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

Professor Gordon Walker, Co-Director, the DEMAND Centre, Dr Howard Porter, CEO, BEAMA, and Michael Ware, Partner for New Energy and Environment, BDO LLP

Q114 The Chairman: Welcome to this session of the inquiry we are doing on resilience in electricity. We are being broadcast. Would you like, therefore, to introduce yourself for the record? If any of you would like to make an introductory statement please feel free to do so. Perhaps Mr Ware would like to start.

Michael Ware: Good morning. Thank you for inviting me along. My name is Michael Ware. I am a partner of BDO, the accountancy firm. I specialise in project finance and renewable energy, and our role is to raise money for projects for both generation capacity and also some demand-side response, although there is very little of the latter at the moment. I am here to take questions.

The Chairman: Dr Porter?

Dr Porter: I am CEO of BEAMA, the trade association for the electrical manufacturing industry. I think we have been invited here today because we have various projects with manufacturers looking at the integration of smart metering, smart grid, electric vehicles, heat pumps and a variety of other equipment of that nature. We have all the manufacturers of all the smart metering equipment within our membership and, therefore, we have a lot of experience in those areas and I am asked to share those with you today.

The Chairman: Professor Gordon Walker?

Professor Walker: I am Co-Director of the DEMAND Centre at Lancaster University. I should explain that DEMAND is an acronym that stands for the dynamics of energy mobility and demand, and we are one of six research centres that were set up last year by the Research Councils in the UK to do research on end-use energy demand. We are a social science-led research centre, so we have particular interest in the dynamics of energy demand, how they change with social dynamics and social change. I would like to say that it is particularly welcome that there is a chance to talk about demand as part of this inquiry process. For a topic like the resilience of electricity infrastructure, it would be easy perhaps just to talk about the infrastructure, the supply side and the transmission and distribution, and to forget that the whole point of that is because of the demand relationship and the resilience of the relationship between demand and supply. So it is very good to have a chance to discuss all of this with you.

The Chairman: Thank you. We will indeed be talking about the demand-side response in this session. Lord Peston, would you like to start?

Q115 Lord Peston: Yes. What I would really like to get from you is both clarification of what we mean by dynamic management of demand and then examples of how we might use it. Am I right that the whole point of the dynamic approach to demand is to move demand, by one means or another, to where we would be using our generating system more efficiently if the demand occurred at that time rather than that time? Are there mechanisms—wearing my economics hat, price would be the one that immediately pops into my head—whereby, if you demand at that time rather than this, it will be cheaper, whereas if you demand then it will be much dearer? Another might be special forms of contract. Would that be included in all of this?

I was speaking to someone with a smart meter—although I have never found out what the point of it is other than the fact that it flashes lights on all the time when my wife switches on the dishwasher, for example, which means it is expensive at that point. But I take it smart meters are also an important ingredient of this, but, as I say, speaking as a customer, it is not obvious how that influences demand as far as I am concerned. So am I right that those are the topics we ought to be talking about, and then can you give us examples of the latest state of thinking of how you are operating this dynamic system? I am not sure who wants to go first.

Dr Porter: Certainly we could dissuade you from your view that smart metering does not do anything. I think the system you have in your property is not the final design. That is an early design, before the mass rollout. Certainly in demonstrations we have done—I think links were sent to you all, if you looked at that—we demonstrated that, with a smart meter infrastructure that will be planned from 2015 onwards, that can be the basis of the demand response in the future. I am talking primarily about domestic buildings at the moment although it is relevant for non-domestic, but unless you have that technology base within the building it is possible but very difficult to have a demand-response technique in place. Once you have that technology in place—we could discuss all day about when and how, but we will leave that for the moment—we believe that the functionalities of that final smart meter rollout are sufficient in our UK design to allow a wider range of uses and functionalities than the limited functionality of currently installed equipment.

Now, if you look elsewhere in Europe, that is not the case. There is lobbying going on in Europe to make sure that more of the smart meter rollouts have more functionality to allow these things to be possible following rollout, but the UK has the most functionality within the smart meter rollout, allowing more of the add-on benefits that, not all of which are immediately possible on day one but, it is then a case of using those functionalities as we go forward. That is probably the opening from our side to kick us off.

Michael Ware: There are a couple of points I would add to that. Looking elsewhere in the world, we see that demand-side response has particular potential on the domestic side, but I would say more in the commercial and industrial space. I think a recent auction in the US generated 11 gigawatts of capacity through demand-side response compared to only about 4 or 5 gigawatts of generation capacity in the same auction. Industry is ready to do this and the technology is ready to do this.

