Unrevised

Members present

Earl of Selborne (Chairman)

Lord Broers (co-opted)

Lord Dixon-Smith

Baroness Hilton of Eggardon

Baroness Manningham-Buller

Lord O’Neill of Clackmannan

Lord Patel

Lord Peston

Lord Rees of Ludlow

Viscount Ridley

Baroness Sharp of Guildford

Lord Wade of Chorlton

Lord Willis of Knaresborough

Lord Winston

______________________

Examination of Witnesses

Professor Catherine Mitchell, University of Exeter, and Dr Konstantin Staschus, Secretary-General, European Network of Transmission System Operators for Electricity

Q139 The Chairman: I welcome Professor Mitchell and Dr Staschus. I apologise that we are starting a little late, but I know that you have had some challenging travel arrangements to get here, so perhaps you have had time to catch your breath. Could I ask if you would like first of all to introduce yourselves for the record? If you would like to make an opening statement, please feel free to do so. First of all, would Professor Mitchell like to introduce herself?

Professor Mitchell: Yes. I am Catherine Mitchell. I run the Energy Policy Group at the University of Exeter. I think we will just go straight in, for me.

Dr Staschus: My name is Konstantin Staschus. I am the Secretary-General of ENTSO-E. ENTSO-E is the European Network of Transmission System Operators for Electricity. It was established in 2009 following the adoption of the European Union third internal energy market package, which prescribes in one of its regulations that all the transmission system operators in Europe need to be members of ENTSO-E and work together to do joint, Europe-wide, 10-year network development plans and to draft network codes related to technical and market conditions for co-operation across borders in the European electricity market.

The Chairman: Thank you.

Q140 Lord Broers: This is the very general and important question. How does electricity resilience in the UK compare to that in other countries in Europe and North America, and are the UK’s current and projected capacity margins lower than in the other countries? How does the resilience of transmission and distribution networks in the UK compare? Dr Staschus, you have the good European viewpoint.

Dr Staschus: Yes. If I may, let me start with a general remark about the growing importance of electricity transmission and electricity interconnection with respect to resilience, growing as the European Union in general and the UK in particular are trying to reduce their carbon dioxide emissions from electricity generation and from the energy system in general.

There are of course different kinds of generation resources that are being pursued, but one very important kind is renewable energy, and especially among the various kinds of renewable energy, the less expensive ones compared to some others like wind energy and solar energy. Both of these operate only when the wind blows and the sun shines. In many parts of Europe, for wind, that is then in the neighbourhood of 20% to 30% of the time. That has a very important implication for the need for interconnections, because if you want to supply a lot of energy with wind energy, for example, then you need to install quite a bit more wind energy capacity than even your peak load, maybe, which then means if there is no wind, you tend to have too little electricity, and if there is a lot of wind, you tend to have too much. That is where the strong European grid comes in, because over a relatively large area like Europe the wind conditions differ in different parts of Europe at the same time, so the parts of surplus have some probability of being able to export to the parts of deficit.

When we are doing our transmission planning studies on a European basis, we find that much of the economics and 80% of the projects Europe-wide are driven at least partly by renewable energy integration, and the economics of that and our economic studies for that work out largely along those general principles I have been trying to describe. A strong grid is one of the best ways to keep resilience up as you are investing more and more in renewable energy, and to keep the overall costs of the electricity system affordable to consumers.

Finally, coming to your original question, of course with Great Britain being an island, the situation of the interconnections is not very strong so far. Towards the continent, that is 3,000 megawatts, and that is relatively low in comparison in terms of interconnection capacity to the countries on the continent that have it easier because they have many neighbours on land.

The interconnection is of course only part of the resilience of the electricity system. The electricity market in Great Britain—England, Wales, Scotland—is already quite a large market with quite a bit of diversity, and it is managed very well in comparison to other parts of Europe with respect to the market arrangements, the duties and the tools that National Grid has at its disposal to keep the system balanced and so on. From those perspectives, focusing on Great Britain alone, it is a very positive picture. If you look at the increasing importance of interconnectors for the future as more and more renewable energy comes into the system here and elsewhere in Europe, more interconnection will have to be built to keep the transition towards low-carbon resources affordable and as resilient as possible.

