Unrevised

Members present

Earl of Selborne (Chairman)

Lord Broers (co-opted)

Lord Dixon-Smith

Lord Hennessy of Nympsfield

Baroness Manningham-Buller

Lord Peston

Lord Rees of Ludlow

Viscount Ridley

Lord Sharp of Guildford

Lord Wade of Chorlton

Lord Winston

_____________________

Examination of Witnesses

Anthony Price, Director, Electricity Storage Network, Dr Charlotte Ramsay, Project Director for NSN Link, National Grid, and Professor Goran Strbac, Faculty of Engineering, Imperial College London

Q102 The Chairman: Welcome to this session of our inquiry into resilience in electricity. I have to warn you that the acoustics in this room are notoriously poor, and some of us are challenged a bit in hearing so if you could speak up that would be helpful. We are being recorded, so I am going to ask you, for the record, to formally introduce yourselves. If anyone would like to make an opening statement, do please feel free to do so.

Anthony Price: Thank you. My name is Anthony Price. I am the Director of the Electricity Storage Network, which is an industry group with members representing developers of electricity storage: project developers, users, consultants and academic institutions. Our intention is to create a favourable market for electricity storage in the UK, because we believe that user storage is in the national interest and also that a strong home base will support our industries as they seek to develop export markets. We have a strong track record in creating awareness of the importance of electricity storage in the industry. I should also point out that I am the founder of Swanbarton, which is a consultancy company that specialises in the commercial applications of electrical energy storage. We have worked for clients in the UK, Europe, America and Asia.

If I may, I can make a few comments about storage in order to set the scene.

The Chairman: Dr Ramsay?

Dr Ramsay: Good morning. I am Dr Charlotte Ramsay. I am Project Director for NSN Link, in National Grid. NSN Link is the proposed interconnector from the UK to Norway. In addition to that role, I am also the head of the Commercial and Regulatory Team in National Grid’s European Business Development Division. Just for clarity, I should explain that National Grid has a separate business development activity that exists separately from its regulated monopoly activity. So that is where I am based and where I work.

The Chairman: Thank you, and Professor Strbac?

Professor Strbac: Goran Strbac, professor working in energy systems, Imperial College. I specialise in development of new methods to assess value—in this context, the value of emerging technologies and the role of emerging technologies in supporting cost-effective transition to low carbon future. We have done a lot of work—my team has done lots of work—on quantifying the value of storage and interconnection for the Government and Regulators, both in the UK and in Europe, to inform the decision-making process among policymakers but also in industry.

Q103 The Chairman: Thank you very much. Perhaps I could start then by asking a rather general question. How great a role does electricity storage and interconnection currently play in balancing the electricity system? To what extent are we dependent on these technologies?

Anthony Price: Perhaps I may take that question first then, Chairman. Currently our electricity system contains about 3 gigawatts of electricity storage in Great Britain against a peak load of, say, around 70 gigawatts, and in Northern Ireland there is access to 300 megawatts of pumped storage in the Republic. By balancing the system, we mean both second-by-second maintenance of the system frequency and longer-term balancing of energy—for example, peak against off-peak. The use of electricity storage to provide second-by-second frequency regulation is well documented and National Grid do publish information on their balancing services. So, typically, frequency regulation requires about 1 gigawatt of plant and fast reserve typically about 500 megawatts or 600 megawatts. That provision could be met entirely by our current pumped hydro in GB. But it is also not explicit exactly how much of this is used at any particular time unless you start diving into the deep detail of the contract arrangements between the providers and the system operator. I am informed that our pumped storage is not fully utilised in this area, mainly because of the commercial arrangements.

The Chairman: Can you explain that? You say we have pumped storage and we do not use it.

Anthony Price: We do not use it for providing frequency or providing fast reserve in its entirety because the contracts between the storage providers and the system operator are not sufficiently favourable for that to take place.

The Chairman: That is very surprising.

Lord Broers: Can I ask why? What is unsatisfactory?

Anthony Price: I am not a pumped storage operator but, as I understand it, they need to recover a certain amount of their costs and, therefore, they put in place contracts either through tendering or through legacy arrangements to provide their services to the system operator, and if other providers of the same services can do so more cheaply then the contract will go to other providers.

Lord Broers: So it is too expensive?

Anthony Price: It could be seen to be too expensive.

Lord Broers: But it is the cheapest of the storage techniques.

Anthony Price: Yes, for bulk storage pumped electricity storage is very low cost.

Viscount Ridley: So is it competing against back-up generators, spinning reserves or something like that?

Anthony Price: In terms of frequency it is competing against typically CCGTs that can operate in a flexible mode. We have seen a decline in ancillary services prices over the past five or six years, mainly due to the fact that CCGTs have lost some of their energy sales and have been recovering their costs by offering increased ancillary services, often at very low marginal rates.

Lord Winston: Could you remind us what the efficiency of this pumped storage is? I cannot remember.

