Revised transcript of evidence taken before

The Select Committee on Science and Technology

Inquiry on

THE RESILIENCE OF ELECTRICITY INFRASTRUCTURE

Evidence Session No. 2                            Heard in Public               Questions 17 - 28

Tuesday 21 October 2014

11.40 am

Witnesses: Sarah Rhodes, Craig Lucas and Andy Shields

USE OF THE TRANSCRIPT

Members present

Earl of Selborne (Chairman)

Lord Broers (co-opted)

Lord Dixon-Smith

Baroness Hilton of Eggardon

Lord Hennessy of Nympsfield

Baroness Manningham-Buller

Lord O’Neill of Clackmannan

Lord Peston

Viscount Ridley

Lord Rees of Ludlow

Lord Wade of Chorlton

Lord Willis of Knaresborough

Lord Winston

________________

Examination of Witnesses

Sarah Rhodes, Head of Energy Resilience, Department of Energy and Climate Change, Craig Lucas, Head of Engineering, Department of Energy and Climate Change, Andy Shields Head of Security of Electricity Supply, Department of Energy and Climate Change

Q17   The Chairman: Could we reconvene? I welcome colleagues from DECC who are joining us once more, familiar faces here. Could I start by inviting you to introduce yourselves? If you would like to make any opening statement, please, feel free to do so.

Andy Shields: I am Andy Shields. I am head of the security of electricity supply team in DECC. My responsibilities include the design and implementation of the capacity market and short-term security of supply.

Craig Lucas: I am Craig Lucas. I was slightly mis-billed in the intro document there. I am the head of engineering for DECC. My responsibilities include looking at cross-cutting engineering issues for the department and I am also the programme director of the DECC Innovation Programme.

Sarah Rhodes: Good morning. My name is Sarah Rhodes. I am the head of energy resilience in DECC, which means that my brief is supply disruption, supply breakdowns, both avoiding them if possible and dealing with them if they occur.

The Chairman: Thank you. Would you like to make an opening statement or shall we go straight into our questions?

Andy Shields: We will just go straight in.

Q18   Lord Hennessy of Nympsfield: I declare an interest: I am a fellow with the British Academy. I am not sure how that touches electricity but it is meant to touch everything, so I will declare it in case. Can I ask Sarah a resilience question to start off with? In general, how resilient is the system? I wonder if your answer could cover the implications for the next two winters and the outages that we have been talking about and know about, including the new one yesterday and also how we got into this position of relative vulnerability. Also, insofar as you can safely in public, please talk about the cyber threats and the critical national infrastructure problem and the degree to which the Chinese and the Russians—just to take two countries at random—could do considerable damage to our grid, to encourage us to be more pliable in other ways. I know that is delicate for a public session but if you could range across all of that, I would be very grateful.

Sarah Rhodes: Sure, yes, I am happy to. There is a lot in there. First, on resilience, the system is pretty resilient. When we compare it to international comparatives, it stands up well. We have a system that is proven in operation to be reasonably reliable. That does not mean to say that every problem can be mitigated. There are all sorts of threats to the system around weather, accidents, fires, as we have seen, hostile attack, technical failure—there are all sorts of things that can go wrong. They can be mitigated, but it is impossible to avoid any form of risk. At the end of the day you have to balance issues like affordability and resilience. There are a whole set of issues there to be balanced.

In terms of electricity outages, we have seen a few lately. In fact, this cluster of events is unusual. You do not usually see three fires, for example, this close together. There are all sorts of questions to ask around that, but there is no reason in fact to suspect that there is anything particularly sinister behind this or there is any more than a simple conjunction of events, although we and the electricity industry will be looking at this very carefully.

The incident at Didcot, again, appears to be a simple fire. The fire is now out, as of about 5 o’clock yesterday afternoon. The engineers are on site to try to establish what was the cause of it and, indeed, how bad the damage is and how long it will take to restore the one unit. The second unit is working as usual. At this point there is nothing to suggest that either the cause of the incident or the time to restore the unit are particularly concerning, but it is very early days and RWE do expect to say something on that later this week. I think that answers many of your questions.