Professor Mitchell: If I look at it in a slightly different way. I think one issue is that thinking about capacity margins in terms of a per cent is changing. When it was a fossil fuel and nuclear-dominated type system, one tended to think that you needed to have a certain percentage over and above a certain capacity. As we are moving into a much more integrated and flexible system, I do not think you should necessarily think about things just in that way. You need to think about how much storage there might be in the system or how much demand for flexibility there is or what the interconnectors are.

Then, just turning to the US, the type of codes and licences that most of the 50 states in America have—given you can find any type of electricity system in America in the 50 states—in general the system standards are very similar. One way that the US is far better than all of Europe is to do with demand-side response within markets. Pennsylvania, New Jersey and Massachusetts—PJM—is a market that has bits of 13 states and covers 51 million customers, which is about the size of Britain. I just have this quote for you so that you see the picture. The demand response in that market is able to compete in exactly the same way as supply, so it goes into the same market. For 2010, which was for capacity in 2013-2014, it saved those 51 million customers $12 billion and it paid the equivalent of £430 million, or 10 gigawatts of demand side response. That is in PJM. That is about 12% of projected demand. You bid in to not use it, rather than to supply it. If you have a flexible demand system, then when you have issues of capacity or resilience problems, you are much more able to deal with it, it is cheaper for customers and it is better for security. PJM is the best. That is about 12% of demand roughly, but the average in the US across those 50 states is still 6%. If you look at our system here in the UK, which is a market-wide system, it is about 1% of demand and you cannot bid in in the same way. It is a very poor system in relation to that.

Q141 Baroness Manningham-Buller: Can I just pick up one particular point, Professor Mitchell? You compared Europe to the States, in this particular respect. Are there countries within Europe that are better than we are at handling this?

Professor Mitchell: Not really. We are all trying to think about how we start to bring the demand side into markets. Germany, Denmark, Italy, Spain, all these places are beginning to do that, and I think that they will become better than us. We have just started to do it through EMR, and I would hope that we will learn and grow and become better. Actually, DECC says that it wants to do this. It is just that the system that it has been put in place is something called a market-wide system, which is very inflexible. It is almost the opposite of what you want a demand-side system to be.

Baroness Manningham-Buller: One of the things this Committee is looking at is where we can learn from other people in the world, and you have given us the example of the States. Dr Staschus thought we have a pretty good system here. Could I ask you in terms of carbon emissions, intermittency, percentage of renewables used and so on the question you have already seen in advance: where can we learn from our friends in Europe as well as from America? I cannot believe we are ahead of everybody.

Dr Staschus: Learning within Europe on the precise issue that Professor Mitchell just addressed would probably best focus on those countries that have already rolled out smart meters to their household customers. Italy was first, but then very notably there are also the Scandinavian countries, for example Sweden and Finland, which have made progress on that. That enables the demand also of household customers to somewhat flexibly react to developments in wholesale prices.

I would like to differentiate two effects here. One is where the customer, through his own choice and action, but perhaps also through home automation or smart homes, decides to react to price developments, and of course he has to have the prices there visible to him or to his software. That is the case for industrial customers, for large commercial customers and, in the future, with smart meters, that should be the case for household customers as well. This kind of flexibility we believe is very important.

Then what Professor Mitchell was mentioning was actual bidding systems, where the customers of various sizes react to auctions for especially flexible capacity or especially flexible demand. These are auctions that usually the transmission system operator, perhaps also the distribution system operators, would be running. Then there needs to be some verification schemes, but if those are in place—and to the best of my knowledge they are in place in the United States—these can compete on an equal basis with generation resources to deal with fluctuations in renewable energy input and keep the system stable. In fact, as Professor Mitchell was mentioning, to the best of our knowledge these demand flexibility resources can compete quite well in terms of costs with generation flexibility resources. The Nordic countries would be a good place to learn from.

I want to mention, if I may, a second kind of learning, which is institutionalised through the internal energy market procedures we have in Europe. I mentioned in my brief introduction that ENTSO-E has the privilege of drafting network codes that are supposed to cover all cross-border aspects of the market functioning Europe-wide, so for consumers, people that exceed 500 million. In these codes we try to look to the future and set conditions that support demand-side response, which support flexible generation resources and which make sure that both demand and generation act, during some instability in system operation, in such a way that they support the stability of the system and do not make it detrimental.