Anthony Price: I understand that pumped hydro, say Dinorwig, is about 75%. Modern pumped storage is achieving efficiencies up into 80%, 81%, 82%, as more efficient pumps and turbines are brought on stream.

Viscount Ridley: How does that compare with battery storage and efficiencies?

Anthony Price: It is about the same, if you compare it with the AC to AC component. Many battery providers will tell you that their battery is 86% or even 90% efficient, but if you include the rest of the system then it brings it down to typically the 75% to 80% area.

Lord Dixon-Smith: I want to understand what the competition is with pumped storage. Perhaps you can tell us who is beating these people on contract price and possibly why.

Anthony Price: I wish I could, but the tenders are not open to me. I am just an industry observer.

Lord Dixon-Smith: Can you tell us who, even if you do not know what or why?

Anthony Price: The main owners and operators of CCGT plant, which are typically the big generating companies, are now playing a more active role in providing frequency services.

Lord Dixon-Smith: Effectively, they are providing their own insurance.

Q104 The Chairman: If we could go back to interconnectors so we can be clear about capacity there, there is a very modest amount coming from the Netherlands, and then we are exporting to Northern Ireland, if you call that exporting. We are interconnected to Northern Ireland from England, and then of course the largest is from France. What sort of spare capacity would you assess there is on the interconnector from France?

Dr Ramsay: I can tell you a bit about the French and the Dutch interconnectors, because they are the two that sit within National Grid’s portfolio. Of the 4 gigawatts of interconnection that we have, there are 2 gigawatts to France and 1 gigawatt to the Netherlands, and currently both of those interconnectors are providing balancing services in different forms, so the Dutch interconnector, BritNed, can provide frequency response services to the system operator, which I believe it does at quite competitive rates and is being used relatively regularly since we started offering that service. It can do this because it has particular technologies that allow it to offer this kind of service to the system operators. Not all interconnectors that are connecting into the UK can have this dynamic overload capability, so they cannot all offer this service but those that do can do it very competitively. For BritNed there are also system operator to system operator arrangements, which means that National Grid can communicate with TenneT at times of system emergency or close to system emergency, to have arrangements to help manage during difficult circumstances.

For IFA, the French interconnector, it is slightly different. IFA is not capable of providing this frequency response but it does have commercial arrangements in place between the French and the UK system operators that allow effectively the interconnector to participate and offer balancing services, in the same way that generators may do once the market has closed. So IFA can offer potentially quite valuable and cost-effective services, whereby the French system helps us to balance the UK system, not even just at times of difficulty but just generally through the course of general operation of the network.

It does also have in place the same kind of services that BritNed has to be able to operate during time of system emergency, so arrangements between National Grid and RTE to allow those kinds of services to be provided.

Lord Broers: Do you know what the margin is in France?

Dr Ramsay: The generation margin?

Lord Broers: What is their minimum? Are they are 4% like us or are they up at—

Dr Ramsay: I am afraid I do not know the exact detail. That is something we can get back to you on. I think their margin is healthier than ours, but I believe that across Europe everyone is thinking about these kinds of questions.

Lord Broers: That is key, is it not? If there is a large high that creates a large cold system, France is going to be using a lot and Germany is going to be using a lot and so are the Scandinavians. So these links may not work.

Dr Ramsay: The links will work. Interconnectors will provide for flows and I think what is important is that all countries that we are connecting to do have some kind of margin. Those interconnectors that are more valuable in terms of providing, say, reserves or reserve services, would be where we are connecting to generation systems that are more diverse than our own—very different to our own. So, say, an interconnector to Norway, which is a predominantly hydro system, would have more capacity value than a connection to Ireland because, as has been pointed out, the Northern Irish system may be in more trouble than ours and the Irish system is much more similar to the UK system.

Q105 Viscount Ridley: On most days, I have been told, the Dutch and French ones are running at pretty well full capacity into this country at the moment. If that is the case, how do they help when there is an emergency? In other words, is there any spare capacity to suddenly give us power on a day when we have a demand?

Dr Ramsay: The point is that they are always helping for that reason. So they are always providing capacity and always coming into the UK. In terms of emergency situations, let us say the flow is going in a different direction because prices up to real time have dictated flow in a different direction. Because of the arrangements that we have in place, because of the market arrangements that are in place, the interconnector can be turned round to be able to provide flow in the right direction, to be able to support the system.

Viscount Ridley: Are we normally importing electricity from France most days, because their nuclear power is relatively cheap?

Dr Ramsay: Yes, that is right. The flows are normally going in the right direction.

Viscount Ridley: If we suddenly get a day when the wind drops, it is very cold and there are a lot of people watching television or something, how can we increase that capacity?

Dr Ramsay: They are not going to run any harder, but that does not undermine the contribution that interconnection makes to security of supply.

The Chairman: There is not a lot of spare capacity is what you are saying, but it is nevertheless making a valuable contribution at the moment.

Dr Ramsay: Exactly.

Q106 Lord Hennessy of Nympsfield: How do you expect the role of storage and interconnection to change in the future, particularly as electricity gets more and more decarbonised?