Coming on to cyber, there is a lot of work going on with the industry, with DECC, with the security agencies to analyse the cyber systems, to define what is critical national infrastructure and to establish the degree of vulnerability protection to this threat. It is not a new threat, but it is a fairly recent one. The industry does not start from a position of being unprotected—quite the opposite. The industry is probably ahead of the game relatively.

But what we are doing is ensuring that there are audits done by the security services of the resilience of each critical piece and it is like the layers of an onion—you start with the centre and you work your way out. A lot of mapping is going on as to how the system operates, where all the links are and a lot of work is going on, both with individual companies and collectively, to establish things like minimum standards but also to make sure that each individual business is resilient, so there is a lot happening.

Lord Hennessy of Nympsfield: Would I be right in thinking that, since the last period of severe outages, if somebody came back from the Civil Contingencies Secretariat of those dreadful years of the 1970s and they listened to you and they read all your stuff, they would say that the range of threats has all gone one way—it is not exponential but it is noticeably all one way? Do you have any technologies that you can cheer us up about that might be visible now, almost touchable, that will reduce our vulnerability over the next 10 years, which is what we are looking at?

Sarah Rhodes: Looking at the historical parallels, in fact the system has steadily got more reliable. There have been increases in resilience across the whole piece. There is no magic answer to this. There is simply the business of learning from analysing threats, analysing incidents, exercising and looking at risk factors and just trying to ensure we know a little bit more each time.

Lord Hennessy of Nympsfield: What worries you most as an individual, because you have to carry the can? You will not get sacked, but as resilience in DECC you will be before Select Committees and people will be deeply offensive to you if it all goes wrong.

Sarah Rhodes: I fully accept the accountability for that and I am just noticing that the last answer was in terms of “Who do you shoot?” You are not short of people to shoot. What worries us most? Obviously the big one for electricity is a black start, where you lose the whole system. It has never happened to us. It has happened in other places. We do a lot of work constantly on how do you start up again because that is not entirely a straightforward exercise either. It is making sure we are absolutely ready for the big one. But there is generally no shortage of things you can worry about if you choose to.

Q19   Baroness Manningham-Buller: Can I just make an observation that is rather naughty? I do remember the case when the IRA was going to destroy the electricity in London, taking out all the electricity substations and in all of this we did not think very much about that. I want to ask you about the balancing system. We had quite a helpful explanation from the last speakers about how this works. Could you tell us whether you think it is going to be sufficient for the next few winters?

Andy Shields: Do you want me to take that one? Just to explain the process going ahead, in 2013 Ofgem produced its capacity assessment that suggested margins were going to reduce from reasonably high levels—or in fact very high levels over the past few years—to something around a more normal level of capacity. But for the next two winters, the winter of 2014-15 and the winter of 2015-16, there were some particular risks around the level of capacity that we would have on the system. As you have heard already, National Grid is procuring some additional balancing services for these two winters. That would get us back up to a level where we can have confidence and comfort that the margins are going to be okay over the next two winters. The analysis suggests that margins will begin to be even more comfortable towards the end of the decade.

Baroness Manningham-Buller: What would make you uncomfortable about those margins when you say the system gives you confidence? What could change that?

Andy Shields: I do not think you can ever have 100% confidence that any electricity system will be able to deliver. You see short-term events, particularly around storms and weather, those types of events or you can build resilience against them but you cannot protect 100%. In terms of the amount of capacity available to the system, you could see major systemic events, as you saw in Fukushima, but regarding the types of outages that we have seen recently—a fire at a particular power station—the system is generally resilient against those.

Baroness Manningham-Buller: One of the things this Committee is trying to get its head around—perhaps I should not speak for the Committee; I am trying to get my head around—is the market forces here and the policy interventions of Government and whether one distorts the other. Do any of you have any observation on that on this subject?

Andy Shields: The major driver for investment in capacity and ensuring that capacity is available at a particular moment is the electricity market. It is demand and supply and recently Ofgem has moved to improve the price responsiveness of the electricity market. We already start from a position where the signals are there for capacity to be available in tight situations. You look at what has happened historically over the interconnectors and, when we do see periods of high demand in Great Britain over the winter, you see electricity being drawn to the UK, and that should give us confidence.