However, there are two problems. First, this is an investment decision on behalf of the demand-side response aggregators. This involves physically putting pieces of kit into industrial and commercial situations and in the capacity auction as put out at the moment I can only buy a year’s worth of capacity as a demand-side response, so my payback period has to be very compressed. However, for generation, up to 15 year capacities are available. One area the Government has wrong is that the contracts for demand-side response are too small to trigger significant investment on behalf of the investment community.

I think the second point here is about companies seeing that this technology is reliable and that it works. Where the public sector could play a very significant role is to be an exemplar for demand-side response. A recent study by the Cabinet Office, taking the whole public sector estate, particularly health, showed that less than 10% of the public sector were looking at any form of demand-side response and the majority of respondents—over 60%—had no plans to do so whatsoever for the foreseeable future.

Lord Peston: That is looking at the public sector?

Michael Ware: Yes. The Cabinet Office survey of the public sector estate said basically, “Are you looking at demand-side response?” and the overwhelming answer was, “No”. Less than 10% are doing anything at all and over half had no intention to do anything. I think the missed opportunity there is for the public sector to demonstrate to industry that the risks of demand-side response are overstated and that it can be made to work.

Professor Walker: In broad terms, on your opening question in terms of, “Is our understanding right”, I would agree, yes, your understanding was right. The idea of managing demand over time is quite familiar. We have had Economy 7 since the 1970s, which is a very basic form of what is now being rolled out in a much more sophisticated form, through smart meters with the ability to do lots of different work in terms of the time periods over which you set peak pricing, the degree to which you have a price lift and the regularity or the irregularity of those peaks. It could be that you just go to a peak pricing scheme during the critical periods in the winter when there is strong pressure on the system.

The other point is that there is a lot of activity going on already in the non-domestic sphere. At my university we get these things called triad warnings on a regular basis. We get emails around everybody in the university saying, “Between 3 pm and 5 pm on this Wednesday afternoon please try to turn things off,” because we have a contract with an aggregator, which means it is beneficial to the university to try to do that. There is lots of activity already out there in the non-domestic sphere. I have heard a lot of arguments that there is a lot more potential there than has been realised.

Some of what is happening at the moment is basically back-up generators being switched on, for example, at hospitals and IT companies. They have big back-up generator systems to deal with blackout situations and these contracts are enabling them to turn on those, often diesel, generators during these periods. That is not necessarily the best way of achieving the objectives we have, particularly in terms of carbon emissions, but I think there is a lot more than can be done and the new demand-side balancing reserve is opening up the possibility of demand response to a greater range of companies and businesses and I would absolutely agree there is lots of potential in the public sector.

Lord Peston: There is nothing original about dynamic management of demand. We all know in London restaurants nowadays they do a pre-theatre supper as long as you eat early because they have spare capacity then and that is when they would like to use it up, but I am very concerned about your remark about the public sector. There are those of us who are very keen on the public sector, and I certainly am. I have always argued that the public sector should always be taking a lead in the efficient management of resources, which has got me into serious trouble with the Labour Party in the past, but that is another matter. Why is it that the public sector is not taking the lead in responding to the dynamics of this situation? Surely the management must have some understanding that, the more economical they are, the more likely they are to achieve their aims. Do you have any views on where the problem lies?

Michael Ware: If we look at demand-side management, which is relatively new, but also micro-generation in the sense of the public sector putting in solar panels, wind farms and so on, there are two points there. I think the amount of energy generated by the public sector from the estate in this country is less than a quarter of what Germany achieves from the same sized public sector estate, which is a reflection of how far down the road the Germans are in terms of generating renewables generally. Secondly, there is no overarching target or requirement upon the public sector to either generate its own energy or to implement demand-side response. This is purely speculation, but I suspect that, as a manager in a public sector environment faced by competing demands upon capital, demand response and micro-generation are probably lower down on my list of priorities than other constraints because the payback period is much longer and the impact is less visible.

Q116 Viscount Ridley: On the smart meter point again, am I right in thinking that 18 months ago the Government delayed the deployment of smart meters by 12 months and am I right in thinking it did so again last month? Is this turning into a giant public sector IT project that goes wrong, and is that getting in the way of seeing the effect that smart meters would have on demand-side response?