Anthony Price: I will pick this one up then. If you look at variable generation, typically from renewable energy sources, it has a number of implications on the network. At a centralised level, the system operator has to maintain frequency against a landscape of variable generation and, indeed, a more variable demand. When both the demand and the generation change, perhaps in opposite directions and at the same time, fast-acting response is necessary. Therefore, we expect to see a requirement for much more fast-acting response. Electricity storage is one of the four key tools to carry out that task. The four tools are: flexible generation, interconnection, variable generation and storage. You could argue that storage is perhaps one of the most certain of those because if you know it is there and it is going to work. So we expect storage to be used to maintain system frequency at the national level, as well as absorbing some of the so-called wrong-time energy that is produced, in order to play that back later, and often that could be at the regional level.

Ofgem have published figures giving details of the cost of rewiring Britain. Rewiring Britain is important because, as we move on to variable generation and renewables, and we start taking energy from fossil fuels into transport and heating and putting it on to the electricity sector, we could see the current peak load go up from 60 gigawatts—by using electric transport rising to 110 gigawatts, and if we have all-electric heating going up to 220 gigawatts. With those sorts of figures, the only way we can manage that is to put in storage locally in order to make sure that our local system does not get overloaded as well.

Lord Hennessy of Nympsfield: Can I ask Professor Strbac a supplementary? I have heard it suggested that storage is one of the great possibilities for transforming—I think that is the verb—the electricity scene. If we can get breakthroughs there, which are foreseeable, this will make a huge difference, and it is not speculative it is there for the taking. Is that your assessment?

Professor Strbac: Do you want me to say?

Lord Hennessy of Nympsfield: I was asking you, yes.

Professor Strbac: We have carried out analysis of economic and environmental performance of the GB system from now to the future in 2050. Regarding storage, it is certainly one of the technologies that potentially can facilitate cost effectiveness in relation to that future. Just to give you an insight—you have already hinted, regarding the questions about the efficiency of storage—our analysis suggests that, if we are to build the system now, we will be on the verge of building Dinorwig because the business case for Dinorwig was marginal.

Lord Hennessy of Nympsfield: The north Wales type of thing?

Professor Strbac: Yes. But on the positive engineering side I cannot resist not saying that if you ever go to North Wales—if you happen to be there—go to see it. It is a great engineering achievement. The electric mountain is phenomenal.

However, analysis suggests that the kind of elephant in the room with storage—with Dinorwig, for example—is that, although we cannot agree what the investment cost of that technology is, it is between three and five times more than a conventional gas generator. As we discussed, it wastes 25% of energy you put in. How desperate do you need to be to be building high investment cost plant that wastes 25% of the energy you put in? The systems going forward, with nuclear, wind and CCS, are becoming so difficult to operate that our analysis suggests we want to have seven Dinorwigs in 2030.

Of course it is indicated there are other technologies that can also support that system. Anthony has mentioned interconnection and flexible generation, but also demand-side response is certainly potentially a massive contributor to this. We have done the analysis regarding the competition of these sources in the provision of these fundamental services, and there is in fact, quite interestingly, quite a lot of synergy between them. So these technologies do not necessarily exclude each other completely from the game, although our analysis suggests that probably the strongest competition would be between storage and demand-side response. That depends how that future develops, what the cost is and so on. All of these technologies have a role to play, with significantly increased volumes, in running low carbon electricity system cost effectively.

Q107 Lord Broers: I have a simple question about storage and latency. At the moment, we have about 5% of our storage. Now, once the water is down the hill, how long does it take to pump it up again? If we use it all up in one day, how long does it take to pump that water back up? We are unlikely to be able to pump it up the next day if the high is still sitting over us and it is still cold. I think there must be a derating on the storage capacity we have, because of this problem—the same as with batteries. Admittedly, a lithium fluoride battery charges much more quickly than previous ones but pumping water up a hill does not necessarily get quicker, does it?

Anthony Price: May I take that question please? If I can give a bit of an introduction to try to simplify matters, the first point is that the parameters for storage often confuse people. We know that there is generally a misunderstanding between energy and power and energy and electricity. You need to think of storage, both in terms of its power capacity—so let us say its rated power—and also have an idea of how much energy can be despatched or the duration of time for which that power can be despatched. So a typical lithium battery or even, say, a car battery, if you discharged it at its nominal rate would take about an hour to discharge. Dinorwig takes five hours to discharge. If there is an inefficiency loss, a simple rule of thumb can be: it takes the same time to charge as it did to discharge, but you need to charge at a higher rate to overcome the inefficiency.

Could I just make a point about inefficiency? I know everyone here has very strong scientific backgrounds and is very good in maths. But to simplify matters, when you think of electricity storage—forget your physics lessons—the best way of describing it is that you take in energy that is often low cost and you give out power, which is of high value. If you put that in mind, although Goran is saying that it appears that we are wasting 25% energy, actually, at the time that you want the output from the storage device, whether it is Dinorwig or whether it is a battery, you really want the power and it is the power at peak times that is valuable. We know that just by looking at the prices in the power market.