As I say, with Ofgem’s reforms in this area and with the third package of EU legislation that has been brought in recently, we should see even more price responsiveness. The market is generally sufficient for that short-term measure. Where we have seen problems—and that is why the Government has developed the capacity market—is the potential for longer-term investment in reliable capacity. The concern there is that you will not get enough of this reliable capacity being brought forward without some type of intervention in the capacity market.

Q20   The Chairman: The supplemental balancing reserve, effectively and quite sensibly, rewards people for being ready to operate rather than selling their product but, of course, what is also needed alongside that is demand management. Do you think that we have sufficient incentivisation towards demand management or is this a bit of a Cinderella, do you think, compared to standby generation?

Andy Shields: In terms of the short-term measures that National Grid is introducing, there is both a supplemental balancing reserve and a demand side balancing reserve. There are two products there, one of which is traditional generation and the demand side is obviously focused on the demand side. That can be back-up generation but it can also be load reduction. There is a new product out there for the demand side, but it is fair to say that there is significant space for more capacity to come from the demand side and there are a couple of things here to point out.

The first is, looking at experience in the United States where they have had capacity markets and capacity mechanisms for a number of years, you tend to see a very significant growth in the amount of demand side that participates in those markets after the introduction of capacity mechanisms. In the GB capacity market, the demand side is eligible to participate and the first auction will be held in December of this year. In addition, there will be two bespoke auctions held just for the demand side held in 2015 and 2016 and the explicit purpose of those auctions is to help grow the capability and capacity of the demand side sector. With those interventions you should see an increase in the amount of the demand side response available over the coming years.

Lord Peston: I am a little lost. We were told by the earlier witnesses that, for example, if there was an outage on a grand scale, the City of London might well close down for the day because it is all electric. I must say that would not break my heart—the country would be a lot better off. Does the back-up generating capacity of users like our hospitals fall within your remit? You were alluding to it in your last answer.

Andy Shields: The back-up generation resilience is for Sarah; I am more of the market and the incentives.

Lord Peston: Right, but does it fall within your department’s remit?

Sarah Rhodes: Yes.

Lord Peston: My obvious second question is: how do you fulfil your remit about that or do you leave it to the hospitals and so on to do what they need?

Sarah Rhodes: We have a whole set of processes that come into play if there is a shortage. Those processes are there to protect essential users, they are very regularly dusted down and that priority-users list is updated on a very regular basis. Alongside that we also expect key users to have their own business continuity arrangements so that they do not start completely unprotected. But, clearly, in the event of a big system issue then it is very much a question for Government working with the sector to ensure that electricity flows to where it is needed.

Q21   Lord Broers: What do you think these reserves should be? I note that the National Grid has sought out a demand side balancing reserve of 319 megawatts, which is less than 0.5% of the national peak load. What do you think is sufficient? What would you like to see those reserves at?

Andy Shields: Government last year decided to introduce reliability standards within the electricity system. That was done primarily to inform how much capacity to buy in the capacity market. That reliability standard says that there should be no more than three hours’ loss of load expectation in a year. Let me just be absolutely clear there: what that does not mean is three hours of black-outs a year. It is three hours where the system operator begins to take action to keep the system in balance. If you look at that reliability standard you then ask the question: given what is predicted to happen to capacity margins in the next couple of winters, how much additional balancing services do you need?

You are right to say that National Grid is already procuring some demand side balancing reserve. It ran a tender for some additional balancing reserve over September. It will announce the results of that, I believe, on Tuesday—certainly early next week. That will tell you the volume of additional services that is being put into the reserve. But I do not think it will be jumping the gun too much to say that what that will mean is there will be sufficient reserve to meet the Government’s reliability standard through this winter.

The Chairman: On the capacity market, do we have anything more on that?

Lord Broers: Yes, the question here has already been dealt with to a certain extent, the question being: will the new capacity market be effective at balancing supply and demand in the medium term and is there a risk that the capacity market will support too much capacity? It has already been said what we are worried about perhaps is an open-ended opportunity for suppliers to make a bit more money by supplying more than we need and so on.