Dr Porter: First of all, I should hope not. We had a meeting with DECC last week on this particular issue about the delay and I know the whole department and everyone involved is very keen that this is not seen as being another delay, or as a reluctance to go forward. I think the issues are in terms of the way in which the structure is put together and how the communications are put in place. There are some testing problems in how the final solutions are put together, which requires some level or contingency. That is our interpretation directly from the DECC officials. We also understand that the whole department and the Minister have said to the civil servants and the contractors, Capita, that there should be no further come-back for more time, “This is it, so please make sure that every contingency you need is in the contingencies now in the consultation”. It is a consultation. It may come back that it is rejected. I do not think it will be.

Viscount Ridley: Capita has asked for more money, though.

Dr Porter: I hasten to use the word “small”. Compared to the contract, there is a small addition. It is still quite a lot of money but, yes, there is an increased amount of money. Now, from our perspective, looking at the manufacturers of the equipment, we are not questioning the decisions on how the structure is put together. We could spend all day discussing that, but that is what there is and, therefore, we are working at best to make sure everything is ready at the time of rollout. You are absolutely right that there is likely to be another delay—or contingency, depending on how you wish to sell that message—but it probably allows a little bit more time to get some of the complexities sorted out to get us there. I had this conversation this morning with other colleagues on other things that we are planning to do on the back of this. It does mean that the rollout at the moment will be squeezed by nine months because the end of 2020 has not been shifted or is not planned to be shifted, so it is squeezed. At the moment we believe that is still doable and it probably just means that the availability of that smarter infrastructure is later, but if you as a typical consumer were going to get your smart metering kit in 2018 you are probably going to get it in 2018 as well. It just means that the first bit is scrunched a bit.

Viscount Ridley: Until then it is only Lord Peston who gets it?

Dr Porter: No, at the moment there is something like 1 million smart meter systems in place. I am not going to give any advertisements for any company here, but if you are with one energy company you will be offered them a lot. If you are with other companies you will less likely to be offered them. I am sure you probably know who I am talking about. I know the department is very keen to encourage the other energy companies to follow that lead in offering consumers smart meters that are not fully integrating with the system earlier than the kick off date but, back to my colleague here, that is a commercial decision from those companies whether they proceed ahead of the game or not.

Q117 Lord Wade of Chorlton: Just as a follow on from that, in one of your earlier responses you referred to smart meters as having facilities in the UK that can obviously allow the electricity suppliers to learn more and more about what the customer does with it. I get the impression that is what you are suggesting. What is the implication of that: that if you are not a good customer they will turn you off? Does that suddenly put the power in the hands of the supplier rather than the hands of the customer? That is absolutely opposite to what I believe in. How do you see that unfolding?

Dr Porter: An awful lot of work has been put into this issue by all parties, including the utilities, manufacturers and the department. There is a very clear delineation of who gets the data and the security around the system. In fact, it caused some problems in terms of connecting other things because there is so much security around the smart meter mandated piece that it causes problems for how you connect to it. Later on I will come on to how that will connect in the future, but within that scope there has been a tremendous amount of work done to get the privacy sorted out and it is very much the case that the energy companies have been given pretty stringent instructions from DECC and now the regulator, Ofgem, in making sure this is very customer-centric in its rollout. There is a danger, as you point out, that if you are a non-payer you may be cut off. The rules are still the same. The rules on how an energy company will react to those customers does not change at all and, in fact, where you have at the moment prepayment, which is where you go along and you buy a token and you use this for your meter, the new technologies will radically change that idea. There is a different term used now. Prepayment—or payment before use, shall we say—will increase because of the smart meter rollout rather than decrease because consumers will feel they are more in control of their spend by pre-ordering and putting it into their system rather than waiting for a direct debit or a bill, or an estimated bill as it is now.

Lord Wade of Chorlton: There is a difference between somebody being cut off because they do not pay and the choice of electricity they do buy. Surely, if a person is prepared to buy the electricity, what they do with it is entirely a matter for them.

Dr Porter: Indeed. There is absolutely no intention from any of the players to cut more consumers off as a result of smart metering data—

Lord Wade of Chorlton: If they have the information how can it end up—

Dr Porter: There is the policy that it is down to the customer to decide and, if we go into other areas of demand response or other aspects within domestic buildings, the philosophy and the rules and regulations all thus far, and I think will be in the future, are down to the consumer to decide. If a consumer is offered a demand-response package by some tariff or some other methodology through their smart metering infrastructure, it is entirely their choice whether they take up that offer or not.