Viscount Ridley: Can I just pursue this point about efficiency and wastage a little further? There is a term called “energy return on energy invested”. In other words, if you build a technology like wind, you use a certain amount of energy in building the turbine, maintaining it, backing it up and all that kind of thing. Hopefully, you get more energy out of it than you put in—that is the general idea. When you add the need to store that energy, even in pumped storage and therefore waste 25% of it, according to a German analysis I have seen you make it uneconomic in energy terms—not in financial terms but in energy terms. Your energy return on energy invested is getting too low to be worth doing. Do you accept that analysis?

Anthony Price: I have seen these analyses and I am never quite sure which side to believe. Your point is well made, and you can look at some types of battery where clearly the energy used to make the battery is far greater than the energy you will ever get out from it in its lifetime. Pumped hydro typically will have a lifetime of, say, 80 years if it is given a refurbishment at the mid-life point. So these questions are very important questions and I must confess I do not know the answer to them.

Lord Peston: I just got a bit loss on Professor Strbac’s answer to Lord Hennessy about storage. In a way, if you look at batteries, storage is one of the greatest inventions of modern life. Most of us could not run our lives without batteries. But what I was not clear about—this slightly anticipates where we are going in a later question—is: where would research into storage stand on your research priorities list? I was not very clear. At one point you seemed to be saying, “It is a waste of time” and another point you were saying it was of the essence, and I became a bit lost.

Professor Strbac: I wanted to demonstrate how the importance of storage going forward would increase very significantly—exponentially, if I can use that word. Regarding your question, if we do more research, obviously there are challenges because it would be great if the cost of storage could be reduced. In that context, what our analysis very clearly suggests is that the UK, given that we are an island, would need storage earlier than other countries—earlier than Europe, for example, because Europe is much more interconnected and there is a very significant diversity of demand and supply.

Now the question is—which we have posed and there was some positive response to this—can we turn that problem into an opportunity for the UK and start potentially leading research and innovation in the area of energy storage, and then solve the problem here and offer that technology elsewhere? As I say, I was quite pleased that there was a significant investment, which we think was well justified, from the Government to research organisations to start working on the hard core of new technologies that would be potentially much more cost effective than what we currently have, in order to solve our problem but also to potentially try to lead the work at the international level. I do not do work on storage technology itself—but the UK has a very significant capacity in the research areas of storage technologies. I think this is quite important.

Anthony may not fully agree with this, but the present technologies of electricity storage that are being applied to the grid did not all have the grid in mind when they were designed. For the batteries in my mobile phone—the core criteria are low weight and low volume. If we build grid-scale storage, it is useful to have that, but lower cost will be the core criterion. There are new technologies emerging and, as I say, the UK is leading some of these developments at the international level. I think that is potentially a good use of resource to try to make breakthroughs in using technologies that are not yet in the market. Currently, if you talk to big companies, they do not have very large orders on their books, so there is not a huge amount of work on developing new technologies, and that is an area that I think will be useful to continue and develop, because if we get this right the benefits will be enormous.

Lord Winston: Just to continue on the storage issue, can we have an idea of what progress has been made in developing grid-scale storage, which obviously is a game-changing technology, and bringing the cost down? We are hearing quite conflicting evidence about that and it would be helpful to hear your views.

Anthony Price: Thank you. If you talk about grid scale, to a certain extent that is a confusing statement. It could mean anything from power capacities of, say, hundreds of megawatts possibly down to the order of, say, 1 megawatt where it is still of value to the distribution network operator.

To take a brief snapshot, if you were to put in pumped hydro now, you would choose a good site and you would put the best available equipment in. In fact, CIGRE, the international committee for large-scale generation, did a study on various storage types a few years ago. Surprisingly, the costs of pumped hydro are about the same as they were when we built Dinorwig. So pumped hydro, if you have the site, is still the premium technology to go for.

Also it is interesting to look at the mechanical systems, such as compressed air, liquid air or cryogenics, because these typically have long lifetimes. If you can double the lifetime of a plant, you make a substantial impact on its cost benefit. I should not forget flywheels, which are very low cost in terms of the cost per kilowatt installed. Flywheels often get associated with short duration, but there is a considerable amount of work going on to develop longer-duration flywheels—flywheels that can discharge energy over an hour or more. These again have a benefit of long lifetimes.

When we come to the world of batteries, there is everything going on. The cost of lithium batteries has halved in the past three or four years and is likely to go down by another third in the next two to three years. We are looking at flow batteries, which is a very interesting area. There are new technologies emerging. The United States Department of Energy is supporting a number of programmes looking at the use of quinones to make organic flow batteries. Essentially this is using rhubarb-type chemicals to produce very low-cost battery systems.

So in terms of promise, there is a great deal. But what I also want to say is that there is a lot of storage going in at above 1 megawatt size in the new technologies. I can think of three battery companies that are able to produce between 500 megawatts to 1 gigawatt of batteries per year, and they are looking to double or treble that in the coming four or five years. If we look at North America, we look at Germany, we look at Japan and Korea, and indeed China, batteries are moving like hotcakes.

