22
Examination of witnesses
Simon Virley and Stephen Smith.
The Chair: Good afternoon. Welcome to the second session of the Economic Affairs Committee. Could I ask you to introduce yourself please, Simon Virley?
Simon Virley: I am vice-chair and head of energy and natural resources at KPMG.
The Chair: Thank you.
Stephen Smith: I am group head of strategy at National Grid.
Q154 The Chair: Great. As you will certainly be aware, the Government are meant to be publishing their energy policy strategy—I am not sure exactly what we call it—sometime soon. I will not say a date, because it seems to be a slightly moving feast.
I have a big question to start with, maybe just as a scene setter, so feel free to give some headlines. In responding to the energy crisis that we are in and against the backdrop of the commitments that the Government have made to net zero and decarbonisation, what do you think the Government’s three headlines would be of their strategy? In particular, what timeframes are we talking about in terms of different options to ensure that we get an energy supply that is affordable, renewable and reliable while meeting our targets? I will ask Simon Virley to start.
Simon Virley: I will start with what I understand is coming out, but obviously I have not seen it so I am speculating, and then say what I think should be in it, if I may. What I understand will come out is some higher ambition and some higher targets for both renewables and nuclear deployment to try to reduce our dependency on imported gas, plus a new consenting or licensing round for the North Sea, so that we use our indigenous production of oil and gas as far as possible as we make the energy transition—and, thirdly, diversifying our current sources of oil and gas so we have the diversity of supply that is needed for security of supply.
I have two comments on that list, if that is the correct list. First, there is a question of how you speed up the deployment particularly of renewables, because the problems are not so much financial as to do with non-financial barriers—to do with the planning and consenting. You asked, Chair, about timescales. A typical timescale for an onshore wind farm from start to finish is four or five years.
The Chair: Offshore?
Simon Virley: Offshore, it is even longer—seven or eight. For nuclear, it is more than a decade. These things will not happen overnight. They will certainly not have any impact on consumer bills or indeed our energy security overnight. There is a question about how they will address the questions about planning and consenting—
The Chair: We will come on to that.
Simon Virley: —which are absolutely critical if those deployment rates are to be speeded up.
The second observation I would make is about the absence of anything on the demand side. All those points I have mentioned are about the supply of energy. It seems to me to be a big omission not to have any attempt to try to tackle energy efficiency, which, if you are really serious about trying to get bills down and reduce our dependency on imported gas, is the place that you would start.
The Chair: Very good. Thank you, that is a great overview. Stephen.
Stephen Smith: Simon might have stolen some of my best lines.
The Chair: Agreement is good.
Stephen Smith: I do not think there is much I would add. He is exactly right, and your question really spoke to it; it is the timeframes point. Energy efficiency is the lowest-hanging fruit and probably the stuff that could be done fastest. The economics of it has changed fundamentally because of the move in energy prices. It is about looking at the elements around how we can deploy renewables faster, which, as Simon says, comes down ultimately to planning and networks, which I am sure you are going to ask me about, so I will stop there.
The Chair: We will indeed. On the timeframes point, maybe I could stick with your point on energy efficiency. If you were Kwasi Kwarteng or the Prime Minister, in the near term, the next two to three winters—let us be blunt about it—you would focus very heavily on energy efficiency, would you? Is there anything else? Can I ask Stephen Smith first?
Stephen Smith: Energy efficiency deals with lots of issues. Typically, it will impact on winter gas demand, which obviously eases a number of the problems we have. Yes, I would certainly be looking to do as much as possible there.
Simon Virley: I absolutely agree. We have had a rather sad and sorry tale of energy efficiency policies over the past 10 or 15 years. We have been stop/start through a number of policies, with the latest incarnation being the green homes grant, which was introduced and then abruptly ended. We now need to have a consistent set of policies—incentives for home owners to take up schemes, whether that is fiscal incentives, stamp duty, council tax discounts or whatever, as well as tougher regulation in setting industry standards that the industry can then respond to.
The Chair: I am not hearing anything that necessarily speaks to me for the next two winters. Is that something that we just have to say is to do with the market and we will have to hope that other sources of supply will open up?
Simon Virley: No, there is certainly going to have to be more support, based on the projections we have seen so far, to get households through certainly the coming winter, because the projections look extremely challenging as to where the price cap may go to.
Lord Fox: Briefly on the lead time for reducing demand—because it is not without its challenges—how quickly could a sufficiently large and skilled workforce be delivered in order to start the process of making a significant impact on demand?
Simon Virley: It comes back to the clarity of the long-term signal that you give to the industry and the supply chain. That is why I advocate having clearer, long-term, tougher regulatory standards on energy efficiency, to give the supply chain a chance to gear up. We could certainly make a significant dent in energy efficiency within a two-year timeframe. I think it is about the long-term certainty for the supply chain to ramp up, which we have had in certain sectors such as offshore wind, where we have made great progress and built up our supply chain, but we have not done that in energy efficiency because it has been stop/start.
Lord Fox: That certainty comes through an assured revenue model, does it?
Simon Virley: Both funding and regulatory standards, yes.
Lord Fox: Very good.
Lord Griffiths of Fforestfach: Would that include electric cars, gas boilers and all that?
Simon Virley: It would have to address the question about the future heating within homes, because that is a major source of our gas demand and of our carbon emissions. The Government have support in place for heat pumps, but there are other low-carbon technologies, such as hydrogen; we have yet to see the details of the Government’s support for transition to hydrogen.