Now, it may well be the utility highlights how beneficial it is and, if it is beneficial for the country or beneficial for the climate or beneficial for the pocket, it is entirely up to the utility—or aggregator if that comes into domestic in the future—to make that offer. However, the customer can say, “No. I hear what you are saying. I do not want that”. That is the same as in the commercial arrangement my colleague has mentioned. If a public sector or factory owner says, “I am not interested”, no one is going to force them. It is exactly a choice for the consumer whether or not they connect.

Q118 Baroness Sharp of Guildford: To some extent you have already answered this question. To what degree are current policy and market arrangements for electricity insufficiently focused on the demand side? In particular, does the Government have a sufficiently joined-up approach to future electricity security, including demand-side measures? Does the National Grid have the balance right between supply and demand-side measures? Does the capacity market itself provide sufficient incentives for demand-side response?

Michael Ware: There are two specific points I would like to make there. The first is the capacity auction. Our understanding is that demand-side response contracts are much shorter than they are for generation, which is a disincentive for investors to invest in demand-side response. For industrial and commercial users, this is an investment requirement. The aggregators have approached us in the past to say, “We want to raise £10 million, £20 million or whatever to roll out demand-side response technology across a customer base of commercial and industrial users”, but the payback is so compressed because the amount of capacity they can sell into the auction is limited to a year. I think that is an obvious amendment to make to the policy that would bring in investment much more quickly.

Secondly, you asked about joined-up Government in this and I think there is an interesting point here. We have a Government that is faced with capacity constraints across the grid and yet other parts of DECC are cheerfully promoting policies that will increase demand upon the grid—in particular, I mean electric cars and heat pumps. We spend quite a lot of time thinking about electric cars but, to our mind, there seems to be no end-point as to what percentage of the UK fleet the Government is trying to persuade to shift to electric and, secondly, what the impact upon the grid will be of shifting that percentage across. Through our conversations with DECC we have never found the person who knows the answer to those two questions and I suspect they do not exist.

Dr Porter: Keep on looking.

Michael Ware: We have a Government that is actively giving people £5,000 grants and free electricity to switch to an electric car, irrespective of their personal means, in a situation where this Committee and a lot of Government is thinking about capacity constraints upon the grid. In answer to your question, I do not think that is a good example of joined-up Government.

Baroness Sharp of Guildford: Also the example you gave of the public sector not taking advantage of the demand-side measures that are already in hand.

Professor Walker: I would also question whether the Government is sufficiently ambitious in its overall objectives because, if you take the 2050 carbon scenario seriously and the targets seriously, we are talking about major reductions in energy demand overall—not just the time of use but the overall energy demand reduction.

There has been a lot of debate in Europe recently about whether there should be a mandatory Europe-wide energy reduction target and proposals came from the Parliament for a 40% reduction in overall demand by 2030. Unfortunately, from my point of view, our Government was instrumental in blocking that and the outcome has been a 27% reduction—we are not quite sure why exactly 27%—by 2030 but not on a mandatory basis. I think overall there is a lack of ambition and a lack of realism about how much you need to bring down energy demand, particularly if you are electrifying heating and vehicles. You cannot be doing that at the same as allowing energy demand to stay pretty much where it is or to allow it to increase overall.

Dr Porter: I would tend to agree in slightly different ways to my two colleagues here because, again looking from a manufacturing perspective—the people trying to develop kit that will deliver this—there is probably above all this something like a 20% or 30% reduction in electricity usage possible from all building types and all factory types. Currently we are doing some work within the department to try to highlight this. You almost want to do that before you start thinking about how you do demand-side management.

Q119 Baroness Sharp of Guildford: I was also going to ask you about building regulations and whether they were tough enough.

Dr Porter: Well, we could be here all day talking about the pros and cons of that. There are enormous opportunities to reduce the use of energy before you start thinking about demand response and the other types of things that we have been talking about, such as electric vehicles and heat pumps and electric heating. We were part of a big study launched last week by Carbon Connect and in that independent people looked at all the scenarios to get you to 2050 and I think the increased use of electricity in terms of heating and transport featured in four and a half of them—I am not quite sure what happened to the other half. We are somewhat biased given we look after electricity manufacturers, but all the work seems to go in that direction because if you want to decarbonise you do not build more coal-fired stations or more gas. You have to produce it with renewables or nuclear or other storage methods you were discussing earlier. If you have that scenario by 2050 you have to have achieved the appropriate use. You take off the road the other vehicles, a little bit like the way in which the rail industry transferred to electric trains 30 or 40 years ago, when I was a young lad.

