends of the Supergrid goes not just to the north John Scott: I think perhaps the key issue is that we German coast but right down to southern Germany. It do have good wind resource in this corner of Europe would be a new cable. The reason for that is that, at and we do find ourselves with a shallow sea, so we the moment, the north/south links in Germany are can build offshore. There are not many countries that fairly congested but also, as Eddie said earlier, it gives have that opportunity, but we also have a very heavily you this greater scale. loaded grid. Our neighbours in Europe have very One of the things that maybe we have a mismatch on heavily loaded grids and the evolutionary step, which is the first step and the big eventual picture. Norway you always see when you look back over grids, is that is a great place to trade power with. If we build a you then have to build an overlay. You build a new couple of gigawatt link to Norway, that will be very level on top. The big step this time is to move it to useful and that is a couple of gigawatts, but if we are DC rather than another AC grid, which is what we looking to the future that was in the offshore have been doing since the 1930s. We have built layers evaluation last year, where the UK is a net exporter of AC grid. We now have a 400,000 volt AC grid of as much offshore wind, wave and tidal energy as fully loaded. The next step is a DC grid. the equivalent of North Sea oil, by that stage we need Dr Harrison: Historically, the decision about to be interconnected with everywhere. Britain has committing to the next voltage up is always a big and always been a strong supporter of free trade and free difficult one. It is much easier to do incremental markets. The beauty of the supernode idea is that the extensions of what you have already and it takes power will go wherever the market price is the best somebody brave and with some vision to go to the for it to go. That means overall and over time, across next level. For this, the problem gets compounded by the bigger geographic area the better, which brings the fact it is multi-jurisdictional and that is an especial benefits to everybody because the cost of power challenge that has to be dealt with. comes down through that market-based approach rather than through being highly regulated. We are not Q23 Christopher Pincher: You say it requires looking at a centralised super-European regulator/ someone with bravery and with vision, but operator here. We are looking at enabling a market in presumably it also requires deep pockets. I just electricity that is trans-continental; a much larger wonder how much a supergrid is going to cost, scale. particularly if you are going to build the architecture, Mr Scott, that you talked about to make it truly viable Q22 Dr Lee: I follow that the reality is that there is and if you are going to build in the resilience that you an industry in the infrastructure. say is necessary to deal with security or redundancy. Matthew Knight: Yes. Those costs, it seems to me, vary wildly from Dr Lee: The Germans have done a very good job of something like €30 billion to €210 billion depending taking a huge share in that. They have invested hugely on what you are building. What do you quantify the in solar, which is why they want the North Africa cost to be? thing. They have invested hugely in offshore wind, Matthew Knight: In the Friends of the Supergrid along with the Danes. I am a bit anxious that, yes, paper there are some numbers on this. There are two Ev 8 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott elements—what does it cost and who pays for it? there for where gas price might go in the future. What it costs is pretty low. The calculation in the Potentially, there is a glut of gas on the world paper comes out with an increase of a fraction of a market— penny per unit on electricity bills for the first phase of the supergrid. As for who pays for it, if you can create Q25 Christopher Pincher: If there is a clear cost to the right market so that somebody entrepreneurial can an alternative and the payback that you have build something and get paid for doing it, it does not demonstrated in your paper is what you say it is, then need to cost the public purse anything. It ends up on presumably the City is falling over itself to invest in the electricity bills. If you can’t create the right this supergrid idea, isn’t it? market, then it needs to be driven by a decision to Eddie O'Connor: It can't as yet because we do not build it because of the benefits to the public. That is have the standards; we have not decided who is the the issue we need to grapple with. It is not that it is owner. not affordable, but at the moment nobody could put a project forward and find a mechanism to get paid for Q26 Christopher Pincher: It must be pushing for doing that. these things because it can see an opportunity? Eddie O'Connor: The City is the City, it will do its Q24 Christopher Pincher: So it is not unaffordable own thing in its own time, but people need to see a but the question is whether there is the desire to invest very secure regulatory framework before they will put in it? money at risk. As I mentioned at the start, what we Dr Harrison: I think the key cost question is: what is have to address and what the Friends of the Supergrid the cost compared to the cost of alternatives? We are was set up to do was to address the soft issues—who going into a world—I think it is probably generally regulates it, how is the plant established, who owns it, agreed—of rather more expensive electricity to what standards will it be built and how is the cost whichever way we go. What I think probably needs charged to the customer? If we get those issues better quantification through fairly urgent further addressed within the next two years, then I believe study is what this looks like compared with that it will flow from then on in. That will lead to the alternatives. The wide variability is to do with scope: creation of a regulatory environment, so that people €30 billion is I think roughly your North Sea can see the cash flows coming from this big supergrid— investment. Then the City will come into it. It is Eddie O'Connor: First leg. premature to say to the City, “Will you invest right Dr Harrison:—first leg; €200 billion is something now?” because the question is, invest in what? more like an eventual end-game price, but it is all Matthew Knight: May I add that the infrastructure about justifying that against the cost of other options. finance community in the City tends to have a Eddie O'Connor: I anticipated that this was going to relatively short time horizon. If there is a deal to be be a nub of the issue. If we don’t have offshore wind done in about six or nine months, then they will put and we don’t have the supergrid, what are we facing 100 people on it and do something, but if there is no into? Well, by 2020 the only amount of plant that we deal for five years, they will let somebody else work can deploy at scale is gas. Therefore it is either one it up to a point where it is ready to go ahead. That is or the other. If you were to, let’s say, allow that it is exactly why a group like the Friends of the Supergrid going to cost roughly €100 billion to build 25,000 exists, to try and create the situation. megawatts of offshore wind and it is, let’s say, €30 When the project is ready to be done, I am sure there billion for the supergrid; that is €130 billion. That is is appetite to invest in it. What we have seen with an enormous figure, except when you start working offshore wind and recently with the OFTO process, is out how much you would pay for gas in the meantime. that offshore infrastructure assets are very easy to sell A figure to build out that amount of gas plant would once you have created a structure to sell them in. The be a hell of a lot less, but when you take that number first round of OFTO was something like four or five and you start to work out how much gas you would times over-subscribed and there is every expectation have to buy to supply the same electricity, you will that that appetite will continue. So the funds will be find you pay for the €130 billion in eight years. You available but at the moment there is not the pay for it in eight years, and from then on the price opportunity to make that investment. comes down because you have a free source of power. I can quantify this and send the Committee a paper on Q27 Christopher Pincher: If we get the regulatory this, because it is actually quite dramatic. When you framework right, what you are saying is you think that recast your future electricity supply, when you have there will be sufficient appetite out there for not just an enormous amount of it coming free and no the benefits in terms of jobs to fall to Britain, but the variability about it and it is entirely in Britain’s cost would not fall on the Government or the control, that leaves you dealing with, in fact, the taxpayer? There would be significant investment out variability issue, which is what the supergrid was there to build the supergrid without that cost to the initially envisioned to do. We would like to submit a taxpayer. paper to you on that, showing the alternative and how Matthew Knight: Yes. There are a range of ways in quick a payback period you get from not having to which you might decide to finance these things. If you buy any fuel. want someone to take a big risk, they will expect a Dr Harrison: I think there would be value going on big reward. Given the scale of this kind of from that, then, in looking at the range of variability infrastructure, it may be in the interests of UK plc to of future gas price. There are a lot of scenarios out reduce the risk by giving a certain degree of political Energy and Climate Change Committee: Evidence Ev 9

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott direction and support to things but, fundamentally, if trillion capitalisation working on this issue. If it there is a good business case for doing it, somebody becomes a big political issue for two countries, we will invest in it. The world has enough money. will see it happen. John Scott: Could I just pick up on this because this is the topic area of the real core issues. As we have Q29 Dan Byles: Are you basically saying that we heard, the technology, the big architecture, can be can’t leave this up to industry and the market? Are dealt with, but here we are saying, “What is the you saying that it is not going to happen if the signal? What is going to make people apply some Government takes a hands-off approach and says, priority to this?” Because there are technical issues “This is a business decision”? like standards, there are regulatory issues and there Matthew Knight: The issue is that we have to leave are commercial frameworks. We have not talked about it up to about 27 markets. We need several of those that, but there are commercial trading arrangements markets to come close enough together so that there and back office systems needed. To be honest, all of is a business opportunity to trade between them. That those are complicated not only because they are is why we need the political leadership. complex systems but they span jurisdictional John Scott: Could I add to that? I think it is generally boundaries. true that markets are very good at moving at the To understand the trading across various parts of edges, at optimising, at finding a new way forward. Europe or to understand how the trading systems will They never respond to a step change on their own, operate, and so on, it needs an icepack on the head which is why Governments have such an important and some very clear thinking. Who is going to make role to incentivise step change. This is true of smart that a number one issue when they already have a metering and smartgrids, electric vehicles. The market busy home agenda on shorter term issues? Where are in itself is not capable. Once the market gets these really good people going to be found from in established, then the Government can step back and the companies if this is just a conceptual matter? I you get the benefits of competition. think we will see some studies and some reports and this will just go on, unless some kind of signal is Q30 Dan Byles: Do you think this is something that produced or incentive is produced that says, “No, this would be better dealt with at a level, is really important. We know it is a big challenge. It or do you think that would be the worst thing we will go on forever if we do not make a start now”. could possibly do if we want this to move forward in a dynamic and flexible way? Q28 Christopher Pincher: Where do you think that Eddie O'Connor: I think it must be dealt with at a signal needs to come from? number of levels—company level and stakeholder John Scott: I think one has to think about what will level. Primarily to me it seems that if two of the focus the attention of the management of the largest and most dynamic countries in Europe, Britain organisations who have the knowledge? That requires and Germany, decide they are going to do this, Europe regulators to apply themselves, as well as will just say, “How can we help?” They already want manufacturers and grid companies, for example. to create a free market and it is funny that the fastest Eddie O'Connor: They have already committed to moving good or product in Europe is the only one join the Friends of the Supergrid in great numbers, that does not have a free open market at the moment, and we will soon be getting to the stage where we namely electricity. will have to turn people down. To me, it is a multi-tiered affair, but it is in Britain’s John Scott: Stakeholder groups are absolutely core, profound interest to get this thing given what you as is the detailed work of the standards bodies. I am yourselves have mentioned: security of supply, price, very pleased to hear that that is progressing. All the export potential, jobs. I would not like to put a figure inter-jurisdictional issues are solvable but they are on on jobs, but if Britain can actually help to create this an agenda in terms of many other issues. market, imagine Siemens multiplied by 20; then Eddie O'Connor: What could get this thing going is Arriva—they are both represented here at the if the Chancellor of Germany and the Prime Minister moment—new ports being developed; six new were to say to themselves, “We think this is a very different types of ships being built; and new cable good idea. We think this is a joint Anglo-German manufacturing. I myself am on this apprentice project and we will have some other European nations ambassador’s thing and we are looking very hard, involved as well. We expect to see all the soft issues with our chairman here, Sir Roy Gardner, on how we dealt with within the timeframe of three years and we are going to amplify this into a series of jobs for will commit some of our civil servants to assist and Britain. This is really in Britain’s interests. I think work with other stakeholder groups, such as the Britain has to take the lead on this. If you look at Friends of the Supergrid”. That big signal would make Germany’s window on to the North Sea, it is quite this whole thing happen. small. Britain’s window on to the North Sea and the So if your Select Committee were to reinforce what North Atlantic is not limited at all. the Prime Minister has already said in public—he issued a statement saying he was in favour of the Q31 Dan Byles: Apart from the Prime Minister supergrid—I think you could amplify the importance making another speech, what should we be doing of that piece of internal infrastructure, so that he could tomorrow? What should the UK be doing to make say, “If it becomes a priority project for Germany and this happen; actual people physically doing things, not Britain, we will see huge movement here”. We already just talking? have a huge number of companies with a quarter of a Eddie O'Connor: A phone call to the Chancellor. Ev 10 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott

Q32 Dan Byles: So you think the key here is the Hendry has shown huge interest in offshore wind and bilateral relationship between Britain and Germany? he has facilitated a meeting between me and the Prime Eddie O'Connor: Yes. Minister to explain it to the Prime Minister. There is Dan Byles: It has to be driven forward by those two real big interest at that political level because they can nations? see Britain being the huge big winner in this Eddie O'Connor: Honestly, I think that. eventually. Dan Byles: In fact, this is initially a diplomatic issue? We have to align ourselves with Germany— Q36 Dan Byles: It seems to me this is the next Eddie O'Connor: It is fair to say that we can handle logical step, given what we are already doing with the technology issues. If we get the regulatory wind. You cannot do wind and not do this; otherwise framework in place, the financial issues will get dealt you are doing half of the job. with. The wind is out there already and we know John Scott: To put it in context, this is a strategic plan about it and Britain has a more aggressive programme for something bigger because otherwise we could just than anybody else in Europe. There are blockages all be build a DC link between here and Germany or out along the way, but the most profound one, the one that to a wind farm. That is just a merchant development, that bilateral relationship— this is the bigger.

Q33 Dan Byles: The thing that is stopping us Q37 Dan Byles: So there is an argument against actually going forward and making this thing happen evolution. Basically that means saying, “We can’t is more of a political will? allow this to evolve”? Eddie O'Connor: Yes. John Scott: Yes, it is a step change. John Scott: It is the signal that says that we are all Dan Byles: We need to step in and somebody needs up for this. to grip it from the top of the fence. Dr Harrison: It is a step change, but you need to Q34 Dan Byles: Then, presumably, the next step is consider that DECC is also charged with delivering a the practical nature of DECC sitting around with their UK energy policy outcome over a period of time, and counterparts and coming up with the actual the trouble about fitting the supergrid into that is the regulatory regime. uncertainty of end timing. DECC may struggle with Dr Harrison: Definitely, there is a whole heap of that. It has to run parallel paths to do this and it has follow-up activity needed in terms of moving the to deliver the policy outcome, while at the same time regulatory environment forward at a European level. pushing this proposal forward, as fast as possible, to get it to the point where it is certain enough that you Q35 Dan Byles: How much discussion have you had can then start patching into policy decisions in a more with DECC? What signals and feedback are you pragmatic way. getting from the Ministers, if anything? Are they Chair: I think on that note I am going to have to wind gung-ho for it? up. We are out of time. Thank you very much indeed Eddie O'Connor: Chris Huhne is profoundly in for coming in. It was extremely interesting and that favour of an integrated European market given his provides a good start for our inquiry. Send us the background, but I would have to say that Charles figures that you mentioned about the cost comparisons with gas because we are interested in those as well.

Examination of Witnesses

Witnesses: Alex Murley, Head of Technical Affairs, RenewableUK, Andrew Nind, Director, Pöyry, and James Cox, Consultant, Pöyry, gave evidence.

Q38 Chair: Thank you very much for coming in and In terms of renewables, there are enabling benefits that you have heard what has already been said. As I say, interconnection provides. I suppose you could also we have quite a tight deadline. Could I start off by turn it around and suggest that renewable energy can asking you how you think the development of a help the economics of interconnection in the first supergrid might affect the deployment of renewable place. At a high level there are opportunities to access generation in the UK? new markets, access new capacity, share peaking Alex Murley: I think, to start with, there were some capacity, flexible capacity and to reduce transmission very useful discussions in the last session about the costs, both offshore and onshore. wider economic benefits of greater interconnection across Europe. There has been growing Q39 Chair: I think you suggested that there might be interconnection, purely because of the economic some tension between the plans for a supergrid and rewards that interconnection affords in terms of the plans of the national system operators. increased market liquidity, increased competition, and Alex Murley: Yes, we did. I think the example that the driving down of wholesale electricity prices. So, was given in the last session of how offshore even without renewable energy, there are sufficient interconnection lines can be arrive at onshore grids, economic drivers for interconnection in the further inshore than actually at the coast to avoid appropriate sites. restructuring onshore networks, is one of where the Energy and Climate Change Committee: Evidence Ev 11

10 May 2011 Alex Murley, Andrew Nind and James Cox investment portfolio or the investment intentions of at the time when you need power in the UK, because the national TSO could be affected. the wind has dropped off, the wind has not also Obviously, in that example, the alternative to dropped in Germany, in Denmark, in the Netherlands providing greater offshore interconnection is to and in France at the same time. reinforce the entire onshore infrastructure. At a Alex Murley: I think your question was on whether it national level, the TSOs will have a natural interest in is a cost-effective driver to increase renewables. There the investment of their own network. There are similar are already a number of primary drivers encouraging examples in the US, where significant amounts of renewable energy development outside state interconnection has been provided as an interconnection completely. There have been alternative to reinforcing the state level infrastructure, discussions on security of supply and on the and I think where the ownership and development of environmental impacts of taking us away from coal the interconnection is separate from the TSO there and gas. Let’s not forget that we have targets for 2020 will naturally be a tension between the vested interests but, by 2030, we need to reduce the carbon intensity of those parties. of our electricity supplies to below 50 grams per unit, and gas is upwards of 300. Q40 Chair: You also suggested that if it was a So, offshore wind, because of its resource location in requirement to fit into a supergrid scheme, some the UK, has a great ability to contribute not just to investment in new renewables might be delayed. energy security and economically, but also to the Alex Murley: Yes, without taking away from the environmental agenda. So there are significant overall benefits of interconnection, not just for wider primary drivers already there. The interconnection and economy but for those renewable energy projects that the supergrid concept can help renewables along and will be enhanced by them, there are a number of provide additional benefits. Equally, renewables can projects currently under development and at very provide additional benefits to the economic case of advanced stages of their development in the UK. Part interconnection as well as in terms of the wider of the issue in the interaction between taking a very economic benefits they provide. strategic approach to co-ordinating network development is with planning and consent. Although Q42 Chair: Has any assessment been made of the there are many benefits there, projects that are at a environmental impact of laying lots of subsea cables? very late stage of their development at the moment, Alex Murley: I think it is important to start with the which are already a long way towards achieving interconnection across Europe. The supergrid is at an planning and consent, may be asked, “Well, hang on early stage of its conceptual development but, a second, how do you fit in with the wider strategic certainly, in terms of the offshore wind farm vision?” and that is a fair question. The ability of developments in Round 1, Round 2 and Round 3, very individual projects to fit in with this wider strategic robust environmental assessments are required of all vision is very much on a case-specific basis. The aspects of deploying offshore wind. That very much danger is that, if the regulation is not put in place in includes the cable laying and the way in which they a timely and appropriate fashion, then it could pose are brought ashore. So there are robust processes in delays to those projects that are ready to push the place to assess the associated environmental impacts. button on development now. Given the importance of offshore development, both industrially, Q43 Sir Robert Smith: Mr Cox, you mentioned environmentally and in terms of security of supply, it already that even connecting Germany and certain would be unfortunate if those projects that are ready weather climates may not be enough. If you scale it to go now were to be delayed. up to the solar power of the southern part of Europe, does that start to help? Q41 Chair: We already have quite a substantial James Cox: I guess one observation is that wind and programme of investment proposed on renewables. A solar are pretty much uncorrelated, so any time it is very expensive supergrid would obviously add greatly sunny it can be either windy or still. The fundamental to the amount of investment needed. Is it the most problem with solar is any time a system peak occurs cost-efficient way of trying to develop this? it is always at night, pretty much by definition. So the Alex Murley: I don’t know whether my partners on only way that DESERTEC can help with the winter the panel want to contribute to this as well. peak, the peak time for generation in the UK, is with James Cox: I guess a supergrid, at least a North Sea a lot of storage. There is a lot of solar in Spain and a grid, is potentially quite an effective way of balancing great many of investigations suggest that you can the system, balancing the intermittency of the wind. heavily connect Spain with 30 gigawatts But the reality is that across the north-west European interconnection with the rest of Europe. The way that regions—so if you look across the UK, up to Norway, becomes useful is then to have a lot of storage in down to Germany and France—there is a lot of Spain, based on solar thermal systems, which takes correlation between wind patterns and weather the heat from 4pm or 5pm and bring that forward to patterns. So fundamentally, if you get a high-pressure between 7pm and 9pm, when the peak in generation area covering the area, it is likely, if it is covering the is occurring. UK system, that there will also be low generation in Andrew Nind: In a study that we did recently for the Germany, in Denmark and in the Netherlands at the Committee on Climate Change, we looked at the same time. So although interconnection will help, and impact of linking in the supergrid, among other things, help quite a bit with balancing the intermittency of the on wind curtailment in Britain; at times when it is wind, it is not a panacea. You cannot guarantee that very windy how much would wind be curtailed? Ev 12 Energy and Climate Change Committee: Evidence

10 May 2011 Alex Murley, Andrew Nind and James Cox

Broadly what we found in the study was that, although moment, has certainly had an impact in pushing up a supergrid would reduce the amount of wind the gas prices to a greater extent than that 1p curtailment, it would by no means get rid of it. So proportion of the bills. So there are aspects of there was still a lot of wind curtailment occurring in interconnection that can help with this but they the analysis. That is essentially because there would shouldn’t be overstated. be times when it was windy in Britain but, equally, it Andrew Nind: In terms of the Pöyry conclusion—the was sunny in Spain, so effectively you have too much 1p on the bill—we were essentially looking at generation in the sum of the two. wholesale prices and assuming that there was a Alex Murley: I think that report was published subsidy for low-carbon generation, so we were not yesterday and I found a small amount of time to flick looking at retail prices in the analysis. Our view is through it, and it is a very welcome contribution to offshore wind, in particular, is expensive thus far and the debate. I think it is important, in terms of the how much it reduces in cost in the future remains to balancing side of things, to remember the different be seen. We certainly expect it will come down but aspects to it, which are often confused. On the currently our view would be that it is expensive, and flexibility side of things, the intra-hour management so if it is— of variation of output from wind, say 30 gigawatts, Sir Robert Smith: Whether or not you have the would be no more than about 3 megawatts a second supergrid? at peak change, which is broadly similar to what Andrew Nind: Whether or not you have the supergrid, demand does every morning, but you do need to have yes. There is still quite— flexible plant that can ramp up and down with that variation. Q44 Sir Robert Smith: Presumably, once you have The second aspect of balancing is the peaking plant— reached a certain point in the supergrid you start to that means plant that does not necessarily have to be get a standard price across Europe? rapidly responding to those changes but a plant that James Cox: The interesting question is what is the can provide service at times when there are low wind implication of a supergrid? In a recent study, you have periods, maybe not just in the UK but across the a copy of the public report from it, we looked at region, like the Pöyry report has demonstrated. something akin to supergrids. We looked at an Going back to the report that Pöyry put forward, there additional 41 gigawatts of interconnection, which is are benefits of increasing the scope of market a 50% increase in interconnection across north-west integration. I note that the report that the Committee Europe, so around the North Sea area. on Climate Change have released does not include the What we found from that is the 41 gigawatts of Spanish inclusion of markets, nor going down to, for interconnection offset about 14 gigawatts of plant, so example, Greece. So I suppose the further you go you got about 30% back-up capacity from the geographically, the more smoothing you are going to interconnection. So you still have to build quite a lot get in terms of the variation that wind will provide. In of back-up capacity when you put all this wind in. that, you also guard against the one single weather There is a lot of plant sitting idle for long periods of event affecting the whole region as well. As time. The interesting thing then, taking it a stage mentioned, you tap into diversification of resource, further, was the effect on prices and generation costs. such that the rhythms of output coalesce to the extent So when you interconnect countries together, the that the absolute minimum is reduced, so the amount simple thing is you reduce the cost in generation. It of peaking plant you would need in those areas of low makes things more efficient; that is the fundamental output from variable renewables is reduced. thing. Provided interconnection is used efficiently— It is important to separate those two sides of things we will take that as read—the generation costs will and also to remember that, in the context of how much reduce; so you don’t use expensive oil plant in some peaking plant you need to tap into, it should be countries; you run gas ahead of coal, and so on. compared to what you need in an alternative system. What was interesting, though, is you that cannot So if you had a very inflexible baseload-focused guarantee who will benefit from those reduced system, you would still need the peaking plant to take generation costs. It is very unclear. There is a big you in the amplitude of minimum to maximum asymmetry in the benefits. A case in point is that if demand. In terms of the peaking plant that you require you have a North Sea grid interconnecting GB and to handle high penetrations of renewables, if a peaking Norway, which is the main beneficiary from that, our is reasonably low, the cost of managing that aspect latest work suggests that UK prices would barely and the variable aspect is very low as well. The Pöyry move but Norwegian prices could rise very study has shown, I think, that moving up to 65% of substantially. So generation costs are lower but prices renewable penetration in 2030, and 80% renewable in the Norwegian market are much higher. As a result, electricity penetration in 2050, adds no more than a the beneficiaries are all the people who have hydro- penny per unit on to the bills. generation in Norway. That could then lead to a lot I think there is a lot of mischief out there and I think of political resistance as a result, but the impact of a in our submission we said that the pundits do run supergrid across Europe is higher prices in a number away with some of the facts. It is important to put that of countries, which are going to be opposed to the price addition, which comes with the system supergrid as a result. management as a whole, in the context of what risk Andrew Nind: On a related note to that, the volatility exists outside renewables, in terms of fuel risk. You of prices in markets will not necessarily come down know the Japanese increase in demand for gas with the supergrid in place. It might depend on the supplies, to offset their domestic problems at the particular market in question. For example, in Energy and Climate Change Committee: Evidence Ev 13

10 May 2011 Alex Murley, Andrew Nind and James Cox

Germany there have been in the last year or two a lot I think the Carbon Trust have recently been doing a of zero prices, a lot of congestion in northern piece of work for BIS, for DECC, for the Technology Germany in particular. Tapping into that would Strategy Board, in terms of where to focus strategic probably—or could—import some of those zero R&D investment, and they are positive that, by 2050, prices into GB, clearly a benefit to consumers but that the global market for offshore wind is going to be could increase rather than decrease price volatility. I worth £170 billion annually. If we can just get 10%, think the impacts on prices are quite complex. There 20% of that, that is creating 250,000 UK jobs by 2050. is no guarantee either that prices will necessarily come We suggest that by 2020, with the levels of down for consumers or that price volatility will be deployment that we foresee in offshore wind, with 24 reduced, as a result of having the supergrid. gigawatts generation by 2020, that jobs could be Touching also on the point that Alex made, we would upwards of 50,000. certainly agree that the further the geographical scope So there is a point at which you go with offshore wind could be, the more benefits you are going to get. Our where you need to rely on other industries to take the ratio of 41 gigawatts of interconnection saving 14 lead and if you do not have enough ambition to gigawatts of thermal capacity would have been develop an indigenous market early on in the technology development, other people will do it. The somewhat better if we had looked at a wider consequence of not going far enough early enough is geographic scope. Essentially, what we are finding is that we will be importing technology from abroad in that weather patterns are large relative to the size of the future and we will not gain the cost benefits of countries in north-western Europe, so ideally you that technology through the supply chain. Admittedly want the grid to be extensive in its geographical the technology costs are high in the short term, but scope. they are coming down as the technology starts to bed in and deploy more widely commercially. Q45 Dr Lee: To be clear, for us to get a better return on this heavy investment in offshore wind, we need Q47 Dr Lee: One final question, a small one: if we the supergrid? are ploughing this money into this particular area— Andrew Nind: I think it would give the better return you talk about R&D—we are surrounded by wind, on investment in offshore wind. Of course, offset but we are also surrounded by water; it seems marine against that, is the cost of the supergrid itself and technology is getting squeezed out. Is there a danger whether one justifies the other. here that in our attempts to try and make this work Dr Lee: So if we take a 50-year snapshot, yes is the that we are missing an opportunity to be at the answer? A long enough snapshot, because obviously forefront of renewable technology within marine? if you structure allowing for a bit of repair— Alex Murley: Yes. The R&D pot across the board is Andrew Nind: Absolutely, yes. going to be limited, especially at times like these, and there needs to be a strategic vision, not just in terms Q46 Dr Lee: Following on from that, is the sense of energy policy but in industrial policy as well. So here that we have thrown all our money into offshore there will be an inevitable competition between wind because we are blessed with shallow water, and various different technologies. These two just so so on, but now we have to throw a bit more money happen to share a lot of the attributes that are in to make the figures add up a bit better. Is that a necessary for successful long-term industrial vision, fair assessment? and when the coalition talks about long-term vision in manufacturing, in rebalancing the economy and in Alex Murley: As I said earlier, I think the economic exports, these are two very good examples of where case for interconnection will stand on its own two legs that long-term vision can be embedded, and we will without renewables but there will be enabling benefits reap the benefits. There is a natural competition, but given to renewables. Your earlier discussion about the if the manufacturing vision of the broader economy is industrial benefits of offshore wind prompts the there, then these two should stand quite healthily in question: why are we doing this? Why did we not do competition outside the energy sector, just on an this with onshore wind in the 1990s? We failed to industrial economic basis. develop manufacturing and export opportunities, and therefore the jobs, because we did not support our Q48 Dan Byles: I want to tie you down a little bit indigenous market at the very outset of that more on the potential impact of the supergrid on the technology. All the jobs now exist in Denmark, need for back-up generation, because we do seem to Germany and Spain. be getting slightly different messages. WWF have With offshore wind, it is starting now, but it is only suggested that the supergrid would substantially just starting. We have a good market to which to reduce the need for back-up generation. The European supply the energy. As you say, we have shallow Climate Foundation have said that increased waters; we have significant engineering capacity; we interconnection at EU level would reduce total reserve have the ability to have half of the global market for requirements by 35% to 40%, and I think you give a the next 10 years in our country. If we can develop figure of about 30% or so. In the Pöyry report you the level of annual deployment that encourages said, “This heavy reinforcement of interconnection manufacturing to take place, and companies like doesn’t appear to offset the need for very much back- Siemens and GE to come and put their factories here, up plant”. for the short term it will grow to provide export James Cox: I guess it comes to the definition of the opportunities across Europe and the world. “very much”. The ECF and the WWF work have Ev 14 Energy and Climate Change Committee: Evidence

10 May 2011 Alex Murley, Andrew Nind and James Cox considered heavy interconnection all the way to the Q50 Dan Byles: How do you see all this interacting south part of Europe and what are very ambitious with the proposal for a capacity mechanism in the levels of interconnection—I think 30 gigawatts electricity reform in the EMR process, because it interconnection from Spain to France is on the outer seems there might be a bit of a tension here. The scopes of anyone’s possible vision—and then a lot of Government are looking very domestically at saying, thermal storage in the Spanish markets, Italian “We need a certain amount of peaking plant. We need markets, North African markets, and so on. When you a certain amount of capacity. We are going to put all these assumptions together, you start pulling introduce capacity mechanism to produce that, but at all the levers together so you can substantially reduce the same time we are linking ourselves through the need for back-up capacity. The sad fact is that supergrids to everybody else and we can’t just look at back-up capacity, relatively speaking, is quite cheap ourselves as a bubble”? and it is in your country, it works, it is reliable and Andrew Nind: Your point is a good one that it is always there when you call upon it; aside from ultimately security of supply depends on having occasional technical failures, it is there. generation assets, it depends on having enough When you call upon an interconnector, there is no generation and enough flexible generation, and guarantee it will supply you any power at your time interconnection is none of the above. It is just a means of transporting the electricity from one place to of need. A very good example of that of course is another. So someone has to have the flexible the gas interconnection between Netherlands, GB and generation, the peaking generation. I think it is not Belgium, where quite often at times when our system particularly a problem that encouraging peaking needs—it gets very cold in the UK; it is also very cold capacity in Britain is somehow suboptimal, somehow on the continent—the gas isn’t there. Exactly the same contradicting or going against interconnection with would apply in the case of electricity interconnection. Europe. I would have thought it is probably more It is still in Germany; it is still in the Netherlands important that Britain still has peaking capacity for and the stable Norwegian battery, which has a huge security of supply reasons. capacity in terms of its ability to send power, when Alex Murley: I think the point about the peaking plant we are trying to send power to Denmark, to Germany, is well exampled in Spain, where they have very high to the Netherlands, to North France, to the UK at the levels of wind and the load factor of the combined same time. total gas plants are slowly ebbing down, as the wind takes a larger share of the fuel on an annual average Q49 Dan Byles: You have effectively anticipated my basis. The gas plants in those situations will be next question, which was: is there a danger that, if we questioning, “Well, how low does my load factor have over-egg this, we take the lazy option and do not build to go before I can remain on the grid and provide a the peaking plant here, on the assumption it will service, even if I am only needed at a once in a year always be at the end of the tap if we need it, what time when there is low wind?” In Spain they have happens when we will need it when everyone else used every single one of their CCGT plants, although needs it? the load factor has been squeezed down. It shows that, Alex Murley: I think the more extreme danger is not in some circumstances, for the plant that is only that we build the peaking plant here or not, it is needed once a year, it is still very important to have whether you build inflexible plant within the outer that plant and there may need to be an availability reaches of the European network. For example, if you capacity payment that is made available to that plant have a single line, a cable line feeding into a network to make sure it is there. that only has the capacity of two gigawatts, if you put To go back to my point, you have a peaking point and a baseload inflexible plant that is operating 80% of then you have a flexible point as well in managing in the time there, potentially, you can only have enough the intra-hour opportunities. In Ireland, where they space for very small additional flexible, potentially have a wind penetration of about 10%, over double variable renewables to be added on. what we have—they had 52% wind penetration in October last year—the instant operational reserve that If you widen that analogy to say, “That line is the they have is still being completely driven by the loss UK” or, “that line is Ireland to the UK or UK to of the largest unit on the system. So it is not being Europe”, by putting inflexible plant in the extremities driven by wind at all. of the European network, you would increase the I think it is important to note that in Ireland they do congestion at high-wind periods of getting that wind have a capacity payment system, and now they are out of the UK into Europe. It would potentially almost moving towards a targeted capacity payment, encourage the uneconomic build-out of where they don’t just bring in peaking plant but they interconnection in order to make use of the fantastic bring in peaking plant that is flexible because flexible resources that we have in Ireland and the UK. plant can do both jobs. Non-flexible peaking plant can Dan Byles: That is interesting. So it is not about only do one of those things. peaking plant, it is about how we do our baseload? James Cox: To pick up that point: Ireland is looking Alex Murley: It is about the system as a whole, to institute a maximum instantaneous penetration of absolutely. If a large inflexible plant needs to operate renewables. It says the maximum amount of 80% of the time in order to be economic, then there renewables at any time on the system is around is going to be a tension within any network with other 75%—that is the current proposal—and it will curtail forms of renewables that need to run when the fuel is it if it ever gets above that. That is the current proposal very low in marginal cost, and available. from EirGrid and that is for system stability reasons. Energy and Climate Change Committee: Evidence Ev 15