Q108 Lord Winston: We gather there is around £18 million of government money going into research and development for new methods of storage. Is that an appropriate sum, do you think, because the Americans seem to be focusing much more than we are on these technologies and may want to sell them of course?

Anthony Price: In my opinion—if I may, Lord Winston, to get in before Goran does—yes, we are doing the right thing. We are investing a reasonable sum of money. It is not as much as the Americans are investing. But the area where we are falling short is that we have not put as much money into demonstration as the Americans have done. The multi-hundreds of millions that the Americans have put in has included sufficient money for the technologies to be demonstrated at grid scale. The American Government has supported battery installations of 20 or 40 megawatts. We have not done that. In fact, we have the rather perverse situation that one Government department is putting money into research and development—typically at our universities—but we struggle with another department to try to create a market framework where those technologies can be put out and demonstrated that they work.

Professor Strbac: If I could add to this, I agree at the high level, yes. But there are demonstration projects—and we are party to some of those—supported primarily by the low-carbon funding initiative from Ofgem, but also in various cities across the UK there are technologies where we do demonstrations.

There are two sides here. It is obviously good to understand how it works and how we make use of it, but again the technologies that are being demonstrated are still too expensive for the present situation. What I think we need potentially is to develop new technologies and test new ones that have not yet been developed. I am not an expert in storage technologies but I work with colleagues who are in that area. There are strong developments in new technologies and hopefully we will be able to test and work on those in future.

One element that I would like to mention here, which we have not touched upon, is that storage provides multiple value streams to the electricity system. Small-scale solutions could help with delaying or eliminating reinforcements of local distribution networks, they could support the transmission network and they could support balancing and security of supply. An area that requires a lot of work, and the UK is moving into—not necessarily at high speed—is to make sure that our arrangements are able to recognise the value that storage will bring, so that the UK plc objectives, when you want to use storage, coincide with the investors’ objectives. Currently, you would struggle as an investor to make a case for storage. Some cases potentially could make sense if we had the appropriate commercial market arrangements in place, which would enable investors to access parts of the benefits that they deliver to the entire system because, as we know, the system is run by different commercial organisations and the interaction between them could be massively improved.

The Chairman: A lot of people want to come in. Lord Broers is first.

Q109 Lord Broers: This question is about hydro. I read everywhere that we have looked into and used all the hydro that we could generate. I do not understand that. Surely we could build more dams. There are plenty of hills still in Wales and Scotland, are there not? Are we near a limit? Is that a financial limit? What is the nature of that limit?

Anthony Price: Let me come back with a more general comment. If you are building a hydro power station, you are looking at an investment for 40 years, 80 years plus, and it is exactly the same as putting in any other storage projects. If you are going to build something, you want to know that you have an income stream, and unfortunately at the present time there is no sensible long-term income stream that you can take to a project financier or a banker and say, “Sign on to this”. You could, with regret, say that storage is practically the only one of the green technologies that receives no subsidy or support in the long term. That is a major drawback to making any investment. There is a company that is looking to develop a small-scale pumped hydro project in north Wales. I understand they have received planning permission. They have an interesting business model that may possibly overcome this barrier. But they have spent a significant sum of money trying to raise the financing in order to do this. All the projects that I have been involved in, in the United Kingdom, to try to develop a battery project—save one—have failed at the last because we have been unable to convince the backers that the business model that we had would endure for more than a year and, therefore, there was no certainty of income and the project failed.

The project that Goran and I are jointly working on at the moment is able to go ahead because it is being done under the auspices of the Low Carbon Network Fund. So it has taken a Low Carbon Network Fund in order to make a large-scale grid project happen. The only other large-scale projects that are taking place at the moment in GB are those under the DECC innovation competition. I think that is the answer: we do not have a market and commercial structure that allows us to make a sensible long-term investment decision.

Lord Rees of Ludlow: I do not ask about R&D in general. We cannot clearly be world leaders in all these technologies of batteries, supercapacitors and so on, but we do surely need to ensure that we have enough expertise to be informed judges and customers. We want to avoid going down the same route as we did in nuclear where, from being leaders, we do not have even enough people to have an informed watching brief. So are you confident that we do indeed have enough expertise, in universities or in large companies, to be able to make the right judgments and seize on initiatives when something is developed anywhere in the world?

Anthony Price: I have just returned from a conference in Warwick last week. It was very, very encouraging to see the significant resource that is now going in, in our young people, in energy storage. That is really very pleasing. It is very disheartening to have graduates telephone me asking for jobs, expecting to get positions working in energy storage, because there are few, as no one is actually building stuff and moving it out. So we are taking the right steps at the early TRL stages, but we are not necessarily doing enough later on. It is in the demonstration and deployment that we may fall short against our foreign competitors. There are dozens of companies queuing up to enter Britain and Europe with their storage products. So, we are not only losing access to our home market when it arrives, but we are also losing access to overseas markets because we are not able to demonstrate our technologies from a home base.