Andy Shields: The way that the capacity market works is it is a tool to ensure that we have sufficient capacity in the future. The first step is to make a prediction of how much capacity we will need a number of years ahead. You then run a competitive auction for all types of capacity to participate in, so you get the most competitive outcome. The winners of those auctions have to promise to be available in the year that we want them or they face financial penalties. In that way we ensure that the capacity is there able to generate.

The question was around: how do you make sure that we are not buying too much capacity? Clearly, the big issue here is you are making a forecast four years ahead of what electricity demand and the amount of capacity that you need is going to be and things change over those years or can change over that period. What we have done is said that we will buy some capacity four years out and then one year ahead, when we want that capacity in place, we will also hold a second auction to be able to top up if demand is increased, for example, if there is higher economic growth, or we buy a little bit less in that one-year-out auction if demand has not risen as expected. In that way you ensure that you should be pretty much where you need to be and that you are not over-procuring capacity.

Lord Broers: Another concern is: how likely is it that the capacity market will prolong the life of existing coal stations and what are the implications for carbon emissions?

Andy Shields: The capacity market is technology neutral. It allows generation, be it gas, coal or nuclear. It allows demand side. It is new and existing capacity all competing against each other on the basis of cost. We do not expect the capacity market to discriminate. In terms of what the future for coal is, clearly, there is a need for coal in the short term to keep the lights on and to keep the lights on effectively. But as you approach the medium term, as one of your previous speakers was suggesting, there are things within the market that will make it increasingly difficult for coal to generate.

You have heard about the LCPD and the IED. The fact that we are bringing on a very significant amount of low-carbon capacity will push coal higher up the merit order. Similarly, things like the carbon price floor will do the same. By the time you reach the mid-2020s there will be a very small amount of coal capacity generating and by the time you get to the 2030s it is likely there will be no coal at all. In terms of what the capacity market itself and the three-year contracts that are available will do to decarbonisation, all the scenarios suggest that decarbonisation targets will be met.

Viscount Ridley: Just quickly on that, a cynic might say that the capacity market is a euphemism for subsidising fossil fuels as well as renewables, because the effect is that if I am running a gas station but I am bidding for the capacity market—that is, to be available but not to run the whole time—I am going to bid a higher price than if I could run it the whole time in the absence of renewables.

Andy Shields: What the capacity market does, essentially, is it buys the total volume of capacity that you need. The electricity market will send us signals as to which capacity is called and which capacity gets to sell electricity, be it gas or any other fuel. The question is probably getting at whether you need gas to back up wind, and to some degree the answer is yes, you do need—

Viscount Ridley: But you end up paying more for the gas than you would if it was not backing up wind.

Andy Shields: If you just relied on a system of gas you would have different costs in there. I do not have the figures and the answer, but obviously there are volatile gas markets, there are resilience issues around relying on just one type of fuel.

Viscount Ridley: But, other things being equal, if a gas station is running less of the time it is going to charge a higher price.

Andy Shields: Yes, that is true.

Q22   Lord O’Neill of Clackmannan: We are going to move on to contracts for difference, which you might say is the other side of the coin. We are told that contracts for difference should encourage low-carbon investment. In the first instance could you tell us how you imagine and how confident you are in contracts for difference making a difference for the timely investment in low carbon?

Andy Shields: I will. I am not the person responsible for CFDs, but obviously I know some amount about it, so I will just put that out there upfront. You are already seeing a number of contracts under the final investment decision already being allocated. I think we are talking about £12 billion-worth of contracts already signed. That represents about 4.5 gigawatts of new capacity being brought on by the CFDs. You then have the first allocation round, I think, taking place in December. That will bring on more. So we are already seeing very significant interest in CFDs, and we are already seeing contracts being signed. Hopefully that answers the question.

Lord O’Neill of Clackmannan: You are telling us you could have a clutter of these technologies. Mr Lucas, is there anyone in the department trying to establish whether or not this market process is coming out with the kinds of answers that we want? Rather than just volume, are we getting quality as well?