Michael Ware: Something like that.

Professor Walker: Not entirely.

Dr Porter: Not entirely, but it has been going ever since. Electrification is seen as the way you do trains. No one says the best way is to go backwards and it is a similar philosophy going forward. However, my colleague is right, you have to manage it in the right way.

On the flip side of the electric vehicle area, many commentators say the storage available in the batteries of electric vehicles, if plugged into the network via the smart meter infrastructure in your home—or, indeed, in the car park of the office building where there are 10 of them plugged in—is, if you have a smart grid, a very usable level of storage.

One other point we will make here is that, within that smart system and how you manage things, an area of storage that was not mentioned in the earlier session—which I was here for—was a very straightforward thing called electric hot water. In the old days you used to use Economy 7, which I think my colleague mentioned, where you could heat your hot water overnight with the off-peak energy. Some of our manufacturers are now designing the smart technology with a very simple emersion heater, basically, that is available—if you have the right technology and the consumer access devices that allows this, when free power, renewable or nuclear or whatever is available—to remotely charge the hot water up to the right level, controlled by the control system. This means the consumer, again if they are signed up to a deal, can basically get low-cost hot water charged at low-carbon times of day. That is a very low-tech version of the storage area, but it is integrated into a smarter way of handling this and part of the demand response within a building.

Viscount Ridley: I wanted to declare an interest, Chairman, which I forgot to do. Mr Ware’s essay on electric cars won a prize that is named after me, which was judged by the Spectator magazine last year.

Lord Broers: As we are into declaring interests, Chairman, I should in this session declare the fact that I held the BEAMA professorship of engineering in Cambridge for 14 years and so I am a very strong supporter of what BEAMA does.

My question is: in the future, as electricity generation is decarbonised, what role do you expect demand-side measures to play in ensuring system resilience? We have discussed this a lot, but there are a couple of very specific questions here. For example, do you think we could operate at a lower derated capacity margin as a result of demand-side techniques? What would the economic implications of this be?

Dr Porter: I am reading from my notes here because I did ask my colleagues who know about this before. Where demand response has been cost effective, particularly in the US, we understand that that represents 6% of peak capacity and that equates to Hinkley Point, or about 3.3 gigawatts. That is the use of similar technologies—not the same but similar technologies—within a US base. Certainly the DSR in the US has saved some $12 billion in one year. That is clearly a different scale because we are not at US scale, but the 6% is probably worth putting in mind. That is certainly what has been delivered within mainly a domestic context—with some commercial, I think, in that situation. You may have some further figures you can add in.

Michael Ware: I think there are two concepts there that we are conflating. We talk about renewables and the role of renewables in demand-side response. I would go back to storage. Storage marries better with renewables in the sense that renewables have two problems: intermediacy and capacity on the grid at the places where it is feasible to do a renewable energy project. As your Lordships will be aware, one of the problems in this country is that the grid is not uniform and parts of Cornwall and Norfolk are now almost at capacity because of the amount of renewable generating capacity that is in place during the summer months. Only last week one of my clients was complaining to me that they developed a wind farm in Cornwall and were then told by the district network operator that they could not access the grid in daylight hours because there was physically not enough capacity on the grid to take more power in during the day because of all the solar. I think the answer to that in some ways lies in storage. Storage can address the issues of intermediacy and it can address issues of capacity. In that situation my client could store the energy in a battery and then feed it into the grid in the evening and during the night. However, I do feel that storage is a very undeveloped technology. The battery has not fundamentally changed in over 100 years. It is a very undeveloped embryonic technology that is not widespread in this country and it is not particularly widespread elsewhere.

At the moment DECC have placed it within the capacity auction, almost as an afterthought it feels to me, whereas I feel it would have been much better placed under the renewables umbrella of contracts for difference because one can get much more certainty, from an investment point of view, around investing in storage. If it is placed in the capacity auction I am asking my battery-based storage system to compete with the established technologies when I am not at that point and I get much shorter contracts than I do for generation. Under the CfD regime, I am competing with less established technologies in the sense of renewables and much longer contract periods. I think that is much more attractive to investors. The role of the Government there is promoting storage and promoting innovation in storage by placing it under the CfD regime rather than the capacity regime.