10 May 2011 Alex Murley, Andrew Nind and James Cox

So EirGrid say, “50% is okay. If we hit 75%, we’ll Q52 Dr Lee: The more the interconnection, the curtail any wind above that level” and that is the worse the asymmetry? existing proposal. James Cox: The more the interconnection, the more Ireland and Spain are very good examples. Both have the two markets will balance together. As a result, very high wind penetration, both are quite small effectively, the more market coupling you get between markets and both of them have capacity payment the two markets, the more similarity of prices. mechanisms in place, which means that they encourage either old plants down the system to add Q53 Dr Lee: What is in it for the Norwegians then? peaking capacity or new build of peaking capacity. James Cox: Fundamentally, the Norwegian The existing GB market, which encourages CCGTs to producers—particularly those that have hydro be built at a relatively low cost and has relatively low generation—potentially make an awful lot of money. flexibility compared with Ireland, is starkly different Then it is about swings and roundabouts as to where from that of Ireland where roughly half of the new that money goes. You could see all the recovery plant that are proposed to come on-stream are peaking mechanisms that could happen across interconnectors, generation. That is pretty stark. In GB not a single so you could see a situation where there are taxes and OCGT has ever been built under a market mechanism windfall taxes on the producers that are benefiting whereas in Ireland about half are likely to come on as from unexpected high prices, and so on. a result. Andrew Nind: It depends on what happens to hydro; Andrew Nind: I think you can get interesting hydro conditions in Norway and also the fossil fuel unforeseen consequences when one country has a prices. Before 2003 there was quite a lot of interest capacity mechanism, say, which other countries do not by Statnett in developing this cable and the have. When we did our first intermittency study, what assumption was that Britain would export to Norway we found—looking at Britain and Ireland—was that overnight and Norway would export to Britain during one of the big effects was Ireland importing price the day, and the effect would be that it would be spikes, which they would not have had otherwise, as equitably distributed. The Norwegian Government a result of interconnection with Britain. In the study stepped in 2003 and stopped it, because I think there you have a capacity payment mechanism in Ireland was concern that Norwegian consumers would suffer that caps how high prices can go, in a highly as a result of the link. More recently, fossil fuel prices intermittent world you could have a situation in have been a lot higher and so there has been this assumption that the direction of flow would primarily Britain where, if you do not have any such be from Norway to Britain, helping British consumers, mechanism—it is just the BETTA market—the prices arguably at the expense of Norwegian consumers, but could spike up very high and at peak times Ireland it all depends on one’s view of fossil fuel prices and would be exporting to Britain, pushing up the price in also hydro conditions in Norway. Ireland. So as a result of the interconnection you could get very high prices in Ireland. It is an example of the Q54 Dr Lee: And also to what extent you are reliant notion that if you do have different mechanisms in upon fossil fuels. If we go down the path of nuclear different countries, you can get unforeseen results. and offshore wind and energy efficiency, our demand Dan Byles: You become exposed to your neighbour’s for fossil fuels may reduce, in which case we would mechanism in addition to your own? be less likely to be importing those fossil fuels from Andrew Nind: Indeed. Norway, which would then perhaps change the equation. I suppose they could sell the power and then Q51 Dr Lee: DECC have suggested that if we had levy a tax, put it in a sovereign wealth fund and then an interconnection with Norway that UK consumers give it back to the Norwegians in kind so that they would have cheaper bills. Do you agree with that? will buy into it with a longer-term perspective, but I James Cox: That is not necessarily clear. There would wonder about their direct benefits. Do you think we certainly be lower generation costs, so there would be benefit from the interconnectors or, generally efficiency as a result. It is simply not clear that the speaking, do you think if we are connected with UK consumer would benefit as a result. We certainly Belgium, Germany, everywhere, this country benefits? would expect Norwegian prices to rise; so Norway James Cox: My personal view is we are likely to have produces the benefit, Norwegian consumers lose out. benefits but they are certainly not guaranteed. So we Quite often in a lot of the work we do, we see the are probably likely to have less price volatility. There prices in the UK rising when we interconnect to is a likelihood of having lower prices. That can Norway. This is one of the curious sides about the happen but there is no guarantee of that. Particularly asymmetry—the uncertainty of interconnection—you as we head down a course of having more and more get all these unexpected effects. So, in that particular wind, the wind lobby might say, “Well, put a lot of example, Norwegian prices rise because they are low wind on the system. That reduces wholesale prices. and there is a lot of hydro but UK prices rise because, That has to be a good thing”, but if you interconnect if you assume there is a lot of wind in the UK, you the UK to other countries that will raise the price to start to get a lot of low-price periods where the price UK consumers. is zero or negative. By removing those low-price The caveat to that, of course, is that higher wholesale periods, prices in the UK rise as a result. So it is prices means you have to subsidise wind less. So you possible to interconnect the UK and Norway together end up with these complex interlocking circles, which and prices in both countries to rise simultaneously. is why we say you can’t tell where the benefits will Ev 16 Energy and Climate Change Committee: Evidence

10 May 2011 Alex Murley, Andrew Nind and James Cox lie because it is very uncertain. You can’t guarantee Alex Murley: If the UK has an industrial interest and they will come to the UK, though. an interest in developing and manufacturing, then we have to be an exporter in order to maximise the supply Q55 Dr Lee: One final question: do you see us being chain benefits of that. If the Europeans successfully importers or exporters of energy onto the supergrid in manage to bring forward an integrated single market, the future? the wealth of resource across the region will be James Cox: I would have thought exporters, broadly, identified as being rich in the North Sea and the but it depends on the level of wind deployment. If you supergrid concept can only help the exploitation of have a significant roll-out of wind deployment, we are that resource. likely to be exporters, but the flows are likely to be Chair: Thank you very much indeed. That is very heavily bidirectional because of the intermittency and helpful and interesting. Thank you for your time. the variability associated with wind. Energy and Climate Change Committee: Evidence Ev 17

Tuesday 14 June 2011

Members present: Mr Tim Yeo (Chair)

Barry Gardiner Sir Robert Smith Christopher Pincher ______

Examination of Witnesses

Witnesses: Stuart Cook, Senior Partner, Transmission and Governance, Ofgem, Martin Crouch, Partner, European Strategy and Environment, Ofgem, and Alison Kay, Commercial Director for Transmission, National Grid, gave evidence.

Q56 Chair: Good morning. Welcome to this meeting Stuart Cook: I would add to that, even with the of the Committee and thank you very much for existing interconnectors—Northern Ireland, the making time to come and talk to us. We are in the interconnector with France and the interconnector that middle of this particular inquiry, as you probably are has just come online called BritNed, which links us aware. Could I start off with a general question about with the Netherlands—the Northern Ireland how big you think the potential for UK offshore interconnector is currently in export mode at the renewable energy is and why we need a supergrid if moment for physical reasons. The BritNed we are going to take full advantage of it? interconnector and the interconnector with France Alison Kay: I think in our scenarios we see a very big alternate between import and export. So we are potential for offshore wind. We see 16 GW of offshore already net exporters on occasions. wind by 2020, rising to some 37 or 38 GW by 2030. So we see, particularly for the 2020 renewable targets, Q58 Sir Robert Smith: So is export leaving Britain offshore wind has a very big part to play. We see that to Northern Ireland or from Northern Ireland to the benefits that a wider supergrid can bring, other Britain? than provide things like backup support for Stuart Cook: It is export from Scotland to Northern intermittency, will enable us to enact more of the EU Ireland. Liberalisation Directive, enabling cross-border trade. So I think we see very much offshore wind as a step Q59 Chair: Why is a meshed grid better than point- towards a supergrid; a very important step towards to-point connections? something that ultimately we feel could be very Alison Kay: We believe that an integrated offshore valuable to the UK. grid brings a number of very substantial benefits; one Stuart Cook: Perhaps if I could say a few words; is cost. Our estimates have shown that we could knock Stuart Cook from Ofgem. My responsibilities are to some 25% off the cost by having an integrated grid. lead on regulatory framework for distribution and It enables us to scale up the size of the asset so transmission businesses. I think the Crown Estate somebody is planning ahead, making sure that the have put into the public domain estimates of 40 GW assets are not just sized for a particular generator of offshore generation as the potential that we might appearing at the end of a radial link but are sized for roll out to and clearly, in the context of the scale of all generators that may come at the end of that link. A generation that we rely upon to meet needs here, that very important benefit as well is that it does decrease, is a massive opportunity. It is absolutely essential that probably by around half, the number of onshore that generation can connect into the onshore system, connection points that you want and, as we all know, planning and availability of land within the UK is a but it is a step further then to go to say that we need big issue. to have a supergrid and I think there are a lot of These converter stations are twice the size of a questions about what a supergrid would look like; how football pitch and, therefore, the space they require as it would operate; whether it is technically feasible in they go onshore is very great indeed. Another obvious the short-term. So I think it is absolutely clear that we benefit is co-ordination of the supply chain: making need interconnection to the onshore grid network. It is sure that we are giving clear signals as to what is also very important we have increased interconnection going to be needed going forwards; giving the with other countries, for reasons which I am happy to suppliers the necessary certainty to go out and do elaborate on. I think there is a lot of work to be done some R&D and to make sure these things are yet to work out whether the supergrid is the right way technically feasible and thus are able to size and plan of delivering all of the resources, but we are very open their workbook accordingly for this very limited to doing that work. resource. The Western HVDC cable that we are currently looking at from Scotland to England will tie Q57 Chair: If we had a supergrid, could that make up manufacturing capability of cable for two years. us a net exporter of electricity? So there is a very great need to signal to suppliers the Alison Kay: It certainly has the potential to do so, yes. scale of this challenge coming forwards. At times when we have surplus energy here in the UK, there is definitely an increased ability for us to Q60 Chair: Your written evidence suggests that the be able to export that spare capacity. integration of offshore energy is critical to meeting Ev 18 Energy and Climate Change Committee: Evidence

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay

EU environmental targets. Does that mean that you are making sure that there is no risk of stranding. without a supergrid we won’t be able to generate I think that you will able to ensure that the points at enough renewables? which those offshore connections come onshore are at Alison Kay: We think that an integrated offshore grid, parts of the system where the system is currently very which we see as an important step to the supergrid, is constrained onshore, thus helping to ease congestion very, very important for meeting our renewables as we build out our offshore networks. So it is targets. I would agree with Stuart that the evolving of certainly a help in easing that congestion going the supergrid is something that we need to take step forward. It is not a panacea. It still relies on the by step. It is the integrated offshore grid that we see onshore network that we have in train, and things like as absolutely key to being able to meet our the bootlaces that we see coming down the east and renewables targets. west coast of Scotland are still very necessary. We believe that with an integrated network, largely Q61 Chair: Can that be done by 2020? because of where you can be very much more co- Alison Kay: The integrated offshore grid can be done ordinated in where those points come onshore, we can by 2020 with the necessary caveats on supply chain, help to relieve some of those constraints going on onshore planning, on environment constraints. As forward. I said, we are planning 16 GW of offshore by 2020. Martin Crouch: From an Ofgem perspective, we would certainly agree that an integrated network Q62 Sir Robert Smith: The difference between an offshore can help. It is not going to solve the problems integrated grid and a supergrid? of intermittency on its own, but it is a contributing Stuart Cook: If I may answer. I think sometimes these factor, along with the work on market coupling and debates can be cast in quite black-and-white terms. integration with other markets, which will ensure that The reality is there is a range of options for the way when GB prices are high we are importing and when in which the offshore grid could evolve and which our prices are low we are exporting, based on the option makes sense, I think, will depend upon factors flows across the interconnectors. When we have a lot like the extent and the location of generation; whether of wind generation, we are more likely to be or not you get planning consents for particular cables exporting. When we have less wind generation, we and connections onshore; the way in which are more likely to be importing. So it will help balance technology evolves as well and the way in which the the system there as well. regulatory framework assists. The range of options that the transmission companies in Europe have Q64 Christopher Pincher: You said that a supergrid looked at span from, at one end, something that would reduce costs by something like 25%. Is that simply is point-to-point, which is more or less the way largely soaked up by the curtailment that currently that the system has evolved so far; to a system that exists, by the bottlenecks that exist in the system? By involves optimisation of the onshore connection; to a removing those bottlenecks, are you saving 25% of system that involves the optimisation of the onshore costs or are there other ways of saving costs? connections and the interconnections across countries; Alison Kay: No, if I can clarify. The 25% savings was to something that, at the extreme, is a meshed system on the integrated offshore grid. It is very important looking like a grid on the sea. that I clarify it was on the integrated offshore, rather Where we end up in that spectrum very much depends than the supergrid where work done through ENTSO- upon the factors that I was explaining at the start. It E—who you are going to hear from next—has shown depends on how quickly generation comes on offshore that if we get some more co-ordination we should see and what level and extent and location of it. I think savings of around 10%. That 25% saving was very most studies point to the 2020s as the determinant much on capital costs, simply because you are sizing decade. So it will be the generation that connects in the assets slightly bigger than you would do with the 2020s that will really place a shape around the radial point-to-point connections. So it was very much way in which that grid evolves and determine it. Up 25% savings on capital costs, rather than on the until the 2020s, it is more in the realm of avoiding ongoing constraint costs that we are likely to see. It duplication of resources and optimising in a more was very much the capital costs point. limited way, rather than pushing out to the full Stuart Cook: If I may, I think it is worth saying that supergrid potential. a number of estimates are being produced about savings for co-ordination offshore, and indeed savings Q63 Christopher Pincher: Can we talk a little bit for the North Sea supergrid itself. We are, ourselves, about how the supergrid will reinforce the existing at quite an early stage in the assessment of those. We grid? You have touched a few of these points already, have two steams of work under way at the moment: but in terms of congestion the flow of electricity in one through Europe and one through a Great Britain the UK is north to south and in terms of the current initiative, which is trying to understand assumptions use of wind, as I understand it, the majority of and implications of costs and benefits. As far as offshore projects rely on a single connection to the Ofgem is concerned, we note the analysis that has onshore grid. So I wonder how you think an integrated been done to date, but we are not yet in a position to offshore grid will help to ease the bottlenecks that validate it as something that we would support. we face. Alison Kay: An integrated offshore grid will help ease Q65 Christopher Pincher: You said that you will be some of those bottlenecks. If you size the connections able to reduce the connector points by something like to allow for all generation to share those assets, firstly, half. In terms of other transmission asset savings, are Energy and Climate Change Committee: Evidence Ev 19

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay there others as a result of a meshed grid or is it just of doing our best to understand how the system is the connector points that we are reducing? going to evolve. Onshore, we rely on the companies Alison Kay: For the integrated offshore coming to come to us with evidence to make a case as to why onshore, it is just the connection points coming they feel that that necessary investment is required. I onshore. Our work has shown that, in order to meet would expect that sort of model to be appropriate the 2020 targets, we need the onshore reinforcements offshore as well, because the companies are much that were identified through the Electricity Networks closer to the coalface and understand—if I can use Strategy Group and which we are currently taking that analogy—exactly what is required, but I think forward. anticipatory investment is not the only challenge. Martin Crouch: No. Certainly the biggest cost issue Q66 Sir Robert Smith: Yes, continuing on the sort and the biggest technical challenge is not the size of of spectrum of what might happen and over-sizing. the cable so much as when you start to link the cables To get a supergrid, do we need a lot of anticipatory together, because we don’t have an example anywhere investment by networks, assuming more future of a meshed DC grid to follow. So I think it is demand rather than waiting for that demand to probably not realistic to imagine us leaping towards a appear? meshed supergrid or a meshed integrated grid in one Alison Kay: That is a very good question. I think, step; it is more likely to be an incremental approach. certainly in terms of our view of an evolvement to a We have lots of interest at the moment from supergrid, in some of the integrated offshore, we developers in point-to-point interconnectors between would see some need for anticipatory investment. us and different countries. Over the last year, we have Sizing assets back to shore slightly bigger than was seen levels of interest expand enormously in that, and currently signalled might be appropriate in some that can be a component. cases, but in other cases it will still be appropriate to If we were to do that and then come back and say, take into account user signals. I think you may also, “Should we have laid a bigger cable?” I think that is depending on how the supergrid evolves—and I am unlikely to be the question. The question is more, very much with Stuart on this; we do need to take this “Can we link into that cable and create multiple step by step—there may well be some cause for some hubs?” which is a real technical challenge. What we degree of anticipatory investment, but one of the are focusing on in the North Sea Group, and in some things that we should absolutely make sure of is that of the other work, is identifying the building blocks we are really taking account of the way things and the hurdles that we need to address to enable some develop, where the generation is coming on and the of these developments if, as things progress, it looks appetite for cross-border trade, before we look and see like that is a good way to go. So it is identifying the whether some form of anticipatory investment might technical challenges; identifying the regulatory be necessary. frameworks that are different around different countries around the North Sea and how do those Q67 Sir Robert Smith: For the layman, if you are enable anticipatory investment, where that is sensible; laying a cable for 50 miles, if you put in a cable that how do we get the right signals as to what will be is a bit bigger, is the cost in the cable worth the risk, required in future. because of all the other associated work doing it, or is better to come back and lay a second cable? Q69 Chair: We had quite contradictory views about Alison Kay: After the event, I could clarify the exact how the supergrid would balance out intermittency; cost, but it is certainly cheaper to lay a bigger cable Friends of the Supergrid, not surprisingly, on one side in the first instance than to come back and lay a and the report from Pöyry on the other side. What is second cable. You wouldn’t do that without being your view about that? fairly certain that you were going to see that further Stuart Cook: Can I give a view first and then I will generation coming off as well. You wouldn’t take let my colleagues come in with their own opinions? I these decisions lightly. It would be a question of think intermittency itself is a problem that lots of looking to see what was happening, where were the solutions can play a part in the evolution of the smart signals from the generators. Then it is very much grid onshore, the development of storage solutions cheaper to size a bigger cable than to go back and lay and the development of flexible response and smart a second or indeed a third one. meetings. All those things will play into this space. I think interconnection plays an important part in that Q68 Sir Robert Smith: Does over-sizing need to be overall mix of tools and opportunities, and there will led by Government or regulation or does the market be occasions when the ability to export and import is signal deliver? exactly what you need in order to plug a gap between Stuart Cook: I will answer that question and, with generation and demand. your permission, I will also ask my colleague to It does not solve the full intermittency problem expand on some of the other regulatory issues as well, though. There will be occasions, as we know from which I think are quite important. On the onshore weather studies, when quite large geographical areas regime, we are already in a place where we fund of Europe, in the north-west, will be without wind, certain anticipatory investments. That reflects the fact collectively, and that is a problem that isn’t addressed that nobody can know with certainty the way in which by interconnection. The other issue that greater the system is going to evolve and we have to make interconnection, supergrids and so on, does not readily decisions in the interests of future customers as well address is what you might call in-feed loss; so the as current customers. That pushes us in the direction event when a single event trips off a circuit, for Ev 20 Energy and Climate Change Committee: Evidence

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay example, as a result of an accident or malicious action Alison Kay: I think it is vitally important that we look or whatever. In those circumstances, the system has to at storage and look at storage on a mass scale and be resilient to cope with that loss of supply. Again, invest the R&D to ensure that that can come forward. that is not something that is resolved by I think it is a very important part of the mix going interconnection, in a sense it is a problem that is forward, yes. exacerbated by it. Chair: I have just noticed that I should declare an Alison Kay: By and large, I am absolutely with Stuart interest as a director of Eurotunnel, which may have on the answer to that. On paper at least, it must help an effect. with intermittency, having access to a greater range of power across Europe. Stuart is absolutely right about Q73 Sir Robert Smith: You already touched on the wind. You can see a very high pressure and no some of the supply chain constraints. What are the wind right the across Europe, as we saw this winter. technical challenges that need to be overcome to So it is not a panacea. It is not the same as having a develop an integrated offshore grid? CCGT that you can call upon to back up this Alison Kay: If I go first on that. The suppliers are intermittency. I guess with the supergrid you can see, very much a part of a number of the groups that Stuart as the supergrid may evolve—and certainly as some and Martin have already referred to; the North Sea commentators are seeing the supergrid evolve—into Group and Friends of the Supergrid. So we are very going right down into southern Europe, and even much talking to them all the time. I think from where perhaps further, and then up into the north, you get a we sit we don’t see huge technical problems and huge greater range of generation available in mass solar and technical challenges. What we do see is assets on the hydro and, again, it can all help with the intermittency, scale that we are looking at haven’t really been but it is very much an evolving step. utilised on the systems, but what we are being told by Martin Crouch: A technical point to add is, I think, a the suppliers is that they believe an up-step in the big opportunity is access to the hydro generation in technology is very easy. What they need is the Norway and Sweden. They have close to 50,000 MW certainty to enable them to do that R&D and that is of hydro power that can be used to even out wind what is so very critical. So, technically, not huge fluctuations if we have sufficient interconnection, challenges. although we are not the only country that might be Stuart Cook: I think I might have a slightly different seeking to use those reserves. take on it. If I can, I will just say a couple of words by way of context. Most of the offshore generation Q70 Chair: It does need to be pretty big if it is going that has been connected to the grid has been in to be able to take advantage of all this, which certainly relatively shallow waters, relatively close to the coast. has an impact on the costs. I think colleagues in the oil and gas industry joke that Martin Crouch: Yes. In the short-term we are talking we haven’t really got to where it is wet yet, offshore. about 2 GW connections to Norway, which is going To put that into context, if we go out to 2020s and make an important contribution but a small beyond, we are talking about connecting generation contribution. It needs to be a lot bigger. Then the which is probably more than double the distance we trade-off is avoiding anticipatory investment, sinking have connected so far. It is probably at more than a lot of cost into it that customers will have to pay double the depth and it is probably more than 10 times for, unless we are fairly confident that is going to be the capacity. well used. So that is always going to be the trade-off Now, when you are dealing with high voltage direct in these decisions. current systems, which is what is envisaged for the supergrid, you need to have a large physical separation Q71 Chair: Can we safely reduce our backup between equipment otherwise it shorts out between capacity here if we think we are going to have the itself. I think that is stretching the boundaries of chance to trade between European electricity markets? technical capabilities. If I can paint a picture: the first Stuart Cook: I think it comes back to my comment of its kind high voltage direct current platform is about the fact that you have to be ready for the event connected to a wind farm called BorWin1, and it is when interconnection fails. In those circumstances, if connected to the German system. As a critical part of a circuit trips out because of a fault, you still need the its infrastructure, it has a platform on which sits the backup generation in order to provide the supply. So converter station, which converts one type of current it is not clear that it would make a big impact upon and voltage to another one. That converter station has the need for backup. the footprint of a supermarket and is four storeys high. Alison Kay: You can see it reducing the need in some It is a very large building and that is on a platform circumstances for backup generation. It would never built into the sea. That is operating at 400 MW. get rid of the need entirely because, as Stuart says, When people talk about supergrid, they are talking conditions are likely to be the same right the way about 2,000 MW platforms. Remember what I said across Europe and you can never rely on the fact that about the physical separation being important; we are there won’t be a fault at some point in time. going to end up with a much bigger structure supported on legs in the North Sea. That is not to say Q72 Chair: One of your National Grid colleagues it can’t be done, but BorWin 1 is first of a kind. It is told us that substantial electricity storage could be not fully commissioned yet. It is energised, but it is integrated into an offshore national grid. Do you think not fully commissioned. We haven’t had the that storage is going to be a big part of the system opportunity to learn from the experiences of operating in future? that or working out how we design and build a bigger Energy and Climate Change Committee: Evidence Ev 21

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay converter station. You couple that with the fact that suspect. So I just wonder, have you made an there are only a very few companies out there who assessment of what the impact of construction of an are active in this space in terms of the supply chain— offshore integrated grid would be on consumer there are not many organisations who have expertise energy bills? in this area—you are fishing in a relatively small pool Alison Kay: We have and it was negligible. I will of expertise. come back to the Committee with a number. We have The final thing I would say around the technical made an estimate of what we believe the integrated challenges is that we don’t yet have a viable circuit offshore grid would cost consumers and it is breaker for direct current—that is the capability to negligible, but I would like to come back with a switch off a direct current circuit. I think the jury is figure. It was something like £1 on each consumer’s out on whether we need one in order to get to bill for each year of construction, but I would like to supergrid, but there are some people out there who clarify that if I may. are saying at the moment that this is a critical gap in the infrastructure. Q78 Christopher Pincher: So it would increase Q74 Sir Robert Smith: Why can’t you switch— consumer bills, not decrease them? Stuart Cook: An alternating current goes up and down Alison Kay: They increase consumer bills because in voltage levels. At some point it is at zero and when you are going out and building more networks. So it is at zero you can easily separate circuits. A high there is an increase. What we are saying is that an voltage direct current always creates a gap and we integrated grid will lower the costs that a consumer don’t yet have viable technology for solving that. I would face by around 25%; depending on what that came here to try and paint a picture of an analogy. I integrated offshore grid looks like, somewhere think a good analogy of where we are at the moment between £4 billion to £8 billion less than it would do is the Channel Tunnel, in the sense that when the than if you had gone for radial point-to-point Channel Tunnel was built it relied upon existing connections. That was the point of it. Yes, there will technology. In fact, many people talked about the be an increase because you are building out more Channel Tunnel being constructed 100 years ago; I transmission network, which ultimately falls to the think the first Channel Tunnel company was in the user, but we are saying we can minimise that increase 1800s. in cost to the end consumer. What the Channel Tunnel did was it pushed out the boundaries in a way that technology hadn’t previously Q79 Christopher Pincher: How do electricity prices been pushed out before. I think that is where we are in the North Sea countries, the areas that the North with some of the technology on the supergrid and that Seas Group operates in, compare with UK electricity the manufacturers are absolutely right—a supergrid is prices? technically possible. This is not a quantum shift in Alison Kay: Does Martin want to have a go at those technology, but what it is is designing new things, first? bigger things, in an environment that we haven’t Martin Crouch: operated in before, and what my technical advisors In the last few years, we have tended say to me is that the thing that we mustn’t do is rush to import from France. Our wholesale prices have into this because that is when we are going to start been higher than the French prices, so we have been making mistakes. importing power. The French had strikes affecting their plants recently and we were Q75 Sir Robert Smith: On the other hand, what exporting to France because our prices were lower. In kinds of signals are required by the supply chain to the context of Norway and Sweden, it depends ramp up if we do want to end up down this route? whether it is a wet year or a dry year. Last year was Stuart Cook: I think that is a very important point. dry; their prices were higher than ours. So it does There is potentially a role here for policymakers to swing about. We have tended to be importing from help encourage innovation. It is very interesting to me France to the UK through the interconnector we have that the Department for Business, Innovation and because our wholesale prices have been higher than Skills, in their recent announcement on the Green French wholesale prices. Investment Bank, highlighted offshore grids as an area Stuart Cook: I think it is important to understand the where they felt that, because of the R&D challenges way they operate. Effectively, it is about having more and because of the novelty of what was needed, it interconnection. If you have two markets at different might be in need of financial support to help that. I prices, it brings the prices close together. By think that is an interesting observation. definition, the market that had the lower price will probably see price rises and the one that had the Q76 Sir Robert Smith: Is it a global supply chain higher prices will probably see prices fall. So greater challenge? I mean, is the UK better placed or— interconnection may at times lead to increase in the Stuart Cook: No, globally there are not many people wholesale prices in Great Britain; at other times it may who can do it. lead to a decrease. To answer the question about what Alison Kay: Absolutely. is likely to happen is a big exercise, because you need to look at not only price projections in Great Britain Q77 Christopher Pincher: You mentioned that an but also understand what prices will be in France and integrated offshore grid could reduce cost, but we Germany and Denmark. That is part of the work that don’t know what the costs of construction are, I we are doing at the moment. Ev 22 Energy and Climate Change Committee: Evidence

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay

Q80 Christopher Pincher: In the areas in the UK things will pan out in unintended events, there are no where there is currently high demand and potentially guarantees. high prices, those prices could fall and consumers Alison Kay: I think it is very dependent on the amount could benefit from that, but in those areas where there of wind that does eventually connect right the way is perhaps lower demand then prices could go up? across Europe, and it is very dependent on the appetite Stuart Cook: Probably not, because we have a for cross-border trade. Those two things will have a uniform electricity price across Great Britain. It is big effect on what will happen to price differentials. more between hour and hour. So on occasions when It is very difficult to see, and we are working very UK prices are high and it attracts power in from the hard through the various groups to try to get some continent the prices will fall, but on occasions when more certainty around that. UK prices are low and we are exporting, it will raise prices. Q84 Barry Gardiner: Can I just ask you what is Martin Crouch: Once we have a lot more wind the potential for planned arbitrage? For example, you generation that is very much going to be a driver of talked about a dry or a wet winter in northern Europe wholesale prices. So, when it is very windy, our prices reducing storage capacity. That is then a known factor will be low and we will be exporting, so they will be that perhaps a baseload supplier elsewhere can build slightly higher than they would otherwise be. When into their forward projections, perhaps to artificially the wind stops blowing, our prices will be high, we raise the price per unit by constricting their supply. Is will be importing and that will help bring those there scope here for real wholesale manipulation of prices down. the market because, as Robert is saying, it is so large? Martin Crouch: From a competitiveness point of Q81 Christopher Pincher: I am trying to get to the view, the real risk would be if people could restrict the bottom of what the benefit of this will be to the UK availability of interconnector flows. There is a clear consumers who are already seeing increases in their framework in the European legislation and in the rules bills. that are being rolled out, which say all the capacity of Martin Crouch: Part of it should be reducing the interconnectors has to be sold. That has to be volatility in wholesale prices, providing other sources identified by the TSOs and very transparently made of supply and more competition into the wholesale available. A large proportion of that is sold a year market. There are big costs from the infrastructure, as ahead, but then there is this market coupling model Alison was saying. If you spread those over enough that ensures optimal flows at the day-ahead stage. It customers, it does amount to only a few pounds a doesn’t prevent there being market power in year, but we are still talking billions of pounds, so individual markets. So there is still a risk that those are not investments that anyone would enter generators in the individual markets will bid up prices into lightly. in that market at times of system stress but it should ensure that the flows across the interconnectors are optimal to reduce the way in which that market power Q82 Christopher Pincher: How is it going to can be transferred from one market to another. encourage new entrants into the wholesale market? Notwithstanding what might happen in the future to Q85 Chair: Regulatory challenges in all this are change that cartel, but you have a big six with a quite complicated if we are going to go down this stranglehold on that market. How will this help to route. Where do you see the main difficulties? increase entrants into the market? Stuart Cook: I think there is a list of things that are Stuart Cook: A separate team is working on our uppermost in our minds at the moment. We talked proposals in liquidity as part of the retail market about the anticipatory investments, investing ahead of reform programme. One of the things that we have need. We need a framework that allows us to regulate observed in that context is that more interconnection that in a suitable way. Where you have infrastructure increases liquidity of the wholesale market, because it that spans more than one jurisdiction you need a basis provides a means by which new entrant generators can for allocating the costs between the two jurisdictions sell their power and by which new entrant suppliers that it spans. That is relatively simple if you are are able to purchase power. We expect to see an dealing with just two countries, but as soon as you increase in liquidity with the advent of BritNed, and broaden it out to multiple countries, the way in which so on, as a new interconnector quite recently. you allocate costs becomes trickier. The more integration you have, the more important it Q83 Sir Robert Smith: In theory, if it is a good is that people understand the way in which renewable thing, it should narrow the sort of swings and support mechanisms in different countries might affect perturbations in the price. Is there a risk that, because the way in which things operate. At a higher policy it is a much bigger system, you could get more level than Ofgem operates at, there is a need for aberrant behaviour and real spikes suddenly? renewable support to be consistent across countries. Martin Crouch: There is always a risk of unintended There is a need for consistent standards, technical consequences. I think with the moves that are standards, and we need to make certain that the happening on a European scale to have more planning and authorisation processes that operate integrated wholesale markets between countries and between one country and another are consistent. So I to have that working in a much more clearly organised think those are the five key changes. I think those are way, in effect we are then moving to a larger market all being taken forward in one guise or another by the that should be more stable, but as to exactly what North Seas initiative. Energy and Climate Change Committee: Evidence Ev 23