Lord Stern of Brentford: You have emphasised incentives and regulation. What do you think about organisation? If you are thinking about insulating, changing from gas to heat pumps and so on, there are quite a lot of people involved. There is the home owner herself or himself, the local authority, the bank, the builder, and the energy supply company. Getting that act together seems to me to be not competing with but just as important as the regulation or the incentive structure. You are probably old enough to remember the switch from coal gas to natural gas, and, there, the organisational side was greatly simplified by having a nationalised industry that said, “You do it this way”. I am not advocating that; I am observing that from the past. Could you comment on the organisation story and whether we could make more rapid progress there?
I should have added that I advise NatWest and Citibank on climate issues.
Simon Virley: I am a great advocate of what is called local area energy planning, because I think we are going to have a mosaic of different solutions for different parts of the country. What is right for the south-west will not be right for the industrial north-east, for example. We have to bring those groups, as you described, together through a process of essentially convening the experts with local communities and with local councils—or city mayors, if it is a city region—to discuss what the best solution is for that region depending on the attributes of that region.
Is there any hydrogen nearby? Is there a gas main? What are the electricity connections? What is the propensity to take up electric vehicles? That bottom-up process of engagement is absolutely essential if we are to take people with us, because I do not think it will be simple to mandate this nationally in the same way as was done before, as you referred to. We have to build this bottom-up. There is a way of doing it, and it is happening around the country. But there is more to do in terms of engaging with local communities about the right solutions for their community.
Baroness Kramer: It is music to my ears as I listen to you. In this stop/start process, people tend to assume that everything has been a failure. Have you seen some successes that we could use as templates? As you say, every area will be different. Are there any successes you could draw our attention to where this has been done effectively and well?
Simon Virley: On local area energy planning, we are still in the early days. In Manchester and Birmingham, there are initiatives around this to bring together communities and experts from local gas and electricity companies. I would look at the city regions to start with—the big conurbations—as the place where this could really start in earnest.
Q155 Lord Monks: This is a question for Steve, and not just to give him a chance of getting the best lines in first. It stems from the National Grid evidence, for which we thank you, which puts quite a lot of emphasis on words such as “improving the net-zero governance” as a central pillar of the regulatory framework. It seemed to me that these things were a little bit abstract. Could you make them a bit more concrete for me and others trying to delve behind those words to find out as practically as possible what they mean?
Stephen Smith: I would be happy to. At the moment, we see a big gap between the ambition and the desire to do more and where the rubber hits the road as to us and the other network companies being allowed to invest ahead of need. One of the big changes as you think about net zero is that, historically, the networks were pretty much just in time—so, as you tried to build them, you were as nervous about ending up with a bit more capacity as you were ending up with a bit less.
To go back to Simon’s point about some of the lead times for delivering things like offshore wind, a big part of that is getting your grid connection agreement. That is because at the moment we struggle through the regulatory regime to be able to invest so that at the point they are ready to connect we have the network capacity they need, at both a transmission and a distribution level. We need to get that alignment between what the policy is and the decisions that are taken on the ground by Ofgem, in terms of the network price controls that we see. That is what we meant by those words.
If we are serious about net zero, it has some consequences. That probably means that you need to start, as I said, investing in networks ahead of need and seeing them as a key delivery mechanism for those targets. It is not quite there at the moment. Everyone says it, but it is not what we see practically on the ground.
Lord Monks: As the National Grid, a central body, how do you react to Simon’s outlining of his preference for local initiatives and local solutions to some of these problems? Are you comfortable with that, or do you see a conflict between the two? That is for both of you.
Stephen Smith: I do not think there is any conflict. Fundamentally, it is pretty clear, given how much offshore wind we have built and are going to build, and where that sits, that we are going to need a lot more transmission, because most of the demand sits in the Midlands and the south of the country. I do not think there is any innate conflict between energy efficiency, local plans and the need to build more transmission. When we look at this, we look at a whole range of scenarios, but it is hard to find anywhere that we do not need a lot more transmission. We need more transmission today because, broadly, we constrain a lot of wind farms a lot of the time, because we do not have the capacity we would like to have north to south.
Simon Virley: I am advocating both local area energy planning to deal with the things that are going to affect communities directly but also a clearer national transmission plan, a plan for our national transmission system. We cannot carry on in the same way we are at the moment— I fully agree with Steve. The main constraint on getting more offshore wind built will be the transmission lines. It is not the money. We have 25 gigawatts that have just been leased off the north coast of Scotland. The money and the investment are there; it is about how on earth you get that power to where it will actually be used in the cities in the south of England or in the Midlands, and we do not have that clear plan.
I am advocating a clearer national plan for the monopoly elements—that is, the national transmission network, and greater local area energy planning for the things that affect people directly—that is, the future solutions for their decarbonised heating and their transport systems as well as their local grid.
Lord Monks: Excuse my ignorance, but are the transmission lines the responsibility of the National Grid?
Stephen Smith: It is the National Grid in England and Wales, yes, and then the two Scottish companies have the equivalent in the south and north of Scotland.
Lord Monks: Okay.
The Chair: What you have been saying has created a spate of questions—little questions, as I have been assured by everyone. I am going to take them in the order I saw them: Lord Rooker, Baroness Noakes, Lord Fox and Lord Stern.
Lord Rooker: It is the same question to Steve, but having regard to what Simon just said it is a question to both, in a way. There are planning rules, as we have discovered, and last year, as a tourist, I saw the massive onshore construction in Shetland, for onshore wind. Then one looks at the evidence from National Grid—and there is another company, the National Grid Electricity System Operator, which has not given us any evidence by any account. But it is possible and cheaper, and the planning allows it, to put a lot of onshore wind in Scotland, but the electricity, as you rightly say, is needed in England and Wales. What is being done about that? It is a pretty substantial issue. If it is cheaper to put it on land—and I have a question about that—and there is plenty of it in terms of population versus land area, it comes down to a national plan, does it not? It seems pretty fundamental to me, but it does not figure in any of the discussion.