Professor Walker: A broader point that I would make in terms of cost effectiveness is to always remember that the most cost-effective thing is to achieve the same outcomes but without using energy at all in the first place. I would talk there, for example, about cooling without air conditioning. That is something we have been very good at for a long time in this country, but air conditioning is increasingly moving into not just office environments but a lot of other non-domestic settings, and there is a big concern that air conditioning could be moving into the domestic world as well. That is an entirely new form of energy consumption that we do not necessarily need at all because there are many ways of achieving cooling without air conditioning. It is one of the social dynamics that we are interested in investigating and trying to understand. Why is air conditioning moving through the UK building stock in the way it is, introducing new demands for electricity on the system? Natural lighting, only using heating and lighting when we need to use heating and lighting and all those sorts of things should not be forgotten in all of this. It is easy to talk about the smart technology and the complicated stuff when sometimes some of the simple stuff is the most cost effective and the most important.

Q120 Lord Broers: Could I ask another simple question, triggered by Dr Porter talking about different time zones? Will the smart meter allow complete flexibility in that? It strikes me that the easiest way to get rid of this 5 pm to 7 pm hump would be to price that highly. If you had a dynamic pricing structure over the 24 hours easily in force then I would have thought you could bring the market to bear on bringing that peak down straight away—charge three times as much between 5 pm and 7 pm.

Professor Walker: The big question is: what can realistically be moved out of that time period? What is flexible in that evening peak? We have been doing work on this looking at time-use diary data, looking at how people are using their time. What is going on within the peak period? How is that locked into other things that people are doing like working hours and school hours? The evening period in the domestic setting is often a very intense frantic period with lots of activity going on and if you are pushing prices up very significantly during that period, all you could be doing is penalising consumers who cannot necessarily just reposition stuff. The question about what is flexible and what is not flexible in this is important and it is not sufficiently understood as yet. We are starting to get some indication from some of the early trials with smart meters and various things, but I think there is a real lack of detailed understanding about how electricity is being used at all and, therefore, if we do not know that then we do not necessarily know how much of that is moveable and whether you are just going to—

Lord Broers: That is probably a very good thing. I am sure Lord Winston would confirm that it is a bad thing to have a great big meal in the evening. One would have one’s meal in the middle of the day.

Professor Walker: We have been thinking about the changing social patterns of both eating in and eating out and how that has shifted over time, because there have been big shifts over time. It could be that the nature of what goes on in that evening peak does move, certainly it is in terms of patterns of TV watching and the use of computers, mobile phones and tablets. That is all very much a dynamic area of activity in the home environment with implications for electricity consumption during that period.

Dr Porter: I would agree with all of that. However, one has to think: within a domestic building—I am talking about the domestic environment not the commercial, although the same applies there—where are the big electricity users? It is not the power for your TV, because that uses a lot less than it used to do.

Professor Walker: It depends how many you have on.

Dr Porter: Clearly, if you have 10, that is not useful. The big users are: heating hot water, if you have it; electric heating, if you have that; cooking; and your major white goods. A lot of those require a lot less than they used to because of various European regulations, which we have all signed up to, to reduce the usage of those individual appliances, which is a good thing. I agree with my colleague Gordon that only some things can be switched. However, washing machines, dishwashers, cold appliances, electric heating and electric hot water are all pretty high-level things that are switchable to an extent.

I always give the example of a dishwasher. There is no reason, in most households, why the dishwasher has to be turned on at 10.30 pm when you go to bed—it is half full, but you put it on—whereas it could be done at a different time. You could press the button and the smart system decides. You say, “I want the dishes clean by 7.30 the following morning”, or whatever it is. The system then turns that on when there is available energy: when it is cheap, low carbon, whatever the issue is. That involves the use of a relatively dumb technology. It is technology, but it is not rocket science. That is relatively straightforward. That brings us back to Lord Wade’s discussion about the consumer having the power—the consumer says, “Oh, forget this. I am going to use it now”, but the incentive is: turn it on.

Lord Rees of Ludlow: Following up on the social science, I would like you to put your crystal ball on and think beyond 2020 and I would like to ask you in particular about some official future scenarios done by DECC and Ofgem. Do you think they cover the full range of potential changes that may happen? Also, what do you think about future technologies and the impact they would have on these issues?

Professor Walker: We have started to talk to DECC and Ofgem about how good their scenario work is, particularly in thinking about social futures. They are very good at dealing with the variables they feel comfortable with, like technological efficiencies and different scenarios for making technologies more efficient or with population growth or economic growth—the big macro questions. However, if we went into, “Well, what is the future of lighting at home? What is the future of cooking? What is the future of all sorts of different ways in which energy is used”, their scenarios get very basic, if they deal with any of those questions at all. They had a review done recently of all their energy system models, which concluded that there was very little effort going into the modelling of social processes. We think there would be ways of going into those.