More significantly, of course, by not having storage there on the system we are losing that key part of our infrastructure. Perhaps I can also add a little bit. We do have storage that we do not see. Many sites have uninterruptable power systems, which are often battery provided. These are large-scale installations, some of them very big. They are economic because the cost of not having that would be significant, and they are an essential part of typically corporate and, in many instances, Government infrastructure. If it can be seen to be there in order to maintain power, it should also be seen as part of the infrastructure. If we move the debate on from the national system to one of involving the smart grid, one of the dreams of the smart grid was to have local self-healing grids. We need to have the right tools—and storage would be one of them—in order to make sure that micro grids and the smart grid can work.

Viscount Ridley: In the 1980s storage meant stockpiling coal at power stations, and the great advantage of that is you do not lose any of its energy. There is not a 25% wastage. If you ignore the decarbonisation imperative, is that a flexible and effective way of storing electricity?

Anthony Price: Sadly, no, because the real issue is: can you deliver the energy at the time you want it? Having a coal heap is fine provided that you have between six hours and 12 hours to start up that coal plant. What we need to do is to differentiate between storage that we are going to use in applications, almost as an insurance policy in the short term, and storage that we are using to balance energy for perhaps a two-week lull. If you think about it, it is a bit like a transport system where we need a combination of taxis, so that I can walk out of here and get a taxi to my next meeting, and buses and trains where we are just storing up people until we have enough of them and moving them in one go because that is economic. So we want to have the flexibility. It is the ability to get power on demand, which is of value now, and if we have a more renewable grid and a spikier demand, I believe we are going to need a more flexible response when that occurs.

Viscount Ridley: Gas would not help in that respect—

Anthony Price: Well, gas is quick.

Viscount Ridley: But not quick enough.

Anthony Price: There is a battery going in in Leighton Buzzard in two weeks’ time and that will be able to deliver power within half a cycle.

Viscount Ridley: Gas cannot do that.

Anthony Price: Gas cannot do that. We are talking about 10 to 15 minutes. So this area of providing frequency needs to be done on a second by second basis. One of the interesting points from North America is that, where they have used batteries and flywheels to provide frequency services, the amount of reserve that they need to carry has dropped. So for PJM, because they are using fast-acting batteries, the reserve requirement for frequency has gone down from 1% of peak capacity to 0.75%.

Q110 Lord Wade of Chorlton: I apologise I had to go out and deal with some other matters. You appear to be talking about large-scale storage facilities that are fitting into the grid and so on. What research is going on into household storage, so that a householder can have a quick use of facilities if his power goes off for two or three hours? Is there much research and development of those types of products?

Anthony Price: There are some very good demonstration projects under the Low Carbon Network Fund, and the DECC innovation project, looking at household storage. There are three rules of storage: one of them says that the closer you put storage to the end consumer the higher value it has. People are putting in quite a small battery in their houses and these will make a significant impact to their own energy profile. Our internal estimates suggest there are possible savings of 5% or 10% to a householder if they were to use storage sensibly.

Lord Wade of Chorlton: Those are now available?

Anthony Price: Pretty much available, yes.

Baroness Sharp of Guildford: Can I go over what you have been saying and see if I am correct in my interpretation of it? What you are saying is that in the current circumstances there is no market, in effect, to develop storage facilities and, because there is no market currently, while we have the research going on, the demonstration plants cannot get through this barrier of having to prove that they are going to be economic if installed. In the meantime what we are doing—and this takes up the statement that you made right at the very beginning—is we are using essentially gas as our main means for balancing the market at the moment. We have the pumped storage but this is not used to capacity because they are using the combined cycle gas plants, and I know you were saying it takes a quarter of an hour to bring that on to but essentially you have some margin here of balancing it. But I think it is very worrying that we have the knowledge and the potential to provide this but we are not able to bring it forward and to use it.

Anthony Price: I think in answer to that, just to clarify a few points, the frequency response market is about 1 gigawatt. We have 3 gigawatts of pumped storage. So it is not surprising that not all of it is used to provide frequency. So that should be added as a clarification to my earlier statement.

In terms of the market, what we are seeing is that gas plant that is already operating—so gas plant that is producing energy because it is turned on—is able to provide frequency by varying its output up and down. It is doing that at a low margin of cost at the point at which it takes over from pumped hydro and it is that difference. To say that there is no market is an incorrect statement. I would not like to say that. The point is that the market is not readily accessible by providers of storage because storage is not generation but many of the products are more closely aligned to conventional providers of generation-type services.

We are in discussion with National Grid as a way of trying to overcome this. There are similar discussions going on in Northern Ireland, where there are two projects to build both a 100 megawatt battery and a 300 megawatt compressed air plant. These projects are at a difficult stage because the regulator and the system operator in Northern Ireland I believe are still in a mode where they are considering conventional plant and not best use of a greener technology.