Stephen Smith: I think it is. We are slowly iterating there. National Grid has two roles. The system operator you speak of is a legally separate entity; the Government are currently considering whether they want to take it away from National Grid. It is legally separate from me, therefore I can offer views. It is a distinct unit; we build the lines, while it operates the system, but it is responsible for the plan. We input into that, but it is its plan.
We need that national plan. Once we have it, that has to follow through into local planning decisions and national planning decisions, and at the moment that is lacking.
The other area we could probably look at also is the whole issue about how we compensate people, because people do not always like big new transmission lines. To get over this, other countries have come up with statutory compensation schemes and things like that. In the past, we have—
Lord Rooker: Where?
Stephen Smith: That is happening in the Republic of Ireland, for example—and it has always been the case that in France, when big new infrastructure is built, that communities that are affected want to make it an easier process to have things built there. Those are things we could look at beyond just saying, “We have this national plan and therefore this is going to get done to you”, as well as sympathetic undergrounding, which is something we also do.
The Chair: Sorry, I am going to jump in because I know colleagues want to ask other questions, and we have only done two questions out of six.
Baroness Noakes: You talk about wanting to invest ahead of need. To cope with the massive expansion of renewables, I understand that the grid would need to undergo considerable expansion. Investing ahead of time means that consumer bills rise ahead of time as well. Can you put some scale on that?
Stephen Smith: I can. Unfortunately, it is an asymmetric risk because, when we do not invest and we end up having to constrain generation, it is much more expensive than the other way round. Of the customer bill, constraints at the moment are costing them roughly £1.5 billion to £2 billion a year. That is where we have to compensate generators, because we cannot allow them to come on to the system at various points of the year or points of the day.
As to the impact on bills, transmission is typically less than probably £100 a year of the customer bill. You would be talking about small increases in the bill to avoid the risk that we have those constraint costs.
Baroness Noakes: The expansion of the grid needs to be very considerably more, though, does it not?
Stephen Smith: It does, albeit it is slightly counterintuitive. We are going to push a lot more electrons through it. At the moment, the grid is built for a peak, and for much of the year and points of the day it is not operating. As we start to move electric vehicles and so on, we will have many more electrons to spread those costs over.
Baroness Noakes: We might like a paper on this.[1]
Stephen Smith: I would be very happy to write to you on that.
The Chair: If you could expand on how this has all worked in your answer, that would be very good.
Lord Fox: I am not sure, Steve, if you are able to answer this question, but perhaps Simon can be a cipher. It is about the balance that your regulator is imposing between protecting the costs of the consumer today and protecting the ability of future consumers to have the electricity they need. Is that balance right, in your view, at the moment, or should it shift from the consumer price today to the investment for the future? Is it the regulator, in fact, that is stopping that from happening?
Stephen Smith: It is a mindset change, as I said. I should put my cards on the table; I was at the regulator for many years and on the board of the regulator going back about 12 years, so I have sat in that seat. Historically, as I said, for the reasons that we discussed, you worried about investing ahead of need or ending up with too big a transmission system. It is hard these days to conceive of how you would end up in that situation. It is very clear now that we are going to build as much wind as we can in the North Sea. Therefore, you are in a sweet spot of saying that some of that risk has gone away and we need that change of mindset in the regulator.
Lord Fox: Is Ofgem slow to have that mindset change?
Stephen Smith: At the moment, it is certainly the case that we still have a very detailed process where we have to justify line by line and investment by investment on quite a micro scale and go through quite a long process. That is adding to the time it takes. It is a mindset change more than anything else.
Lord Fox: So there would be a benefit from smoothing that process and allowing that investment to happen earlier and with less friction.
Stephen Smith: Yes.
The Chair: Is that a mindset change just by the regulators, or does it come back to your point about a government plan and everything else stemming from the department?
Stephen Smith: It is partly a mindset change—but we as a company also need to step up and think about how we can be more innovative, looking at new technologies to build bigger lines and at how we can squeeze more capacity out of what we have. You fundamentally need that change to say that it is very clear that we are going to need a lot more transmission, agreement on a plan, and then agreement that that is what we and the Scottish companies will build to.
Simon Virley: Could I very briefly add to that? There are two changes that are needed if we are to get our regulatory system fit for delivering net zero at least cost: first, to align Ofgem’s duties to deliver net zero at least cost to consumers while keeping the lights on; and, secondly, give the system operator in its independent form, as Steve referred to earlier, the responsibility for developing that national plan for transmission. That will be an independent expert body. I would make those two changes to make our regulatory system fit for what we now need, which is to deliver net zero at least cost while keeping the lights on.
Lord Stern of Brentford: It follows from this line of discussion. You have the local authorities involved. You have the Department for Levelling Up, Housing and Communities. You have the regulators. You have the Department for Transport. You have BEIS. We need the top-down that you have described. We need the bottom-up that you have described.
There seems to be a fair degree of agreement about the kind of system that we need and a systems approach, but do you see any evidence that the Government are showing an understanding of what is involved in driving such a plan through and making sure that those things happen at the right time, giving the incentives and the powers to the right people to make it happen? We clearly need a nationally integrated plan here, involving so many parts of government and indeed involving so many levels of government. It should be possible, but how do you think it could happen?