Among the 10 network codes that we have been drafting, there are three that relate to how the market functions. We are trying to set all these conditions in what ends up being hundreds of pages of the three market codes in such a way that the demand-side flexibility is supported but the overall resilience of the system is made as strong as possible.

When our members, 41 TSOs from 34 countries, sit together and draft these network codes, their experience from the frontrunners in renewable energy integration flows into the overall discussion. The Irish in their small system might have a system inertia problem, too few rotating machines, with the mass keeping the system stable, so we benefit from their experience with that particular island-related problem, which might hit the rest of Europe later. The Germans have 75,000 megawatts of renewable energy capacity roughly today already, compared to their 80,000 megawatt peak load. That is an awful lot, so they have more experience than the UK and many other countries in how these enormous amounts of renewable energy can be integrated into the system. When we write the network codes, this sort of experience gets integrated in what we write into them.

Professor Mitchell: Yes, I agree. I think you need a very strong transmission system throughout Europe because of flows, but transmission is just one part of the energy system. Essentially what is happening is that over the last 10 to 20 years we now have a completely new set of technologies. We just heard about the rapid change in terms of solar. But the really big one is the ICT, which is now used to operate and manage the systems, so you can manage systems in a completely different way than you did before. The old system, where you had a big power plant and the electricity essentially went down through the system to the customer, is how our markets and regulation works and links to those old technologies, but in fact the energy system is made up of completely different technologies that have completely different operating characteristics. The problem is that this old system fits the rules and incentives and these new technologies have to fit into that system. I think that is where the problem of resilience is.

Baroness Manningham-Buller: It would help the Committee if you could give us a clear idea of what recommendations in that area you would like to see us make.

Professor Mitchell: I think that you need to rethink the role of the regulator, the role of utilities and the role of customers. For example, New York State, which has 31 million people, has something called Reforming the Energy Vision, and that is an example of a large state—that obviously has huge, important industries based in New York City—that is trying to do that. Minnesota, Texas, California: all these states in America are trying to take this very solid base of codes, licences, economic regulation and so forth and drag them into being able to meet the needs of new technologies. An example I give for this, and forgive me if this is too simple—

Baroness Manningham-Buller: We like simple. We have very little of it.

Professor Mitchell: If you think 20 years ago we were based on landline telephones and telephone boxes, and then we moved into mobile phones and all you could do with your mobile phone was talk to somebody on it, I would say that is where British economic regulation for electricity is. Then if you think about phones now, the “speaking to” bit of a phone is just one very small bit of what a phone does. You have maps and internet and all these kinds of things. The reason why we have smartphones, which we can do so many things with, is a combination of competition and of regulation.

In energy, we have all these different technologies that allow us in theory to run a system very effectively with far less energy. The stuff that Kevin Anderson was talking about, about these mega-systems, I think is entirely unnecessary. If you get the competition bit right and you get the regulation bit right so that you effectively have your smart energy system, like you have your smartphone, then I think you end up with a cheaper, more secure and altogether more resilient system. It is rethinking the way that we think about energy. However, our energy system is still at the equivalent of the simple mobile phone rather than the smart phone stage. That is not to say that Ofgem and the department are not trying to do that, but of course they are in this situation that they have to go from one to the other, and that has huge distributional impacts about how you do that. If you go down one way compared to going down another way, then that suits one sector versus another sector, and it is obviously not as easy as I have said it. As I say, many states in the US are now beginning to think like that.

Q142 Lord O’Neill of Clackmannan: I have been listening to Catherine Mitchell talking about the American model and comparing it to the UK one, but is there not one fundamental difference that in the UK there is clearly an attempted competitive market, whereas there tend to be local monopolies in the US, and there is not quite the competitive model that we have in the UK to compare it with? Do you think that makes a difference?

Professor Mitchell: There are 50 states. Seventeen of them have competitive markets, competitive retail markets, so you have several that you can look at.

Lord O’Neill of Clackmannan: Have any of them been the ones you have quoted to us this morning, like the PJM?