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay

Martin Crouch: We saw the 10 Member State Q88 Sir Robert Smith: On that signal of certainty Governments coming together to set up the North and standardisation then, what are the challenges of Seas Countries Offshore Grid Initiative. As Ofgem, the fact that our offshore transmission lines are not we took the lead in getting the regulators of those part of the transmission system operator’s Member States together. We set up a group, which we responsibility yet? When you get into the other are chairing, that has been going through and territorial water, it is the transmission system operator. comparing and contrasting the regulatory regimes in Do you see any challenges there? the different Member States to try and understand how Alison Kay: Shall I go first? Joking aside, we do see they can work together or where the barriers might it as an issue. As you know, throughout most of the come. Separately, on all the interconnector projects rest of Europe, the TSOs have been mandated to build we have, we are talking to the regulator, the other their onshore network offshore. We believe, for all the side of the interconnector, to try and get a consistent reasons that I have been through on the integrated framework that enables us to work together and offshore, that there are some real benefits in allowing support the investments. people to get on and do that. It then comes down to who is going to take the decisions on what the size of Q86 Chair: Are we going to be able to find an easy the link should be, and the TSO is very well placed way of showing the costs of all this—an easy and to do that. fair way? One of the other problems that we do foresee is, when we are trying to co-ordinate around our transmission Martin Crouch: Because it is a range as to what the system operator colleagues around Europe, there will supergrid might entail or what an integrated meshed be 11 or 12 of them around the table, and with the grid might entail, it is expandable. I don’t think there current regime that we have, we could have 11 or 12 is one easy number or even a range that— transmission system operators from the UK sitting Alison Kay: I think it is terribly difficult to sit here around that table too, because we could have many today and say what the cost will be. As both Grid and transmission system operators offshore in the UK. So Ofgem have said today, we see it very much as an I think we see that the radial connections have worked evolving piece. You do build out the offshore fine for what we have so far, but as you get further networks and the interconnectors. The cost of those out into the deeper water it is much more sensible for will be very apparent, and then we have to look and that to be an integrated design and the TSO is clearly see how much of wind connects across Europe before very well placed to take that forward. we can decide whether the cost justifies a greater Stuart Cook: I think the other countries wrestle with expansion. similar issues. It is clear that the regulatory framework Stuart Cook: A couple of observations on that has a profound implication on the way in which these question from me. As I am sure you have done, if you systems evolve, but it is not true to say that the TSOs look through all the evidence that has been presented are responsible for offshore generation universally to you you will see that from the people who provide across Europe. In France, the Netherlands and them there is a very wide range of costs, from tens Sweden, the generator is responsible for building the of billions to many hundreds of billions of euro in connection to the onshore grid. So there are multiple investment. We are doing a lot of work at the moment parties out there at the moment. Alison is right—and under the North Seas initiative and under the offshore I think we would agree with this—that at the moment grid co-ordination initiatives to try and understand we do not see evidence from where we are at this what the shape of the grid might look like. The interim point in time that the offshore regime is causing report from the North Seas is the end of the year and difficulty, but we are not complacent about the fact it will go into next year for a final report, but I think that the regulatory framework can pose challenges, when we finish that we will be in a clearer position to which we need to address. That is part of the work answer your question. that Martin’s teams are working on at the moment, is to try and understand whether, as you go forward into Q87 Chair: Are the companies going to be able to the 2020s and up to the 2020s, the regulatory agree standards, so that interoperability becomes the framework will act as an impediment. If we find that norm? it is, then clearly we will have to do something to fix Alison Kay: I think that goes back to the very heart it, but at the moment we haven’t seen the evidence to of the question about giving suppliers the certainty as support that. to what is likely to be coming forward across Europe. It is that certainty that is so very key for them. It is Q89 Sir Robert Smith: Is there anything at the very, very important that there is a degree of moment though, with so many different offshore standardisation. As we are each going out at the owners, in trying to co-ordinate that sort of moment and building our offshore networks, it is anticipatory ability of a future network? Are we vitally important that the degree for missing an opportunity? interconnectability is taken forward in those designs. Stuart Cook: I think it is right that National Grid As I say, the companies are sitting round the table provides connection agreements that combine with us in a number of the groups that Stuart and multiple interests at the moment, and I think it is also Martin have alluded to. They are very keen to help true that National Grid, in its role as system operator, this vision and, therefore, they are keen at looking at has a role of ensuring that the design of offshore is standardisation. They want that signal of certainty. understood in a co-ordinated way. I do emphasise—I Ev 24 Energy and Climate Change Committee: Evidence

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay am not being complacent about this—that we do need Alison Kay: Absolutely, yes. to understand whether that goes far enough. Alison Kay: To Stuart’s point, we publish the Offshore Q93 Christopher Pincher: Although there may be Development Information Statement on a annual basis, appetite for a regulatory regime, someone has to which gives developers a view of how we see the finance the investment to build the first stage of the offshore system developing and where are the most grid, and I think the Offshore Valuation Group optimal points. It is an information statement, as its suggested that to build a first stage of interconnection name implies, and no one is obliged to build to that by 2020 would be somewhere around £8 billion. I specification. We are currently, as National Grid, wonder if you can tell us something about the where we can integrate those offers, planning for financial challenges of getting the infrastructure built. integrated network. We are sending out connection Stuart Cook: I am not familiar with that number, but offers on the basis of an integrated system, so taking I have certainly seen figures of £15 billion for the into account more—but we are absolutely ensuring offshore investments up until 2020. We have, of that in doing so we have the ability to move away if course, run one tender round under the offshore that is not how the regime plays out in the future. regime so far, and I think it is very welcome that for £1.1 billion of investment we attracted £4 billion Q90 Sir Robert Smith: Just one last thing. On the worth of interest. So the number of bids, when you merchant model for interconnection, does that have total the sums of money that people were willing to enough incentive to ensure maximum interconnection commit was almost four times the volume of the or does that need looking at as well? initial investment. So far we have seen a lot of Martin Crouch: We have been looking at that over enthusiasm from new parties and existing parties to the last couple of years. We found that, because of the raise funds for the offshore environment and the process for getting an exemption to be a merchant, offshore regime. Part of the reason we think that is we would take our decision and then the Commission the case is because we are resting on the fact that we would effectively have a veto at the end of the have a very stable and understood regulatory process. That was exposing developers to a lot of risk framework in Great Britain, which, of itself, attracts that the Commission would say something funds from international investors and makes this a unexpected, which happened effectively with BritNed. relatively attractive place for people to invest. I think So we have been devising a regulated regime, which as long as that continues there is no reason to believe would be available as an option alongside the that that type of investment won’t come forward, merchant regime. Since we started doing this work, as certainly on the basis of the evidence we have seen I said, we have moved from having one project that so far. was interested in building a new interconnector to Christopher Pincher: £4 billion has come forward now we are up to about a dozen. So the interest is so— very definitely there. I think there is a lot of support Stuart Cook: We had £4 billion worth of bids, of within those developers for the regime that we are which the winning people contributed £1.1 billion. So developing with the Belgian regulator as a test for an it was £3 billion worth of funds, which we didn’t need interconnector to be built by National Grid and Elia in the initial round because there were unsuccessful as a first case. bidders.

Q91 Sir Robert Smith: You are saying you could Q94 Christopher Pincher: You said you have seen have parallel; as an investor you could choose? figures that suggest that £15 billion was required for Martin Crouch: Yes, you have the two options. The that initial spend? project that recently announced itself using the Stuart Cook: Yes. Channel Tunnel has implied to us that they are Christopher Pincher: Let’s assume that you need at interested in exploring the merchant route. We have least £11 billion; where is that going to come from? lots of other projects that are interested in exploring Stuart Cook: There is an appetite for investments, the regulated route. We are trying to devise a regime even in today’s climate, where people can see an that allows both, so that the most investment can be understood and stable regime and an opportunity to encouraged. make a return in that context. I don’t think we are Alison Kay: I think that National Grid, as a builder of concerned, based on the evidence we have seen, that interconnectors, has really welcomed the great work people won’t come forward with money. that we have done together to look at moving that regime. I have real concerns that merchant Q95 Christopher Pincher: Do you think there will interconnectors, with all the uncertainty throughout need to be a substantial public investment? Europe at the moment, are going to prevent a lot of Stuart Cook: There hasn’t been so far. further interconnections coming forward, but we have Christopher Pincher: Do you think there might be? been doing some great work using the Belgian Stuart Cook: The only area that I think is worthy of interconnector as a test case as to what that new mention is the point I made earlier about the Green regime could look like. Investment Bank and the way in which the Department of Business had looked at using some of Q92 Sir Robert Smith: When you say merchants that money for the speculative, quite uncertain and would be a barrier, having the availability of the risky research and development aspects of the merchant option still would not be a barrier, but offshore regime, where I think it is rather more merchant-only would be? difficult to get investors to stump up money where Energy and Climate Change Committee: Evidence Ev 25

14 June 2011 Stuart Cook, Martin Crouch and Alison Kay their gains are less certain. In the stable end of the States involved. Extending that to potentially 10 regime, where we are implementing technology that countries around the North Seas is definitely a is already understood, we have not seen any evidence regulatory challenge. That is high on the list of— that there is a problem in raising finance. Stuart Cook: A political one as well. Martin Crouch: We also know that the European Alison Kay: Yes. Once again, it comes back to Commission, through their infrastructure package, is certainty. If, around the North Sea, you have 10 looking at establishing funding potentially for what countries all working together towards a common they see as priority projects and the North Seas is high regulatory regime that can accommodate all parties, up their list among priority projects from a European you start to give that certainty to investors to want to interest. So it may not just be UK taxpayers funding put their money into it. So I think some of the some of this. There may be sources of funding from regulatory challenges, which Martin and Stuart have a European level available. talked through, are absolutely key to ensuring that investors come forward and do wish to invest in this Q96 Christopher Pincher: So beyond the European network. That will come back to a lot of things that funding, which obviously incorporates a significant we have talked about; how does the supergrid evolve? degree of UK taxpayer funding, what other It is getting that certainty out there. experiences do you have in putting in place a regime I would agree with Stuart that so far we have not seen that will share the costs? If there are lots of potential the need for public funding. I think as you move out beneficiaries across the North Sea, have you further into the sea and get towards what we would experience of getting other players to invest, so that call an integrated offshore grid, if you want to build some of that cost is shared, as opposed to public bigger assets it is going to be much more difficult to funding? get investors to invest in assets that are not only sized Martin Crouch: Doing it on a multilateral basis is for their own projects but maybe taking some degree definitely a new challenge. For the existing of optionality for the future. There are lots of interconnectors, the interconnector with France was challenges to overcome. shared cost between the UK and France and BritNed Chair: We have another set of witnesses we have to is a 50:50 joint venture between the Dutch give time to as well, so thank you very much indeed transmission company and National Grid. So there are for coming in. It has been very helpful. examples of sharing of costs between the two Member

Examination of Witnesses

Witnesses: Daniel Dobbeni, President, European Network of Transmission System Operators (ENTSO-E), and Alberto Pototschnig, Director, Agency for the Cooperation of Energy Regulators (ACER), gave evidence.

Q97 Chair: Good morning. Thank you for coming in system solutions we are talking about. It is clear that to see us. I think you have both travelled to do so, and a greater penetration of offshore wind is needed. It we appreciate that, and welcome. I think it is the first may not be essential by 2020, even though it will time, certainly under my chairmanship, you have make a significant contribution. It will be more given evidence to this Committee; so we are very glad essential beyond that, but I think we are still at the to have you. Could I ask, first of all: the Strategic stage where we are trying to figure out exactly what Energy Review said that a North Sea offshore grid this would mean, in terms of grid and in terms of the was an energy security priority? How much work has electricity system more generally. The Commission been done in Europe to assess the costs and the communication last November identified an area, the benefits of developing an integrated offshore grid? connection in the North Seas, as a priority area, but Daniel Dobbeni: If you allow me, I wouldn’t say that from there to say that we know exactly what shape we have a clear definition in Europe about the ultimate this priority area will take in terms of developing the cost of the energy and climate change policies, infrastructure, I think it is still work ongoing. because basically it starts with the decision taken by the 27 Heads of State to move towards renewable Q98 Chair: There is a slight sense that we have this energy sources. Because of that decision, you need to concept that we think sounds good, so we are pressing tackle measures in terms of how to ensure that the ahead with it before we really know how much it is power system will work with the same reliability with going to cost and what benefits it is going to bring. this new energy mix. In that sense, the cost issue is to Daniel Dobbeni: If you allow me, this is a little bit of be linked to the political decision to move towards a chicken-and-egg issue. If I only take the targets that renewable energy sources. So the figures you can read have been set out by the European Commission and in the documents coming from either the European the European Union, and I try to have a reasonable Commission or the ENTSO-E associations are best look at what it means in terms of the number of wind guesses based on the known technology we have farms in the North Sea—and at this stage the North today. So these figures are estimates and the best Sea is the only case; we have also the Baltic Sea but estimates we could deliver but not more than that. let us take the North Sea—we may imagine by having, Alberto Pototschnig: If I can add: as it was made let us say, a standout wind farm of 300 MW, which is evident in the previous panel, we still need to reasonably what we have today, if I take the figures understand exactly what kind of technological and that have been put together by different kinds of Ev 26 Energy and Climate Change Committee: Evidence

14 June 2011 Daniel Dobbeni and Alberto Pototschnig organisations, I come up with between 2020 and 2030, Daniel Dobbeni: Yes, of course. I can give you an with 80 to 280 wind farms in the North Sea. Of example of what is happening in my home country, course, if I have wind farms of 500 MW, it will reduce Belgium: today, when there is more or less wind in somewhat these figures. These numbers give a good northern Germany, we see the difference in the indication of the need for “grids in the sea”, because Belgian network and, as operator, we have to act in I cannot honestly imagine having 280 individual order to facilitate the power flows or avoid constraints connections to the shore only for the North Sea. The in surrounding countries. Such effect is also felt in rationale behind the number of wind farms leads to a Poland and Hungary. The power system in continental rationale at the basis of grids in the sea. Europe, because of its interconnection, is already behaving as a single power system, which is Q99 Chair: Yes. Will this supergrid help to meet the ultimately the objective of the single electricity EU’s strategic objectives: security of supply, market. decarbonisation and market coupling? Alberto Pototschnig: I think you also mentioned Daniel Dobbeni: It all depends what the definition planning. With the Third Package, there are new of supergrid is, because you have different definitions instruments for ensuring that planning of the networks when you talk to different people. I would say that at a European level is made with a greater European there are different needs in order to tackle the 2050 focus. ENTSO-E is responsible for developing an EU- target. I take 2050, because it is even more ambitious wide Network Development Plan every two years. It than the one we have with 2020. We all know, in this is non-binding, so it will still allow some flexibility at audience, that this target implies more complex grid the level of Member States, but it will clearly operation leading to the need for smarter grids. We represent a reference for developing the grid at a also need grids in the sea and at least in the continent, European level and taking a more unified approach, we need electricity highways or overlaid grids, and this will also help with the integration of markets. basically grids that allow to transfer more power over a longer distance. We need the three of them as well Q101 Christopher Pincher: You heard, because I as storage and so on. think you were here during the previous panel, the A supergrid in itself is a concept, as you said. We importance that was stressed of getting a regulatory need to clarify what we talk about. If I take all the framework in the North Sea. Can you explain what grids in the sea, the electricity highways, my answer the role is of your two respective organisations in to your question would be definitely yes, because helping to develop that regulatory framework? honestly I do not see how we could make it happen Daniel Dobbeni: The task of ENTSO-E is not to, let are differently. us say, design the regulation framework. We help Alberto Pototschnig: If I could just reinforce that regulators as much as we can to understand what the message: interconnection between Member States, hurdles are and what can be improved, especially including interconnection that is able at the same time looking forward, given the challenges we have on the to connect offshore wind, is clearly part of the strategy table, among which is the supergrid. I think, when you to try to support the achievement of the three talk about grids in the sea, the major issue is to ensure strategic objectives. that we have—I am not saying “harmonised”— compatible regulatory framework among the different For the North Sea’s countries, I think the current Member States. Once you build the grid that will installed off-shore wind capacity is around 3,600 MW. interconnect the networks of those Member States We are looking in 2020 at 36,000 MW. As I more than is the case today and especially because mentioned beforehand, that is a sizeable contribution, they will be linked to intermittent generation sources but it is not probably, strictly speaking, essential. An like wind, it will become absolutely essential that offshore grid will become an essential component compatible frameworks are available in the different beyond 2020. The new developments will be further Member States that are interconnected. Of course, it away from the shore, so some form of offshore grid is not up to TSOs to do that. We are there to help is probably inevitable. That would also allow the regulators when it touches to regulation frameworks complementary generation technologies to be used concerned with the design or operation of the network, together: hydro in Norway, or if we look further south implicitly or explicitly. As was said during the in Europe, in the Alps, to be used to balance off wind previous panel, this is more of a challenge to me than and other intermittent technologies. Clearly, this does building the supergrids of the future, even though all not prevent or does not allow us not to have local the elements of the supergrids are not yet available, backup because of the potential inevitability of the and Governments as well as regulators will have to interconnection, which is still obviously an issue. I ensure that this compatibility is made available in think it is a component, both offshore and inshore. A due course. reinforcement of the interconnection is still an I would like to clarify one point, because I didn’t essential component of meeting or pursuing the completely answer the previous question when I said targets. Then obviously greater integration of markets it is a chicken-and-egg issue. When TSOs do these is essential for competitiveness and for market offshore investments, we usually anticipate a lifetime, coupling, so probably it is going to be very useful. we anticipate of 25 to 35 or 40 years. Onshore, the lifetime is closer to 30 to 50 years. It is a major Q100 Chair: What about the rules for network challenge to all of us—TSOs, you, regulators—to take development? Are they changing across Europe the the right decisions now because, if we don’t send the way the electricity networks develop at the moment? right signals to manufacturers, we may expect that we Energy and Climate Change Committee: Evidence Ev 27

14 June 2011 Daniel Dobbeni and Alberto Pototschnig are not going to deliver the optimum power system in Q102 Christopher Pincher: How far have your 2030, 2040 or 2050. This is what I mean by a chicken- deliberations taken you? I see that when the initiative and-egg issue, because investors’ will only start to was launched last December, three working parties invest in the needed research and development when were set up for integration, regulatory and market they have a clear view of the long term expectations issues, which I guess is one way of dealing with it coming from the political side, the Government. when planning an authorisation. A number of While for the time being, Governments are asking us initiatives were set to be delivered, deliverables set for how much it is going to cost and whether it is added this month. What progress has been made against value for the consumer meaning that the long term those? expectations are not yet established. Therefore it is a Alberto Pototschnig: At the moment, working group chicken-and-egg issue while we should not number 2, which is the one on regulatory issues, has underestimate the change we are inducing in the been surveying the regulatory regime in different energy mix all over Europe. It is a tremendous change countries, and basically what has emerged is that there moving to 30%, 40% and, even further, 80% is a significant difference at the moment in the renewables, and I don’t think anyone today has a clear regulatory regime applicable to connection of wind view on the complete set of consequences this change generation. The report will be released by the end of is going to create. At a certain point in time, we have the month. The next issue is: what is the best way of to believe in a given solution, and I am afraid that addressing these different approaches? If you want to nobody today can answer your question about what develop an integrated grid in the North Sea, you want the regulatory consequences are. We will have to learn to have consistent regulatory frameworks on all sides: by walking. firstly, because that will make the development easier; Alberto Pototschnig: If you will allow us to briefly secondly, because you don’t want to give spurious describe the function of the Agency for the incentives for locating the capacity not where it is Cooperation of Energy Regulation. It was established economically optimal but where there is a more as part of the new institutional framework of the Third favourable regulatory regime, for example, when it Package, and its mission is to assist national comes to access charges and connection charges. So regulatory authorities to exercise their regulatory that is the effort. As I said, we are still very much in functions at a community level and to co-ordinate the early stages at the moment; it was just a survey of their action whenever necessary. We have a support what was happening, and I think the more interesting role with respect to NRAs and also a co-ordination stage will be the next one. role. The issues that we are discussing today have regulatory implications, both at national and cross- Q103 Christopher Pincher: I am sure it will be. It border levels. I will take three examples. When it has taken six months to survey what the differences comes to cost recovery—the allowed revenues in each are between the different regulatory groups in the Member State—that is clearly within, and will remain countries. You now need to work out how to within, the sole jurisdiction and sole responsibility of harmonise those. How long is that going to take? national regulators in each Member State. Obviously, Alberto Pototschnig: The next deliverable is at the there you can try to either harmonise or have a end of the year and the work will be completed by the common framework, but that is as far as you can go. end of next year, so basically there are still 18 months Then when you have access to the regime, to a cross- to go. That is the timeframe over which these border infrastructure, clearly there you need to make exercises are planned. sure that the access regime on the many sides of the infrastructure is consistent. That is where the agency can more directly support the co-ordination between Q104 Christopher Pincher: Then you will report to the national regulators involved. In fact, it may even whom? have stronger powers, when the national regulators Alberto Pototschnig: That is to be reported to the 10 involved are not able to agree on a common access Ministers of the 10 countries. regime or when they decide to pass the decision to the agency, so there we can have a more relevant role. Q105 Christopher Pincher: Is that a reasonable Then, for example, there is the cost allocation issue. timeframe or do you think the process could be When an infrastructure provides benefit or connects expedited? two or more jurisdictions, then clearly there is an issue Alberto Pototschnig: That is the timeframe that was of how you allocate the cost. The simple rule is 50:50, envisaged in the agreement. It is quite challenging. I but if you go into more complicated schemes, if you think we have probably been through—I wouldn’t say have an integrated grid in the North Sea, for example, the easier part, because part of this time has also been that may affect all the coastal countries then clearly used to establish the working groups and so on, so I the issue of cost allocation among the different don’t know whether we will be able to cut the time, jurisdictions becomes relevant. That again is where because seeing what scope there is for approximating the agency is part of the process by which this is the different regimes is not an easy task, but I think resolved at European level. That is our role. Our role there is goodwill on all sides. We are there as is much more relevant when it comes to cross-border observers because, at the end of the day, this is or multi-lateral issues and less relevant and more something that the national regulators involved, the supportive, maybe sharing best practices or trying to Governments, the Member States and Norway would harmonise, to the extent that it makes sense when it have to agree, but I would say it is a reasonable if not comes to mainly national issues. challenging timeframe. Ev 28 Energy and Climate Change Committee: Evidence

14 June 2011 Daniel Dobbeni and Alberto Pototschnig

Daniel Dobbeni: I think it was a very good initiative Therefore, those 34 countries need to be very closely that was taken because of the experience achieved in involved in what will happen in the North Sea, in the bringing market coupling to continental Europe, Baltic Sea, and maybe tomorrow with energy where basically it started between three countries and produced by the sun in North Africa, because every has now moved to Germany, Luxembourg and the element of a power system is interacting with all the Nordic countries. Experience has shown that the other parts in real-time. earlier you start involving the Ministers, the administrations, the regulators, the TSOs of course, Q106 Christopher Pincher: Given that, at the end but also the market parties, the higher the chance that of the day, this infrastructure has to be built and then you can achieve a common understanding of what is operated, how closely are you working with the needed and how to achieve it. Afterwards, changing investor community and with energy providers, so that the law or regulations, if necessary, is a question of you don’t just create a regulatory framework that is following the established procedures in each Member nicely harmonised between countries but also works State. It is therefore fundamentally important that all for the investors so they can build it, and then the concerned parties understand what needs to be built. energy companies so they get to operate within it? For this to happen, you need a common vision for the Daniel Dobbeni: There are a lot of contacts either political side, regulatory side, TSO side and market directly or indirectly between with those who are parties. delivering or will be delivering those grid components This is the reason why this initiative—and there are a to the TSOs in the future, also through their lot of initiatives in Europe—made me pretty associations, also towards the generator associations, optimistic for the future of grids in the North Sea. because they will also play a major role in the whole Given a very short timeframe, since December last story. The major advantage of having a single TSO year, there was not enough time to go into the detail association for the last two years is that ENTSO-E is of the design, but there was at least sufficient time to now in a position to give the same message and the be sure that all concerned parties understand what we same perception of the consequences on their € need to build. When ENTSO-E talks about 70 networks what is going to happen in the next 20 or 30 billion—this is one of the figures often mentioned— years, so that manufacturers can adapt their research we had better be sure what we are contemplating and development program. building in the North Sea. I don’t think we could do I think a major concern is that when contemplating it faster. To give you an example, before going the recent evolution in Germany, Switzerland and forward in terms of the necessary grid infrastructure, Italy, for example, it is important that, given the fact we needed to take into account the national allocation several Member State will evolve even faster towards plans for renewables. This was only in June last year. a new energy mix—influencing by definition all So, everything is moving pretty fast. What is Europe—there is sufficient manufacturing capacity important is that all concerned parties are ready and among the companies who will have to deliver those want to open the debate and agree on a common view. new grid products. I am sure that there is not enough That is fundamental. manufacturing capacity today to answer all the needs, Alberto Pototschnig: If I can just add one other because we should not expect China or other countries comment: this is quite an ambitious project because I think it is probably the first time that so many in this planet, to stop investing in their networks. countries with such different legacies and There again, the right signals should be given as soon backgrounds in electricity are trying to work together, as possible of what we want to achieve in 2020, 2030, from Norway to Ireland. They have different market 2040 and 2050, knowing, of course, that we are structures; they come into different trajectories. The chasing a moving target and that we will have to Nordic countries have been running an integrated correct the way we are aiming at this target through market now for 10 years in the current configuration; the years. In summary: we are in discussion with the 17 years from the very beginning. In continental manufacturers, of course, but they will not invest Europe, we have more recent, very encouraging and unless they have more stable vision of the needs for very fast-moving market developments. It is quite the future. ambitious. I think we should be ambitious in the results but not over-ambitious on the timing. Q107 Christopher Pincher: Lastly, quickly, what Daniel Dobbeni: A last point. This initiative is about governance? As a result of the work you will fantastic, but at the same time we should not forget be doing—you are going to produce a regulatory that the interconnected power systems concern 34 framework—do you believe that there is a political countries. In other words the grid that will be built will to actually deal with the deadlock whilst the between the Member States having a shore with the regulatory framework is in place? North Sea needs also to take included in the larger Daniel Dobbeni: From what I have understood, yes, view about the power system. This is where ENTSO- and I hope it will remain like that, because if it wasn’t E enters into the game. The same TSOs concerned the case then the Member State policy towards a high with grids in the sea are working on the technical share of renewable in the energy mix would have to aspect in ENTSO-E so as to ensure that all European be reconsidered. Either Member States go forward TSOs understand what is happening. If I go back to towards the contemplated new energy mix and then my example about more or less wind in Germany we need to build the adequate transmission and impacting the Belgian network, imagine what the distribution capacity. If not, Member States will not power flows will become in 2020, 2030 or 2040. achieve their target. You cannot have one, the new Energy and Climate Change Committee: Evidence Ev 29

14 June 2011 Daniel Dobbeni and Alberto Pototschnig energy mix, without the other, more transmission mentioned areas where we might have direct powers. capacity. We are also part of the process of developing the Alberto Pototschnig: At the European level, there criteria and principles for the ENTSO-E to develop seems to be a strong political commitment in trying the rules, and then these rules could be adopted to pursue the infrastructure agenda, to the extent that through comitology, rules that will govern in future the Commission has now proposed that probably there the operation of networks and markets throughout may be some financial support or some initiatives; Europe, so we are part of this process. We are only something that is quite new to the regulatory practice one part. I wouldn’t say we have powers, but we can in most Member States where, in the past, most be quite influential, and we bring together within developments were done through the tariff system. So ACER all the national regulators. The national clearly, at the European level, the Commission—and regulators are our clients but they are also our I would say the other institutions also—are very much constituencies, so in that respect we can be quite on this piece. influential in shaping the way in which the market will work in the future, so at least one of the pillars: the Q108 Sir Robert Smith: When looking around the integration of markets. North Sea at the regulation, are you just looking at the When it comes to security of supply, we also have a specific regulation of the electricity networks, or are role here. It is mainly for national regulation of you also imputing into, say, the decisions of Member States, and when it comes to sustainability, Governments? For example, if we have a floor price that is mainly Member States. We don’t have much for carbon, the incentive may be to build lots of input in that. interconnectors and invest in power stations on the other side of the Channel supplying through those Q110 Sir Robert Smith: The costs and benefits for power stations where there is a different regime for the consumer is that at the heart of the agency’s— the price of carbon. Alberto Pototschnig: Together with national Daniel Dobbeni: It is an excellent question. I was regulators, we promote the idea that any development supposing the European Union was there to solve should be assessed for costs and benefits, not just these kinds of discussions or issues. The fact is that monetary costs and benefits but also to try to include because we cannot easily store a huge amount of externalities because there are still aspects that are not electricity, the power system is one of the few priced through markets. We are getting better there, domains where the Member States have to rely on especially as some of the environmental aspects are each other and therefore agree on a common view and now priced through a market. We are not sure that then walk the talk. If that is not the case then we will the prices that emerge from those markets are fully have to face reliability problems. reflective of the implicit cost, but, yes, this is basically what we are trying to promote. Q109 Sir Robert Smith: You have touched a lot on When it comes to political decisions on targets— the roles of both organisations. Do you have the especially, for example, the 2020 targets—we take it powers to make it happen, or in your situation do you as a given that there are some objectives to be not have the power so much as to provide the achieved at the European level. I don’t think it is for information and the sense of direction? regulators and definitely not for ACER to question Daniel Dobbeni: In an association like ENTSO-E, it them. The issue is more about how you achieve the is our ambition is to contribute to the three pillars of target and the measures you put in place. the European Commission’s energy and climate change policies. So of course we are looking at how Q111 Sir Robert Smith: I suppose you should make our association can help making it happen. But at the sure that those who make those targets know the end of the day, the network development goes back to consequences. I mean, you can inform them of that. the individual TSO and its Member States with their Alberto Pototschnig: Maybe it is for national local regulation and legislation. And, I am not saying regulators. As an agency that is looking at cross- that the hurdles are solved at Member State level. border issues, to be honest, we are not seeing that at Again, the closer we get to the 2020 and the targets the moment as our main objective. Also, given the the Commission and the European Union have fixed fact that we were only established a few months ago, for themselves, the more I hope there will be sufficient at the moment we have to stick to the main priorities, political will to move ahead in order to achieve the and these do not include informing on the costs and goal. As an association, we have the power to deliver benefits of policies that have been agreed at a the 10-Year Network Development Plan, like we did European and political level. Where we may look into a year ago, and the next one is now in the making, to it, as I said, are the costs and benefits of alternative show you policymakers the size of the challenge and approaches to achieve them. In this we clearly work identify what TSOs believe are the things that need to very closely with the national regulators because be fixed in order to go forward. We will implement obviously this is something that the national regulators this plan once we have a clear indication of what is have to do in a harmonised and co-operative way. needed and the regulation and legislation are in place. Daniel Dobbeni: To add one thing about that subject, As engineers we will find the technical solutions, when we think about the new grids in the sea or the provided of course regulation and legislation electricity highways, one way to have the cost as low solutions exist. as possible, taking into account, of course, the lifetime Alberto Pototschnig: As I mentioned before, the main of those assets, is to go forward as much as we can task for the agency is to support the regulators. I also towards a standardised approach. Today, in Europe we Ev 30 Energy and Climate Change Committee: Evidence