Simon Virley: I will declare an interest. I had 25 years in Whitehall before I went to KPMG. I worked in No. 10, the Treasury, and, latterly, DECC. There has been tremendous progress with the targets and the net zero strategy. The need for systems thinking has never been greater, but the bandwidth has never been smaller in my experience in 30 years of dealing with energy policy. That is no criticism of any of my former colleagues; that is just the reality, frankly, of crisis after crisis—Brexit, Covid, and now the Russia-Ukraine crisis.
I am advocating giving the future system operator, an expert independent body—think Bank of England for energy—the responsibility for developing, where we need it, the national plan. I am only advocating it where there are monopoly requirements that only the Government can deal with. I am not suggesting that we do not have all the innovation we can from the private sector—I want all the innovation we can—but there are certain things only government can do. I think that should be done in an expert body where you can pay people to get there and retain the right talent. That needs to come out of Whitehall and be in the future system operator.
Lord Stern of Brentford: Could it have the powers to get action at all the different levels that you have described?
Simon Virley: I would love the FSO to be given the responsibility of engaging with all those local authorities and city mayors, and really being the source of expertise. You do not want to create 650 different expert bodies. You need one expert body that can engage and provide the advice to the local authority or the city mayor on what might be technically the right solution for them.
Lord Stern of Brentford: That is not delivery powers, is it?
Simon Virley: It is not delivery powers, because you have to maintain democratic accountability at a local level for what the right plan is for that local area. It has to be top-down and bottom-up.
The Chair: We should come back to your point on delivery powers with Lord Skidelsky’s question, because it gets into issues of planning, which are key.
Q156 Lord Skidelsky: My question is about hydrogen. With the Chair’s permission, I would like to ask it in two parts. First, what specific business models or non-financial interventions could be used to scale up hydrogen and drive down costs?
Simon Virley: I think the Government are intending to introduce what is called a contract for difference, which is what they have used for offshore wind, and it has been very successful. I absolutely think it could work for hydrogen. We await to see the details. Most of my clients have been eagerly awaiting the details of the CfD model—what levels of support will be provided, what the reserve price will be, what the reference price will be, how they will deal with volume risk and other technical points. The CfD model, as it is called, could work for hydrogen and would be highly suitable—but I would not just say, “That’s it, done. Hydrogen is ready to go”. We need to be thinking about the whole value chain when it comes to hydrogen. We need to be thinking about demand and supply.
To Lord Stern’s point about systems thinking, you have to think about hydrogen’s role across the whole economy. Hydrogen can play a role in industry, in heavy transport, in power and in certain areas in heating. We need to think about the whole of the hydrogen economy we are trying to build and as a role as a storage vector, by the way, for seasonal storage.
We need to work on demand and supply. It is not good enough just to have a production incentive through a CfD; we have to think about what is happening at the demand end. I would advocate mandating hydrogen-ready boilers by 2025, for example, as one way to make sure that we are future-proofed in our homes and we are not putting in boilers that cannot be converted. In the same way that once upon a time we converted from a hydrogen-based system to methane, we now need to convert back in certain areas to using hydrogen again.
Stephen Smith: We have business in North America as well. One of the things that is going on there—and there is a parallel here—is calls for submissions into areas to bid for what are called hydrogen hubs. You bring together potential sources of local demand and then areas that could produce green hydrogen because they are going to have wind capacity. There is an analogy in the UK, where you concentrate those CfDs, looking at industrial clusters and areas where there are potential significant sources of demand to get that first-of-a-kind learning but where you are also clear that there will be demand there.
Lord Skidelsky: You asked what hydrogen’s role should be across the whole economy. How much should hydrogen use be scaled up? It is a quantitative thing, really. What proportion of the economy’s energy use should be hydrogen use? Although hydrogen produces no carbon emissions, it costs quite a lot of carbon to produce itself. What does the case for hydrogen rest on? Is it a security thing? Is it an affordability case? Is it a climate change case? There is an assumption, and I would like to ask you what the assumption is.
Simon Virley: The Government’s hydrogen strategy talked about hydrogen potentially providing up to 35% of final energy demand by 2050. One-third of Britain’s energy use could come from hydrogen. That would be realistic and achievable, but we would really have to think about the system we want to create to do that—the production and the demand. It is not good enough to simply put a financial incentive out there and say, “Produce and they will come”. We need to be thinking about the end uses of that hydrogen; where physically—this is my point about local area planning—that will be used; and the transition from what will happen initially, which is blue hydrogen produced from methane in industrial areas, which needs to be linked to carbon capture, and over time building up green hydrogen.
To answer your question about what the main barrier is, yes, hydrogen conversion is expensive at the moment. However, if it follows the same trajectory that we have seen on solar or wind costs, hydrogen can be competitive with natural gas certainly by the end of this decade. Given the investment that is going on around the world, particularly in countries such as Germany and elsewhere, we expect to see fairly significant cost reductions in the production of green hydrogen, which will make it a very viable storage vector for the future. All those excess renewables we will have will no longer have to be constrained off, we hope, because we can use it to create green hydrogen at a reasonable cost.
Lord Skidelsky: Thank you. Steve, do you think the 35% case has been made?