Craig Lucas: I will declare an interest: I am a fellow of the IET as well. We have a central model called the dynamic dispatch model that looks at that supply and demand balance and looks at the generation merit order. In the process of writing the EMR delivery plan, we gave that whole model to National Grid and asked them to take it to pieces and QA it. Because they operate the system, they could inform us whether we had made any mistakes in our assumptions. There were some quite robust discussions about some of the assumptions in it and it has been improved as a result.

The modelling we have shows that we have a mix of technologies. It is partly to do with the way that CFD budgets are allocated. That is more a policy question rather than a technical question, but the modelling we have shows that we do get a mix of technologies. We can have a sighting shot of what that mix is but we are not trying to lead the market. In general the answer is, we do have a fair idea and it is balanced. I do not know if you want to add to that?

Andy Shields: I can only say that the policy intent is to ensure that we support a range of technologies. Ultimately, as has been seen through solar, the cost of those technologies comes down and then you are in a better position to procure those that are better value for money and more resilient.

Lord O’Neill of Clackmannan: We have had the experience of solar, where prices have collapsed and, as a consequence, the need for a subsidy has been reduced. Is this system going to be sufficiently flexible—I do not want to use the word “resilient”—to accommodate radical changes in markets in the manner that we have seen in respect of solar generation in the last couple of years?

Andy Shields: If you mean the system whereby contracts for difference are allocated, the proposal is to move on a staged basis to a system where you have competition between technologies—we are already seeing some of this in the first allocation round—based on price. There is a staged plan to get there and that is the ultimate end game.

Craig Lucas: The other element to that is in areas like solar PV, where we see it as a very fast-moving market with some very dynamic things happening with pricing, we—my department and the Office for Renewable Deployment, who are not here today—regularly collect evidence about connection applications and things from the market. Then we filter that and look at it. We get that evidence from Ofgem and from the network businesses as to what is going through the planning and consent processes so we have an understanding of how we think the market is evolving.

Q23   Lord Willis of Knaresborough: It does seem to me that the conversations we are having on this question bring us back to the first panel, because there is so much interconnection between each of your roles in terms of answering the question of resilience, market supply and so on. I wonder whether, within DECC, you have approached this idea of total systems engineering so that all the bits are brought together for consideration. Is it an attractive proposition to DECC, is it actively being considered and, if not, can you explain perhaps why you are not considering the things in the system as a whole?

Craig Lucas: We are considering it. We set up an internal project probably about a year ago to look at the system issues holistically. That involves our economic analysis colleagues, it involves the engineering people and it involves those people that build models for DECC. We have a head of modelling and we have a suite of tools and models that we use to set our policy suite. The way that we have approached that is at two levels. One level is looking at the electricity system and what we see as the key resilience—partly resilience but they are partly market evolution—questions emerging for the electricity system. We have also looked at it at a more whole system level. So there are some bigger questions, like what proportion of it is going to be electrified and what is the evolution of electric vehicles and so on. We have those two work strands that are going on as underpinning evidence for all of the work that is going on in the policy space, and we have a number of academic partners working on them with us. Certainly some of the work that the IET has been doing is feeding into that as well.

We have various fora where we can talk to stakeholders in the industry, like the Smart Grid Forum. There is the Energy Network Strategy Group and various other fora where we can test, with industry, whether our emergent understanding of the issues is correct or not. Some of the players in the industry have very good data but none of them has the complete picture, so we are trying to draw that together in a more holistic way and it informs the way that we build and specify our modelling as we improve our understanding of how the market is developing.

Lord Willis of Knaresborough: Do you see this as your responsibility, and will there be anywhere where this will be published for scrutiny and examination?

Craig Lucas: We certainly see it as our collective responsibility as DECC, as the analytical leads in DECC. I am one of the analytical heads in the department. I am not sure we have thought through how we publish that and when, because we have been very much at the stage of defining what the key questions are and how that affects our internal work programme.

Q24   Lord Rees of Ludlow: I would like to ask about the particular problem imposed by the growing dependence on renewables. In particular, to what extent does the rapid growth in intermittent renewables present challenges to resilience, and how do you think we can reduce these challenges?