14 June 2011 Daniel Dobbeni and Alberto Pototschnig have 27—and sometimes even more—different kinds Q113 Barry Gardiner: We are talking years, are of power system transmission and distribution we not? networkds, because all of us used different standards Alberto Pototschnig: I am talking about months here. that are not totally different, but a little bit different. Barry Gardiner: For the launching of the TSOs now have the unique opportunity, when we are infringement procedure, but then you know how long working towards these grids in the sea and electricity infringement procedures take. This is the European highways, to define commons standards. ENTSO-E Union. has the responsibility to deliver network codes, Alberto Pototschnig: At the moment, the European through open communication with stakeholders. Once governance is based on infringement procedures. these codes have received positive advice from ACER Unless you get to having, as you mention, a European and have been approved by comitology, they will Central Bank and European energy regulators, that is become law. I think this is exactly what I was trying what we have. Again, in the case of disagreement to say in the beginning. Given the challenge we have between national regulators on terms and conditions and the cost involved, TSOs now have a window of for access to cross-border infrastructure, as I opportunity to establish these common standards. mentioned beforehand, after six or 12 months, ENTSO-E is working on these codes, but of course depending on the circumstances, this decision may we cannot do it alone; we need manufacturers; we come to us and we will decide. Again, we will not be need the other market parties; and we need the support able to enforce the decision, but we will have to rely of the comitology process. on either national regulators or the Commission. They have the powers. The Third Package increased the Q112 Barry Gardiner: Mr Pototschnig, could I just power and the independence of national regulators. So ask you to think with me? We are in England here. I either we rely on national regulators in the am a Scotsman, so I find it difficult as well. In the jurisdictions or we have to rely on the Commission. It UK, we look at European monetary union, and you is already quite a step forward with respect to what know the background in the UK of not being part of we had until 2 March. that, believing that a common currency might require a common Government. In a sense, do you see a Q114 Barry Gardiner: I don’t doubt that, but you parallel between your body of regulators and the sort can see the scepticism that one can have here of, of European Bank position, where you can set a set particularly, national Governments under domestic of rules, you can have your regulatory framework, but political pressure to back up their own TSO and to you can’t ensure adequately, because you don’t have back up their own regulator in protecting certain the statutory powers of the Government, that it is aspects of their own economy, being out of step with going to be observed in the different sovereign states? the regulations that you are trying to ensure get How do you propose to prevent the equivalent of a common adherence. You have quite openly said that Greece or a Portugal happening in this area? you don’t have powers to enforce compliance. Alberto Pototschnig: That is an excellent question, Ultimately, you will rely on the national Governments because I am often asked, “Are you the new European bringing themselves into line, or the European Union, regulator?” and I have to say no, because we are not. in a process of Kafkaesque complexity and A lot of people would like us to be, but I don’t think tendentiousness going on perhaps for years with a Europe is ready for that. On the other hand, we don’t country not in compliance. have direct powers, but I think there is a system in Alberto Pototschnig: I can agree with you that this place where eventually Member States or national probably is not the most expeditious process. Keep in regulatory authorities who are not behaving in line mind, however, that this is also the process through with the new European rules would be brought to which the European Union institutions can enforce account. proper implementation of the Third Package to start Let us take one example; I could give you more. The with. The deadline for implementing the Third new network codes: we develop the framework Package, which is basically the framework within guidelines, which includes principles and criteria. which all we are talking about today is set against, ENTSO-E develops the network codes, they come was supposed to be implemented by all the Member back to us, we see whether they are in compliance States by 3 March. No Member State implemented it with the framework guidelines and we recommend or transposed it into national legislation by 3 March. their adoption by the Commission. The Commission The Commission indicated that they would give a six- goes through comitology; they become law—that is, month grace period but now, I think, in September the they are mandatory in the 27 Member States. Now, let issue will come as to whether the Commission will us assume that one national regulator in one country take it seriously. I am sure that there will be a long takes a decision that is in contrast with these codes. list of countries receiving the communication of We can be asked by another regulator to look into it, infringement procedures. That is the way in which the and if we find that this is the case we can issue a whole game is set at the moment. I may be able to recommendation. The national regulator has a period share your scepticism, but that is what we have at of time—I think it is six months: three months, plus the moment. three months—in order to bring the decision into line. Barry Gardiner: At the start, people tend to start off If they don’t do it we make a recommendation to the with the best of intentions and, as you say, it is not an European Commission, and the European auspicious start. Commission can launch an infringement procedure. Daniel Dobbeni: Maybe it is worthwhile to remember You can say this is a very long process— again that electricity, because of the nature of the Energy and Climate Change Committee: Evidence Ev 31

14 June 2011 Daniel Dobbeni and Alberto Pototschnig product and the service, implies a very high level of Daniel Dobbeni: You need both. The worst would be, co-operation between Member States to make it in a complex power system like ours, just to think that work reliably. you can reinvent everything only from a top-down Barry Gardiner: Just like money. approach, and the same would be true if you would Daniel Dobbeni: The interconnection of several only think about doing it bottom-up. We are in the Member States in Europe happened before the position today where the power system is redefined European Union was invented, and I am convinced all over Europe. A good example is to image having that, given the targets we have for 2020—and we 27 different kinds of airplanes leaving from 27 don’t yet know the targets for 2050—the pressure will Member States. At the end of the journey, it is be pretty high on all bodies, TSOs included of course, expected to land with the same airplane, with a to make it happen. When I contemplate for the UK, different kind of motor and different kind of fuel, Ireland and Scotland the ambition in terms of wind while the passengers didn’t notice anything. That is energy and imagine what is needed to balance this the challenge, because TSOs cannot shut down the intermittent generation being an electricity island, it system for the weekend for an upgrade. The public appears to me even more of a challenge, especially in expectation is to continue to benefit from the full a cheap way. So there is a need to interconnect UK reliability TSOs have delivered successfully nearly all with the continent to benefit from a larger power over Europe for the last 10, 15 or so years. To this system, and I hope this will be the driving force to aim, TSOs need to carefully take into account the accelerate the development of the network, without infrastructure they operate today and how they can having to go towards an infringement procedure. I improve it, whether with electricity highways, smart hope this will be the way we go forward. grids or grids in the sea. You cannot decouple one of these new developments from the existent networks, Q115 Sir Robert Smith: I suppose there were so you need both approaches. lessons learned, because we built gas connections and we thought that meant that, if we had problems, gas Q117 Chair: It is inevitable, is it not, that if we have would flow into the country but in reality, because of a more integrated electricity network, that means the different regimes in different countries in Europe national sovereignty in relation to energy and about the obligation for security of supply, the gas electricity issues has to be pooled? flowed against the market out of our country. Alberto Pototschnig: I guess this just goes back to the Daniel Dobbeni: If you go back to what happened in fact that we will have common rules that would be the case of Ukraine, the needed investments have been binding on all 27 Member States, rather than having achieved, in the meantime, to allow gas moving in 27 sets of rules that are more or less harmonised, as two directions, which was not always the case in was the case up until the Second Package. The First continental Europe previously. This is an example that and Second Packages were mainly about harmonising when a major problem happens, Europe is able to national rules. Now we are going, at least for what react very quickly, much faster than any regulation concerns cross-border issues, towards a common set change or legislation, because there was a real need. of rules that would be binding throughout. So yes, in That is what I was trying to say for electricity. For that respect you can read it that way. electricity, it is even stronger due to the fact that electricity cannot be easily stored. Q118 Chair: If we have a common set of rules that Alberto Pototschnig: If I may just add on a more relate to the harmonisation of an offshore grid, can positive note, there have been a number of initiatives that happen without a common set of rules that might in Europe that have seen regulators, TSOs, relate to electricity generation? Governments and Member States very much Daniel Dobbeni: That is, to me, decoupled to some supporting the integration of markets. In fact, those extent. I am used to saying that it is not a problem for that were involving Member States were the ones a country to be highly dependent on imports as long where progress has been achieved more speedily, and as someone is ready to export. Yes, we will have to probably better progress. The integration of the evolve towards more, let us say, common points of market in central continental Europe between France, view in terms of energy mix. It doesn’t mean that an Germany and the Benelux countries, between Spain European energy mix will be imposed to the Member and Portugal, then integration in the Nordic area, are States because that doesn’t make sense either. You all examples where Governments were key in have more wind on the coasts of Scotland and Ireland promoting development. I have to admit there are than there is to be found in other places in Europe. So other areas of Europe where probably the situation is geography in itself is already a good reason why we slightly different. We are looking into it, because it will have—and we will keep—different energy mix also has to do with the independence of national among the Member States, but we need more regulators, but if the UK Parliament wanted to understanding of the impact of these energy mix on propose greater power for the agency, personally I each other power systems. wouldn’t complain. Daniel Dobbeni: I am not so sure I would not Q119 Sir Robert Smith: Of the barriers to this complain. ambition of a North Sea grid, which are the most pressing: the technical, the economic or the socio- Q116 Chair: If this is going to work, is it principally political? going to be a top-down process, though, or can it be Daniel Dobbeni: All of them, because you need all of a bottom-up process? them. Don’t forget that it is not because you build the Ev 32 Energy and Climate Change Committee: Evidence

14 June 2011 Daniel Dobbeni and Alberto Pototschnig grid in the sea that you do not need to reinforce grids Daniel Dobbeni: Of course. You are hitting an onshore. Grids in the sea may help to optimise interesting topic. When in some Member States onshore grids by having the highest usage of the existing contracts for renewables are put into question, onshore connection and offshore connection, and this increases tremendously the perception of risk by reducing their number, but it will not solve the fact investors and investors usually translate that into a that we still need permits to build more higher risk premium, so nobody is advantaged by infrastructure onshore. increasing the risk perception of the financial markets, Alberto Pototschnig: Perhaps because I have the but it is happening now. greatest esteem for engineers, I would say probably the non-technical aspects are the most challenging. At Q122 Sir Robert Smith: Your 10-year plan is €23 the moment, in Europe, permitting, not only for billion to €28 billion? offshore—in fact, mostly for onshore—is clearly the Daniel Dobbeni: The first five years. single most relevant obstacle to developing grid Sir Robert Smith: The first five years. How much infrastructure. I think that is clearly a challenge. Here more do you think we would need to create a viable we are looking at possibly 10 different systems supergrid? currently, and if you look at an infrastructure that links Daniel Dobbeni: How much? If I knew the answers, a number of them, clearly you don’t want the I would quit my job and start as a consultant. As I difficulties in each of these systems just to add up, said at the beginning, we at ENTSO-E have given one on top of the other, and then, as we mentioned rough ideas and we came out with something around before, also, a good regulatory regime that would €70 billion for the grids in the sea, only for the North facilitate this development when it comes to access Sea. Don’t attack me in 10 or 20 years if it is €80 costs and location, and so on. billion or €60 billion. It is too early to give accurate figures. What is important is to have an idea of what Q120 Sir Robert Smith: You are saying there will this means with respect to all other investments TSOs be onshore developments that still need to be accepted are doing anyhow. This relative figure is important for by the community if we are going to have our energy? policymakers because, at the end of the day, these Daniel Dobbeni: Yes. The danger with words like major developments will have an impact on the “supergrid”, “smart grid”, “super-smart grid”, and consumers, the poorest family among us, as well as “electricity highway” is that these are concepts, and the industry. This is where the issue is. As long as it you can find different definitions to them. It may remains, let us say, acceptable and that we do it the happen that people believe, “We just have to wait cheapest way through standardisation, then I think we some time and we will not have to deliver permits to are on the right road. build new onshore infrastructure”. That is not true. New onshore infrastructure help the whole process of Q123 Christopher Pincher: At the risk of boring achieving the 2020 target. It does not cancel the everyone to death by talking even more about needed reinforcement all over Europe. You said regulation, the current rather simple system of during the previous session that there was an compensating for the cost of infrastructure into quite important flow from North to South. You cannot solve a more complex supergrid because it tends to benefit it only with grids in the sea. You still need to do the exporter of energy rather than the importer of reinforcement all over Europe. ENTSO-E identified energy. It seems to be rather unfair, so it needs to be 500 projects only to handle the three pillars of the changed. Do you think it is going to be possible to European Union policy, and I am not talking about the create a mechanism for fairly sharing the costs of the day-to-day investments that each TSO has to do. In supergrid structure? this 500, you don’t find the grids in the sea and the Daniel Dobbeni: I can’t answer you, because this is electricity highways. clearly a Member States’ and a regulatory issue. As One of the points that regulators will have to tackle, TSOs we are open to any allocation keys whatever. and also how to explain that to consumers, is that this What is important—and again, that is the added value will definitely have an impact on the price of of the initiative of 10 Member States in the North electricity, not that much on transmission. Sea—is that we need clarity there as soon as possible. Transmission represents in the electricity bill of a Ultimately, a decision will have to be taken, and there consumer something around 4% to 6% or 7%, is no perfect allocation key, because even if we were something like that, so before the price of grids in to design a fantastic computer to calculate the the sea or the electricity highway makes a tremendous allocation keys nobody knows what will be the energy difference in the electricity bill at home, we would mix in 20 years, or even in within five years. So who need to invest much more than in grids in the sea. will import? Who will export? Who will benefit from Nevertheless, we need to attract investors. For many the wind in the seas of the UK, and who will benefit TSOs, this means more than nearly doubling the from the sun? You don’t know, so we will have to investment requirements for the next 20 years, so build a network that is reasonably correct for all TSOs need to be attractive for the investment consumers in Europe and all Member States, knowing community, and there we come back to the point: the that we have no clear view of the next 40 to 50 years. right political and regulatory signals. So allocation keys will have to be decided politically. I don’t think there is an engineering formula able to Q121 Sir Robert Smith: And certainty. How bring that out. confident can the investors be that the wind farms will Alberto Pototschnig: There is in operation in Europe, actually be producing the electricity? an interim inter-TSO compensation schemes since Energy and Climate Change Committee: Evidence Ev 33

14 June 2011 Daniel Dobbeni and Alberto Pototschnig

March 2002. That scheme has been modified slightly around the European Union are on this issue, how but basically is still running more or less on the same much their officials have brought it to the attention of principles. I think now the challenge is to see whether their Ministers and how engaged those Ministers are it is still fit for the new situation in which more with this particular matter as opposed to all the other complex and probably larger infrastructure would problems that they are dealing with. Surely, you have have to be built. That scheme was mainly devised to some sense of whether this is something that most try to compensate for the use of existing infrastructure Energy Ministers are absolutely seized of the for transits. Personally, I think it will require some importance of and what to get on with, or whether it rethinking before it can be used for supporting new is just a law and order issue that on the whole is not investment. It is not easy. This has been looked into on their political priority list. by several academics and other institutions over the Alberto Pototschnig: Sorry, are you referring to the years. I agree with Daniel; I don’t think we will have cost of location or more generally the integration of the magic formula, so it is a matter of finding a the market in the North Sea? reasonable formula. It is also true that energy flows Barry Gardiner: I am specifically going to the point will not necessarily be the main driver or the only that Mr Dobbeni said when he said, and I think I am drivers for the allocation, because there are some quoting you almost exactly, “Sooner or later, a benefits that are not necessarily reflected in energy decision is going to have to be made here, and that is flows. There are wider benefits of integration, of going to have to be made by politicians”. sustainability and security of supply, typically. I think Daniel Dobbeni: The only element I have to give you it is a challenge, but it is one of the challenges that is the summary of the meeting of the Heads of State we will need to address in the next few years. in February, where for the first time clearly some of It is not particularly relevant for TSOs’ decisions to the points we have discussed today were addressed in invest, because at the end of the day what is relevant writing by saying that they have discussed it at the is whether they would be allowed revenues sufficient highest level. I hope that if the Heads of State are to cover the costs, and here we are talking about how discussing this at the highest level, it is the same for the different jurisdictions would share the cost. Where the Energy Ministers. it is relevant is on building consensus for new Barry Gardiner: So do I. infrastructure, because that would be how the new Alberto Pototschnig: If I can add another dimension, infrastructure is seen from the national perspective of the different jurisdictions. Ministers at the technical level would have to be part of the comitology process, so that we will have a clear sign. I think the first comitology process will be Q124 Christopher Pincher: That is going to be launched probably next year, so we will have an partly political, isn’t it, which is going to mean energy immediate sign of how engaged the various ministries spirals, and therefore knowing how that cost is going are and the various administrations are. There is a to be spread out will be important to that decision? commitment at the highest level. Then, when you look Alberto Pototschnig: It is a zero-sum game, which makes any agreement very complicated. at the involvement at the technical level, I think you Unfortunately, we have a regulatory system in place, have a more varied picture and you have some so any time you propose an amendment or countries that are really following and pushing, and modification of the system there are some countries others that are at the moment still looking from the that are going to win, according to likely scenarios, outside. and some other countries are going to lose. I have Barry Gardiner: I will not ask you to name names. been involved in this for a few years, and my Thank you very much. experience is that the first question you get is, “What does this mean for country X?” Then all the nice Q127 Christopher Pincher: I have one more technical details behind the quality of the algorithm question about decisions that have to be made in this are not particularly of interest. case about the various low-carbon schemes we have operating across Europe. Here we are going to have a Q125 Barry Gardiner: You said that sooner or later, carbon price support scheme. That presumably means politicians are going to have to take a decision. On a that electricity prices here go up. If you have a scale of one to 10, 10 being top of the priority list and supergrid that presumably means that cheaper one being in the category of “just too difficult to electricity could be imported from abroad, where there decide upon,” where would you say European Energy may be no carbon price support or a less advantageous Ministers are at the moment on taking that decision carbon price support system in place, so what sort of you talked about? alignment do you think might need to take place to Daniel Dobbeni: I can’t answer you. I have no idea ensure that those low-carbon schemes work across whatsoever whether it would be one or 10. Being an Europe, and do you think it is an important issue? optimist by nature but not necessarily a believer, I Alberto Pototschnig: I think there are two would not say 10, but hopefully we will get there. If dimensions, if I understand your question correctly. you allow me, you said, “sooner or later”. I would There is now a European carbon market, which will like to qualify it, “Sooner the better.” hopefully operate in an unbiased way throughout Europe, and then there are other promotion schemes Q126 Barry Gardiner: I am going to push you, that may have an impact on the way in which the because it seems to me that you must have a clear electricity market works. The Commission tried a view of how focused different energy departments couple of years ago, with the initial proposal on the Ev 34 Energy and Climate Change Committee: Evidence

14 June 2011 Daniel Dobbeni and Alberto Pototschnig renewables directive, to create a more integrated generation with an intermittent character, the bigger market; for example, for renewables support. It didn’t the system the better, of course, providing it is stable, get its way. It is still very much national. There was a because at some moment in time very high quantity strong resistance to any form of European market in of energy will be produced in some places with a low that respect. I think what worries me the most is that demand and we will be happy to find someone that some of these schemes would keep a large share of needs this energy. That is also another reason why it generation out of the market or not respond to price is difficult to identify which country is going to win signals, so this would have an impact on the liquidity and which country is going to lose, because the more of markets. That is where I think the problem is. It is Europe relies on intermittent generation, everyone not the fact that you still have national schemes; it is could lose or win, not every five years, but every hour, the fact that some of the national schemes may every day, every night or whatever moment. There, deprive the market of some important liquidity, again, interconnection is a natural benefit. How to especially if we look in the future at having calculate this benefit is another story. renewables at 30%, 40% and, in some countries, 50% of generation. You take that out of the market Q129 Sir Robert Smith: They used to argue whether somehow and you prevent that generation responding Scotland supported England because it provided most to price signals. That might be a problem. of the power, but then the people operating the grid said, “Well, really, England supports Scotland by Q128 Chair: We have been looking mostly at a grid providing all the phasing.” around the North Sea. How are the prospects for Daniel Dobbeni: A huge power system such as the north-south, to Europe, to Africa, or east-west to European power system today, knowing of course that Russia? Are those projects coming along? China will be bigger someday, deliver energy of a Daniel Dobbeni: There are, for the time being, trials very high reliability to some 530 million people. Of of grid synchronisation with . They are going course, if I drill down and I go to a given village, forward. In the next few weeks, the first market maybe this given village will benefit from another exchange will take place. We are contemplating a step village because, at a given moment, the resident by step approach, because the bigger the system, the reduced electricity consumption when there is a peak. more we have to ensure that we keep the stability and I think we have to look in terms of added value, pros a well-functioning power system. When you talk and cons at the European level. If you drill down to about Russia, there are also discussions. We did a specific cases, you will always find good reasons to study before—a former association now—UCTE with connect or not to connect Member States, but globally the Russians, whether it was feasible or not to the advantage of higher interconnection capacity is synchronously interconnect Continental Europe with clear. Russia. It appeared that it would not be feasible at that Chair: Thank you very much indeed. It has been a time and that a DC-DC connection would be better. very interesting session, and we do appreciate your I think there also you have to put time in perspective. time and trouble in coming to give evidence. Thank When we go forward in relying more and more on you. Energy and Climate Change Committee: Evidence Ev 35

Thursday 30 June 2011

Members present: Mr Tim Yeo (Chair)

Dan Byles John Robertson Dr Phillip Lee Laura Sandys Albert Owen Sir Robert Smith Christopher Pincher Dr Alan Whitehead ______

Examination of Witnesses

Witnesses: Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and Sue Harrison, Head of European Energy Markets, gave evidence.

Q130 Chair: Good morning. Thank you for coming expensive as a way of doing it, but I don’t think we again. I am afraid we are seeing a lot of you, but we have to develop at the outset the full grid. I think we are grateful for your time. I should draw the could sit down for years and map it and think of every Committee’s attention to my entry in the Register of single potential connection that could be a part of that Members’ Interests and in particular that I am a paid process, and what I think we absolutely should be director of Eurotunnel, which is planning an taking forward is bilateral negotiations on some interconnector. strategic interconnectors to begin with: to Norway, Could I start with a question about what plans you potentially to Iceland, to Denmark, additionally to have in DECC for developing an integrated offshore France. So a range of additional interconnectors, grid and what benefits do you think that is going to which create the spine, perhaps, of an offshore grid deliver? from which it can evolve over time, but we don’t have Charles Hendry: There are a number of benefits that to have a perfect blueprint from day one. we think it delivers. We think it is a critical part of being able to develop the offshore wind sector. If Q132 Chair: That may anticipate what I was going people are going to be investing billions of pounds in to say, because some of the witnesses we have heard new offshore wind farms, they need to have comfort from suggested securing, creating an integrated that they can get the power they generate to market offshore grid simply won’t happen by 2020. It is not on day one and the more integrated that is then the physically achievable. better that will be. Secondly, we think that in terms of Charles Hendry: It can’t be in place in its totality by delivering it at a lower cost it has benefits because if 2020, but its evolution could be well under way. every individual offshore wind farm seeks to have its own point-to-point connection from where it happens Q133 Chair: Do you think that there are some to be out at sea to the coast then obviously it can be regulatory issues, as well as the political ones, that more expensive and it also requires a huge amount of will need to be solved very quickly, the next couple upgrading of the onshore grid, which we discussed of years, if we are to avoid locking ourselves into a last time, which is difficult in its own right. It also transmission infrastructure that is less than optimal? enhances our security of supply so that, for example, Charles Hendry: They will be essential as part of if one sees a wind pattern moving from the west coast developing an offshore grid, so one needs to have a of Ireland through the Irish Sea, through the North regulatory regime. We have different regulatory Sea into the Baltic then one can pick that wind up and regimes with different countries and therefore there arrange a different location if one has an integrated needs to be some agreement between those. There network to make it happen. So that is where we see needs to be agreement on transmission currents and real benefits. It is helping to deliver low carbon issues in that respect. So there are technical issues that electricity, it is helping to deliver security of supply need to be resolved as well. If you look at, for and reduce costs. example, the approaches we set out on the All Islands In terms of the workstreams, we are involved in a Approach at the British-Irish Council last week, those number of different ones. There is the European one are exactly the workstreams that we are prioritising. for the 10 Member States in the North Sea that are involved, including some others. We have a separate Q134 Chair: To what extent do you see the offshore initiative, the Nordic-Baltic, which came out of the grid as a means of relieving the pressure for more summit last year, and we are also looking more overhead transmission lines onshore, which is, as you specifically at the British Isles and how we connect know, extremely controversial in some parts of the with Ireland and the Channel Islands. country, including my own constituency? Charles Hendry: As indeed we discussed last time Q131 Chair: Would you go so far as to say that we round, Chairman. I totally understand why developers won’t be able to meet our renewable energy targets are so concerned that on the day when they are ready unless we get on and develop an integrated offshore to generate they can get their power to market and grid? they need to be comfortable about the costs of that Charles Hendry: I think it is helpful. It doesn’t stop and the certainty of it. What we then have to do is to us doing it, but it would make it potentially more look at our strategic overview and say what is the Ev 36 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison case for Government, National Grid, others, Crown to stop investment that is actually taking place. That Estates, being involved in saying, “These are the most is the last thing we want to do. important parts of that network. How do we get those constructed? How do we get those financed?” The Q136 Dr Whitehead: You mentioned the North Seas difficulty sometimes is going to be that if you have an Countries’ Offshore Grid Initiative. What has offshore wind farm relatively close to the shore they happened so far with that? What are the results to will not be particularly concerned about putting in an show? There was a timetable adopted after the oversized interconnection link in the anticipation that agreement was reached, aiming for this summer, I at some point in the future a new offshore wind farm think, for some initial results about feasibility and will be built further out that could share it, because protocols. they would potentially have to carry that extra cost Sue Harrison: There are three workstreams in the without getting any benefit for it. We have asked initiative, one looking at regulatory and market issues, National Grid to help on this; Ofgem are helping on one looking at the technical issues and one looking at this; DECC is doing its work on this; so it is actually the physical planning issues, and they all had getting the building blocks in place in the right order. deliverables, outputs by a specific time. A couple of We all recognise where we need to get to. The work those deliverables were in June this year, but for the that we are doing at the moment is working out who third workstream the first deliverable is not until the takes the lead and how we bring it together. end of the year. Our commitment was to give a report to Ministers at the end of this year, but we are going Q135 Sir Robert Smith: You mentioned how it to do an interim report in the next couple of weeks could evolve with maybe Norway, Ireland, Iceland. If that will set out the progress that has been made in it is going down that evolutionary road, how important all three workstreams and looking forward to the first is it before those early ones start to physically appear official report to Ministers at the end of the year, so that there is some kind of standard setting and long- what we are going to achieve over the next six term idea of what the integrated system would look months. That should come out in the next couple of like? weeks. There has been quite a lot of preparatory work, Charles Hendry: We will need to have a bilateral preparatory analysis, that we have carried out already, arrangement in any case for each of those. The more which we hope we will be able to tell people about in that can be harmonised then the better that is going to a couple of weeks’ time. be, and I think the EU can play a very significant role because quite a lot of the countries that might be part Q137 Dr Whitehead: Are you able to reflect today of this process are EU members but obviously not on whether that interim report when it comes out will exclusively so. I think that we can’t hold everything prove to be a positive series of steps as far as back waiting for all of that detailed work to be done. feasibility and protocols are concerned? We have had active discussions with the Norwegians; Sue Harrison: We won’t be coming to any we have had some preliminary discussions with conclusions. We have done a lot of evidence Iceland; significant discussions about an gathering. We have been looking at the regulatory interconnector from France and Flamanville coming regimes in the countries around the North Sea and the via the Channel Islands into the United Kingdom. So Irish Sea. We now have a very good digest of what there is a range of different discussions that have the regulatory regimes are. We will then have to do an happened already and I think it would be very analytical piece of work to see whether those different frustrating, where there is a real prospect of progress, regulatory regimes present barriers, because you don’t if that was to be held up because of the lack of a have to have the same regulatory regime but they have complete overall agreement on some of those to be consistent. We have done a lot of data gathering regulatory matters. on plans that the countries have to develop offshore Sue Harrison: Perhaps I can come in at that point. I generation, because before you look at what kind of think you are quite right that if we don’t do anything grid you will need you will need to know what now we will end up with point-to-point connections generation is planned, and getting that kind of and direct connections between offshore wind farms forecasting data and getting it consistent and to shore, so you won’t get a more co-ordinated compatible has taken time. The problem there is that offshore grid. The work that we are doing with nine most countries do not have any plans beyond 2020 for other countries around the North Sea and the Irish Sea generation because everyone is working to the 2020 is to look at whether a more co-ordinated development targets. So between 2020 and 2030 we are having to in offshore grids would be to our mutual benefit and make assumptions and give some sort of ballpark looking at the kind of configurations that that might figures, but it gets more uncertain the further out you take. A supergrid can be many different things. We go. don’t want to stop any investment that is happening at the moment. We certainly don’t want to stop the Q138 Dr Whitehead: This is a question to the point-to-point connections, because we will always Minister particularly. That initiative, as we hear, looks need those, but I think before you get a more co- at technical options and appraises various ways of ordinated grid development Governments collectively working better together but doesn’t make any political are going to have to give some kind of signal, some commitment to build or to progress. What political kind of vision, and do something with the regulatory efforts are there under way to develop that particular arrangements to make it happen. But we do not want side of the whole process? Energy and Climate Change Committee: Evidence Ev 37

30 June 2011 Charles Hendry MP and Sue Harrison

Charles Hendry: These are issues that are addressed Charles Hendry: No, that said, “It is all right, I can at the European Energy Ministers meetings, so there speak German if you would like me to”, and I am is a continuing focus on them. I think one of the not sure whether that is permissible in Hansard,so reasons why we have a range of different workstreams hopefully the translation will help. If necessary, we going on is to increase the prospects of work will pick up a phone call wherever appropriate and happening at an early stage. That is why we have the the Prime Minister is happy to do that where it is separate programme for the British Isles as a whole; appropriate for Britain’s economic interests. On a why we then looked separately at the Nordic and regular basis, we are talking to our fellow ministerial Baltic aspects as well and the particular connection counterparts. With the Norwegians, for example, we opportunities that are there, as well as this wider have had regular ministerial discussions on this; European one, which it should be remembered that Iceland has been at a ministerial level. There is a work is also going to have a separate group looking recognition that all of us can have a mutual benefit at it at a southern European grid and connecting into from this, and certainly at a ministerial level I have North Africa. So I think by trying to keep the different discussed it with my German counterparts as well. avenues open, the very clear commitment that comes There is no doubting the Government is keen, from the Prime Minister personally in terms of the politically, to push this forward. conclusions of the Nordic-Baltic British summit last year, shows this is an area where we believe that there Q142 John Robertson: Minister, you have is particular scope for co-operation. mentioned offshore grids being developed, I think you did anyway, around the British Isles. Do you expect Q139 Dr Whitehead: On the question of political co- that to be linking into similar projects in Europe? operation, we have heard and we know that on Charles Hendry: I guess ideally. This is something previous occasions some individual countries have that can evolve to cover a range of projects in many blocked or looked like they might block different jurisdictions. interconnector plans on the grounds that they may have had, say, low consumer prices and that the net Q143 John Robertson: Are there any preparations effect of an interconnector, while it may be being made for that interoperability between the overwhelmingly beneficial all round, would have an British projects and future European projects? effect on their consumer prices. I believe Norway Charles Hendry: On a specific project basis or— intervened in this respect, I think in 2003, on an earlier John Robertson: Or on projects, plural. I imagine proposal for an interconnector. What sort of efforts there is more than one on the go. may be undertaken to ensure that that sort of response, Sue Harrison: When you say interoperability, are you politically, is not made by those involved in the talking about technical standards or— process? John Robertson: And being able to connect up, Charles Hendry: I think if we are looking where there discussions about how it would be done—planning for is a bilateral arrangement then both countries have to the future, in other words. be persuaded that it is in their interest to do so, and we Sue Harrison: We are looking at that in the two fora have, with the Norwegian Government for example, at the moment. We will be looking at it under the to persuade Norwegian consumers that this is a good British-Irish Council workstream that was agreed last prospect for them. So, for example, when there is week, the All Islands Approach, and that is looking at surplus offshore wind available, which we couldn’t how we can co-ordinate grid development and also use in our own system, that can be put into the share renewables resources possibly, developing them Norwegian grid or into pumped storage and then they in a mutually beneficial way. That is a sort of subset, could sell back to us hydroelectricity when we have if you like, of the wider North Seas Initiative where extra demand in the United Kingdom. The Norwegian you have 10 countries, where we are trying to do a consumers need to be persuaded that that is not going similar thing on a slightly larger scale. to push up their prices and it is not going to be taking electricity out of their system at a time when they may Q144 John Robertson: In the Irish Sea itself, how need it themselves. They have to be persuaded that much will the UK spend on that and are we getting a this is a good deal for them as well and so this has to contribution from Ireland as well? be on a voluntarist approach and carrying consumers Charles Hendry: In terms of how much will the with us is part of that process. British Government spend? John Robertson: Yes. Q140 Dr Whitehead: We heard from Eddie Charles Hendry: This is not a Government-led O’Connor, the CEO of Mainstream, who suggested programme. This is an area where the investment that the best way to advance politically a European would come from the individual companies involved supergrid would be a phone call to the German or from specialist operators and this would not involve Chancellor. I was just wondering how good your public funds going into the project. German is. Charles Hendry: Ja ganz gut, ich könnte auf Deutsch Q145 John Robertson: Do we not help to subsidise sprechen wenn das einfacher ist. these offshore wind farms and research and development and also the grid itself? Q141 Dr Whitehead: Unfortunately, mine is not Charles Hendry: Yes. The ROC system, the very good. Does that mean, “I am about to ring the Renewables Obligation, is there at the level of two Chancellor up and—” ROCs to support the development of offshore wind. Ev 38 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison

That is supposed to be a reflection of the costs as part of the market review process to see if we can involved and so the costs of interconnection are try to move to a more standardised approach, and we incorporated in that process. will be publishing our final position on that shortly, but on all of these issues, companies looking to invest Q146 John Robertson: It always amazes me we use in the United Kingdom want as much clarity and as the word ROC. How much is a ROC? simple a jurisdiction as possible, rather than if they Charles Hendry: Two ROCs is the equivalent of £8 are operating on a cross-boundary, cross-border basis. per megawatt hour, I think it is, but we will need to come back precisely on that. We have the ROC Q150 John Robertson: I want to push you more on Banding Review, which is going on at the moment. I this because it is important, particularly for the people know the idea of banding ROCs becomes even more in Scotland: does the referendum possibility and the tautological. We are publishing that shortly. Our possibility of a yes vote for independence curtail recommended— your negotiations? John Robertson: When we talk about these things it Charles Hendry: I don’t see it does. I think that we would be helpful, I think, if we could actually put a have the respect agenda with the Scottish Government figure on a ROC. I have this vision of somebody at the moment. We totally understand where they can throwing a stone into the sea and wondering how make their own decisions, particularly on planning, much that is costing us. Anyway, that is me, perhaps. and how that brings forward different energy I am not quite as sharp as the rest. technologies and their very understandable interest to make the best of Scotland’s resources. We want to do Q147 Chair: On the ROCs review, that is going to that in as harmonious a way as possible but there is be concluded by the end of the year; is that right? certainly nothing in our discussions with them at the Charles Hendry: What we have said is that we will moment that is affected by the potential referendum publish the recommendations before the summer with or any conclusions from that. a three months’ consultation, with the intention of providing the final decisions at the end of the year. Q151 Sir Robert Smith: How does the interaction between the two regimes impact on a connection sea Q148 John Robertson: Being Scottish you would down the coast? They would go out to the territorial expect me to ask you a Scottish question. Do you limit and then the regulation would become UK? agree with the Scottish Government’s proposal to Charles Hendry: Yes. So they would control the first identify priority energy corridors in home waters? few miles of foreshore and the seabed and then after Charles Hendry: We work very closely with the that it is a UK-wide policy. Scottish Government on many of the renewables issues. What we also recognise is that for Scottish Q152 Sir Robert Smith: But in terms of driving renewable energy to achieve its potential in the forward those bootstraps of connection, how much of Scottish Government’s stated ambition of self- it would be policy driven by the UK Government and sufficiency then that needs to have additional how much would require a Scottish Government connectors for getting it to an English market where policy drive? they wish to be exporting it. There are very significant Charles Hendry: We have the primacy on the energy grid constraints on land and therefore it is absolutely policy side of issues but, as I say, we are trying to right to be looking at whether there are offshore develop a very consensual approach, because we both connectors that can get the electricity from where it is see the benefits to Scotland and the wider UK being generated into the key English markets. interests.