Stephen Smith: There are two potentially big uses. In an intermittent system, you need long-duration storage. We know that there are meteorological conditions that can lead to the wind not blowing in the North Sea for several days, and hydrogen is a potential solution to that—subject to, as Simon said, getting some of the learning and getting electrolyser costs down. Potentially using surplus renewables converted to hydrogen then stored for those periods is a potential significant use, whereby you would then burn the hydrogen in gas turbines during those periods. It also could be useful for domestic heating. We have a gas pipeline system that is pretty much hydrogen-ready. There would need to be some things done. Obviously it is much cheaper to transport molecules at volume at winter peaks than electricity. For me, it is all a question of where we can get the costs to and whether we can get electrolyser costs and efficiency to a point where it is competitive as a fuel with electricity.
Storage is the other big thing that could be important. There are competing technologies. It is not completely clear yet that hydrogen will win out, but it certainly looks viable.
Lord Skidelsky: Thank you.
Viscount Chandos: Is green hydrogen essentially not a transmission mechanism? For it to be green, it requires renewable energy to have been used in its transformation. If it fed 5% hydrogen by 2050, that is in addition to the renewable energy that is being transmitted through the electricity grid. Is it not saying that it is 70% renewable energy and that that capacity is needed to meet those targets?
Stephen Smith: To be clear, I was talking about green hydrogen—the role of hydrogen that is solely produced from renewable energy. So those numbers make broad sense.
The Chair: Can I quickly summarise what you have been saying? Am I right in taking from what you have been saying that there is sufficient capital to be deployed to address our needs? Are you saying that the issues seem to be more lack of clarity about government policy, the strategy, the plans and uncertainty about implementation, picking up on Lord Stern’s point, and that is where the focus should be? We should not be worrying that there is insufficient capital to invest to deliver renewable, reliable, affordable energy in the UK. Is what you are saying a fair contention?
Simon Virley: I would agree with that statement, yes, because we see huge interest from all our clients and from investors in investing in green technologies. Something we have not mentioned yet is that the new climate risk disclosure rules—the so-called TCFD rules—are certainly going to drive that even faster, as corporates look to meet the various targets that they have put out for when they are going to try to get to net zero.
The Chair: The point that Lord Stern and you were saying about having a Bank of England for energy is one where it would not only set strategy. I want to pick up on the planning point, because I am not sure we are going to come back to it. Planning seems to be a major issue, and in your excellent bit of evidence you cited that. Can you say a bit more, as specifically as possible? We are always hearing that planning is a real issue. What specifically should change in the planning regime if we want to see faster deployment of wind in particular?
Stephen Smith: First of all, as Simon said, separate plan from planning—having a national plan that is agreed, which is vis-à-vis assets, and this is the transmission system we need to deliver these targets. But then it is about driving that through harder into the national policy statements so that, when decisions are taken locally or nationally on planning decisions to deliver that, that is given due weight in the consideration. At the moment, there is too much of a gap. We do not have that clearly defined plan and we do not have that traced through to the decisions.
As I said, it is also worth thinking about whether we need to go beyond that. Even if you have that, it is still possible for judicial review and other challenges along the way. We should start to think about whether we compensate communities who are particularly impacted by new transmission lines. We should not step over that—that is a big issue.
Simon Virley: I agree entirely with those two points. I would add a third. The National Policy Planning Framework, which effectively allows a small number of people to overrule the majority view in an area, needs to be looked at again.
Lord Fox: It is an interesting challenge, because we are seeing it in Suffolk. There is a very good example where that process is going through the planning process, and it is evoking a huge local process. While taking your point, Simon, you are asking politicians to override local communities in some legal or planning way, and I wonder how that works.
Simon Virley: I am not asking for local communities to be overridden. Absolutely, there should be proper consultation. At the moment, if I put myself in Steve’s shoes or in National Grid’s shoes, they are basically left to defend a national objective in Suffolk and elsewhere without the cover of, “And here is the national need. Now let’s talk about how we do it sensibly with consent in the local area”. There is a national need to get all that power from Scotland down to England and Wales. How are we going to work together to do that? That is what I am advocating. I am not saying that we should be trampling over—
Lord Fox: So your Bank of Britain for energy will set the context. Who does the negotiation with the local community?
Simon Virley: The consultation would still have to be led by the transmission company with the community, but it would be within the framework of a national plan that would say, “We need to get all this renewable power from offshore”.
Lord Fox: The analogy of that is a national plan for housing. There is a national plan for housing, and there are indeed local plans for housing. That does not stop almost every neighbourhood bridling against those houses being built there. I am not sure how that in the end delivers the green flag that Steve’s organisation needs to build its transmission scheme.
Simon Virley: I would emphasise what Steve said about community benefits. The results of recent polling suggest that, with community benefits, you can get more people on side. It is complicated.
Baroness Kramer: Mine is a very small point. I see exactly what you are saying. You talk to us about things like renewables. We tend to think that if there is a good way to make planning more streamlined that would be good, but that same slipstream presumably would be offered to things like small nuclear and fracking. Is there any way that you can see that you do not become entangled in much more controversial provisions? I can guarantee with my own neighbourhood that, if we can stop the third runway at Heathrow for nearly 30 years, give us a chance with any of those and we will keep them talking for 100 years.
Stephen Smith: There is some scope for optimism. There are interesting things going on at the moment with onshore wind, whereby companies are coming up with schemes where local communities benefit directly through lower energy bills; they seem to be proving wildly popular. It is about linking a national need for this to people actually seeing some benefit where they are. There needs to be a bit of creative thinking. For my sins, I am an economist, and there are many more eminent economists around this table than me. It is the old idea that, if the winners do not compensate the losers, it is not always easy to get things done. Some of that could make a big difference.