Craig Lucas: There are a few different facets to that, and I will treat them in no particular order. One of the first things you can do is look at the way you forecast. It takes four hours to start a large gas plant from cold, so if you can improve your accuracy of forecasting four hours hence you can operate more efficiently. There is a whole piece about operational approach and data and evidence, and that is one set of solutions. The National Grid is looking at that very hard.

A second area is looking at flexible technologies, and in that bracket there are probably four. We have touched on demand side response; we have touched a bit on electricity storage in some of the earlier evidence. Flexibility of generation comes in two flavours. It is possible to buy thermal generation that is more flexible than the legacy plant that was built 20 years ago. The specification of thermal power plants evolves. As we have been developing our thinking, we have been talking to manufacturers of generation plants about how that works and what that looks like.

In addition, if you look at the renewables generation, the people that build and specify renewables generation are increasingly being pressured, not just in the UK but in other markets, to minimise its impact on the grid. So the technical capability of renewables generation is evolving as well. There are things that, for example, a wind farm can do, if you buy it today, that were not required in people’s conception of how it would interact with the grid before, but that will be an evolutionary process.

There are also things about how we use interconnection. Again, with power electronics and with the evolution of the high-voltage DC technology, there are things you can do with interconnectors now. For example, the east-west interconnector with Ireland is a much more flexible animal than the England and France interconnector. The challenge for us is all these things are evolving, they are all part of our landscape, and it is constantly understanding what technology readiness levels they are at and how they might influence the overall game plan and eventually bring essential products to market.

Lord Rees of Ludlow: The long-distance DC grids have clearly been a good thing, but what about other ways of storage—batteries, capacitors and all that? Are you optimistic that they could be game-changers at any time?

Craig Lucas: We would love them to be. I would qualify that by saying that I personally have been involved in storage for a long time and it still has to get down the costs curve. That is the fundamental challenge with it. When DECC looked at storage, there are a number of technologies. Briefly, there is the electrochemical battery world; there is the electromechanical world of fly-wheels and things of that nature; there are other thermal processes; and then there are other physical processes like compressed air and hydro storage. We felt that the challenge is to get those technologies up the technology-readiness curve and ultimately drive the cost down. That is why we put £20 million of innovation funding into demonstrating some of the different technologies at scale to see where the cost reduction potential is, because technically they are all there—you can technically integrate them to the grid—but they are still too expensive.

Lord Rees of Ludlow: Slightly off the mark, could you say something about CCS? If we had CCS, of course, all these problems would be eased. Is that going to come on in a reasonable timescale and be economic?

Craig Lucas: Again, the technology for CCS exists. We have a company we are working with who are building a demonstrator in Texas and they are going to pump the CO2 down a well and earn money for it. The technology does exist. The main technology risk in our whole chain demonstration—I am not the CCS team, so I am paraphrasing from an engineering point of view—is in understanding storage in our geology. But the power station and the CO2 process engineering is relatively well understood. Part of the challenge from that process is understanding how to make CCS generation flexible, and that will greatly increase its value to the grid. But, yes, we do see it as a potential game-changer and that is why we have committed to run the CCS competition.

Q25   Lord Broers: Can I ask a rather general question? When it comes to safety and building roads there is a number that enables one to decide whether one is going to do something that is expensive but makes it safer. It is an awful number and we do not want to talk about it. It is something like a life is worth £400,000 or something. Do you think you are going to the point where there is a number like that for resilience? One can always go on improving resilience and improving resilience, but there has to be a financial limit. To be intelligent about this issue, one has to, in the end, try to come up with a number.

Craig Lucas: I think that comes back to value of lost load. Do you want to add to that?

Andy Shields: The reliability standard that I mentioned before essentially does that. It trades off the cost of additional capacity against the potential costs of disruption. I believe last year DECC put out a paper that explained exactly how that cost trade-off had been taken and the decision made on the reliability standard for the electricity industry. We can certainly send it to the Committee.[1]

Craig Lucas: I would just add it is based on the economic cost not on the immediate loss of energy. It is an economical methodology that assesses the cost to the economy, through a series of econometric experiments. It is a recognised methodology. There are other methodologies.