Q149 John Robertson: There are two problems as I Q153 Sir Robert Smith: Just one other thing. The see it. The first one would be on who pays for these North Sea discussions are taking place but the full things, energy being obviously reserved but planning vision for a supergrid involves deeper connections being devolved, and the problems that we have had in into the east. Is there a wider European discussion of many devolved areas, particularly with the Scottish those countries that could be involved? devolved Administration, in getting things done and Charles Hendry: Do you mean across in the Baltic, the hold-up there, which obviously always adds to the or do you mean further? cost. Would that be built into any—shall we say— Sir Robert Smith: Also into the south and the long- agreement that was made? Plus, with 2014 being the term vision of connecting to North Africa and so on. date of the referendum on independence in Scotland, Charles Hendry: It is a priority for the European has that been taken into consideration and would it be Union now to look at how one enhances the a consideration that the Government would have to infrastructure network and therefore looking at where take some cognisance of in the future? are the strategic links that are necessary, north-south Charles Hendry: The system is more complicated as links; this is both for electricity and for gas. So the a result of the funding mechanism. So, for example, enhancement to that and security of supply that it the Renewables Obligation regime, there is a separate would bring is a very significant area. It has been system applied in Scotland that is more supportive of greatly strengthened further by the Hungarian some of the emerging technologies—for example, presidency and the Polish presidency where these are tidal technologies, which they support with five ROCs clearly issues of particular concern to them. The compared to two in England. So that complicates the potential for an offshore grid is looked at in a different structure. We have had active discussions with them way than the need to upgrade and enhance the onshore Energy and Climate Change Committee: Evidence Ev 39

30 June 2011 Charles Hendry MP and Sue Harrison existing grid structure and so what has been would be absolutely a matter for the Irish happening is looking at where the potential Government. weaknesses and the potential challenges are in that onshore structure to see where they need to be Q156 John Robertson: Is that off the Northern reinforced, but separately exploring how it can be Ireland coast we are talking about? done, both offshore in the north and also into a North Sue Harrison: No, we are talking about Ireland, the Africa grid. Republic of Ireland. There are renewable resources off Sue Harrison: Perhaps I can add something to that. the Northern Irish coast as well, but recently we had Later on in the year, there will be a new piece of discussions with the Irish Government. legislation coming out from the Commission on infrastructure that will identify priority corridors and Q157 Chair: Given that Britain is already a leader in it will look at the various regional groups that you offshore wind and has the potential to become a very have mentioned. Our North Seas will be one of those substantial leader in this, are we doing enough and priorities and then there will links with the south, quickly enough to exploit this advantage in terms of which are solar in the south, and then there will be offshore industries generally and sort of export links with east-west, with in the east. I think potential? they are looking at a regional basis at the moment. Charles Hendry: In terms of where we are, we are The North Seas region is, I think, the one where most now the world’s largest deployer of offshore wind. work is being done, but I think the long-term vision Seven of the world’s 10 largest offshore wind projects is to join up all those regions, and they talk about are in UK territorial waters, so we have a very electricity superhighways by 2040, which is a long substantial position. We want to drive that through to way in the future. get the supply chain investment and the ports projects, which is looking at actual manufacturing projects on Q154 John Robertson: I missed out one of the port sites worth £60 million. That has stimulated a lot questions I meant to ask you, moving towards Ireland of interest with companies like Siemens indicating again. How many gigawatts of renewable electricity they are looking to go to Hull, Gamesa looking to generation would you expect to connect in the Irish come in, Mitsubishi looking to come in, Olsen Sea? potentially looking to come in, and a few others as Charles Hendry: It is a matter for the Irish well who will berate me for leaving their names off Government. It is not for us to set any targets or the list, but nevertheless the world’s key players in the ambitions for them. The thinking behind the approach sector are now all looking at Britain. What they need we have taken is that at the moment there are stranded is to know what the market is going to be and their potential assets, assets that won’t be built in the Irish final investment decisions will be based on decisions Sea or in the west of Ireland because the Irish grid by potential wind farm operators to go ahead with an and the Irish demand market could not accommodate investment. So that needs the clarity that the market it, but these are good resources; they are accessible; reform process will give and the approach we have they are more affordable than some of the deeper taken there on contracts for difference, so they can see water ones. So there is a benefit to us if we look in the likely return they will be getting. We are setting totality at the British Isles from harnessing those out a renewables roadmap in the course of the next resources: by providing an interconnection into the few weeks that talks about the level of ambition that United Kingdom market does that enable different we have in these areas and what needs to be done to developments to come forward? At the moment, the deliver that and so people can try and see what we reaction from the Irish Government has been are doing. extremely positive, and from the Irish press and others The other thing, which we have made very clear, is has been very good. We are therefore keen, having the scale of that ambition is linked as well to bringing established the principle, that we want to talk about down costs. The industry tell us that they can bring this further to see how much it could bring. down the costs to around £100 per megawatt hour. If they can do that then the scale of the ambition can be Q155 John Robertson: Is there a minimum figure very much greater than if it is £150 or £200. This is where if it drops below that it is not worthwhile doing, where we are working very closely with them to try or a maximum figure? Somebody somewhere must to see what can be done to bring down costs, where have an idea of what kind of size we are talking the area of looking at strategic interconnection issues about? can be part of that process and to facilitate that Sue Harrison: As the Minister said, the Irish certainly happening. So we do have a strong leadership position have their long-term forecasts. I am afraid I don’t have at the moment. The policy drivers are in place, I think, them at the moment; we can let you have them. They or evolving, in order to give the clarity to investors, do have enormous potential in Ireland, both onshore but we certainly aren’t there yet. and offshore, both west and east coast, and that is why they see it as such a valuable resource, which they Q158 Chair: One of the other things, of course, want to maximise. investors would need is a skilled labour force in the Charles Hendry: The minimum would be linked to places that you have referred to, or capable of moving the cost of installing an interconnector. That is going to those places anyway. Are we doing much to try and to be a few hundred million, so the cost of that has to develop those kinds of skills to make sure that if big be covered as part of that process. As Sue was saying, players in the supply chain chose to locate here they we don’t see a maximum in that respect, but that would recruit the right sort of people? Ev 40 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison

Charles Hendry: Yes, without doubt there is a lot the jackets that have been built for the offshore oil happening in that respect. I think the change to the and gas sector, that technology is very appropriate for Local Enterprise Partnerships has been very helpful in the jackets for many of the designs of the offshore this respect, because they are more likely to focus on wind turbines. The skill set involved in underwater what is going to be a real growth potential for their cabling, which has been developed for the oil and gas communities and to tie that in with their FE colleges. sector, again is absolutely directly transferable in deep I was in Hartlepool on Monday looking at some of underwater working understanding. So there are a lot the facilities in the ports there for the renewables of skills that can read across. There is also, I think, a sector, the way in which that is tying into the local FE very strong commitment for the companies involved college and looking at how one brings forward the in this sector to make sure they make the most of it relevant skills. These are often communities that have and we should absolutely recognise the global a very long history of heavy manufacturing and where achievement of the UK subsea sector where an they have been in long-term decline. So there are extraordinarily high proportion of global contracts for people with historic skills that can be readily updated, subsea work comes back to companies that are based along with an individual approach from people who in Britain. This has been an amazing success story for want to see this investment coming forward. So I think this offers very, very good opportunities for well companies in this country and we think this offers paid, well skilled, long-term jobs. them a very important new income stream in the future. Q159 Chair: Do you have a figure in mind for the sort of total potential for offshore renewable energy Q163 Sir Robert Smith: Turning to the costs, an resources that we might be able to develop? integrated offshore grid will cost many billions of Charles Hendry: In terms of jobs or in terms of pounds. Have you made any thoughts as to how much capacity? consumers are going to find their bills going up to Chair: Capacity really I was thinking of now. make it possible? Charles Hendry: The Crown Estates have identified Charles Hendry: Again, the cost directly relates to sites offshore that would allow 25 GW to be built on how integrated and how broad it is. What we are top of the eight that was already planned at the time. doing as part of the reviews we have been carrying That is essentially an allocation of areas rather than a out, the market review, the ROC banding review, even target. We will be setting out a renewables roadmap, on the feed-in tariffs review, is saying that we need to our thinking for what we believe is achievable on a be very clear that at the end of the day there is a cost high growth or a low growth scenario out to 2020, but on people’s bills for supporting these technologies and we also need to move our mindset beyond 2020, we have an obligation to try and therefore focus on because 2020 is now too close to get the supply chain the ones that are most attractive and most beneficial. investment and people need to believe that there is a That is why so much focus is being put on how one 20 and 30-year market for their products rather than drives down the overall costs and that the greater the one for just a few years. costs that can be brought down the greater the contribution they can make. There is a funding Q160 Chair: If we manage to do all that, do you envelope for the Renewables Obligation and the think that a supergrid could then enable us to become support that goes into these technologies will have to a net exporter of electricity? stay within that envelope. Charles Hendry: I think if you look at the challenges we face we are looking more towards self-sufficiency Q164 Sir Robert Smith: issues rather than exporters, but if we can then we Is National Grid being should certainly do so. The nature of these things, of optimistic or in the ballpark when it thinks the course, is at times we will be exporters and at times construction costs going on to a consumer’s bill will we will be importers, so there will be cross-border be £1 on each consumer’s bill for each year of flows we would expect in that process. construction for the grids? Charles Hendry: I have no reason to question Q161 Chair: Yes. Those might even out over a National Grid’s figures. They have probably the best period of time. technical understanding of these issues. We should Charles Hendry: Yes. also recognise that National Grid is not the only company that can be investing in these areas, and for Q162 Sir Robert Smith: I should remind the some of the existing offshore grid connections, many Committee of my entry in the Register of Members’ of the projects for those have been won by other Interests as a shareholder in Shell. The Minister was companies who are keen to invest in this area. Indeed, at the reception for Subsea UK yesterday and I when Ofgem and I jointly launched the second round wondered how much he thought that what we had of OFTO, the offshore transmission operators regime, already learnt about working offshore and subsea there are 100 different companies from around the engineering in all those years with the oil and gas world who are looking to invest in the UK offshore industry had put us into a stronger position of being transmission sector, which I think would have been able to provide leadership with subsea engineering unimaginable three years ago, and it just shows the required for the renewables. extent to which companies from around the world Charles Hendry: I think it has put us in a very strong with appropriate expertise are seeing this as a market position for much of that work. I think, for example, in which they want to be involved. Energy and Climate Change Committee: Evidence Ev 41

30 June 2011 Charles Hendry MP and Sue Harrison

Q165 Sir Robert Smith: What we have seen, mechanisms are set. We start off with an ambition to though, from past interconnectors in a different field, try and make this happen and so we are looking at with the gas field, is that people thought they were how one drives down the cost. We are talking to building an interconnector to achieve one goal and people who could manufacture more high voltage DC then suddenly found—surprise, surprise—they had cabling and to see how we can stimulate that linked two separate markets and our gas prices went investment and create additional jobs in Britain, up to meet the levels of European gas prices. How because if one looks at the scale of the ambition, just much do you think there is a concern that while the in the North Sea, that could take most of the global markets are not that connected at the moment—you output of high voltage DC cabling over the rest of this told the Committee, I think, we are in the bottom four decade. So there is a very, very strong business case for the EU 15 for electricity prices at the moment— for additional investment in the supply chain. We start what is the downside risk that by becoming more off with a desire to see how do we remove the integrated we actually put up consumer prices in this obstacles, how do we bring down the costs, rather than country? one of saying we don’t think this is possible. Charles Hendry: I think it will help to reduce volatility, which I think is beneficial because it is often Q168 John Robertson: Before we move on, I have the spikes that cause the greatest anxiety and so the another question. You were saying how we are more one can spread that over an area the better. The probably the best at attracting people in offshore. How fact that where you have excess supply coming that much do we fund it compared to other countries? Are can’t be brought into a market therefore that becomes we better, or worse? very cheap electricity and being able to bring that into Charles Hendry: How much do we fund the other European markets could be a downward offshore sector? pressure. So there will be some elements that are John Robertson: Yes. Are there incentives to come upward pressures and there will be some that are here? downward pressures, but we believe what it brings in Charles Hendry: No. It is because of the terms of reducing the cost of developing some of these attractiveness of the market; it is because of the skill projects, what it brings in terms of a security of supply set of those companies that have grown up in the is a very worthwhile prize for the country as a whole. North Sea and therefore started off by working in some of the most inhospitable waters in the world and Q166 Sir Robert Smith: Do you think we need to the skill set that they learnt there has been very easily have a clear cost-benefit analysis before we finally sellable internationally. So this is an absolute success make the commitment? story for industry. Charles Hendry: That is the starting point. So, for example, on the All Islands Approach the starting Q169 John Robertson: I ask the question simply point is: is this worth doing? Is the cost involved because a similar question was asked, must have been justified by the gain we would make from it? There nearly 10 years ago now, to about their are three other workstreams that follow on from that, investment in onshore wind and the question was, “If but if the conclusion of that first one is that there is you didn’t receive the subsidies you get from not a business case for this then it is a nice idea but Government would you build these wind turbines?” one that would not be able to be taken forward. and the answer was no. I just wonder if the same thing Sue Harrison: That is one of the key outputs of the applies to the North Sea and other areas. North Seas Offshore Grid Initiative—the same Charles Hendry: The North Sea in its early years of exercise we are doing there as we are in the Islands exploration did receive big tax allowances. I think project—and that is to look at likely grid every emerging technology requires support in order configurations in future and then do a cost-benefit to get to a point where it breaks even, and without assessment of those likely configurations. The results doubt the market can make a judgment between of all this work over the next two years will be security of supply and affordability. It can’t factor in presented to Ministers and the Ministers will then a price for low carbon unless Government gives an have data on which they can make some decisions, so indication of what it thinks that should be, and that is it is a political initiative. the main reason why we need to reform the electricity market to respond to that. What we are doing the Q167 Sir Robert Smith: How free are Ministers to whole time is looking at the actual costs of make a completely unfettered decision on the cost- deployment to make sure that when we review the benefit if the EU has designated the development of banding levels of the Renewables Obligation they are the North Sea as an energy priority? If the EU set that set at the right level to take account of cost increases designation, does that leave Ministers still free to say or cost reductions. it is not cost effective; it shouldn’t go ahead? Charles Hendry: We are not required to put funding Q170 John Robertson: For the UK, how much does into it, but at the same time our funding regime the business case for the integrated offshore grid rely through the Renewables Obligation or the market on the need to efficiently harness our offshore wind reform proposals would be set at a certain cost. That resource? cost will either need to take account of and stimulate Charles Hendry: There are certainly economies of the investment in a wider grid infrastructure or it scale or benefits that will be derived from doing this wouldn’t. Those are domestic policy drivers. We make in a more strategic way. As we were saying earlier, the final decisions at the level at which those support what we have to balance is the interests of the Ev 42 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison developers to be absolutely certain that they can get is improving all the time in terms of the efficiency their power to market on day one with the strategic and what they can deliver, but inevitably there will be overview. That is involving industry, Ofgem, the lulls in that time. But in most cases the wind is still National Grid, other operators and ourselves to try and blowing somewhere in these islands. see how one moves forward on a more integrated approach. Q174 John Robertson: Will you take the Climate Change Committee’s recommendation and revise the Q171 John Robertson: We have seen it in a lot of 2020 figure? areas to do with energy. We have seen it with CCS; Charles Hendry: We are going to respond in due we have seen it with nuclear; and the great worry is course to their figure. I think that part of the answer that we will not get a return for our money quickly to that is as well about looking beyond 2020, to talk enough. It will be 2025 before we could possibly have about where the ambition is going afterwards, because a viable CCS power station built. Where are we with if you are a supply chain investor then you need that offshore? Are we ahead of what we would plan longer term vision. timescale-wise or are we in the same boat as we have been? The other thing that I wanted to ask is the Q175 John Robertson: I know what you are saying, efficiency of the offshore, has it been calculated? The and I agree with most of what you are saying, but we one thing we learned with onshore was you are lucky are not getting anything that is concrete enough that if you get a 30% efficiency rating from the turbines. we can turn round and say that we expect to have this What is the equivalent in offshore? by such and such and we expect to have so much by Charles Hendry: It is about 40% offshore. That such and such a time, and therefore it makes it very doesn’t mean it is only working 40% of the time. They difficult to plan ahead. As we know, after 2015, are working, typically, about 90% of the time but at a towards 2020, we are going to have an area of where lower factor, so the load factor is about 40%. If one we might be in danger of not having enough power. I compares that with coal, a traditional old coal-fired am sure we won’t, but given a hard winter or power station, you only get 30% of the energy whatever, we could have a really sticky spell and resource out of the coal. So in all areas there are therefore if the money here is being ploughed into losses, but the advantage of offshore wind is you can these projects then we need to know when we expect put out bigger installations, the wind resource is to get a return for our money. stronger and therefore, although the projects are Charles Hendry: You will get much greater clarity bigger, are more expensive, one does get a better in the renewables roadmap. I have always been quite electricity output from them. critical of targets for the sake of targets. I think targets are important for raising ambition and that is a job for Q172 John Robertson: On reliability to feed into the Government to do but unless you know what you are grid itself and give us that bit extra that might be aiming for, unless you know whose job it is to deliver needed, are things still where we expect to get a it—so the renewables roadmap will identify those core reasonable output from them? renewable technologies that will deliver the Charles Hendry: With wind it is always going to be overwhelming majority of what we need to do to get variable. It is much more predictable now than to our 2020 targets and what Government needs to do historically used to be the case, so very rarely one to realise that ambition, and that will be happening in would see an unexpected drop off in wind. Part of the the course of the next few weeks. case for a more integrated grid network is that it does mean you can pick up the wind as it travels across Q176 Sir Robert Smith: On the offshore wind, how from the west of Ireland through to the Baltic and so much does the Department feel that there is still one can pick it up at different stages in that process, potential for more efficiency in the offshore wind? My but there will still need to be backup technologies. understanding is that basically this sort of generation The interconnectors could be part of that; of offshore wind has taken the onshore technology, hydrocarbons or biomass plants can be part of that; marinised it and put it offshore, but because of things storage mechanisms can be part of that; but there does like sand not being the same issue offshore there could need to be backup in order to make sure the electricity be more efficient designs. Does the Department have is available when consumers need it. any assessment of benefits coming down the line as we become more dedicated to an offshore specific Q173 John Robertson: My fear is that we will spend product? a fortune in offshore technology for us to receive very Charles Hendry: We have seen significant evolution, little, which in all honesty would appear to be what if one looks at, for example, the earlier projects, the has happened with onshore. ball bearings and how they were affected by sea water Charles Hendry: I think it is a contributor. We have have needed to be replaced and some the drive chains never said this is the whole solution, but it is a have needed to be replaced. In the newer technology contributor to our energy security and to low carbon coming forward that has been factored in and we are energies. We have, around the British Isles, the getting wind turbines that are specifically designed for strongest wind resource in Europe; 40% of Europe’s seawater conditions. In addition, the scale is obviously wind, I am told, is around these islands. I think when very much greater. Onshore, 3.5 MW would be a large we are trying to harness a range of different wind turbine. We are now seeing people trialling wind technologies then we ought to be taking advantage of turbines of 6 MW, 7 MW and upwards and so the that potential that is there. The nature of the turbines potential for a very much larger output is much Energy and Climate Change Committee: Evidence Ev 43

30 June 2011 Charles Hendry MP and Sue Harrison greater. So we are now seeing this emerging as an target, as it were, in the NPS documents. What would industry in its own right rather than just a simple be your view of that sort of argument relating to development of what had been an onshore technology. flexible backup generation in future that might change I think we are making good progress with some of the as a result of such installations? Would you go along companies that are leading in that development work with National Grid? I guess you would probably say and looking at the United Kingdom for places to trial what is in the national planning statement is pretty those different technologies. accurate, but do you envisage that possibly being reviewed and changed as a result of these sort of Q177 Dr Whitehead: What is your view of the developments? relative salients of the different cases that have been Charles Hendry: I completely agree with the principle made for a European supergrid or similar between, and I have no reason to question the expertise of say, the question of making sure that there is the most National Grid’s work, because they clearly have efficient supply of renewables various or, greater ability to understand the full costs and the alternatively, the extent to which such a system might benefits than most other organisations. This shouldn’t itself provide some of the flexible generation to back just be looked at in terms of national policy up intermittency elsewhere in national systems? What statements, but if you look at the capacity mechanism, would be your view of the most important element of which will be there as part of the market reform such a system? process, that is not just about having a new gas power Charles Hendry: There certainly is a case that can be station available for a cold day in February when the made for the more interconnected it is then wind itself wind is not blowing. It is also looking at ways of managing demand more effectively and so what is the can be a backup resource for wind elsewhere by being lowest cost way of delivering the certainty that able to pick up a resource that is blowing in one part consumers should rightly be able to expect and the of the Irish Sea but not in the North Sea, for example, role that interconnectors can play as part of that so there is a case for that. I think, on the benefits of process, alongside other technologies of storage, of interconnections, it is primarily to do with security of compressed air, of hydrogen, of battery technology, supply and affordability because if it helps to bring looking at the relative costs of each of those to deliver down the costs of offshore deployment we can go the security that we need. I think for the wind industry further in that respect and the more it is interconnected the biggest challenge this decade is how they move then the greater the benefits are in terms of being able from being a power source that is available when the to balance out some of the peaks and troughs. wind blows to being a power source that is available when the consumer needs it, and that requires the Q178 Dr Whitehead: If you were to consider that a investment in the backup technologies, of which supergrid could have a substantial role in balancing interconnectors, I think, is a very important part but it intermittency, how large and how connected would it is one of a number of different potential solutions. have to be before it played a very significant role in terms of UK balancing, in your view? Q180 Dr Whitehead: Again going back to the Charles Hendry: I think the larger it is the greater its history of gas, we built a gas pipeline thinking that potential benefit, but then I think it is going to be an now we have security and then when we needed the evolutionary approach and it is not going to be a gas nothing came through the pipeline because the blueprint for where we want to get to, and it wouldn’t market decided not to deliver it. How much is the be that initially. I think this is an area that is absolutely electricity market in Europe different in terms of its perfectly suited for being developed over time and transparency to make sure that if you do have seeing how one enhances that as it develops, so that interconnectors they behave in a rational way and funding doesn’t need to be found upfront but it would follow the market? happen gradually over time. It also means it helps to Charles Hendry: On the gas interconnector side, the become self-funding because the operators can sell United Kingdom essentially now is a transit country— into whichever market has the greatest demand at any we are not just a destination in our own right—and particular time, so I think that helps with for much of the time, if one looks at the flows going construction costs. through them, the gas is coming in through one interconnector and going out through another. If there Q179 Dr Whitehead: National Grid produced an is a shortage in the United Kingdom, there is a update report just recently on the extent to which the particular pressure point and the gas price goes up emergence of a substantial penetration of renewables then they have a much greater vested interest in in the UK energy supply market could be balanced by keeping it in a domestic UK market rather than a number of measures. They concluded that with a shipping it out. The market has so far, touch wood, relatively modest increase in interconnection a much delivered the security that we need. It has been tight lower level of installed capacity for the future could at times, but with the development of the LNG be planned and the system could be balanced than is facilities and additional pipeline infrastructure then envisaged, for example, in the national policy that security has been enhanced more. With electricity statements at the moment. They have suggested, I inevitably one will see, through development of more think, something like by the early 2020s 101 GW of interconnectors, more international trading in that installed capacity as opposed to 113, which is the respect and one will avoid some of the peaks, as I was Ev 44 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison saying earlier, and it will smooth out that process nor particularly good value for money. The more. I think what it does for consumers overall is it problems about value for money aren’t just concerned enables us to have a more predictable outlook; it with the actual costs of the turbines and their life and enables us to deliver the security of supply we want so on, but it also relates to transmission demands. at a more affordable price, because we happen to have Charles Hendry: The funding mechanism in the so much of our own backup capacity of hundreds of Renewables Obligation takes account of the levelised millions of pounds of plant that may only be used for cost of building different technologies. It doesn’t take a few days of the year. So it is a better way of account of a specific grid rebuilding in a particular delivering that security. part of the country, so it is averaged out across the sector. We do need to upgrade that grid in any case for Q181 Dr Whitehead: We saw in Denmark how the development, potentially, of new nuclear power being connected to Norway they could have a lot of stations, so in Suffolk and Essex you are seeing part wind, because when the wind blew the Norwegians of the pressure as a result of potential for a new power didn’t need to let the water run and when the wind station at Sizewell but also seeing that as an area stopped the Norwegians—so there is a lot of positives where a lot of the offshore could connect naturally to interconnection, but if every country that is signing into the National Grid. I think one thing that we are up to interconnection says to itself, “This is great very acutely aware of is that the more that you have because it gets rid of my peak problems and deals point-to-point connections in the offshore farms then with my intermittency and I don’t therefore need to the greater the onshore pressure will be for putting have so much capacity on the system,” is there any very visually intrusive pylon infrastructure in coastal overarching regulation to say that Europe as a whole areas, in low lying areas very often, and therefore a could be at risk in certain situations because every short-term gain for a particular operator results in a country has decided to take the benefits of interconnection and therefore there is not enough very significant additional onshore cost to the National capacity around the system in a serious situation to Grid and significant community concerns about it as deliver across Europe? well. So the case for bringing it onshore at the most Charles Hendry: At the end of the day, the network appropriate locations and to have as few of those as operator, National Grid in our case, has a legal can rationally be achieved is an entirely proper responsibility to look at those issues, to be objective. comfortable about it, and so it would be their primary responsibility. I think they would exercise a Q184 Chair: Reverting to the supergrid, one of the precautionary approach to how much it is safe to rely difficulties suggested to us is the equitable allocation on trading. The Irish situation is quite beneficial of costs between different countries. It is not an area because Ireland will not have that many additional where the European Union has been particularly markets it can export directly into, so we do have a successful at reaching agreement, where there are greater security of supply on the western side. Yes, potential disagreements. Do you think that a cost this can bring benefits, but clearly we have to be sharing mechanism can be devised that will be comfortable that this doesn’t get taken to an acceptable? assumption that everybody is taking account of all of Charles Hendry: In my expectation, these will be the North Sea’s potential wind output as if it is their commercial operations, so these will be individual own domestic consumption, because that would companies that invest in the infrastructure and they certainly end in tears. would be involved in trading, so there should be no costs for the development of an offshore grid that Q182 Dr Whitehead: Back on the domestic would come from the British Government or from situation, do you see any way of achieving enough other Governments, or indeed from the European capacity north-south without a subsea cable at some Union. point for the UK? Charles Hendry: It can be done, but it would require very significant onshore grid upgrading and, as the Q185 Chair: If that trading is going to be profitable Chairman has made clear, these are not always in order to justify the investment, does that depend on popular developments. Putting that through some of there being significant price differentials at certain the most beautiful countryside in southern Scotland times of the day and the year and so on between one and northern England would bring its own tensions market and another? and so if it can be done in a way that is cost effective, Charles Hendry: I think one of the issues that has to which has very few transmission losses because of the be resolved is, at a time when there is a reasonably nature of our HVDC cabling, then that is something good wind resource but a very high demand in a range that we think is absolutely right it should be looked at. of different countries, how will it be sold. Will there be development of long-term contracts so that we can Q183 Chair: When we are looking at the costs of have a comfort that offshore wind from the United intermittent forms of generation, do we factor in the Kingdom will be available to British consumers when extra transmission capacity that is needed? It seems to it is needed? Otherwise I think that it becomes more me that there is a growing feeling that huge fraught, if there is a sense that when we need it here investment in offshore wind is neither giving us any that because a different European country is prepared Energy and Climate Change Committee: Evidence Ev 45

30 June 2011 Charles Hendry MP and Sue Harrison to pay more on the spot market at that particular via the Channel Islands to the United Kingdom and moment that resource could be potentially all taken pick up some of the tidal resource in Alderney and off somewhere else. So those contractual issues have Guernsey and elsewhere, then that would be to be resolved. something where it is going through three different jurisdictions. That would have to be resolved before Q186 Chair: Does it go beyond the contractual that could be built and could go ahead and it would issues in terms of the incentives? We have ROCs; we need to deal with all of the technical issues that are are going to have Carbon Price Support, Capacity there as well, but that can be resolved for that one Mechanism payments and so on—quite a complex particular connection without having a European-wide array of different types of support. Those in agreement. So one would expect some degree of themselves could affect the flow through the harmonisation to happen over time, but it is not a interconnectors, but the relationship between those critical element for individual elements of that various incentive payments and incentives that are process. paid in other countries will also presumably have an impact on what actually goes which way and when. Q189 Dr Whitehead: Can I press you? Do you Charles Hendry: Yes. One of the reasons why we are envisage or have you done any work on the point at looking at the system we are is that it still keeps the which there would seriously have to be pooling relationship to the wholesale price so that we continue agreements entered into, which would then involve to have a market structure that is within that. You are almost inevitably a certain pooling of sovereignty in right; in most other European countries they have a terms of market planning and market arrangements feed-in tariff mechanism as opposed to a renewables and also protocols on development of capacity? How obligation mechanism. What we are looking to do is serious an issue do you think that is and at what stage to run the Renewables Obligation alongside our new is that likely to become that sort of serious issue? mechanism until 2017 and giving people a choice of Charles Hendry: It is one of the workstreams for the which system they wish to work with. We think that North Seas Offshore Grid Initiative; it is additionally is good for giving comfort to investors about the one of the workstreams for the All Islands Approach, regime that they will be working under, but I wouldn’t which we have set out. In both of those cases, it is expect to see harmonisation of those support one of the key issues that is being identified and mechanisms across different European jurisdictions. addressed and the extent to which that needs to be more comprehensive or it can be more narrowly Q187 Chair: If we don’t have harmonisation, you focused will clearly be looked at as part of that don’t see that as impeding the development of a process. supergrid? In fact in some ways you might even say Sue Harrison: I think if I could add, it is not a it is going to provide a further incentive for it? question of sovereignty. It is a question of cost and Charles Hendry: I think if you are a potential benefit here. We all have to comply with the EU developer of that grid infrastructure then you will also legislation in this area, which is comprehensive, so we be operating a trading business and therefore you do are all using the same rulebook, but when you have want different prices in different parts of that market shared resources, if you have common joint projects in order to trade, and so I think that is an important for example, there will be a quite complicated cost- part of the principle that will drive the investment. benefit analysis that will need to be done so that the party that pays for a facility gets adequate Q188 Dr Whitehead: Presumably though, in terms remuneration from it. Sometimes the flows may not of the question of harmonisation, there is a point at coincide with who paid for the particular facility and which, as bilateral early stage developments of that is an issue. That is something, as the Minister elements of the grid turn into a grid proper, issues of said, that we are looking at in our 10-country initiative synchronisation of grid frequencies, for example, may to see how you would sort out those flows of money come into play and also the extent to which indeed and benefit from co-operative projects. one is not removing one’s own energy security on the basis of possible market switching on the basis of who is getting the best price in whatever direction the Q190 Dr Whitehead: It is not just a question of overall grid is going. Of course, it involves the extent sorting out those flows in the cost and benefit though, to which anybody may decide they are not going to is it? For example, one can envisage circumstances invest in capacity, because they think that someone under which you would see the development of a sort else will supply the capacity that they may be able to of European central Wokingham in terms of balancing benefit from. At what point would you envisage supplies across Europe and therefore, among other serious pooling of sovereignty on these issues things, a substantial change in control over occurring and is that something that is easy to despatching and things such as that. Is that something contemplate under these sorts of arrangements? That that is perhaps at the far end of the spectrum or is it is the Bill Cash question, I think. something that perhaps is coming up faster? Charles Hendry: This will often be done by an Sue Harrison: No, we see no need for that in the near international agreement; it doesn’t need to be an EU- future and I am not sure how far out we can see. But wide agreement. For example, if we were looking at at the moment you have an integrated grid in mainland a connector from northern France, which will come Europe where you have 34 system operators who Ev 46 Energy and Climate Change Committee: Evidence

30 June 2011 Charles Hendry MP and Sue Harrison collaborate together and they keep that grid running years now. It just needs a lot of co-operation and a lot and it has been working perfectly adequately for 50- of common working, but you don’t need one body to odd years. I don’t see why we can’t carry on that same control or regulate the system. co-operative arrangement with collaboration on an Chair: Thank you. I think we have covered the offshore grid. You don’t need to have one system ground we wanted to this afternoon. Thank you very operator; you don’t need one regulator. The regulators much for coming in. We look forward to seeing you have been working together very well for a number of again soon. Energy and Climate Change Committee: Evidence Ev 47

Written evidence

Memorandum submitted by the Department of Energy and Climate Change

Executive Summary 1. The development of offshore renewables in the North and Irish Seas could play a key role in meeting the UK’s 2020 EU renewables target and, in the longer term, in decarbonising our electricity supply. More interconnection with continental Europe and subsequently an offshore grid, potentially incorporating offshore generation, should also improve UK security of supply and resilience; and reduce the cost of integrating renewables into the UK and EU markets. More coordinated offshore grid development raises complex issues which must be explored in close collaboration with neighbouring countries. These are being pursued through three parallel and complementary international work streams: the North Seas Offshore Grid Initiative; the British Irish Council; and UK-Nordic-Baltic cooperation.