It is very difficult to know with any degree of certainty about processes of social change. I think they are far harder to deal with than others in many ways. On the other hand though, you could work through: what are the possible different scenarios for cooking? The way people cook, the way they prepare food, the balance between cooking at home and eating out—all these sorts of things would be relevant to the peak and you could develop scenarios that built up from a range of different key forms of energy use to inform some of the modelling they did in a better way.

Michael Ware: I think the difficulty is that consumer behaviour changes much more quickly than the Government can react by changing generating capacity. Consumer behaviour can conceivably change very quickly within the next five years. It is almost impossible to get any significant generating capacity in place within such a short timescale. I suspect the whole focus of demand-side response on the consumer, and it may be a bit of a cul-de-sac, is that from an investment point of view it is very hard to rely upon consumers. The demand-side aggregator is unlikely to have a contract with every single consumer. If it did have a contract with every single consumer, it would be very expensive to enforce. If people do not behave in a way that the demand-side aggregator anticipated, it is very difficult, apart from crude pricing mechanisms, to influence that behaviour.

I suspect the easier contractual situation is to focus on the commercial and industrial sectors because there is a smaller number of users, there is a contract in place and it is an enforceable contract. I would rather have one contract with Sainsbury’s than 10,000 individual consumers because I can enforce that and I can make an investment decision on the basis of my contract with Sainsbury’s. I can go back to the grid and say, “I can guarantee to deliver you X amount of capacity between peak hours”. It is much harder for a DSR aggregator to make that assumption and assertion based on 10,000 individual consumers who may change their behaviour very quickly in the next five years.

Just to summarise that point, I think the focus of demand-side response is it is too difficult to rely upon consumers. They do not adhere to contracts and their behaviour is very unpredictable. Corporates are much easier as an investment proposition.

Q121 Lord Rees of Ludlow: Professor Walker, do you think that social attitudes may change so that, apart from the financial incentive, there may be a feeling that it is somehow naff to be extravagant with energy—a change in attitude like we have had in smoking and drink-driving and issues like that—and that may also have an effect on individual behaviour?

Professor Walker: That is certainly talked about. The degree to which we are likely to see change in how energy is used because of a change in the way of thinking about things is a bit limited. People are caught up in all sorts of habits and routines and ways of doing things with other people in patterns of everyday life, which means that, even if you become very environmentally aware or very concerned about energy, it does not necessarily mean you can unpick all the ways you are using energy. People certainly talk about smart meters and other forms of technology as creating a different relationship between people and energy. We are a little sceptical in our approach to this, but certainly that is talked about.

Dr Porter: From an investment perspective I entirely agree with my colleague, but maybe to get domestic demand-side management to work you probably do not use the same methodology. You do not use the aggregators for Sainsbury’s as you do for 10,000 householders. It is not the right model. If we want to get demand-side management to work with 25 million households with smart metering infrastructure in place in a few years’ time, I do not think the model—as Michael would be very aware of—is the right one, for the reasons he has explained. There would need to be a different relationship, maybe through the energy company, but it needs some thinking as to how exactly that would work commercially because, I agree, I do not think it would work commercially with the current arrangements.

Lord Dixon-Smith: Chairman, I may get my head chopped off but we are worrying about the peaks. What I am concerned about is how we fill the troughs because that is where we are going to get spare capacity to deal with the complete electrification of road transport, which is the long-term prospect if we are going to achieve the 2050 target. It will not be batteries, in my view, but fuel sales and hydrogen that run it. I wonder what we are going to do with all the redundant batteries when their lives eventually run out, whereas hydrogen has a benign cycle. You turn water into hydrogen and oxygen and you reverse the process and get the electricity back. What I worry about in the long term is not the peaks. The peaks will take care of themselves just simply because costs will be something that everybody will work on, including residential customers, and we see a constant improvement in the efficiency of domestic equipment. The demand-side management is going to be the critical thing and it will be essential that the generating industry can handle virtually a flat line, probably, in electricity production and it may even have to expand as a result of the changes that are going to come about. Having a discussion, which is what we have been having, is fine, but we are not constantly, nationally, thinking about the target that we have set in legislation and that is behind all this. The first thing we shall have to do is fill up the troughs. We will not need that much additional generating capacity if that is what we do, but if we do not manage it with that in mind there will be problems even for the Treasury in this because the first thing they have to look forward to is losing a few hundred million of fuel duty and so on. We are not looking at this in a sufficiently long-term way and I hope you agree that these are manageable problems if we look at it in that way.