Lord Rooker: In many ways, we have covered a lot of the question I have. I am conscious of time. I want to be clear and I want you to be clear. It is only just in the last few seconds that Simon mentioned it. You talk about the national plan. Let us get this clear. We are talking about Great Britain. We are not talking about England and Wales. It is devolved. We have a Government in Scotland. We have different planning laws in Scotland, and yet to keep the lights on across England and Wales it is quite clear that we need that electricity from Scotland. This is a pretty fundamental change, which I wholly agree with and can see that we need. But to sell that—you have touched on it as well—the consumers have to see how they benefit rather than the producers. That is what we do not do. You have touched on it, but it is all producer benefit. It is about what it looks like from the Government’s point of view, what they impose and they bring a plan. We look at it and say, “The Government are doing this, that and the other”.
What is the benefit for the consumers? It is all very well saying, “We want to keep the lights on”. Until they go out, we cannot prove that we have won, and we do not want that to happen. It needs something more in terms of a stable and affordable power supply. As the stability changes, the more we go for renewables, the more there is a problem of synchronising the generators and other issues. It can become unstable by going for more renewables. What is the cost of avoiding that and at the same time selling it to the public?
Simon Virley: There are two points I would make in response to that. You are quite right to identify the need for more storage on the system. As you have more renewables and intermittency on the system, you are going to need long-duration storage—that is, storage that can cope with those anticyclones that last for two weeks in January. We mentioned earlier that hydrogen could be part of that, but there are other technologies. Pumped hydro, for example, could be part of that. There are not yet sufficient incentives in the market to build that, and the Government need to address the gaps. There are frameworks that work for interconnectors that could be applied to long-duration storage projects such as pumped hydro cap and floor schemes.
The Chair: Sorry, capital floor schemes?
Simon Virley: Cap and floor—
The Chair: Yes, sorry.
Simon Virley: —which work for interconnectors but could also work for long-duration storage schemes.
The second point is in answer to your question about what is in it for consumers. There is a huge capital investment to overcome to get the renewables in place, but remember that once they are up and running it is virtually zero marginal cost power. At the moment, consumers are not accessing that because, essentially, our power prices are set by the marginal plant, which is still 90% of the time gas. As a result of high world gas prices at the moment, we are all paying higher energy bills. There is the prospect with the cost of renewables coming down so far that we can build a cheaper, greener and secure energy system, which is what we should all be aiming for, but we need some of those other policies in place to do that.
Lord Rooker: I will leave it there.
The Chair: I have a question. I want to pick up on what you were saying, Lord Rooker, about the role of Scotland and the devolved Governments here. It is directed at you, Steve. What Lord Rooker is saying is very interesting about our reliance on Scotland. Can you map out whether that contention is right and what that means in terms of the planning process? If we want to accelerate plans for offshore wind and other forms of improvements in our security of supply, what does that mean for Scotland and the planning regime in Scotland?
Stephen Smith: It is broadly the same as what we have discussed is needed. I do not see big resistance north of the border, precisely because they know they sit on much of the resource and the inability to deliver that is hurting them today. You are right; we need reform on both sides, but I do not see that as a big blocker.
The Chair: Okay, that is good to clear up. Can I come back to the point that Simon talked about in terms of the business models? It would be very good if you have any more detail you would like to send in on that. On that point in particular, coming back to the incentives to provoke investment in storage, and LDS in particular, would be very interesting indeed. It would be very helpful if you could tell us what you think has worked in the past that could be applied in the future, learning from best practice.
Q157 Lord Stern of Brentford: We are close to the end of the session and I think this is a question that has a short answer. How would you support the scale of carbon capture and storage and use that we need to get to net zero by 2050 and decarbonise our power system by 2035?
Simon Virley: My plea to my former colleagues in the Treasury is not to be half-hearted about this. We have had two previous failed attempts on carbon capture. I was in government for both of them. We need to make it happen this time and we need to do it at scale. The Government have talked about doing four clusters by 2030. We need to do four clusters and make sure that we have sufficient scale to get the costs down, just like we have done on offshore wind, where we have stayed the course and benefited from having developed an offshore wind industry, or just like the French did on nuclear in the 1970s. We need to be clear and long term in that policy framework. The policy framework is largely now coming together on what is needed, but it is now about the commitment to stay the course and build that new industry.
Lord Stern of Brentford: What would the incentive structure be?
Simon Virley: The incentive structure is essentially a regulated asset-based model for the transport and storage options, and then, coming back to the industrial conversion options we talked about earlier, it will be a contract for difference for the conversion to hydrogen for those plants that want to capture the CO2 of the methane that they were using.
We now need to see the detail of that business model from BEIS. My clients are eagerly awaiting it, so we hope it will be very soon. If that comes together, we should be able to move ahead. My worry is that the Treasury now looks at that and says, “We can’t really afford to do that”.
Lord Stern of Brentford: What is the role of carbon pricing?
Simon Virley: It is massively important, yes. We need greater clarity on carbon prices going forward.
Lord Stern of Brentford: If you guaranteed the carbon price, would that be enough?
Simon Virley: Not enough, but it would certainly help, and it would reduce the subsidy you need on top at the moment.
Q158 Viscount Chandos: I have a separate question for Simon Virley—but, Steve Smith, is the proposed sale by National Grid of the majority to Macquarie of the gas transmission and metering business going to contribute to the achievement of net zero and, in the shorter term, improving security and cost of gas?
Stephen Smith: The context of that is that we took the decision about a year and a half ago when we bought WPD’s distribution businesses that we wanted to rebalance our UK business more towards electricity than gas, which is why we are selling that business. We still see a significant role for gas in the transition. We still own some large gas businesses in the US and North America. We still own the Grain LNG facility, which is very important and has been for a number of years. That was part of our desire, because we own the transmission network here, to look at how in the UK, through the ownership and distribution, we could deliver on net zero.