Introductory Remarks 2. The Department of Energy and Climate Change (DECC) welcomes the opportunity to submit evidence to this very timely and important inquiry. When the Committee launched the inquiry it referred to the Memorandum of Understanding signed by the UK in December 2010 on the North Seas Offshore Grid Initiative in the context of the potential for building a “supergrid”. It noted the UK’s relatively low level of interconnectivity and asked how the balance of costs and benefits of a “supergrid” would affect the UK.

3. The term “supergrid” is used in a variety of different contexts, ranging from a more integrated offshore grid in the North and Irish Seas, with the possibility of linking offshore renewables developments to it, (the subject of the afore-mentioned Initiative) to a network of “super highways” across the EU, as mentioned in the Commission’s Infrastructure Communication of 19 November 2010 (16302/10). The Commission’s long-term vision sees these super highways carrying renewable energy from the Northern and Baltic Seas, the East and South of Europe and also North Africa to the major consumption centres in Northern and Central Europe. DECC’s submission concentrates on the former. We have set out below summary information on the North Seas Offshore Grid Initiative and related government activity as this may be helpful to the Committee. We then address each of the Committee’s questions in turn.

Background on North Seas Offshore Grid Initiative

4. The UK Government recognises that the development of offshore renewables in the North and Irish Seas could play a key role in meeting our 2020 EU renewables target and, in the longer term, in decarbonising our electricity supply. We have one of the best wind profiles in the world, already have more offshore wind deployed than any other country in the world and current development agreements allow for up to 50GW. Significant investment in grid infrastructure will be needed in the future to bring offshore generation to shore.

5. Other European countries face similar challenges so it makes sense to collaborate with them, and more particularly with those bordering the North and Irish Seas. More interconnection with continental Europe and subsequently an offshore grid, potentially incorporating offshore generation, should also improve UK security of supply and resilience; and reduce the cost of integrating renewables into the UK and EU markets. They should also offer more trading opportunities.

6. This is why the UK, together with nine other countries (Germany, France, Belgium, Netherlands, Sweden, Ireland, Luxembourg, Denmark and Norway), signed a Memorandum of Understanding in December 2010 launching the North Seas Offshore Grid Initiative. The aim is for governments to work together over the next two years, with energy regulators, the Commission and industry, to identify the cost and benefits of, and tackle the technical, regulatory, market and planning barriers to, different approaches to co-ordinated development of offshore grids in the North and Irish Seas. This is against the background of an expected sharp growth in offshore renewable generation. Detailed work will be carried out in three particular areas: grid configuration and integration; market and regulatory issues; and planning and authorisation procedures.

7. This work will explore many of the issues which are to be investigated by the Committee. The workstream on grid configuration and integration will develop plausible scenarios for offshore grid infrastructure out to at least 2030, based on each country’s renewables plans and planned grid developments. It will consider, in close collaboration with the relevant manufacturers, the technical implications of these scenarios and assess their costs and benefits. The work on market and regulatory issues will identify and develop ways of addressing the market and regulatory barriers to offshore grid development, including ways of sharing the costs and benefits, dealing with the anticipatory investment that may be needed, developing market mechanisms for combining offshore wind farms with interconnection, and the impact of national renewable support schemes. The workstream on planning and authorisation procedures will identify and address areas where the incompatibility of national planning and authorisation regimes acts as a barrier to offshore and onshore grid development and identify best practice for streamlining these procedures. Ev 48 Energy and Climate Change Committee: Evidence

Related Government Activity 8. The British Irish Council (BIC), whose members include the UK Government, the Irish Government, the three devolved administrations, the States of Guernsey, the States of Jersey and the Government of the Isle of Man, has an energy workstream which covers grid issues and marine renewable energy. Its annual summit in June 2011 (which will be chaired by the Deputy Prime Minister) will focus on the development of offshore grids. DECC Ministers have proposed to BIC colleagues that we explore an All-Island Approach to assess the potential to work more effectively together to exploit our energy resources. This could be through better co- ordinating development of the networks and interconnections between us and assessing the mutual benefits of undertaking specific joint renewables projects. There are complex legal and regulatory issues which would need to be resolved to achieve this. We see this work as an important contributor to the North Seas Grid Initiative. DECC and Irish Ministers will ensure that the two streams of work are fully integrated. 9. Following the Prime Minister’s UK-Nordic-Baltic Summit in January 2011, DECC has proposed that we should continue this fruitful cooperation in key areas of mutual interest, including identifying ways of accelerating the transition to a low-carbon economy. We are considering a high-level meeting in the next few months to discuss concrete ways of progressing this shared agenda, building on the North Seas Initiative and a similar initiative in the Baltic region, the Baltic Energy Market Interconnection Plan (involving Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden and Norway).

Answers to the Committee’s Questions What are the technical challenges for the development of a European Supergrid? 10. There are some considerable technical challenges to be overcome in order to be able to build a supergrid, if by this is meant the combination of interconnection and offshore renewable generation. Large and flexible cables would be needed to transport energy efficiently over long distances and link up offshore renewable resources to interconnectors. The technology for this either does not exist at present or is expensive. Current technology for the high voltage direct current connection used is also limited to 1.8GW, which could prevent full realisation of some configurations. Manufacturers have told us that the appropriate technology could be developed over the next few years were it to be required. This is a key issue which is being explored with manufacturers as part of the grid configuration and integration workstream in the North Seas Offshore Grid Initiative.

What risk and uncertainties would a supergrid entail? 11. Any decision to build a supergrid would require the countries concerned to take a view on the grid configuration and coordinate offshore developments to achieve this. The selection of a particular configuration over another—setting a strategic vision—would need assumptions to be made about the offshore (and onshore) generation that is likely to be built post-2020. However, no country has made firm commitments beyond 2020, so such assumptions would inevitably entail huge uncertainties. If the decision were nevertheless made to select a particular model for grid configuration, there is a risk that inaccurate projection of future levels of generation would lead to sub-optimal use of the infrastructure built. For example, there could be stranding of assets if the grid configuration was based on high renewable projections which turned out to be incorrect. It is likely that the costs of these unused and potentially expensive assets would fall on consumers. This is clearly an outcome that all countries involved would want to avoid. This, again, is an issue which is being investigated by the grid workstream of the North Seas Offshore Grid Initiative. 12. There are risks in the shorter term too. Achieving the UK’s 2020 renewables target is dependent on the development of considerable offshore capacity between now and 2020. DECC has worked with Ofgem to put in place a regime that balances reducing costs to consumers through introducing competition against providing the certainty developers need to make investments. Any move to significantly change the offshore transmission regime between now and 2020 could provide unwelcome uncertainty.

How much would it cost to create a supergrid and who would pay for it? 13. There is no simple answer to this question as it depends on a range of factors, for example the geographical coverage of the supergrid, its technical characteristics and design and the technology used. DECC has estimated that the cost of connecting our renewables resources in the North Sea could be in the region of £15bn-20bn over the next decade, but has not made any assessment of the costs of a more integrated grid including interconnection. The costs of interconnection alone vary depending on the technology used, size of the cable and distance covered but are substantial. Recent projects have estimated costs ranging from £1m- 3.9m per km of 1GW cable. 14. The Commission refers in its Infrastructure Communication to the OffshoreGrid study which estimates that offshore grid development in the North and Baltic Seas would cost €32 billion by 2020 leading to a total of €90 billion by 2030 with radial connection of offshore renewables, which could be reduced by €15 billion, ie to €75 billion, with clustering of wind farms. The European Association of Transmission System Operators estimates that, assuming that the investment in offshore wind connections and point-to-point interconnectors Energy and Climate Change Committee: Evidence Ev 49

which is currently planned is realised, the additional cost of integrating future generation in a coordinated grid in the North Sea could range from €63bn to €70.5bn depending on the design. 15. Although the actual cost is difficult to determine, it is clear that it will be substantial and ultimately the cost will fall to energy consumers in those countries using the infrastructure.

Will a supergrid help to balance intermittency of electricity supply? 16. Under the EU internal market legislation, flows across interconnectors should be determined by differences in price between the two markets. At present, the main factors affecting variation in price across EU markets are the level of demand and the marginal cost of plant running at any given point. Diversity in demand patterns across the EU and the associated price differences therefore allows interconnection between markets to play a role in cost effective balancing of supply and demand. This is analogous to the way any national transmission system has the ability to manage supply and demand across its area. 17. As the level of intermittent renewable generation increases, it will begin to affect wholesale price more significantly. When this happens, flows across interconnectors are likely to be influenced by renewable output across different countries. Our current understanding is that there will be significant diversity in output of renewable generation across the EU. A well integrated grid able to react flexibly to changes in output could therefore play a vital role in balancing that supply. This would be less effective in cases where the same weather pattern spanned a wide area, such as a five day wind lull, spanning most of North West Europe; but initial evidence suggests that these will be relatively infrequent events.. In these circumstances output from solar and hydro, for example pumped storage in Norway topped up at times of excess wind generation, could be used. 18. National Grid have done some initial analysis on the cost-effectiveness of direct interconnection and radial offshore transmission versus a more integrated approach which would involve linking interconnection directly with offshore renewables generation. This analysis showed that, with very high levels of offshore wind penetration in 2030, there are benefits in linking interconnection directly with offshore renewables generation.

Will a supergrid reduce energy prices for consumers and businesses? 19. On the assumption that a supergrid would increase interconnection with other countries, then this should result in more efficient use of resources across the EU by allowing least cost generation in an interconnected area to provide electricity to a wider group of consumers. This should increase generation efficiency, equalise prices across the area and, in aggregate, reduce costs to consumers. 20. Therefore, overall there should be benefits from joining up individual Member State markets. However, for markets where prices are consistently lower than those in neighbouring markets it is possible that prices could rise with increased interconnection. On the other hand, markets with higher prices could see prices fall. In reality, it is rare for prices to be consistently lower or higher, but instead tend to fluctuate over years. For example, currently the UK has prices roughly in line with neighbouring countries but this varies significantly from year to year depending on available capacity and its cost relative to demand, which itself fluctuates. 21. Independent research carried out for DECC suggests that, looking at European wholesale prices over the past five years, UK consumers could have benefited from greater interconnection with Norway. However, this position has reversed since the start of 2010. Whilst future relative prices are uncertain and will continue to fluctuate, interconnection will assist in reducing short term peaks in price by allowing imports at a time of scarcity. Conversely, exports at times when output exceeds domestic demand increases prices during troughs. This could prevent negative pricing when there is excessive wind in GB, thereby avoiding payments to wind generators to curtail their output, which currently include lost renewable obligation payments. 22. A separate question is whether an approach based on interconnection combined with offshore transmission would be more cost effective than a combination of simple point to point interconnection and radial offshore transmission. Apart from the capital costs of the different approaches, there are a range of costs and benefits to be considered, including security of supply, curtailment of wind generators’ output and trade benefits. The balance of all these factors will be considered by the North Seas Offshore Grid Initiative, including the sensitivity of the benefits to different levels of offshore wind penetration. As well as establishing the most cost effective option given uncertainties over renewable levels post-2020, relevant Member States will need to consider how the benefits are shared between the different countries and how these will affect consumers and industry.

What are the implications for UK energy policy of greater interconnection with other power markets? 23. At present, the UK is relatively poorly interconnected with other countries. This is primarily because interconnection is more expensive in the UK because it involves high voltage subsea cables rather than overland electricity lines on the continent. We have a link with France and one with Northern Ireland (which therefore links us indirectly with Ireland). There has been little interest in building interconnectors in recent years, although there appears to be a good business case for further interconnection. The main barrier has been the mismatch between the regulatory regimes in the UK and other countries. To address this barrier, Ofgem is Ev 50 Energy and Climate Change Committee: Evidence

revising our regulatory regime. The prospect of change has led to a significant upsurge in interest in interconnection projects. 24. If all these projects were built, the UK’s interconnector capacity would increase from 2.5GW to over 10GW by around 2020, some 10% of installed capacity. Whilst this would represent a fairly rapid expansion from current levels, this is still relatively low compared with other EU countries and the impacts are likely to be relatively small. 25. The immediate implications of greater interconnection are the impacts on security of supply and how it interacts with any capacity mechanism which could be introduced through the electricity market reform (EMR). There is potential for interconnection to reduce required capacity margins which would need to be taken into account in any prediction of future capacity requirements. However, there is also the risk that an interconnector could be exporting at times of need, pushing up the price in the market. These issues need further consideration and the Government intends to report on its approach towards interconnection as part of the white paper on the EMR. 26. At present there is no regulatory regime at national or EU level that would facilitate the association of interconnection with renewable projects. For this reason interconnections are considered to have limited potential to contribute directly to UK renewables targets in the short term. However, this is another issue being considered in the North Seas Offshore Grid Initiative as there is a general assumption that such a regime may be needed in the future if the combination of interconnection and renewable projects proves to be cost-effective. In this case, the potential for impact on the UK’s renewables targets would need to be further considered.

Which states are potential partners with the UK in a supergrid project? 27. The potential partners are likely to be those in the North Seas Offshore Grid Initiative, plus possibly the Baltic countries.

How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package? 28. A supergrid would meet many of the goals of the Third Package. The development and operation of a supergrid would promote regional cooperation between Member States, regulators and transmission system operators which is seen as a first step towards creating an internal energy market. It would require the development of a consistent legal, regulatory and technical framework to incentivise the grid investment needed. And by facilitating investment in more interconnection it would facilitate cross-border trade, thereby promoting competition and securing the supply of energy to our consumers at competitive prices.

Would new institutions be needed to operate and regulate a supergrid? 29. No new institutions would be needed. New legal and regulatory arrangements governing the operation and regulation of a supergrid would need to be developed, both to ensure consistent across the region covered and, potentially, to enable offshore renewable generation to be associated with interconnection . However, the relevant transmission system operators and regulators could respectively operate and regulate the supergrid, working closely together as they do already on bilateral interconnectors. March 2011

Memorandum submitted by National Grid Executive Summary 1. Greater electricity interconnection represents a vital part of the UK’s low carbon economy. The optimal level of interconnection must be debated and will depend on the generation mix and demand side factors in the UK and mainland Europe. However it is likely that, for the UK, somewhere around 10–15GW of interconnection would enable the UK to transition to a low carbon energy mix in an affordable and secure manner. 2. The connection and integration of offshore wind in the UK and the North Sea will also play a significant role in meeting the EU environmental targets. Whilst radial point to point connections have adequately provided a route to market for near shore wind so far, a more efficient way of connecting wind needs to be sought for the increased volumes and distances of wind expected. 3. Integrating the offshore transmission network has many benefits. In the UK, this is achieved through the deployment of larger connections shared between the more distant wind parks delivering: — substantial capital cost savings of £4–8billion; — a reduced environmental footprint with associated consenting issues; — increased reliability of the connection for wind; and — better utilisation of valuable resources. Energy and Climate Change Committee: Evidence Ev 51

4. Combining the principles of greater interconnection and integrated onshore-offshore grids leads us to the concept of a “supergrid” which could drive further benefits. These include: — increasing the reliability of the connection for the wind; — increasing overall utilisation of the assets by sharing them for wind connection and cross- border trade; — strengthening security of supply in a “windy world”, providing flexibility of operation for the System Operator; — increasing the opportunity for cross border trade, further integrating the European market consistent with the EU ambition to create a single energy market; and — providing a route for the UK to become a net electricity exporter; thus creating economic growth. 5. The development of a European supergrid however is not without its challenges and key to its success will be the alignment of the various regulatory regimes and government support schemes. Whilst technology itself is unlikely to present an issue, there is a real need to provide timely signals to commence the necessary standardisation and R&D in this area. 6. The European Commission’s approach to the development of regional transmission infrastructure represents a solid starting point for the concept of a supergrid. The work already underway within the various, regional, cross-European and Industry groups such as the North Sea Countries’ Offshore Grid Initiative (NSCOGI), the Friends of Supergrid (FOSG) or the European Network of Transmission System Operators for electricity (ENTSO-E) needs to continue to ensure that the opportunities are maximised through considered analysis, with the necessary enablers in place, in time.

Introduction to National Grid 7. National Grid owns and operates the high voltage electricity transmission system in England and Wales and, as National Electricity Transmission System Operator (NETSO), operates the Scottish high voltage transmission system. National Grid also owns and operates the gas transmission system throughout Great Britain and through the low pressure gas distribution business, distributes gas in the heart of England to approximately eleven million offices, schools and homes. In addition, National Grid owns and operates significant electricity and gas assets in the US, operating in the states of New England and New York. 8. In the UK, National Grid’s primary duties under the Electricity and Gas Acts are to develop and maintain efficient networks and also to facilitate competition in the generation and supply of electricity and the supply of gas. Activities include the residual balancing in close to real time of the electricity and gas markets. 9. Through its subsidiaries, National Grid also own and maintain around 18 million domestic and commercial meters, the electricity Interconnector between England and France, and a Liquid importation terminal at the Isle of Grain. In addition, the wholly owned subsidiary National Grid Carbon Limited has advanced the transportation and storage elements of the Carbon Capture and Storage (CCS) supply chain.

A European Supergrid in Context 10. Greater electricity interconnection represents a vital part of the UK’s low carbon economy. The optimal level of interconnection must be debated and will depend on the generation mix and demand side factors in the UK and mainland Europe. However it is likely that, for the UK, somewhere around 10–15GW of interconnection would enable the UK to transition to a low carbon energy mix in an affordable and secure manner. 11. The connection and integration of offshore wind energy in both the UK and the North Sea is critical to meeting EU environmental targets. Whilst any network should offer a solution that is consistent with the EU (and UK) policy goals of energy security, sustainability and affordability, it must also be practical. In recent months, National Grid has been exploring the concept of integrating offshore transmission within the UK, thus ensuring an efficient and economic transmission network that is optimised both onshore and offshore. The benefits of this approach include lower capital costs (£4–8 billion), reduced consenting issues and better use of valuable resources. 12. National Grid’s 2030 accelerated growth scenario suggests a peak demand in the GB market of 56GW, with 134GW of installed generation (of which 50GW is intermittent wind generation). When the wind is blowing, greater European connection will be important from an operating perspective. On windy days, the UK will need a mechanism to export the surplus power to the continent. Conversely, non windy days are likely to result in an energy shortfall, therefore requiring an import of electricity—eight out of ten of the peak demand days this last winter were non wind days. 13. NSCOGI, led by the UK and National Grid, with the support of ENSTO-E, the Association for Cooperation of Energy Regulators (ACER) and the European Commission, has already begun evaluating how the volumes of wind expected can be efficiently and economically connected to provide reliable access to market. Discussion on how to maximise opportunities to provide cross-border trade opportunities, consistent with the EU ambition for a single, integrated energy market, is integral to this work. Ev 52 Energy and Climate Change Committee: Evidence

14. The 3rd package places an obligation on European Transmission System Operators (TSOs) to coordinate transmission planning, and as such, ENTSO-E produces a bi-annual Ten Year Network Development Plan (TYNDP) and Regional Investment Plan (RiP). A pilot TYNDP was produced in 2010, and the first RiP will be available in 2012. ENTSO-E’s Regional Group North Sea will have responsibility for producing this first RiP, and will consider the need for infrastructure in the North Sea, consistent with the priority corridor identified in the Commission’s communication on the Energy Infrastructure Package.

What Should a European Supergrid Look Like: National Grid’s View

15. A European supergrid would entail the evolution of a high voltage, multi–user offshore electrical network that interfaces with a number of different European countries. Typically built as a “direct current”1 network, it is likely to evolve over time as the feasibility, ownership structure, financeability, operability and regulatory and commercial backdrop becomes more fully developed. It is envisaged that a supergrid will include, at least in part, the backbone of an integrated UK offshore network, interconnection (both existing and planned) as well as the development of further DC links both on and offshore. It will provide reliable connections to shore for offshore wind generation over long distances and allow for transfer of power between countries, providing connection, cross border trade and flexibility of operation. It is expected that such a supergrid will be under development prior to 2020.

16. With many sources of renewable power available across Europe, hydro and wind generation in the North, to solar power in the South, it is our view that the initial focus should be on the efficient connection and secure integration of the significant volumes of wind generation expected in the North Sea. ENTSO-E has recently undertaken a design study to consider how to efficiently connect the volumes of wind expected in the 2020–30 timescale. Its purpose was to show the relative benefits of an integrated solution over one which is dominated by a continuation of national, radial schemes, with point to point interconnectors providing the only opportunity for cross-border trade.

17. Figure 1 shows just one concept of how such a network could evolve, and a lot more detailed work needs to be carried out within the various groups (NSCOGI, ENTSO-E and FOSG) to gain more clarity on the benefits and route map towards an integrated offshore grid. It provides, however, a useful representation of what the development of a supergrid might entail and the benefits that such a coordinated, integrated grid could bring to the countries it connects:

Figure 1

AN INTEGRATED OFFSHORE CONCEPT NETWORK IN THE NORTH SEA FOR 2030 (ENTSO-E)

Norway Shore Line

Scotland 9 GW (5 GW) Norway SK1-3 1 GW Scotland Shore Line SK4 Denmark 4 GW NordLink

Dogger Bank (3.5 GW) 13 GW Denmark Shore Line

Hornsea CORBA 4 GW Germany NorNed NorNed 2 (24 GW) Norfolk (24 GW) 7 GW England Shore Line

BritNed Nemo Netherlands (12 GW) England North Sea Rounds (20 GW) 1 & 2 Belgium Germany Shore Line (5.5GW) 4 GW

(7 GW Interface Capacity) Netherlands Shore Line (10 GW) Belgium Shore Line (3.5 GW) HVDC Transmission AC Transmission ‘In Flight’ or current

1 Direct Current networks allow for greater levels of energy transfer to be achieved over long distances, thus reducing electrical losses. Energy and Climate Change Committee: Evidence Ev 53

Why Build a European Supergrid 18. The benefits of pursuing a European supergrid in the right geographic region, in this instance the North Sea, are many. A coordinated, integrated North Sea grid will deliver significant benefits to the UK and its energy consumers, including: — an overall reduction in costs to the UK consumer through: (a) lower capital and maintenance costs associated with the establishment of an offshore supergrid due to the need for fewer, larger assets. For the North Sea, the ENTSO-E initial findings suggest this to be in the region of 7 billion Euros (or 10%) if all the potential renewable generation proceeds to commissioning; (b) increased capacity for cross border trade and access to other energy markets providing a route to allow the UK to become a net electricity exporter; (c) an ability to balance the intermittency of wind generation more effectively and efficiently by allowing the cross border transfer of power flows, thus offering the potential for shared plant margin, and (d) improved security and network resilience for export/import. — an ability to reduce the onshore network reinforcements required through additional flexibility to inject power into stronger parts of the onshore network under outage conditions; — significant environmental benefits given the reduction in required corridor routes, landing points onshore and supporting onshore transmission reinforcements such as new overhead lines or substations; — removal of some of the expected supply constraints, further enhanced through standardisation, thus improving deliverability of offshore wind. The delivery of the large HVDC cable currently in design between Hunterston in Scotland and the Wirral is expected to take up the supply capacity for high capacity HVDC cables for at least three years; and — a reduced risk of asset stranding since close to 100% utilisation of the asset can be achieved by complementing wind generation with cross border trade. At present, dedicated transmission asset to wind generation would only be utilised approximately 40% of the time, resulting in effective stranding of 60%.

Risks and Uncertainties 19. Many aspects regarding a European supergrid remain uncertain. One of the greatest uncertainties is the rate of deployment of wind generation in the UK and the rest of North West Europe, and the point at which this necessitates further interconnection. If the rate of deployment continues as expected, it is our view that, alongside the backbone of an integrated UK offshore network, further interconnection beyond that identified in the TYNDP is not warranted ahead of 2020—at this point sufficient wind should be connected to start to make further network extension viable. To do otherwise, increases the risk of asset stranding and under- utilisation. It is possible to mitigate the risk of stranding but the network will need to be designed and built on a modular basis such that its development aligns with user commitment. 20. A further significant risk is that the issues posed by the regulatory regimes may not be fully addressed and remain inconsistent. It is our belief that a network can be designed and physically delivered but until issues of ownership, subsidy, who pays, who operates, amongst others, are addressed, it is unlikely that a European supergrid will proceed in any meaningful integrated manner. This is further addressed in sections 26 to 31. 21. Greater interconnection between the GB power market and other systems is likely to increase security of supply for GB consumers by providing access to a wider range of sources of power generation, transferring power from the lower to higher value power market. This gives comfort that exports from GB across interconnectors will only occur when there is capability to export power within the GB market. During any period of stressed balance between demand and generation, we expect GB prices to rise relative to other markets and therefore act as a natural mechanism to reduce exports if power is scarce in GB.

The Implications of Greater Interconnection for UK Energy Policy and for Consumers 22. UK energy policy is aligned to that of Europe in its aim to deliver secure, sustainable, affordable energy supply. As our generation mix changes over the coming years, the implications for UK energy policy of greater interconnection with other power markets are positive. 23. Greater interconnection will improve energy security of supply and subsequently reduce the amount of back up generation required to cover the expected level of intermittency when considering the range of potential renewable sources (Wind, Hydro, Solar etc). Similarly, for periods of high wind in GB but at times of low demand, greater interconnection will reduce the need to curtail wind generation, thus harnessing all the benefit of renewable generation. Finally, increased interconnector capability will allow for increased competition in the electricity supply market, allowing for greater choice for UK consumers and ensuring affordability. This may result in lower prices for consumers but will depend on the price differential in the various energy markets. Ev 54 Energy and Climate Change Committee: Evidence

The Technological Challenges 24. As part of the discussions under way within the UK regarding the best design to connect offshore wind generation, we have been looking closely into the issue of technology and the challenges that this may pose. It is our belief that the technology itself is not the issue. Whilst it is true that cables at the required rating and other technologies such as voltage source convertors are not yet in service to the required level, this technology is already in development, and we are aware that orders have been placed for 1GW cables and associated convertors. We therefore do not believe this development will be significantly challenging, a view which is further supported by all major European manufacturers. 25. The more important challenge will be ensuring that the necessary research and development occurs in a timely fashion. Timely signals will be required to ensure sufficient supply chain capacity is available and asset standardisation is developed. Without standardisation, the incremental build of any such network is likely to be more complex and reduce competition, hence exacerbating the risk of asset stranding.

Feasibility of the UK’s Contribution to a European Supergrid 26. The level of co-ordination to deliver a European supergrid is complex and is likely to require changes to a number of existing mechanisms where the current arrangements prove to be incompatible.

Inconsistent and incompatible regulatory and market regimes 27. The existing competitive UK regime for the provision of offshore transmission capacity is incompatible with the development of a wider European supergrid (see Appendix 1). All other European countries have placed the responsibility of designing and building offshore transmission with the TSO. The multiple parties in the UK will mean that trying to drive consensus in decision making will be more difficult.

Ensuring co-operation 28. In order to make an integrated and internationally coordinated European supergrid a reality, cooperation of all international players is essential. If efforts to acknowledge compatible technical standards and harmonise regulatory frameworks are not coordinated, the development of an integrated onshore-offshore network model is unlikely.

The need for anticipatory investment 29. To ensure that the offshore transmission network does not become a barrier to the development of a European supergrid and UK offshore wind generation, it is likely that some investment will be needed ahead of clear signals of user commitment. This anticipatory investment could take the form of installing slightly larger cables at minimum cost, and/or establish “tee points” that can accommodate further connections at a later date and/or route of cables such that they are located conveniently for future developments. Questions arise as to who decides when and how much European anticipatory investment is made to ensure overall delivery and under what framework should this be delivered. We believe this could be carried forward through existing anticipatory investment frameworks in the UK supported by the ENSG.

Government support mechanisms 30. Numerous support mechanisms are in place across Europe to incentivise the development of offshore wind into the future. In the UK, this is primarily in the form of the Renewable Obligation Certificate (ROC). The current ROC scheme guarantees a payment to the offshore generator as long as the energy generated comes ashore in the UK. In the world of a European supergrid, it will not be possible to identify individual power flows and therefore ensure that the power generated by a particular site lands on the UK shoreline. In addition, issues such as whether priority is given to wind over cross border trade across shared, integrated assets will also need to be reviewed.