Lord Broers: That would be very useful. Another very quick question: if the market price of electricity goes above the strike price, is the consumer going to see any of that?

Andy Shields: I am not the CFD policy lead, so I will have to take that one back; apologies for not being able to answer it today.[2]

Q26   Lord O’Neill of Clackmannan: What aspect of resilience is the supply of, for example, gas? There have been debates about whether or not we have a sufficient storage capacity. Indeed, there was a recent court case which has thrown out the judgment of one of your Ministers in the last few weeks. Are you reconsidering this question of gas storage facilities in the UK, given what has happened? Obviously, if you do not have adequate supplies of gas, then gas-fed power stations could come under threat, or businesses that use gas for power generation would be put in some difficulty.

Sarah Rhodes: Shall I take that one? We do look very closely at gas storage. Is there enough? There is obviously a very lively debate out there. I think it is constructive to look at the experience of March two years ago when the weather was unexpectedly cold and there was a huge surge in demand at the end of the season, when storage is bound to be relatively low. What we did see was that prices went up significantly, but we also saw, in a sense, the market acting as it is expected to do. As the prices go up, they draw in gas supply and the system was sufficiently supplied. So we do look very closely at the system in operation, because, after all, if we start building more gas storage, that has to be paid for. Again, we are trading off whether there is enough resilience in the system versus whether there is a case to put in more cost in order to buy yourself more resilience. We do keep a very close eye on it, not least because, as you say, we occasionally lose judgments and are forced to revisit our decisions.

Lord O’Neill of Clackmannan: What you are saying is that the system works provided the price mechanism operates and, at the end of the day, it is the consumer who pays for that. You have a responsibility to the citizen as a consumer as well as someone who wants to keep the lights on, and whether or not the gas storage capacity is sufficient to avoid these quite extreme changes. Other countries seem to be able to operate their system with fewer of these changes—these radical price spikes—but do so at the cost of having greater supplies of gas.

Sarah Rhodes: You are absolutely right, and the price equation, the question of what is affordable, is absolutely about whether it is cheaper to pay for the occasional price spike—and whether that is going to work to provide you with enough fuel—or whether it is cheaper to put more storage in. At the moment we are still in the former: that it is cheaper to pay for the odd price spike as long as we continue to have confidence that the market will deliver. But you are right that is the decision to take.

Lord O’Neill of Clackmannan: The concern is that the spike goes up very quickly but takes rather longer to come down.

Sarah Rhodes: We watch that very carefully.

Q27   The Chairman: You will have heard at the end of the last session evidence from IET that they favoured a new systems architect. I think the answer you gave Lord Willis suggests that you feel you are on the case within DECC and that you have the capacity to do what they are suggesting is required. Would you like to comment on the specific proposals of IET for a systems architect?

Craig Lucas: Yes, I will. We feel that the IET have been very helpful to us in helping to break down the resilience problem into some tractable sub-problems, particularly the way that they have convened a number of the industry players in an impartial setting, as a professional institution can, to look at the issues.

As came across in the previous evidence, while they have identified and quantified a number of risks and issues, principally about the end-to-end performance of the system, they have not yet proposed what the institutional framework for that might be. I would characterise the issues in two ways. One is that there is a set of technical things that we need to understand better, and that needs better modelling and better data and better technical expertise around them. That is a kind of advice point, an evidence point. Another point is then whether that leads you to taking any action to change something; that might be regulations or it might be standards or it might be the remit of somebody in the market.

On the first point, the way that we are thinking of approaching it is that with Innovate UK we are setting up a body called the Energy Systems Catapult, and its business plan is to look at the system integration issues of the energy system. We have been having a discussion with the catapult, as part of writing that business plan, that there is a work stream there for them to do to become a technical centre to look at those types of issues.