That is a long way of saying no to your question as to whether this a big change or whether it should impact on net zero. The gas transmission system potentially has a big role to play. We talked about the potential role of hydrogen. We just decided that for us at the moment we wanted to focus in the UK on our electricity network assets.
Viscount Chandos: It is subject to regulatory approval.
Stephen Smith: It is, indeed.
Viscount Chandos: Do you anticipate concern, for instance, about the degree of leverage in the acquiring structure? I understand there is a high level of borrowing.
Stephen Smith: At the end of the day, as you said, it is up to regulators to decide on that. Macquarie already owns the Cadent Gas networks, or a significant proportion of them. Those are the local distribution systems. It has owned and continues to own other infrastructure; it is a major investor. I think you had somebody from Macquarie here talking to you about the scale of its investment in the UK and in energy more generally.
Viscount Chandos: Simon Virley, you talked about 10 years as a timescale for nuclear, and that implies small modular reactors rather than the large-scale reactors. How important do you see it in that timescale and beyond in terms of energy supply?
Simon Virley: The Climate Change Committee has talked about potentially a doubling of electricity demand by 2050 as we electrify transport and heat. I take the view that you are going to need all the sources of low-carbon power you can get. There is a potential role for small and large-scale nuclear in contributing to the volume of low-carbon electricity we need in the 2030s and 2040s. I would not say that there will be much by way of new-build nuclear by 2035, which is the date the Government want their net-zero power system to be up and running.
This is more about the volume of low-carbon electricity that we are going to need in the 2030s and 2040s, just because of the timescales I mentioned. My answer was “at least a decade”. I understand that some of the proponents of small modular reactors are saying that they hope to get the first ones commissioned by 2030. That looks stretching.
There remains the question of cost. Can the cost of nuclear come down to anything like what we have seen with the cost of renewables, taking account of the system benefits of having firm, low-carbon power? Those are the two challenges for nuclear—cost and timescales—but it potentially has a big role to play.
Viscount Chandos: Public concern about energy issues ebb and flow. The safety issue and particularly the disposal of nuclear waste has perhaps gone down the ranking but has not gone away in terms of public concern. Are we deluding ourselves that public support will be there when decisions have to be made?
Simon Virley: The polling suggests that public support is still broadly there, but you are right. The question of waste has not gone away, and that remains a big outstanding issue that still needs to be sorted.
Viscount Chandos: Do you have a solution?
Simon Virley: When I worked in the department, we tried to move forward on the geological repository. It has still not moved that much further forward since I left, as I understand it. There is still a long way to go to solve that problem.
The Chair: I know that Lord Rooker and Lord Fox want to come in. I have a quick question for you. Everyone talks about the cost of renewables going down. Is there some calculation that you have that sets out the cost of renewables, including the obvious cost of getting long-duration storage batteries plugged into that and the grid, so that one has a view of this cost to make wind reliable as well as affordable and renewable? Is that something that you have seen?
Simon Virley: I have seen estimates of that in the range of £10 to £15 per megawatt-hour. If you take the last offshore wind auction that came in at just below £40 per megawatt-hour, you might need to add £10 or £15 to that to account for the system costs. I have seen estimates of that order.
The Chair: Is that in the public domain? Is that something you could share with us?
Simon Virley: There are estimates in the public domain. I am happy to send whatever I can.
The Chair: If you could, that would be very kind.
Lord Rooker: I go back to our previous discussion in a way, because I am very conscious that we are covering the UK. In the context of the integrated system on the island of Ireland—and Northern Ireland is still part of the UK—there are interconnectors to England. They are upset for various reasons, and are talking about interconnectors going straight to Europe. In the context of the integrated electricity market in Ireland and the plan, which we have referred to as a GB plan, is there an effect on the market in Ireland?
Simon Virley: There will be because, physically, there are connections, so, yes, there will be an impact of that. As you say, the Irish market is run on an integrated basis, north and south, and there are plans to build an interconnector between southern Ireland and France as part of the European Commission’s plans. So, yes, there will be—but, in general, further interconnection is a helpful thing, because it gives diversity of sources of supply. I have always thought that diversity is an important watchword in energy, because you do not want all your eggs in one basket, basically.
Stephen Smith: We have built five new interconnectors between the UK and Norway, Netherlands, France, a second one, and Belgium. The reality of renewable systems will be much more transmission offshore. If historically interconnectors have been single point to point, a large cable between two countries, you will start to see networks evolve where you might have wind farms that sit off the coast of Ireland that have connections into the Irish grid and the British grid. You will see a lot more of that. It is probably something that we have not talked about, but a big part of the plan will also be what the offshore networks start to look like, for the reasons Simon said in a renewable system. We now have access to long-duration storage—it is called Norwegian hydro—because we built a 700-mile cable up to there. It is in everyone’s interest to do that. There will be times when the wind is blowing in Ireland when it is not blowing here, and vice versa.
Q159 Lord Fox: If I am running this fabulous new Bank of Britain energy firm, how much nuclear power should I budget for by 2035?
Simon Virley: New nuclear or existing nuclear?
Lord Fox: New nuclear.
Simon Virley: My answer would be not an awful lot, because not a lot will get built by 2035.
Lord Fox: Not an awful lot or none?
Simon Virley: The proponents of SMRs are saying that they can get the first ones on board by 2030. That looks like an ambitious timescale at the moment, because regulatory approval is not due until 2024 at the earliest, which would mean six years—and we are 15 years and counting on Hinkley.