Funding and Regulating a European Supergrid 31. It is unlikely that further institutions will be required to oversee the regulation of a European supergrid. The presence of ACER, coupled with the national regulators, should mean that sufficient regulatory oversight and mechanisms exist to manage such a network. The UK for example already has a number of regulatory tools, depending on ownership, that can facilitate the building of a wider offshore network including: — anticipatory investment mechanisms; — regulation of longer term outputs and the provision of incentives through the RIIO process (revenue = incentives, innovation and outputs) therefore protecting the consumer to an extent; and — the ability to introduce competition into the process. 32. The more difficult decision will be deciding upon the ownership split of a European supergrid and how the responsibility for operation is allocated. Such issues need to be addressed before it is possible to agree on the funding arrangements. Energy and Climate Change Committee: Evidence Ev 55

The EU Third Energy Liberalisation Package 33. As well as seeking further unbundling of European energy markets, the EU Third Energy Liberalisation Package looks to establish further regional integrated energy markets. The provision of greater interconnection and thus ultimately, establishment of a supergrid, between the UK and mainland Europe will help to facilitate this goal.

Recommendations 34. To ensure that the UK meets the binding EU environmental targets, the concept of a European supergrid represents a crucial part of the infrastructure investment required. We therefore make the following recommendations. — support the development of an EU wide strategic plan to ensure clarity of objectives and timelines; — continue to support the further development of a European supergrid through the various industry groups, NSCOGI and ENTSO-E in particular, to ensure that opportunities are maximised through considered analysis and that the necessary enablers are in place on time; — develop proposals for the enduring regime for offshore wind connections which is compatible with the ambitions of a European supergrid and is compatible with other European regimes; — encourage the timely provision of signals to ensure sufficient research and development so that technology does not become an unnecessary barrier; and — understand and seek to address the various inconsistencies present in different European markets in order that the goal of a regional energy market is achieved. March 2011

APPENDIX 1 THE CURRENT APPROACH TO NEAR SHORE TRANSMISSION 1. The current national approach to connecting offshore wind generation encourages the installation of single user point-to-point (radial) sub sea connections to each individual wind farm. Equipment is designed and installed sufficient to allow access to the market for 100% of the potential output from the windfarm, but remains unused when there is no wind. 2. Given the typical load factor of an offshore wind generator is less than 40%, this underutilisation is significant, with 60% of the asset effectively under utilised. This approach has worked acceptably for the smaller, near shore installations seen to date, but larger, more distant from shore volumes of connection can and should be planned differently to maximise utilisation of these assets and facilitate the management of wind intermittency. 3. With no substantive interconnection to mainland Europe at present other than some direct shore to shore interconnectors facilitating bulk energy transfer, increased interconnectivity between the UK and continental Europe is important. Greater interconnectivity is seen as an important tool in managing the system with increased volumes of wind attached to it allow for export when the wind is blowing and import when not, offering essential balancing services and the potential to share operating reserves thus reducing the potential for stranded assets.

TSO Roles and Responsibilities 4. In all other EU countries, the building of electrical connection and interconnectors is the responsibility of the national Transmission System Operator (TSO). Uniquely in Europe, the current UK regime, prevents the onshore TSO from building transmission assets offshore. Instead, the TSO is limited to building the necessary onshore reinforcement associated with the offshore assets: (a) For wind—the right to build and own offshore transmission assets is subject to a competitive tender process run by Ofgem. In many instances, these owners have their basis in financial institutions and are not able or incentivised to ensure that onshore/offshore optimisation is carried out when considering optimal network designs. This ignores the experience and expertise of the TSOs. (b) For interconnectors—interconnector developers apply for a licence to construct, own and operate an interconnector. As interconnectors connect the national transmission systems in two neighbouring countries, the framework at the “other end” is an important consideration. Usually the onshore TSO is the only entity able to build such infrastructure. The differences in the UK regime with that of the rest of Europe has therefore been a significant barrier to their development to date. This has been recognised by Ofgem, and is the subject of an ongoing consultation to develop a more appropriate framework going forward. It is therefore unlikely that an integrated, pan-European supergrid will evolve given such a framework. Ev 56 Energy and Climate Change Committee: Evidence

Memorandum submitted by Ofgem 1. Context for Our Response 1.1 Ofgem welcomes the opportunity to respond to the Select Committee enquiry into a European supergrid. As the GB energy sector regulator, we are required to protect the interests of present and future gas and electricity consumers through, among other things, our regulation of transmission networks and promotion of competition in energy markets. This includes consumer interests in the reduction of greenhouse gases and in security of supply. 1.2 Over the last decade, the open access offered by the GB transmission regulatory regime has enabled the connection of major new onshore conventional and renewable generation, as well as a new interconnector (Britned). In addition, Ofgem has approved several billion pounds of investment by the onshore transmission owners. In order to ensure that GB offshore renewable generation is able to enjoy similar access to transmission, Ofgem and DECC have established an offshore transmission regulatory regime tailored to the needs of the offshore users, and compatible with our onshore regime. 1.3 We consider the harmonisation of European markets, and the move towards the internal European energy market as set out in the “Third Package”, to have significant benefits for GB consumers. These benefits are primarily the enhancement of security of supply and more competitive pricing. Increased physical interconnection between Member States is important in facilitating this harmonisation as constraints on the amount of electricity that can be transferred between Member States can limit the extent to which markets can converge. This is recognised in the European Energy Infrastructure Package2 which sets out the requirement for a European strategy and funding for projects such as the North Seas Countries Offshore Grids Initiative (NSCOGI) and the European Electricity Highways that are expected to contribute towards the development of a European supergrid. 1.4 In addition, we look to protect future consumers through the promotion of carbon reducing measures including the increased integration of renewable capacity into our power generation mix. Given this, we fully support the principles of increased renewables integration and of interconnection between Member States. We agree that the supergrid concept might contribute towards achieving this goal, but we also see that the concept of a “supergrid”, can be realised in a number of ways. How a North Sea grid (or European supergrid) evolves should depend on an evaluation of the costs and benefits of alternative approaches. An assessment that would compare e.g. incremental development of existing networks in response to demand from transmission users versus a more centrally planned approach, that could lead to anticipatory investment coordinated amongst many partners, but also face the risk of stranded assets. 1.5 We also note that there has thus far been limited detailed analysis of what the costs, benefits and risks of a European supergrid would be and stress that it is one of a number of options for delivery of integrated markets and integrated renewable generation. 1.6. The ECCC has asked for evidence on a range of specific questions. We have drawn on experience from work that we have been involved with to provide information which we consider useful in responding to the questions set out where possible. However, as a result of the limited analysis conducted to date, we have not responded to all questions set out in the Committee’s inquiry directly. For example, we do not believe that it is possible to provide even an indicative figure of what a supergrid would cost at this stage with a large amount of uncertainty still surrounding technological feasibility and how a supergrid could be most cost- efficiently designed.

Offshore Development 1.8 To provide further context, we note that there are a number of transmission activities that might be undertaken in the north-European seas. These different activities can be characterised as follows: 1. Direct connection of renewable energy generation e.g. offshore wind farms to individual Member States. 2. Interconnectors between Member States. 3. Offshore networks which are used to relieve constraints in the onshore network of an individual member state (e.g. the “bootstraps”). 4. Networks which include interconnection between Member States with renewable energy generation attached. 1.9 We understand that discussion of a north-European offshore grid or a pan-European supergrid often makes reference to item four on this list. However, it is important to be mindful of the full range of transmission activities that will be undertaken both now and in the future. At this stage, it should not be presumed that grid development should take place through some form of meshed system before the costs and benefits of such an approach have been fully explored and there is value in keeping all options available. In any case, and as noted above, it may be more cost-efficient to allow a grid to evolve into a meshed system incrementally in response 2 Find the Energy Infrastructure Package document: Energy infrastructure priorities for 2020 and beyond—A Blueprint for an integrated European energy network here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SPLIT_COM:2010:0677(01):FIN:EN:PDF Energy and Climate Change Committee: Evidence Ev 57

to demand from transmission users. In this respect, direct connection of both renewable generation and interconnectors continue to play an important role.

Ofgem’s Work in this Area 1.10 In responding to the inquiry, we have mainly drawn upon our experience of jointly developing the GB offshore transmission regime with DECC and on our work to integrate the GB electricity market with that of other Member States. 1.11 NSCOGI in particular is providing direct experience of many of the associated issues. Ofgem chairs the regulators group which supports this initiative. Our response therefore focuses on work that is being undertaken to facilitate the development of an offshore transmission infrastructure in the north-European seas. 1.12 However, we note that the concept of a supergrid often goes beyond this to depict some form of pan- European network (of which NSCOGI will be an incremental step). This shared network would facilitate the bulk transfer of power from areas of (primarily renewable) generation surplus3 to demand4 and storage hubs5 thus optimising the provision of generation at a European (rather than national) level. We are engaged in preliminary work in this area through the Energy Infrastructure Package which sets out, for example, the idea of European Electricity Highways. We have also referred to this work in our response where relevant.

The Offshore Transmission Regime The Offshore Regime 1.13 Jointly developed by Government and Ofgem, the GB offshore transmission regulatory regime was launched in 2009 to deliver offshore transmission connections for offshore renewable generation. The regulatory approach that has been adopted is largely the same as onshore in that it extends the onshore regulatory and connection regime to the generators offshore connection point, ensuring that a clear commercial and technical interface already exists for potential future development of an offshore meshed or interconnected network. 1.14 Where the offshore regime differs significantly from the onshore regulation of electricity networks, is that the licensed right to build, own and operate the offshore connections is awarded on the basis of a competitive tender process, run by Ofgem. The competitive approach was adopted to attract new entrants and investment to the sector, encourage innovation, and drive down the costs of network assets for generators and consumers. 1.15 The first tender process for nine offshore transmission connections was run during 2010. These were all already built or under construction by Generators. Strong competition has attracted almost £4 billion of investment appetite for all nine transmission links which are in total worth around £1.1 billion. The first tender round resulted in overall forecast savings of £350 million for offshore wind farms and ultimately consumers. Further rounds of tenders will be run over subsequent years, with an estimated total value in excess of £15 billion. The second such round is currently underway.

Co-ordination project 1.16 Government and Ofgem recognise the importance of developing effective and efficient transmission infrastructure to connect offshore renewable generation to the onshore grid. It will be important to ensure that the regulatory regime can support the realisation of benefits from a co-ordinated, efficient and economic offshore transmission network. 1.17 Ofgem and DECC are currently working together to consider whether any additional measures are required to ensure that the benefits of co-ordination are maximised through the offshore transmission regime. The work will include consideration of opportunities for offshore generator sites to be interconnected, or for anticipatory work to be undertaken. DECC and Ofgem will be publishing a conclusions report on this work in winter 2011.

North Seas Countries Offshore Grid Initiative (NSCOGI) 1.18 NSCOGI is a framework for regional cooperation between ten countries6 to find common solutions to challenges related to current and possible future grid infrastructure developments in the north-European seas. Through our involvement in the NSCOGI project, we are working alongside DECC, looking at the potential for UK contribution to an offshore cross-border transmission network in the north-European seas. 1.19 The workplan of the initiative includes activities to identify a range of plausible scenarios for development of an offshore grid and to identify and address the technical, market and regulatory challenges associated with these scenarios. 3 Examples of potential generation hubs include the north-European seas and the North African desert. 4 Examples of demand hubs include central and northern Europe. 5 Examples of storage hubs include the hydro generation and storage in Nordic countries and the Alps. 6 The 10 Member States signed up to the NSCOGI project are Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden and the United Kingdom. Ev 58 Energy and Climate Change Committee: Evidence

1.20 NSCOGI plans to identify a set of plausible scenarios for onshore and offshore grid infrastructure for 2030 and develop proposals to overcome barriers to the development of these potential grid configurations by December 2012. By this date, the project also aims to develop proposals for regulatory and market design for a coordinated offshore grid while also proposing methods for tackling issues such as cost allocation and anticipatory investment.

2. Responses to Inquiry

What are the technical challenges for the development of a European supergrid?

2.1 While Ofgem is not best placed to advise on the detailed technical challenges of a supergrid, we are involved in one of the fundamental technical issues of the development of its development. Through our involvement in projects such as the Offshore Coordination Project and NSCOGI, we are developing an understanding of the considerations surrounding the physical layout of an offshore grid in the north-European seas.

2.2 Wind farms around the coast of GB have so far been connected to the onshore grid by “point-to-point”7 connections. These wind farms have been located relatively close to the coast in relatively shallow waters. However, future wind farms are likely to be located further from the shoreline and may be of greater total capacity.

2.3 A number of different styles of connection solution have been proposed for the connection of future offshore generation. These designs can be roughly characterised by the level of shared assets that they provide for offshore transmission users. These would range from simple point-to-point connections (such as the existing interconnectors and connections between offshore wind farms) up to complex, meshed offshore-grids including connections between several European Member States.

2.4 It is important to note that no single design will be the cost-effective choice for all projects. As for onshore networks, the current and expected future requirements of the generators influence these choices in different ways. The most cost-effective design will be dependent on e.g. the specific characteristics of the project such as distance from the shore, available cable routes, environmental and planning consents, optimal network redundancy requirements, size of the wind farm, operational characteristics, the transmission technology available, and also the risks that transmission users and their finance providers are willing to bear. This is likely to lead to a hybrid mix of the designs for an offshore grid.

2.5 The figure below summarises the conceptual range of designs that have been proposed. We would stress that the development of offshore connections to deliver any one of these designs could take place in a number of ways. For example, rather than being centrally planned, a fully meshed grid may evolve incrementally in line with demand through the development of point-to-point connections which are then connected to each other.

Offshore connections

Radial +: Advanced Radial: Point technology and Tntegrated to-point multiple connections offshore Fully meshed connections to each onshore point hubs offshore grid

Less integrated More integrated

Interconnection

Increased point-point interconnection Increased interconnection with direct connection of renewables to form meshed grid

7 Point-to-point connection is direct connection from a generation source to the onshore grid or from one onshore grid to another. Energy and Climate Change Committee: Evidence Ev 59

What risks and uncertainties would a supergrid entail?

2.6 Work to date on coordination of the offshore regime and on NSCOGI have presented a number of challenges for the development of an offshore grid in the north-European seas: 1. Level of investment: One important challenge with NSCOGI and to an even greater extent with the pan-European supergrid will be encouraging the levels of investment required. 2. Anticipatory investment: In addition, a number of potential designs for a north-European seas grid and for a European supergrid would rely on anticipatory investment, ie a need for infrastructure to be built in anticipation of demand where this demand may not yet be in place and may not be completely certain. There are advantages of anticipatory investment such as the potential to realise economies of scale through sizing infrastructure to meet expected rather than current demand. However, this has to be weighed up against the risk that the demand will never be realised thus rendering part of the infrastructure as a sunk cost. It is likely that much of this risk will be passed onto consumers and so it is vitally important to consider the extent to which anticipatory investment is desired and how the associated risks are dealt with. 3. Cost and benefit allocation: Future projects may be financed by a number of stakeholders from a number of different Member States. This raises the question of how to allocate the costs and benefits of the project to one Member State or the other. 4. Coordination of regulation: In addition to allocation of costs and benefits there is also the question of how shared assets or assets that lie outside of the border of the country into which they are connecting should be regulated by the National Regulatory Authorities. 5. Coordination of operation: In the same regard, there is the question of how the different national transmission system operators involved will operate a shared asset. 6. Coordination of renewable generation support schemes: This includes issues around harmonisation of the different support schemes that are provided in each country. In addition, there is the challenge of allocating support schemes and renewable generation contributions to a project that is constructed in one country but exports power to another. 7. Conflicting European legislation: There a number of pieces of EU legislation that convey conflicting messages in relation to some of the characteristics of a supergrid. For example, direct connection of renewable generation into an interconnector will present a conflict between legislation that sets out the requirement of priority access onto the network for renewable forms of generation with legislation that requires access onto interconnectors to be non-discriminatory. 8. Capacity allocation: In addition to the above, there is the question of how to predict the level of capacity available for use across the interconnector due to the unpredictable nature of renewable generation. 9. Planning and consents: It is also important to consider the coordination and optimisation of planning and consenting procedures. It has been suggested that the coordination of an offshore grid would reduce the amount of onshore and offshore substations that are required thus decreasing the risk of planning and consenting delays. This risk is also proposed as an important barrier to investment in offshore and cross-border infrastructure. It is thus vital to consider how best to streamline these procedures from a national and European perspective.

2.7 Some of these issues may be relatively straightforward while others are more involved, but they can also be interlinked. It is therefore sensible to subject them to focussed analysis in a structured way. This is what the NSCOGI is intended to achieve.

How much would it cost to create a supergrid and who would pay for it?

2.8 As highlighted earlier, the concept of a pan-European supergrid has not yet been clearly defined and as such more analysis needs to be performed before even an indicative cost can be provided. As the work is likely to be modular, spread over decades, and the boundary between a supergrid and the existing transmission network may be (arguably should be) blurred, a total cost figure may not be meaningful.

2.9 Even as a step towards a pan-European supergrid, work on NSCOGI has so far considered that an offshore grid will be developed through a range of different types of connection. An important part of the work being carried out is to analyse the costs and benefits associated with this range in order to identify likely future scenarios for an offshore grid development. As such, an indication of costs cannot be provided with any accuracy at this stage.

2.10 Development of a north-European seas grid and, in turn, a pan-European supergrid will involve coordination of projects between a number of Member States. This raises the question of how to allocate the costs and benefits of these projects. This question is being explored through NSCOGI and we expect that many of the outcomes of this work will feed into cost allocation of a wider supergrid. Ev 60 Energy and Climate Change Committee: Evidence

Will a supergrid help to balance intermittency of electricity supply?

2.11 Increased interconnection between countries can balance intermittency by providing additional markets when there is excess generation and by providing additional capacity from other countries when renewable output is low.

2.12 The key driver for a supergrid is to connect areas of excess renewable generation to demand and storage hubs. This should act to balance intermittency. The same will apply to a north-European seas grid as a stepping stone towards a wider supergrid.

Will a supergrid reduce energy prices for consumer and businesses?

2.13 In order to meet renewable targets and gain the benefits of a more sustainable energy infrastructure whilst maintaining security of supply, significant amounts will have to be spent on the development of infrastructure. This is likely to have an upwards effect on energy prices in the short term in whatever way this is achieved.

2.14 Therefore, it is important to question not whether a supergrid would reduce energy prices per se but whether a supergrid would be the most cost-efficient way to achieve these objectives, thus minimise the impact that achieving these objectives will have on energy prices.

2.15 This question is being explored at a north-European seas level through NSCOGI which is considering the costs and benefits associated with a range of options for the connection of offshore renewable generation.

2.16 In the longer term, it is likely that the increase in competition associated with access to new markets achieved through increased interconnection will place a downwards pressure on prices and this should be considered as one of the benefits of a European network with greater levels of interconnection.

What are the implications for UK energy policy of greater interconnection with other power markets?

2.17 Greater levels of interconnection and market coupling over interconnectors (as will be the case for Britned) will increase the impact of European energy policy and markets on the GB market. We believe it to be important that these implications are considered when looking at the introduction of measures such as capacity mechanisms and feed-in-tariffs as part of the Electricity Market Reform package.

Which States are potential partners with the UK for a supergrid project?

2.18 As a project which could act as a stepping stone towards a pan-European supergrid, NSCOGI is a joint framework between ten Member States with an interest in grid development in the north-European seas. The Member States involved are Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden and the United Kingdom.

2.19 Further into the future, work on a pan-European supergrid will involve input from all European Member States. In addition, the possibility for projects in other Member States to contribute to UK renewable targets if they are funded by the UK (even if the generation does not connect into the UK) provides an opportunity to partner with any Member State in theory on projects which could feed into a supergrid.

How would a supergrid contribute to the goals of the Third Energy Liberalisation Package?

2.20 On 4 February 2011, Heads of State of all Member States committed to the achievement of the internal European energy market by 2014. While the harmonisation of market and regulatory regimes will go some way to improving the efficiency of cross border flows of electricity, the level of physical interconnection places a limit on the extent to which this is possible. Therefore the development of increased interconnection between GB and European Member States associated with a supergrid would assist the achievement of this objective.

Would new institutions be needed to operate and regulate a supergrid?

2.21 A north-European seas grid will require cooperation and harmonisation between both TSOs and NRAs. We note that ACER (the agency for the cooperation of energy regulators) has recently been formally launched and may have an important role to play. Cooperation among NRAs currently takes place through regional initiatives which will be overseen by ACER and this may be a useful vehicle for coordination. This issue is being considered as part of NSCOGI and lessons learnt from this are likely to feed into policy towards a pan- European supergrid, but as yet we see no need to prepare new institutions. March 2011 Energy and Climate Change Committee: Evidence Ev 61

Memorandum submitted by the Institution of Engineering and Technology (IET) Executive Summary 1. A European Supergrid is a fascinating concept that in the long term could provide some very interesting options for UK electricity, particularly in managing intermittent renewables. 2. The term “European Supergrid” is used rather loosely at the moment to describe a range of interconnection concepts, including: — a North Sea supergrid, principally connecting countries with North Sea coasts and potentially large amounts of offshore generation; — a North-South supergrid bringing power from North Africa into Europe; — an East-West supergrid crossing several time zones and thus allowing advantage to be taken to different timings of demand peaks as well as uncorrelated renewables; and — various combinations of the above. 3. Each of these would have rather difference costs and benefits, could be scaled at different levels and could make different levels of use of existing infrastructure. 4. Technically a super-grid would be challenging on account of its large size but would not particularly stretch the knowledge we have today. However its deployment in a complex multi-jurisdictional environment, with massive construction of transmission infrastructure in countries each with their own challenges in planning, would be very challenging.8 5. We would suggest that it is currently not possible to predict by what date a useful supergrid could be made sufficiently complete to provide large scale benefit to the UK, and the IET would therefore caution against placing too much reliance on its being available when planning UK policy. 6. However, we do need to start somewhere and these uncertainties should not be a reason for holding back on preparatory work, which the UK should fully support. As we move forward to decarbonise the UK and wider Europe’s energy systems the challenge of greater interconnection will in time need to be addressed. The potential benefits may be substantial. 7. The IET would strongly support continuing scoping and other studies to allow functionality, costs and benefits to be quantified. Alongside this, the institutional, legal and other barriers should be explored. Deployment would then need to be planned, financed and delivered. Once deployment was well underway, and greater understanding of the challenges of delivery had been gained, the UK may be able to take a view on planning for the use of a Supergrid as a part of future energy policy. 8. In providing this response, we have addressed the potential for very much greater interconnection across Europe. We have not included in this evidence the smaller (but still substantial and important) issue of providing the best means to connect UK offshore wind generation to the UK power system. There are more integrated alternative possibilities than the point to point connections envisaged under the OFTO regime. Should the Committee wish to explore this issue further, we would be pleased to provide further evidence. 9. Our detailed comments below are necessarily generic, and it may be that the various concepts have radically different economics. Much more analysis of need, technical solutions, costs and risks is needed to understand these issues fully to inform decision making. 10. Our responses to questions 1, 2, 3, 4, 5, 6 and 9 follow.

Question 1: What are the technical challenges for the development of a European Supergrid? 11. We assume here that a European supergrid would be a multi GW meshed electrical network connecting the power systems in numerous European countries. The technical challenges for such a European supergrid are significant but are not at all insuperable. 12. In conceptualising the supergrid, key early decisions would need to be taken about its architecture and the extent, if any, that conventional AC transmission would be used rather than high voltage direct current (HVDC). HVDC transmission would be needed for any links crossing significant bodies of water (such as the English Channel or the North Sea), and may be desirable for economic or aesthetic reasons for large overland power transfers. 13. AC transmission is a highly mature technology, but HVDC networks (as distinct from point to point connections using HVDC) are as yet an immature technology. If the supergrid were to be substantially HVDC then the principal technical challenges would be: (a) At present HVDC networks would have to be designed without the use of DC circuit breakers at high voltages as they are not yet available. If the international industry were to develop them there would be significant cost savings and operational benefits. 8 Although it should be noted that large scale power transfers across mainland Europe using legacy networks are undertaken routinely. Ev 62 Energy and Climate Change Committee: Evidence

(b) To date, almost all successful HVDC schemes have been point to point connections, meaning that control practice for a meshed DC network is not yet established and would need to evolve. (c) There are limited suppliers of HVDC technology who would be able to overcome these challenges, leaving limited choice in the equipment market place. (d) Supply chains are not sized for this major expansion of HVDC technology and would take time to catch up, meaning that deployment would take some time. (e) Planning consent for converter stations, DC overhead lines and submarine cable landfalls would take time to obtain. 14. These issues have been looked at in some detail as part of the ongoing discussions in the UK regarding the best ways to connect offshore wind generation. We believe the “missing” technologies can be developed by the industry provided there is perceived demand for them. 15. If the supergrid were to be substantially AC, the principal technical challenges would be: (a) The probable introduction of a higher voltage than the 500 kV maximum common across Europe currently. This should not be a major issue as 765 kV is in use in various parts of the world, and 1000 kV is under development in China. Higher voltages allow higher power transfers. (b) Care would need to be taken to develop and manage the network to avoid stability risks and cascade failure risks across Europe. HVDC tends to avoid this issue by avoiding synchronous connection of multiple power systems and thus effectively creating “firewalls” between national systems. This issue should be manageable but will require careful attention to system operation and governance. (c) AC overhead lines are generally more visually intrusive than DC overhead lines, which may create additional planning consent issues. Other planning consent issues would be similar to DC, though fewer building structures at substation sites would be required. 16. The more important challenge in relation to technology is to ensure that the necessary research and development takes place in a timely fashion. This requires timely signals to manufacturers to ensure they commence investment in technology and in the scaling up of the supply chain to be able to deliver at the right time. There will also be a need to drive standardisation as an important contributor to timely and efficient delivery.

Question 2: What risks and uncertainties would a supergrid entail? 17. The main risks and uncertainties are: (a) during the creation of an EU Supergrid, uncertainty as to when it could be brought to full fruition, given the range of jurisdictions involved and the consequent complexities of consenting and funding; (b) resilience during operation; (c) geo-political risks during operation; and (d) uncertainty as to whether market rules and systems will be sufficient to allow a truly transparent process of sale across multiple boundaries at times of energy shortage in Europe.

During Creation of a EU Supergrid 18. The main risk in bringing a European supergrid to full fruition is ensuring timely completion given the range of jurisdictions involved and the consequent complexities of consenting and funding. Persuading countries with nothing much to gain from a grid to accept the infrastructure through their territory would be challenging. It would therefore be unwise to rely on the supergrid to deliver significant amounts of energy to or from the UK until its deployment was quite well advanced. We would caution against it being used as a convenient assumption in policy making when considering the long term requirements for generation, for example. 19. The legal challenges involved in creating a cross-jurisdictional network should not be underestimated, particularly for those portions of it that might be developed offshore. There are significant differences in the ways EU member states apply laws relating to electricity in their coastal waters, and their legal frameworks are at different stages of development. 20. Another legal/regulatory issue is that the EU is currently organised into various regional electricity markets already (for example the GB market and the All-Island market in Ireland), and the commercial drivers (and legal frameworks) for creating increased linkage between these markets are very specific to the local context. There is also an economic fact that, if interconnectors between markets are financed privately, a large element of their market value consists in being a trading path for generators in a market area with low prices to sell electricity into a more expensive area. As more and more connection is built between markets these price differentials tend to zero, so the commercial incentive to build incremental capacity decreases. This challenges some of the market and financial models in place today, and might require different approaches to remuneration for owners of network assets. Energy and Climate Change Committee: Evidence Ev 63

21. The time taken to gain consents for new transmission lines is significant and projects can be subject to significant local opposition. The same is true however for potential alternatives, such as building more conventional generation plant.

Resilience and Technical Risks 22. The design criteria for the supergrid would need to include adequate redundancy against maintenance and breakdown downtime of individual components to ensure resilience was adequate. 23. Elements of the supergrid would be potential targets for terrorism, and appropriate measures would need to be taken to guard against this, which might include both redundancy in design and also physical protection at key node points.

Geo-Political Risks 24. Once operational, a supergrid would carry a number of political risks to UK electricity supply, including the possibility of switching off supply from source countries, such as those in North Africa, for political reasons, and sharing power amongst European states in time of shortage.

Market Uncertainties and Risks 25. Once operational, the supergrid would need to be governed by clear trading rules such that there could be no question of transit countries acting in their national interests in circumstances where power was short. 26. Existing markets have a number of mismatches in their operating rules which act as a barrier to otherwise rational trades across borders. These are being addressed in part by legislative change at EU level but there are various changes to market rules and systems required to allow a truly transparent process of sale across multiple boundaries.

Question 3: How much would it cost to create a supergrid and who would pay for it? 27. This question can only be answered meaningfully after defining the extent, capacity and boundaries of a supergrid, which would then be the starting point for a cost study. To make a major long term difference to moving renewable energy across Europe, power transfers might be greater than 100–200 GW—which is 50 to 100 times the capacity of the current England-France link. However, other concepts for a European supergrid are rather more modest, seeking instead the more limited objective of flexing output from offshore generation to countries best able to accept the output. The difference in costs between these two could be a factor of 10 or more, illustrating the uncertainties involved. 28. Costs for individual transmission connections can be calculated but this does tend to depend very much on individual circumstances. The cost varies greatly depending on whether links are sub-sea, over mountains, through densely populated areas etc. The costing of conventional AC transmission is well understood and various projects are underway to build better knowledge of capital costs for HVDC projects. We can point the Committee to this work on request, but this only addresses the cost of individual connections that might form part of a supergrid rather than a complete supergrid. 29. One option to reduce costs and increase the chances of gaining planning consents would be to convert existing AC line routes across Europe to HVDC operation, which would substantially increase their transfer capacity. Extensive technical studies would be needed to determine the feasibility of such an option, which could of course also have an impact on the networks of which these lines are currently a part. 30. To deploy a supergrid of sufficient capacity across Europe to make a significant difference to managing the intermittency of renewables is likely to cost in the tens of £billion at 2011 prices. 31. The question of who would pay for it will be highly influenced by the existing mechanisms for remuneration of transmission networks in different member states. There are significant differences in approach (for example, in the UK currently generators pay a charge for use of the transmission network; in some member states they do not). 32. In addition, most major renewable energy projects are financed by subsidies such as feed-in tariffs or Renewables Obligation Certificates. As subsidies are not generally transferable between member states, as all have their own systems and targets, this means that a generator in one country will be subsidised by the customers of that country, regardless of where the energy is finally used. This has potential to unfairly penalise customers in small states with high amounts of renewable generation. Legal mechanisms exist at EU level for member states to trade surplus renewable energy but they are not fully defined beyond 2020. Further work is required in this area to come up with a workable approach to subsidies which recognise different countries’ individual targets whilst creating capability to move subsidy funds transparently around the EU as a whole.

Question 4: Will a supergrid help to balance intermittency of electricity supply? 33. A supergrid has the potential to contribute significantly to balancing intermittency of renewable energy production, provided: Ev 64 Energy and Climate Change Committee: Evidence

— it is connected to countries with uncorrelated renewable supply and/or demand; — they are willing to trade; and — the supergrid is of sufficient capacity. 34. It is noteworthy that the electricity system has to be balanced on an ongoing minute by minute basis, so any analysis of its benefits would need to take account of scenarios such as low UK wind and high local demand for Scandinavian hydro, as well as the reverse, more favourable, cases, since investment in additional back-up plant would be largely governed by worst case combinations. 35. If major benefits are to be achieved in smoothing intermittent renewable generation sources, this would imply the supergrid would need to cover a wide geographic area, possibly extending beyond Europe into North Africa and Russia, and be of sufficient capacity to transport very large (100GW scale or larger) amounts of power. Staying within the relatively limited geographical confines of northern Europe will limit the amount of uncorrelated renewables accessible, and also the opportunity to exploit time differences in times of maximum demand, other than at the margins. 36. The extent to which using a supergrid to back up intermittency is cheaper than other options for coping with intermittency (such as demand management, storage, low cost back-up generating capacity, etc) can only be determined by detailed study, at least in part using highly complex hourly models. 37. Extensive commercial modelling will also be required to understand the commercial incentives acting on generators and consumers to trade power across such long distances. Even if this is technically possible and desirable it might not represent a credible market response. 38. The technical capability to balance intermittency will only be realised in practice if various countries’ market rules are sufficiently aligned.