In parallel, there are other pieces of work we have been doing. We and the Government Office for Science commissioned the IET to do a study of the way that different people model the electricity system in particular. Understanding that these new challenges are emerging and the way that people model and share data might not be adequate for them, we have asked for a horizon-scanning piece that they are in the process of drafting with some of the industry players as well. What we are intending to do is to land that as a work programme in this new vehicle called the catapult, which would then give us an evidence base so that we could then look at it and say, “Does that inform our policy and regulatory landscape to do something different?”

Lord Peston: I am still a little lost. Our previous witness had this image of an architect, which was a hypothetical thing, which meant they would look at what that architect did. That would be my understanding of what they were saying. But then the architect has to get transformed into either a person or a committee or something. Am I to understand that you are working on that transformation and taking evidence on it? Because as at least one of my colleagues said, we would like to be able to report precisely on that as part of our eventual report. I am not clear what the architect is in the first place. I had assumed it was someone who would optimise, or something like that, within the criteria that gets set up. Can you enlighten us at all on where you stand as a department on that sort of thing? In particular, can we assume that the one person who will not be the architect is your Secretary of State?

Craig Lucas: We have not formed the policy position yet, to be really frank, but we are looking at all the issues that IET have raised—looking at whether they are issues that are effectively about centralising expertise and coming to a common understanding of the problem or whether they are more directive issues about the need for someone to control things differently. The outcomes that you might suggest would be quite different. It is a piece of work that we need to do. I do think that it is essentially a technical function and not a role of policy.

Lord Peston: Are you then telling us that, if we were to say something on this, we are on our own?

Craig Lucas: I think the line we are taking at the moment is that we welcome where IET are going. There is some real evidence there. How it moves forward we are not sure, but we are very keen to be part of the conversation.

Q28   Lord Willis of Knaresborough: My apologies, Chairman, for jumping the question earlier; I had not reached to page 6. I think this is an endless piece of work. The complexity of creating a piece of architecture that is decipherable by policymakers is such a massive task that it could go on forever. It is such an attractive proposition because systems engineering in all different forms is something that we are particularly bad at as a nation. We tend to have a silo approach to things. What would interest me is if you could advise the Committee as to what you think the priorities would be within that architecture. While you might create a very elaborate and intricate building, you actually start with a number of key places, particularly in terms of the foundations. I think at least this Committee ought to be able to examine and recommend where the starting point for that should be. How it ends up, what form it takes and who in fact runs it and owns it is something for immortal beings, not just humans.

Craig Lucas: I will try to start that discussion. One of the things is that the IET have defined a series of resilience challenges. You can then work down from them and say, “What things do we need to understand to answer those challenges?” There are clearly some things about different approaches to modelling the problem, so there is a stream of work around that. There is a stream of work around who has what data in the market, how they share that data and how they talk to each other, so that is a strand as well. Then there is another strand about, if you have started to identify the challenges, what mitigating actions you might take. They might be about things like codes and standards and you might start looking down that route as well.

There are several technical work streams that drop out. There is also a technology and innovation work stream about how you integrate all the new things that are coming into the system, including things like smart metering and demand side response as well. Then there is a policy and regulatory strand that comes out of it that says, “As we see how these things interact with our system, how do they challenge the policy and regulatory frameworks that we have?”

I would say as well that DECC at a top level recognises that the smart technologies question is something we should have more of a policy view on. We are going to set up a small internal policy team to look at that in a cross-cutting way from the policy perspective and look at the value to the consumer, so we are approaching from that perspective as well.

Lord Willis of Knaresborough: It would be enormously helpful to the Committee if you could articulate what you have just said, and those other elements, within a short document and let the Committee have it. In answering the question that the previous panel rightly put to us, it would be useful to say that this is a direction we should be travelling in and these are the elements that should be on that early part of the road.

Craig Lucas: Yes, that is fine.

The Chairman: I am going to bring it to a close now. It is the allotted hour for the conclusion. I reiterate what Lord Willis has said on any follow-up help you can give us. We will be taking evidence, as you know, for the rest of this calendar year or so, so there will be an opportunity, if you have further evidence, to submit it. You will, of course, also have an opportunity to correct the written record so far as it is factually incorrect. It will be sent to you. On behalf of the Committee I thank the three of you for some very helpful evidence.