Professor Strbac: This may be going into the detail, but it is incorrect to say that gas plant cannot provide frequency regulation. How we do that is we part-load gas plant and then it can increase power very fast. So gas plant can provide frequency regulation. The only question is how that competes against storage. When you run a gas plant part-loaded, you lose efficiency and you get the frequency response at the expense of taking energy as well.

Secondly, regarding storage, something like Dinorwig cannot necessarily provide very fast primary response, because it takes time for the water to get from the top of the hill. So, in fact, CCGTs are better than pumped storage in terms of time. Let us get the detail of that right.

Regarding the markets, our analysis suggests that, in the present system, business case for storage plant, particularly new technologies such as batteries is not a straightforward, because it is still very expensive. The present system does not need this as desperately as we are going to need it when we start building more nuclear and wind and it is hence critical that we do all of that research, we do demonstration and we get ready to make sure we do that in a cost-effective manner.

The Chairman: We must move on and back to interconnectors.

Q111 Baroness Manningham-Buller: That is exactly what I want to say. We want to go back to interconnectors. I would like to ask, probably Dr Ramsay—whom we have not heard from for a bit—about the plans for interconnectors between the UK and other countries. How far have these developed? Is the regulatory framework right? Give us a bit of background. I am sure we will have some further questions on it.

Dr Ramsay: Things have been developing quite significantly over the last 12 months. As was pointed out at the beginning of the session, we are relatively poorly interconnected at the moment in relation to other countries in Europe, but there are plans over the next 10 years to be seeing probably around a doubling of our interconnection capacity. There are a number of projects that are on the verge of their final investment decision, so moving from development into the delivery stage, and that has been brought forward by a step change in the regulatory framework for interconnection. I think if we had had this discussion maybe 12 or 18 months ago, I would be in not too dissimilar position to Anthony in talking about a lack of regulatory and commercial framework that was a barrier of further investment. But what we have seen, with the decision from Ofgem in the summer time to bring forward their innovative cap and floor regime for interconnection, is that there is now a clear pipeline of interconnector investment that is looking to come forward between now and 2020.

Baroness Manningham-Buller: Why did they change their policy?

Dr Ramsay: The last interconnector investment was made around about 2007, which was building the BritNed interconnector, the connection to the Netherlands. That was done under what is known as a merchant regime. So network interconnection is not treated like the rest of the UK onshore transmission network. It is a merchant activity, which means that investors can come and build whatever they want. You do not get a regulated return. The money that you make is based on the arbitrage opportunity between the two markets. So BritNed was the last investment that we saw and there were some problems with the way that European legislation was applied to the BritNed merchant investment. Although the investment went ahead, it was not seen as being a particularly attractive route to go in the future because of the legislative and regulatory risk that was attached to that investment.

From that point forward, Ofgem was quite keen to see how the regulatory arrangements could be improved to still maintain the market-led approach, so as not to be putting a huge amount of consumers’ money into a regulated return and to maintain the market-led approach but provide a regulatory wrapper to sit around the investment. From around 2010 onwards, Ofgem has been investing quite a lot of energy and policy thinking into how to generate this new regulatory regime.

Baroness Manningham-Buller: Has that brought in much more private investment?

Dr Ramsay: Not yet, but it is on the verge of being realised. I am the project director for the Norwegian interconnector. That is around €2 billion of investment that will be split 50/50 between National Grid and Statnett, the Norwegian system operator and transmission owner. That is looking to go to a final investment decision in March of next year. The Belgian interconnector, also within National Grid’s portfolio, is around €600 million of investment, again split 50/50 with us and the Belgians. That will go to a final investment decision in February of next year. So the next six months are quite critical for interconnector investment to see whether or not the regulatory regime has truly unlocked the next generation of investment coming through.

Baroness Manningham-Buller: I think it probably has.

Dr Ramsay: I am pretty confident. This is my job for the next six months and everything is really well aligned, so for the Norwegian interconnector on the Norwegian side they were recently awarded their trade licence, effectively, by their ministry. So the Norwegians are incredibly keen. We have a huge amount of Government support here for the project too.

Baroness Manningham-Buller: Professor Strbac, you want to comment.

Professor Strbac: Just to support that. Our analysis on maximising UK plc’s welfare suggests that the UK will benefit significantly from interconnection. Our analysis suggests all the projects that are proposed, currently 4.6 gigawatts, are a good thing to do. I am a member of the Panel of Technical Experts for DECC that is scrutinising the implementation of electricity market reform and the capacity mechanism, and we expressed a concern that interconnection has not been included in this. Some of the value streams that interconnection may bring will not necessarily be delivered, but will hopefully overcome that. However, another concern we have is that we might in fact potentially buy too much generation, in which case we may not necessarily benefit from interconnection—the benefits may not be possible to realise because we will have already spent the money, which should not have been spent.

Just to give you a little bit of an indication of how important interconnection is for security of supply, we have done work for DG Energy that demonstrates that, if we move away from a member state-centric approach to security of supply to a more Europe-wide approach, we would need to build 100 gigawatts of peaking plant less. That is an area that is developing but that is something that we think should take a high priority, given that there is obviously lots of concern about security of supply. Interconnection can make a massive contribution here, and that is an area where we think we need to develop further arrangements.