Question 5: Will a supergrid reduce energy prices for consumers and businesses? 39. Without the analysis referred to above, and a more detailed knowledge of the capacity and topology of the supergrid it is not possible to comment on its impact on UK domestic energy prices. 40. If capacity were sufficient it would tend to produce more uniform prices across Europe. Whether these benefits are sufficient to offset the price impacts of building the Supergrid is unclear at the moment. 41. We would caution that, in any case, energy and electricity prices are likely to rise substantially over the next 10 years, and the debate about supergrid economics should be more in terms of whether it limits increases more or less than other options rather than whether it reduces prices. 42. Building a supergrid entails addressing a series of complex institutional issues which are only worth tackling if it is demonstrably cheaper than the alternative of building large amounts of backup generation or demand-side measures to match demand to generation from intermittent renewables. The problem could be that, for individual countries, the balance of costs and benefits might be significantly different: arguably there could be net winners and net losers. For example, a small country could conceive of being a net exporter of wind power into neighbouring states, but unless subsidies are apportioned fairly, the consumers in that country could end up paying more to subsidise exports of green electricity. For those states for whom offshore network build is contemplated, the construction costs are significantly higher than onshore and have to be borne by the market somehow, so the benefit derived in terms of access to cheaper generation would need to outweigh this cost.

Question 6: What are the implications for UK energy policy of greater interconnection with other power markets? 43. Assuming interconnection with Europe was of rather higher capacity than today, the UK market would become in effect a part of the wider European market. Electricity would be traded across Europe for the best price, and the UK would need to consider safeguards to ensure supplies needed domestically were not sold into the rest of Europe in times of shortage. 44. Greater interconnection than at present should reduce to a degree the need for reserve generation capacity as, in principal, reserve plant could be shared. However the issues around backup plant for intermittent renewables would need careful analysis, taking account of the correlations in renewable outputs and national electricity demands in worst case hours. 45. The issues around subsidies for renewable energy mentioned above would need to be tackled, however for UK, with a high population density and the corresponding challenges of planning and environmental barriers to building enough renewable projects to meet its own targets, greater interconnection could allow the country to import green energy from any neighbouring countries with a surplus. The GB market is one of the largest and most open electricity markets in the EU and therefore potentially attractive in this respect. 46. In summary, more work is needed to evaluate the benefits. The supergrid could potentially leverage significant economic benefits as outlined above, but at the same time could leverage risks, both technical and in governance terms. Energy and Climate Change Committee: Evidence Ev 65

Questions 7 and 8 Not answered.

Question 9: Would new institutions be needed to operate and regulate a supergrid? 47. The option of letting a supergrid evolve through the gradual development of component links between pairs of countries is worthy of consideration. However certain countries are likely to fulfil more of a transit role with less obvious benefits to themselves. At the very least, regulatory arrangements would seem to be needed to incentivise the construction and to govern the operation of the supergrid. This whole area needs further investigation as part of the overall studies needed for the supergrid. 48. In areas where interconnection is not well developed already, such as around the North Sea, or between the UK and mainland Europe, a supergrid is unlikely to evolve9 without groups of affected countries agreeing to coordinate network planning and also coordinating regulatory development to remove barriers to implementation. Such coordination could occur at a working (zonal) level without a need for over-arching institutions. There are existing regulatory bodies at EU level already considering some of these issues and they can also play a useful role. However there is still work to do to improve and coordinate overall governance across Europe. 49. The UK does not at present have to engage significantly with European Transmission System Operators (TSOs). With a supergrid this would change, and the UK would need to guard against governance decisions that were not in its favour.

About the IET 50. The Institution of Engineering and Technology (IET) is one of the world’s leading professional bodies for the engineering and technology community and, as a charity, is technically informed but independent of network company, equipment supplier or service provider interests. 51. This submission has been prepared on behalf of the Board of Trustees by the IET’s Energy Policy Panel and takes into account inputs from experts within the IET’s wider membership who responded to a request for input. 52. Evidence from the Institution of Engineering and Technology (IET) supported by The Royal Academy of Engineering (RAEng), The Institution of Mechanical Engineers, and the Institution of Chemical Engineers. March 2011

Memorandum submitted by RenewableUK Executive Summary 1. The response comprises three sections: (a) Answers to the questions posed. (b) Additional questions and answers. (c) About RenewableUK. 2. Our key points are: (a) Development of a supergrid or coordinated network must not be allowed to delay or adversely impact the connection of offshore wind projects which are currently underway. (b) The key issues are consenting, finance and regulatory issues not technical matters. (c) The development of a supergrid will require, and could help drive, a common framework of market rules across Europe. (d) The supergrid can be (and is being) started with point to point connections integrating offshore wind and interconnectors.

Questions Posed What are the technical challenges for the development of a European Supergrid? 3. The technical challenges are not a significant issue compared to the regulatory, commercial, finance and consenting issues. 4. Initial steps and projects are feasible using current technology, though for some of the more advanced concepts (e.g. wide-area offshore meshed grids) will require demonstration projects and the first projects with the new technology may not be cost effective until deployment ramps up and lowers costs. 9 Individual interconnectors may be provided by the market, but not an integrated grid. Ev 66 Energy and Climate Change Committee: Evidence

5. The issue of standardisation will arise and the benefits of standardisation (e.g. of HVDC voltages) will need to be weighed against the risk of stifling innovation and the potential advantage to one manufacturer over another.

What risks and uncertainties would a supergrid entail? 6. The key uncertainties are in forecasting the future demand and generation locations, volumes and timing alongside the timescales for development and delivery of a supergrid given consenting issues for transmission and the need for regulatory coordination. 7. National TSOs may see a supergrid as a threat if it means that their investment plans are “adversely” affected. E.g. if ownership of supergrid links/assets is awarded on a competitive bidding bases to third party owners (e.g. as in the GB OFTO—offshore transmission owner—model) and a supergrid may reduce the drivers for investment by national TSOs. 8. There is a real danger that the process of supergrid coordination results in delays to new generation projects which are under development, if a regulator or authority were to decide that the project should be re- engineered to fit into a supergrid scheme. It is imperative that any supergrid developments do not delay or adversely impact on projects that are under development by changing their grid connection points, cable routes, connection voltages, or commercial terms etc. This may apply, for instance, to the initial phases of Round 3 developments where design and environmental permitting work is already underway. 9. Financing the supergrid must be considered, including at the high risk stage of development and considering the consenting and land lease/easement/acquisition costs. European strategic financial support and the Green Investment Bank could be important in this respect.

How much would it cost to create a supergrid and who would pay for it? 10. The costs of a supergrid are dependent on how much capacity is built, over what distances and in which regions. The supergrid should be justified on a cost-benefit approach. The benefits for Europe being: (a) Increased competition leading to lower energy prices. (b) Increased security of supply. (c) Access to a greater amount of renewable resources. (d) More rapid decarbonisation. (e) Ability to access lowest cost low carbon generation wherever it occurs within Europe. 11. Electricity customers would pay for the supergrid, either directly (through the transmission tariffs) or indirectly (through recharging of transmission tariffs levied on the generators from whom their energy is sourced), but the cost-benefit approach referred to above would ensure that consumers received an overall benefit through, for instance, reduced generation prices thanks to increased competition and efficiency of operations. 12. The allocation of development finance for projects, which is inevitably riskier (although much smaller scale) than construction & project finance, must be addressed. 13. All grids must charge users to cover their costs and all grids have rules of access and connection for the users. For a supergrid to work fairly and effectively, charging, connection and access would need to be regularised or standardised across Europe, as is proposed to happen from 2014 under the Network Codes. 14. At the moment we have an iniquitous situation in GB where an interconnector can connect to the GB transmission system and not face any transmission charges whereas a generator connected in the same location will be subject to charges, even if both have an identical impact on the GB transmission network. It is one of the issues which we have flagged under project TransmiT and which we expect TransmiT and European Codes to address. 15. The cost of any new grids are likely to be significantly higher that current transmission assets, which were built in a time where there was much greater public acceptance of the benefits of overhead high voltage lines. New lines may need total or significant undergrounding (with the associated extra expense) in order to be accepted and approved.

Will a supergrid help to balance intermittency of electricity supply? 16. Interconnection will help maximise the utilisation of variable renewable generation sources such as solar (PV and thermal), wind, wave and tidal and hydro. It will reduce the need for balancing or peaking plant which can be shared. Although the costs of balancing and peaking needed for large wind penetrations are very modest and tend to be exaggerated by pundits they could still be reduced through additional interconnection. 17. With a large increase in the penetration of wind generation on the UK grid system, variability has two effects: one is in relation to market prices and predicted increase in price volatility; the other is in terms of system operation. A supergrid will help the GB to balance electricity supply from variable renewable generation sources. The use of interconnection between countries including integration with large offshore wind farms Energy and Climate Change Committee: Evidence Ev 67

will facilitate imports during times of low wind and high demand, and export surplus power to Europe in times of high wind. Increasing the capacities of networks across Europe also provides a natural hedge and risk mitigation measure by ensuring that wind generation is spread across wind zones and weather systems (i.e. reduces the correlation between wind power generation at different sites.)10

Will a supergrid reduce energy prices for consumers and businesses? 18. Given the cost-benefit test set out previously, supergrid designs will only be approved (in place of conventional grid designs e.g. that connect the same volume of offshore renewables to one country only), if they deliver the desired level of security of supply at lower prices. There is considerable evidence that for the connection of far-offshore wind farms in the North Sea supergrid-type solutions will have a cost advantage, at least until the amount of interconnection to Britain has been increased substantially from the current level. 19. In addition greater interconnection will provide greater market coupling and reduce GB prices when GB prices are relatively high, but raise GB prices when GB prices are low. This will provide more stable and certain prices for customers. For generators it will provide increased market access and more certainty for investors and therefore assist in delivering the new renewable and low carbon generation that Europe needs. Overall these effects should deliver the low carbon electricity that it needed at the lowest possible cost.

What are the implications for UK energy policy of greater interconnection with other power markets? 20. Interconnection could enable UK to import more renewable energy—e.g. from Ireland in which case there may be pressures to reduce renewable development in the UK. Interconnection would enable UK to export more renewable energy in which case there are opportunities for the UK to capitalise on its resources and use the opportunity to sell renewable electricity and benefit from the associated supply chain in terms of job creation and business. 21. There will be a need to share the costs of system management which may be provided in one country and used in another (e.g. peaking capacity, storage, flexibility, ancillary services) facilitated by interconnection and the supergrid. This need not be complex, and has been undertaken successfully in continental Europe for over 50 years.

Which states are potential partners with the UK in a supergrid project? 22. The immediate opportunities are with Ireland and countries across the North Sea especially where interconnection assets can be shared with offshore windfarms' transmission connections to reduce the overall costs.

How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package? 23. The high level goals of secure, competitive and sustainable markets are all facilitated by a supergrid. Increased capacity between countries improves security by allowing mutual assistance in emergencies; it also makes it easier to integrate renewables and allows generators in different countries to compete more extensively. In addition the existence of an offshore network would help to accelerate the connection of offshore renewables. A supergrid would also force the pace of coordination in regulation, markets, grid charging, connection, access and support mechanisms for decarbonisation.

Would new institutions be needed to operate and regulate a supergrid? 24. Existing institutions could probably be developed to perform the necessary roles though there must be strong stakeholder involvement and representation on governing bodies and codes. In developing the Pilot Network Code for Connection over the last year or more, ENTSO-E has not demonstrated effective stakeholder engagement and industry representation compared to established practice in GB.

Additional Questions 25. We are suggesting and responding to the following additional questions

What do we mean by a supergrid? 26. A supergrid transcends national boundaries. It could provide: (a) Connections to offshore wind farms which also reduce GB onshore reinforcements; (b) Interconnectors which also help to connect offshore windfarms; (c) Interconnections between synchronous systems (e.g. GB to Ireland); (d) Reinforcements to weak connections within synchronous system (e.g. the West & East Coast bootstraps in GB); and 10 We note a recent study from Poyry http://www.povry.com/linked/services/pdf/142.pdf which indicates a low level of benefit from interconnection in Northern Europe. We welcome this work but would suggest that further work is required in this area, including expanding the limited geographic scope. Ev 68 Energy and Climate Change Committee: Evidence

(e) High voltage transmission across Europe bypassing countries (e.g. a hypothetical link from GB's North Sea to Austria). 27. It could comprise of: (a) HVDC links using underground/subsea cables and/or overhead lines. (b) Point to point HVDC links. (c) Interconnected and meshed, multi-terminal HVDC systems. 28. It is likely to start by the use of offshore HVDC technology to simultaneously connect offshore renewables and allow trading between national markets. This may involve smaller individual HVDC networks and subsequently HVDC meshed/interconnected network(s). 29. High capacity links can create a challenge when they trip or fail, therefore appropriate ancillary services, generation intertripping and demand management would be needed to ensure high utilisation of such links; or a number of links would be required and operated with some form of redundancy.

What are the planning, consenting and permitting challenges? 30. The challenges of consenting and permitting are similar to the connection of individual offshore renewables projects to shore. 31. A challenge for the supergrid, especially when projects cross national and regional boundaries and have to deal with different consenting regimes.

Would the supergrid have implications for siting and operation of generation on a European level? 32. The ECCC should consider if a highly developed supergrid will interact with the siting and operation of generation plant within a European context. 33. For example, it might not make sense to locate new high load factor generation on the west coast of Ireland, as during high wind and low demand periods in the British Isles, energy would need to be exported from the west of Ireland across, to and through GB and onto continental Europe. Such siting could lead to either an uneconomic level of interconnection (i.e. with low utilisation) or to generation constraints. 34. As a further example, early 2010 was a wet period in Spain, so that wind, hydro and solar generation combined with reduced demand (due to the recession) meant that CCGT generation in Spain had very low average load factors, down to about 30%. If these plants had been connected to a stronger European network they may have been able to operate with a higher load factor, potentially displacing higher carbon coal fired plant elsewhere in Europe.

About RenewableUK 35. RenewableUK (formerly the British Wind Energy Association (BWEA)) is the trade and professional body for the UK wind and marine renewables industries. Formed in 1978, and with over 660 corporate members, RenewableUK is the leading renewable energy trade association in the UK, representing the large majority of the UK's wind, wave, and tidal energy companies. April 2011

Memorandum submitted by Friends of the Supergrid 1. Introduction The Friends of the Supergrid (“FOSG”) is a group of companies and organisations which have a mutual interest in promoting and influencing the policy and regulatory framework required to enable large-scale interconnection in Europe.11 With a special insight into the technology needed to create Supergrid the Friends will be empowered to build the know-how to deliver it in practice. FOSG combines companies in sectors that will deliver the HVDC infrastructure and related technology, together with companies that will develop, install, own and operate that infrastructure. The Friends will design the physical equipment, and work alongside the companies that will build the structures at sea, so that both are empowered to compete and win. The risks of providing this new transmission service will be reduced by the early knowledge gained during the policy formation and design stages. FOSG is able to present “cradle to grave” interconnection solutions to policy makers and others looking to develop energy policy across Europe through to 2050.

11 www.friendsofthesupergrid.eu Energy and Climate Change Committee: Evidence Ev 69

2. Executive Summary 2.1 A consensus exists among EU member states on the need to decarbonise their power sectors and develop new sources of low carbon energy. Supergrid is an essential element of this energy package. 2.2 Given the many benefits of Supergrid for the UK, the UK government and the regulator need to view the creation of Supergrid as vital for the national interest and as an integral part of national policy. 2.3 FOSG has made preliminary indicative calculations for the costs of Supergrid and finds that project costs are not excessive and would be recovered from an agreed and regulated tariff. 2.4 Supergrid will help balance intermittency of electricity supply: by interconnecting areas with different peak demand times and different renewable generation patterns, reserve capacity can be deployed on a more effective basis. 2.5 Supergrid will reduce energy prices for consumers and businesses as a result of increased competition and better utilisation amongst existing plant and by enabling more renewables with low marginal cost to connect to the system. 2.6 The technology is available today that can deliver Supergrid. Certain technological and supply chain risks exists but all these can be mitigated should regulatory certainty exists.

3. Supergrid 3.1 FOSG shares a mutual interest in promoting the concept of open markets in electricity transmission, trans-national interconnection and exploiting the resulting business opportunities. This development in interconnection has become known as “Supergrid”. 3.2 Our definition of Supergrid is the following: “an electricity transmission system, mainly based on direct current, designed to facilitate large-scale sustainable power generation in remote areas for transmission to centres of consumption, one of whose fundamental attributes will be the enhancement of the market in electricity.” 3.3 In late 2010 FOSG devised a “Phase 1” Supergrid linking the UK with four other European markets (“Phase 1”). With the recent arrival of new entrants to FOSG we are working on a revised Phase 1 proposal to take into account, amongst other things, work that National Grid is undertaking in the UK. 3.4 Work is also ongoing to take account of developments put forward by other associations also looking at Supergrids—in particular, the North Seas Countries Offshore Grids Initiative (NSCOGI) and the European Network of Transmission System Operators Electricity (ENTSO-E).12

12 As the European body of Transmission System Operators, ENTSO-E's mission is to promote important aspects of energy policy including security and adequacy of supply, market regulations and sustainability. The association has been given important new roles in the 3rd EU Energy Liberalisation package. Ev 70 Energy and Climate Change Committee: Evidence

NORWAY

UK

GERMANY

Munich

3.5 As such, the “Supergrid” detailed in Phase 1 is recognised to be a concept that will evolve with time as the feasibility, ownership structure, financeability, operability, regulatory and commercial backdrop becomes more fully developed. Nevertheless, the “Supergrid” detailed in Phase 1 is taken as the starting point for developing the answers to this Select Committee Inquiry.

3.6 It is envisaged that the Supergrid will include, at least in part, the backbone of an integrated UK offshore network, interconnection (both existing and new) as well as the development of further DC links both onshore and offshore in NW Europe. As such, it is envisaged that the Supergrid will be under development before 2020.

3.7 The illustration above provides an indicative overview of how Phase 1 could be developed. The final design will, as outlined above, be subject to further detailed analysis, and be the responsibility of national TSOs and regulators.

3.8 The Phase 1 concept recognises that: — The UK must connect further substantial amounts of offshore wind to its already congested networks by 2020. A number of possible solutions have been considered to facilitate this including line up-ratings, offshore “bootstraps” and offshore clustering. — Germany plans to build 25GW of offshore wind generation by 2025/2030 and the existing grids in Northern Germany are already largely congested with on-shore wind generation. — Norway wants to trade its hydro generation, and — Belgium’s renewable energy plans include at least 2GW of offshore wind generation.

Phase 1 addresses these immediate issues while providing a staging post for the future.

4. What are the technical challenges for the development of a European Supergrid?

4.1 There are technologies available today that can deliver a Supergrid. These include Voltage Source HVDC Converters (VSC), undersea XLPE (cross-linked poly-ethylene) HV cables up to 320kV, oil impregnated cables up to 500kV and 400/500kV HVAC technology. To start today the main challenges will be: — Supply Chain—manufacturers (particularly cable HV suppliers) will struggle to satisfy the demand associated with the rapid pace of global marine renewable development in addition to the European Supergrid. — Development of the infrastructure to deliver the hardware and logistics/operation services for the offshore grid. Energy and Climate Change Committee: Evidence Ev 71

— Control Systems—the control and operation of an HVDC based Supergrid requires new control/protection/operation hardware and software—particularly software. This may incorporate “Smart Grid” technology with decision support systems encompassing demand side management to match available supply. — Standards—to allow interoperability between different manufacturers and to ensure that designs are future proofed it is necessary to develop and agree technical standards. 4.2 For the future we expect technology development to continue to provide: — More efficient converter technology. — Higher Voltage DC XLPE Cables. — HVDC . — Lower Cost platform design. — Superconducting pipes to carry very large amounts of power onshore. 4.3 A key concept for Phase 1 is the SuperNode. From a technical perspective a SuperNode interconnects a number of DC links together with wind parks via a small islanded AC network (the node). The term islanded means that the small AC network is not connected to other AC networks but only fed by the connected DC links and the wind parks. 4.4 It is an important advantage of this concept that it is largely based on technology existing today. As of today there is much experience with DC links interconnecting two AC systems. There are quite a number of HVDC links operating or under construction, which are based on VSC technology. The development needed to build SuperNodes is mainly in the field of control and protection including frequency control on the islanded AC network, power flow dispatch and fault detection/clearing strategies. 4.5 The preferred DC transmission technology for building SuperNodes is VSC. This is because a VSC transmission system can generate and maintain the AC voltage at the node with respect to amplitude and frequency, a feature also referred to as capability. The concept of VSC transmission controlling islanded AC networks will be demonstrated by the first HVDC connected wind parks in the North Sea which are currently under construction.

SUPERNODE CONCEPT AC DC

2.4GW 2 x 500MW 2 x 500MW

400kV 2.4GW ±320kV Convertor Station ±320kV 2.4GW

2.4GW

2 x 500MW 2 x 500MW

4.6 The most important step needed to develop HVDC grids further is the aspect of interoperability of different individual projects and technologies of different manufacturers. Interoperability requires standardization of the basic principles of design and operation of HVDC grids. As a starting point for the standardization of HVDC grids some fundamental planning criteria needs to be defined, probably leading towards different types of HVDC grids (eg transmission and distribution HVDC networks, sometimes also referred to as "local" and "inter area" grids). 4.7 The technical aspects of future European HVDC grids are the subject of a European Study Group "Technical Guidelines for HVDC Grids" chaired by the German Electrotechnical Commission VDE/DKE. The Study Group includes European manufacturers of HVDC systems, European Transmission System Operators (TSO) and Universities. The standards bodies CENELEC TC 8X and Cigré B4 are also involved. Functional specifications for the components needed for the first multivendor HVDC systems in Europe will be prepared by late 2011. Ev 72 Energy and Climate Change Committee: Evidence

5. What risks and uncertainties would a Supergrid entail? 5.1 A political consensus exists within the EU 27 countries to fully decarbonise their power sectors by 2050 at the latest; open the European electricity market to greater competition; and, develop new renewable energy. A Supergrid is an essential element of this energy strategy. 5.2 Taken to its full extent, Supergrid could be the largest infrastructure project undertaken in Europe. There will be technological risk—VSC technology is relatively new, is undergoing continuous improvement and has never been deployed in this way before. The development of this technology, however, is being driven by companies based in the UK and elsewhere in Europe, giving us a competitive advantage in its deployment. 5.3 The Supply Chain risk is significant but not insurmountable. Progress has been made, even in the last year, driven by the UK’s actions to enable supply chain investment in support of offshore wind. Progress is needed to develop the manufacturing facilities and infrastructure to deliver Phase 1 with certainty. 5.4 All these risks can be mitigated. Today, the rules for operation of a pan European Supergrid (or even a Phase 1 connecting more than two countries) do not exist. Finance will not be available if there is regulatory uncertainty. Technology development will follow, when there is certainty.

6. How much would it cost to create a Supergrid and who would pay for it? 6.1 FOSG has made preliminary indicative calculations for the costs associated with the development of Phase 1 and proposes two possible models or a combination of both to finance it. Project costs would be recovered from an agreed or regulated tariff. Two models are considered: 1. User Pays—where the Transmission Use of System (TUOS) Charge is paid by the direct users of the system, and 2. Socialised Cost model—where the costs are recovered through the electricity retail tariff in the connected countries. 6.2 User Pays—Transmission Use of System—TUOS Although the preliminary model that underpins Phase 1 for the use of system assumes 23 GW of wind alone connected at a 40% (or capacity utilisation), the operator should be incentivised to increase this factor by allowing other users to trade on the network and by providing ancillary services such as spinning reserve and voltage support. This will reduce the required TUOS charge. For this reason both 40% and 90% capacity factors are used in the analysis. 6.3 The main assumptions in the TUOS calculation are: Project Finance: — Capex = £28,000 million (2010 values). — 30% Return on Equity. — 23 GW of Wind at 40% Capacity Factor must carry the cost. — Six year build out with 40 years of operation. Capacity Factor: — 40%—if the wind alone trades on the system. — 90%—when wind and other energy service providers use the network. The calculated TUOS for different values of Debt/Equity and capacity factor are shown in Figure 1: Figure 1 TRANSMISSION USE OF SYSTEM CHARGE Capacity Factor Gearing TUOS (£/MWh) 40% 70/30 46.7 75/25 43.8 80/20 40.8 85/15 37.8 90/10 34.8 90% 70/30 20.8 75/25 19.5 80/20 18.1 85/15 16.8 90/10 15.5

6.4 In summary, the transmission charge for Phase 1 could vary from 4.67p to as low as 1.55p per kilowatt- hour (p/kWh), depending on gearing and utilisation. The challenge is to provide a regulatory environment that leads to high gearing values while incentivising the grid operator to increase the capacity factor/utilisation. Energy and Climate Change Committee: Evidence Ev 73

6.5 Socialised Cost Model In this variation the costs are recovered by adding a Supergrid component to the national retail tariffs in the Phase 1 connected countries of Germany, UK, Norway and Belgium. Figure 2 summarises the electric energy consumption in these countries (IEA 2008): Figure 2 ANNUAL CONSUMPTION (IEA 2008 STATISTICS) IN CONNECTED COUNTRIES Consumption Country (GWh/annum) Germany 617,132 Belgium 95,527 UK 400,388 Norway 128,806 Total Energy 1,241,853

Figure 3 SOCIALISED TARIFF CALCULATION Income 2,820,720,000 £/annum Total Energy 1,241,853 GWh/annum Cost 2.27 £/MWh Tariff 0.23 p/kWh 6.6 Figure 3 presents the calculation of the increased tariff in the countries connected to Phase 1 in order to recover the project costs over 40 years based on 2008 statistics published by IEA. The result is that in Germany, UK, Belgium and Norway an increase in the retail tariff of 0.23p per kWh would be required to pay for Phase 1. These calculations have considered all consumers from these four countries benefitting equally. However, a cost allocation mechanism might be necessary if that is not the case.

7. Will a Supergrid help to balance intermittency of electricity supply? 7.1 Yes: By interconnecting areas with different peak demand times, and different renewable generation patterns, reserve capacity can be deployed on a more effective basis. However, there are number of caveats. 7.2 Reserve capacity cannot be totally eliminated by interconnection. The amount required is governed, inter alia, by the security of supply standards in place, the geographic dispersion of the capacity [too far “apart” and it is less “secure”], the degree of interconnection and the size of interconnection links. 7.3 However, the future shape of the Europe’s electricity network will be determined not merely by issues of increased variable supply, but also increasingly variable demand, requiring the greater deployment of storage and —using a grid not only interconnected for power but also with multi-directional communications; integrating ICT with the power grid; a so-called smart grid. Interconnection enables the UK not only to have access to Scandinavian hydro resources, but also the capacity in continental markets where the peak in consumption occurs at a different time.

8. Will a Supergrid reduce energy prices for consumers and businesses? 8.1 Supergrid should enable increased competition and better utilisation amongst existing plant, thus bringing down average prices. It will enable more renewables, including wind, with low marginal cost, to connect to the system; reducing portfolio risk and thus putting downward pressure on prices.

9. What are the implications for UK energy policy of greater interconnection with other power markets? 9.1 The UK needs to lead the debate in the areas outlined above—markets, operation, regulation, and technical standards. Otherwise we risk the imposition of solutions designed elsewhere, which are inappropriate to our needs and costly, being imposed on us. 9.2 The evolving European regulatory framework means that the UK may have little choice but to implement decisions which may not be totally aligned to our own wider domestic energy policies. This is likely to frustrate government objectives if allowed to continue unchecked. 9.3 The UK is likely to be a net exporter of electrical energy with the establishment of a Supergrid and, more generally, improve the conditions for the development of our offshore renewable resources. 9.4 UK Energy policy should recognise this fact and seek to lead the debate on the detailed framework of integration, in order to ensure that the evolving structures facilitate our objectives and maximises the economic benefits to the UK. Ev 74 Energy and Climate Change Committee: Evidence

Beyond a national energy policy

9.5 Given the geographic distribution of renewable resources, individual countries will struggle to deliver sustainable and secure energy supplies if they base policy on national considerations alone. The EU has encouraged the creation of a single energy market, while energy policy is retained at a national level.

9.6 There is a risk that this national focus will constrain thinking. Given the many benefits to the UK of a Supergrid as outlined above, the UK needs to ensure that government departments and the regulator have a wider market focus when considering energy policy and that the creation of the Supergrid is seen as being in the national interest, and an integral part of national policy.

10. Which states are potential partners with the UK in a Supergrid project?

10.1 In Phase 1 with its emphasis on fully developing the UK’s existing offshore wind resource, we advance the case for linking the UK to Norway, Germany and Belgium. By doing so the Supergrid will interconnect markets with sufficient demand and supply to enable the most effective use of the grid for trading electricity. Further work is on-going to measure these benefits in our outline Phase 1.

10.2 Over the medium term—from 2020 to 2030 the Supergrid will most likely develop to supply the electricity markets in other countries in the North Seas Grid Group, so that UK generators could take further advantage of an open market in electricity supply to deliver low cost, low carbon generation to consumers across Northern Europe.

10.3 Over the long term—from 2030 to 2050 it is envisaged that the Supergrid will grow to become a major element of an open, liberalised, zero carbon power market bringing electricity generated from marine renewables in the north and solar in the south to consumers across the EU.

11. How would a Supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

11.1 The objective of the 3rd package is to make the energy market fully effective and to create a single EU gas and electricity market. This will help to keep prices as low as possible and increase standards of service and security of supply. The earlier sections of this response explain how the Supergrid helps to achieve this.

11.2 In terms of meeting the co-operation and co-ordination aspects of the 3rd package, considering the formal powers recently given to ENTSO-E under the third package, FOSG believes that the planning aspects of a Supergrid should fall to ENTSO-E but ensuring entrepreneurial insight. The mandate to ENTSO-E should come from the EU Commission and ACER and should also focus on developing a 2050 Master Plan.13 This Master Plan will identify the sources of future power and will design an integrated grid to connect them to the key nodes of AC networks while optimising security, redundancy and the single market.

11.3 Such a plan, despite giving a general overview of the entire EU, should also be divided into steps or phases with a first phase focussed in more detail on the North Sea.

11.4 Moreover, TSOs through ENTSO-E should also define a single Grid Code for the Supergrid. Standardisation and interoperability are major steps forward to achieve the efficient and timely realisation of the Supergrid. Such a new Grid Code should be proposed by ENTSO-E with the agreement of the EU Commission and ACER and after consultation with all the interested stakeholders. The preliminary focus of such a Code would be on offshore wind connection.

12. Would new institutions be needed to operate and regulate a Supergrid?

12.1 By its nature, Supergrid will span existing national and jurisdictional boundaries. There will need to be a mechanism for raising the capital to build it. There will need to be rules for recovering the cost and allocating the revenues accrued. These may not be simple, as the “notional allocation” of the costs and benefits involved will be complex. We consider that ACER, although not formally a European Regulator, could get the necessary powers to develop these mechanisms. ENTSO-E could be mandated to set up an independent system operator (ISO) to operate the Supergrid. April 2011

13 The Agency for the Cooperation of Energy Regulators (ACER) is a European Union body established in 2010. ACER's mission is to assist National Regulatory Authorities in exercising, at Community level, the regulatory tasks that they perform in the Member States and, where necessary, to coordinate their action. Energy and Climate Change Committee: Evidence Ev 75

Supplementary memorandum submitted by Pöyry Many thanks for the opportunity to participate in the ECC select committee panel discussion yesterday. I hope Pöyry’s contribution was helpful, though I am aware we perhaps failed to get our view across in a couple of respects. Firstly, we are a little sceptical of the “seven-year payback period” mentioned in the first session. The economics of wind power and the supergrid are dependent on a number of uncertainties such as fossil fuel and carbon prices, capital costs and wind patterns; but our expectation is that offshore wind will turn out to be significantly more expensive than gas-fired generation. (Of course, it arguably has other benefits.) And the economic case for the supergrid may depend heavily on the extent of the avoided costs of AC network upgrades. The first panel had a bullish view on these avoided costs which should be challenged: this is an important area for further investigation. A second point is the uncertainty about who will benefit from interconnection. Although interconnecting countries together should lead to lower overall costs of generation, it is not clear that GB plc, or GB consumers in particular, will necessarily benefit. It could be that interconnecting GB to other markets raises prices in GB, or it could lower prices. Thirdly, although interconnection provides diversity and helps mitigate security of supply issues, it does not replace back-up generation. Weather patterns are well correlated even across large areas, so the benefits from heavy interconnection should not be overstated; when the system is tight in GB, there is a reasonable chance that it is tight in other countries too, and that their backup generation is already being used. In our view, given all the uncertainties, an incremental approach to the supergrid has a lot of merit, beginning with bilateral country-to-country interconnection. It may also be the only realistic way of making significant progress. The motorway example given by the first panel is a good analogy—when the M1 was built, a detailed plan of the next 50 years of motorway construction wasn’t needed—the M1 was of sufficient value on its own to speed up north-south transport. The stepping stone it provided to a full UK-wide motorway network was a subsequent benefit, but not the rationale for building the first motorway. Once again, many thanks and we enjoyed the occasion! May 2011

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