The Chairman: Dr Porter, would you like to take that one?

Dr Porter: Yes. I think you are absolutely right. Again, if you have a chance, look at the video that the clerk sent round to you, which is a demo of how we got 12 companies to work together to demonstrate how this could work. It was remarkable to see and remarkable we got them to work together. That is a real demonstration. The scenario demonstrated in Aberdeen at that conference was exactly in this area. If you simulate having a lot of wind power and you simulate having a sunny day on a roof based PV system, there were five ways in which you could store energy in that grid: from the bigger battery side, to putting it in a heating system, to putting it into an electric vehicle, in exactly the scenarios you are talking about. Even if you have very variable load and very variable usage in the future, if you can use a combination of smart technologies and the right financial systems that incentivises people, systems, energy companies to use a technology to smooth it, you will never get a perfect flat line but the benefit of adding more electrical use, although it increases the overall load, is that they are eminently switchable. As I mentioned earlier a lot of the things you use now are not very switchable, whereas if you have electric heating and electric vehicles those are eminently switchable. Therefore, you can manage the load much better, although the load is perhaps higher because you put more load on the network.

The Chairman: A final question from Lord Winston.

Q122 Lord Winston: It is just a short one. We have not discussed this, but we are hearing quite a lot about cybersecurity and whether or not smart meters increase our risk. What is being done about that?

Dr Porter: Again, I mentioned earlier there is an awful lot of work being done both on privacy and on security, but it has to be recognised that any system is potentially hackable. I am not a security IT expert, but even if you are Sony Films you can have a problem with this, as happened last week. Again, within the smart secure zone there has been an awful lot of work and focus on this to make sure that the utility-owned and offered equipment has the highest level of security for the functionality required.

There is a balance here. If you put too much security in, it puts the cost up and you do not do it. That is the German situation. The big problem is in putting so much security in there, which most people think is unnecessary, for certain functions, but there is an absolute requirement to have the security requirements done. An office of GCHQ has been involved in working with DECC to work out exactly the security requirements that have to go in all the equipment. From the individual smart metering side, it is felt there is a very low risk. There may be some risk that somebody could hack into your smart meter, but you have to ask why.

In terms of the overall cybersecurity, on whether you could shut the country down, the feeling from those experts is that is not the case. If you have a wider smart grid and you have the whole system to be smart, that is a much greater level of risk and there will be even more requirement to get it right. In terms of the smart meter rollout, everyone believes, including the security experts, that there is sufficient security put in place for the individual householder or, indeed, building and it does not cause a threat for the whole country.

Q123 The Chairman: We have just a final reference back to the smart meters again. You reminded us earlier that DECC have had to postpone by a month the rollout, but the date itself by which the project has to be delivered has remained the same. What needs to be done now in order to ensure that this programme is kept up?

Dr Porter: A lot of work has already been done. There is in the UK a great deal of co-operation between the different stakeholders and, compared to some of the European member states, we are doing it extremely well. I think we can all pat ourselves on the back a little bit. We are doing it very well. There are a lot of processes coming together. So, I think in the next few months we want as little change as possible.

The Chairman: No interference from Ministers.

Dr Porter: As little interference as possible from anybody. We know what everyone has to do to get over the line.

The Chairman: This is an election year.

Dr Porter: I am sitting in this place and I am well aware there is an election coming up, but all three major parties are fully behind the programme. That has been fairly consistent for the last 10 years and it is the case now. We are not expecting any major policy differential. There is a slight worry, if the fixed energy prices were to come in, what effect that would have on the usability of smart data in future. But, again, even if that were to come in, by the time the mass rollout comes, that policy, as I understand it, will have worked through before we come to the end. We are a little concerned about the talk of “Let us get rid of Ofgem”, given that Ofgem are getting more involved in the regulatory push to push utilities to roll out this technology. Even if there was a change in regulator, we would say that we should not take away the regulatory requirements that are in place because that could mean there is a dip in pushing the whole industry to deliver.

The Chairman: I must conclude the session. We have overrun, but I am most grateful for your patience in answering our questions. I certainly have taken away the message that you now want consistency of policy and we will see whether we can help deliver that. It is always an aspiration of this Committee to help. Thank you very much indeed. If there is any further information you feel you would like to impart to us as a result of this session, do please feel free to forward it to our clerk. Thank you again very much for your help.