Lord Fox: That is for something that has never been built once.
The Chair: We are running over time, so can I pick up on that at this point? I am sorry if colleagues need to slip away. What I am taking from everything you are saying is that, if you were Kwasi Kwarteng, you would look at wind in particular and expedite the planning process. You need to look at the demand side, in particular energy efficiencies, and expedite that. What else is there? Are there other things that we should look at in terms of LNG plant to make sure that we can improve supply of LNG and other things? Fracking is mentioned as well. Just for the full panoply, is there anything that we have not touched on that you think is important for that gap before nuclear comes online?
Simon Virley: I would add a couple of things to your list. We have not really talked about how you run the grid more smartly in future, in essentially having the signals and the transparency of data between what is happening on the transmission system and the distribution system so that you can manage capacity more effectively and reduce consumer bills that way. Steve referred to constraint costs earlier. We talked about long-duration storage, which is an important part of it, and interconnectors to provide diversity.
The Chair: Sorry, just to stop you on long duration, when is the new technology going to be at scale and viable?
Simon Virley: That could be at scale and viable later this decade in terms of the timescale. It requires some incentives to be in place, as I mentioned. They are not in place.
The Chair: Sorry, you can finish your list.
Simon Virley: I was going to add that, apart from energy efficiency, we have not really talked about the demand-side response very much, but there are lots of technologies in terms of the demand-side response and how you use them that we have not really spent a lot of time on today but that are very important.
The Chair: Out of those, which ones do you think would deliver the fastest result at scale?
Simon Virley: On the demand-side stuff?
The Chair: Yes, on the demand-side stuff.
Simon Virley: Start with the demand side every time.
The Chair: On the demand side, we have retrofitting. What else?
Simon Virley: Demand-side response technologies that basically enable you to flex the demand to meet what is increasingly intermittent supply. Rather than having a system that is essentially able to turn up and down, we now have intermittent supply, so we have to make sure our demand can respond.
Lord Fox: On the long-duration storage, you said that hydrogen is one of those things and there are competitors. I do not think you enumerated or talked about what those competitors were.
Simon Virley: I referred to pump storage as an example.
Lord Fox: Pump storage. And batteries?
Simon Virley: Yes, batteries.
Stephen Smith: There are non-lithium-ion battery solutions that have broadly more chemistry. There are various technologies. There is compressed air as well. There is literally a whole range. Broadly, their characteristics are that lithium ion is good for four to eight hours, but there are things where you can store the energy, and economically, for days.
Lord Fox: Once you had the contract structure sorted, you would let the market sort out which of these would work best for them.
Stephen Smith: It is also worth saying that this is a global problem. The US is spending vast amounts of innovation funding on this, as are China and everywhere else. Everyone understands that long-duration storage for energy systems is a problem that the globe needs to crack. It is not unique for us.
Q160 The Chair: I am going to ask one final question. Fracking has become a political issue here, as you know. It has always been, I suppose. Very briefly, is that a viable option that the Government should or should not explore? If so, in what timeframe would it possibly yield any results?
Stephen Smith: I offer no expertise in this. It goes back to some of the previous questions. Our problem with gas, to the extent we have a problem with gas, is largely one of price, because of our connection to Europe. The big problem with Russian gas, sadly, is Germany’s and Italy’s, but we are hooked to their prices because we export, and so we should. I would look to the North Sea first, because we know that there is resource there. The problem with fracking is that people look to the US but, as we know, it is a very different geography, and they have some particular factors there.
The Chair: Simon, do you have anything to say?
Simon Virley: We live in a very crowded island, and at the times we have tried this before it has not been possible to get public consent.
The Chair: Also look to the North Sea first.
Simon Virley: Look to the North Sea first.
The Chair: Would you see from your vantage point that there is any difficulty in anyone financing that North Sea development or new explorations and infrastructure?
Simon Virley: No, because the incentives are there at the moment. There may be some companies that do not want to do it anymore, but that is a matter for them.
Baroness Kramer: I wanted to raise with you the issue of stranded assets. We have had evidence from people who have said that, if you start exploring, the price you pay is ending up with stranded assets. If we try to plan this so that everything gets used up and nothing is left stranded, it does not work. Would you share that opinion? Do you think that government is going to have to step in and take that stranded asset risk because no commercial company will?
Simon Virley: Corporate disclosures now with the new TCFD rules mean that a lot more information is going to be in the public domain for investors to assess whether a company’s transition plans are credible and whether there is the risk of stranded assets in any investments that they have made. That is a big change with TCFD-mandated disclosures this year coming into effect from April. My team is working on a large number of those, and they will provide huge information to the market about whether companies have credible transition plans.
Baroness Kramer: My question was very slightly different. You have talked about looking first to the North Sea. Potentially, if you are going to expand exploration there, those fields will last beyond the date when they are required. You have a stranded asset. Is anyone going to invest in that without some kind of backstop to take the risk and to take the asset at the point that it is no longer of use?
Simon Virley: Coming back to some of the things we were talking about earlier, there is an enduring role for gas, if you have conversion to hydrogen and you have carbon capture and storage. Just to tie the conversation together, I would advocate really going all out to produce that hydrogen economy and that carbon capture and storage system, because then you have an enduring role for gas in your low-carbon energy system.
The Chair: Very good. Thank you so much. I am sorry that we have gone on way over time. It shows just how much you have been adding insight. We are really grateful. We probably could have gone on and on, but we will draw stumps there. Thank you both very much.