The second element is what was mentioned about the short-term benefits, in terms of not only shipping nuclear power energy to the UK—a kind of energy arbitrage—but also to make sure that interconnection can be used for balancing demand and supply in real time. We do not think we are using that fully.

The third value component of interconnection, which I mentioned, is the contribution to security of supply, which has not been fully recognised within the market regime at the moment.

Q112 Lord Broers: I will move on, Chairman, to the final question here. My question relates to that to a certain extent, and we have discussed this a lot already. Is enough known about how interconnectors will function and whether they will contribute to or disrupt system stability? My somewhat supplementary question is an engineering question: is the cost of interconnection linear with power or not? I would imagine that it is not. That is, if you built a connector that could deliver twice the power, it would not cost twice as much.

Dr Ramsay: That is right. The Norwegian interconnector is 1.4 gigawatts. If we built it at 1 gigawatt it would be roughly the same amount as it is now. It is a non-linear relationship, so, while the cable is very expensive, there is a certain fixed cost in building the two converter stations at either end and then you can have a slightly larger cable, slightly more capacity, without having a linear increment in cost there.

Lord Broers: So we might be being foolish there. Perhaps we should build it at 3 gigawatts?

Dr Ramsay: There are also other technology limitations that mean you can only go up in certain increments and then the step change in cost becomes again non-linear but, once you get to a certain scale, you cannot go beyond without seeing a much bigger increase in costs.

I know we spent quite a bit of time talking about some of the challenges around storage in terms of whether or not it can be cost effective with other balancing technologies. One of the benefits of interconnection is that with all of the different options that you have, through being able to balance the system, it is a very competitive technology to be used right now. So while we only have a limited amount of services, because we only have a limited amount of interconnection, we would see it as being a very cost-effective tool to support balancing of the system. It is not the only thing but it should be part of a portfolio of tools that the system operator can use, and we see that interconnection will play a big part in helping to balance the system in an intermittent and variable feature that you would see coming with high penetration of renewables.

The Chairman: Yes, quickly because we are coming to an end now.

Professor Strbac: Just to expand a little bit on the limitations regarding regulatory and commerciality in this context, what our analysis suggests, for example, is that this interconnection from Norway would bring massive benefit if it was going via Dogger Bank, where there is the largest offshore wind resource in the UK. Given the big offshore resource we have—and given the fact that you just said that there are massive economies of scale costs when you put interconnection in—if you went via Dogger Bank, then in a few years’ time if the offshore wind happen to materialise, we may be saving more than £0.5 billion. The option value of that in our view would be great, and we think that the UK should start looking into this.

The interconnection could provide additional value streams such as potentially connecting offshore wind farms on the way. But we have the problem that the offshore connection developments and interconnection are different businesses and they are not coordinated. I know that if National Grid was responding to commercial arrangements, which you would expect them to do, and if there was a more sensible approach to this, this interconnection would go via Dogger Bank.

The Chairman: A last question from Lord Dixon-Smith.

Q113 Lord Dixon-Smith: Chairman, I understand interconnection is a very easy thing to do if you are part of mainland Europe—you just run the cables up to the border and go straight over—whereas, of course, doing interconnection for the UK, because we have a large maritime barrier wherever we do it, even if we cross the Dover Straits, is a much more expensive solution. Surely, in the final analysis, whether that is worthwhile or not comes down not to the actual technology but the actual cost in relation to paying the insurance premium to cater for variable situations within our particular islands. I wonder if you have any information you could give us that would indicate which way that equation is likely to work out.

Professor Strbac: Our analysis very clearly suggests that the UK would benefit from having more interconnection, particularly if we go forward with low-carbon generation such as nuclear and wind—being connected, for example, to Norway and have the balancing of demand and supply. It is expensive, I agree with you, but the value of it is bigger than the cost. All our analysis very clearly demonstrates that the UK will benefit from increasing interconnection very significantly.

Lord Dixon-Smith: I see that, but you have not yet quite told me that that is going to cost less than providing the cover for a big variation in this country. That is the question I am asking.

Professor Strbac: Not yet. There are four core technologies that can help us in terms of balancing our own demand and supply: storage, interconnection, more flexible generation and demand side. What our analysis suggests is that, when you put these choices into our models and you put in the costs for these choices—and I can tell you that it wants all of them to some extent—certainly interconnection is very beneficial for the UK, including all other options.

The Chairman: Between you, I think you have given us a clear steer that interconnection is going to be a part of the portfolio and probably cost effective. I am sorry we have run out of time. In fairness to those who are following we must close this session. We have learnt a lot about storage, interconnection and the like, and thank you very much for your help. I think, Dr Ramsay, you did say you would be able to give us some further information, at one point. If you would like to follow that up, please do so—and, indeed, if the others have any further information that they wish to send, we would be very happy to receive that. Thank you again for your help.