Professor Mitchell: Yes. Absolutely. All of those that I have talked about are the competitive markets.

Lord O’Neill of Clackmannan: Fine. Thank you.

Professor Mitchell: There are real differences between any electricity system in any country, and you need to always design your electricity system or your energy system to meet that country, but there are so many examples of just sensible practice around the place that I think it is easy to be able to bring those back from the US or, say, from Denmark. Somebody was talking about heat pumps, for example, and heat pumps can be incredibly inefficient if you use them singly, just because of the technical thing. It just happens in Denmark that people tend to live in these apartment blocks and some times they have loads and loads of wind. Sometimes they have 160% of their electricity demand needs. So what they do is that the extra 60% effectively goes into their heat pumps and it acts as storage. That is absolutely brilliant for Denmark. It is not something that would be able to work in Britain. But if one learns from other countries then you can start to pick and mix so you can get a system that totally suits Britain.

Lord O’Neill of Clackmannan: Dr Staschus?

Dr Staschus: Yes, I wanted to latch on to some of the things Professor Mitchell just said. I used to know the US market pretty well because I lived there for 14 years when I was younger, including nine years of work at Pacific Gas and Electric, one of the bigger utilities over there, but that was 20 years ago. I am still trying to follow it, and indeed we have good contacts to PJM. The numbers Professor Mitchell just gave tell an interesting story. Out of 50 states, 17 [1] have a market in the US, and a large number do not. They indeed have the old monopolies, as you were implying. It is a bit unfortunate that the US has not been able to agree nationwide for their 350 million inhabitants on a common model for how they want to arrange their electricity industry. Thanks partly to the UK’s forerunner role back in the 1980s and 1990s, Europe has embarked on what I find an amazingly strong consensus that market solutions are the right answer for how to arrange the electricity industry, and the same kind of basic market arrangements all across Europe with 500 million people is the right answer.

From my personal perspective, one aspect of having market solutions is not to be underestimated at this time, and this is the innovation that comes from, for example, a big price drop in photovoltaic panels over the last five years, and the innovation that Professor Mitchell mentioned with respect to better usage of information and communication technology in order to make our homes smarter, in order to make our grids smarter, in order to be able to use storage solutions locally or Europe-wide. All this innovation from our perspective can best prosper within the market environment and not in a monopolistic environment like many parts of the southern US still have.

We try to plan the transmission grid and analyse each new interconnector with respect to costs and benefits in a multi-criteria way and with respect to the greater uncertainties that we foresee in the future. It is very hard to estimate, for example, whether the photovoltaic cost decreases that we have seen over the last five years will continue, and if so, at what pace they will continue, and how cheap photovoltaic power will be even in the year 2020 or 2025. It is also not so easy to estimate how much demand response there will really be from the households. If they have a heat pump, there can be a lot of responsiveness, but not everybody is going to have a heat pump. Not everybody will have an electric car within the next 10 years. If one does not have these large demands within the household, then the benefits from smart meters might be quite a bit less.

We try hard to send each of the 120 Europe-wide transmission projects through a very demanding cost-benefit analysis, with hour-by-hour simulations of the year 2030, in four very different scenarios: one that has lots of renewable energy, lots of demand response, and will almost certainly need strong grids and also very smart grids at the distribution level; and another scenario at the other end, which is quite conservative and does not have anywhere near as much renewable energy, not anywhere near as much innovation in the distribution grid, and then you will need less transmission lines. Even in that conservative scenario, you still need roughly twice as much interconnection Europe-wide as you need now. The two big spots where the biggest investment is needed are Germany, with all the renewables they already have, and the UK, with the interconnections to Norway, Denmark, Belgium, Holland and France that would make the market in the UK much better integrated. If the wind blows well, in the future, with a lot more wind energy in the UK than today, the operators of those wind parks can still get a decent price for their wind energy in other parts of Europe that they are exporting it to. If the interconnections are not there and the wind blows well and you have installed a lot of it, you need to curtail it and you do not know where to put it, except perhaps in storage, which today is still quite expensive.

Q143 Lord Peston: I got a bit lost on the difference between market and non-market solutions, and I would like you to clarify. If you are in America, there are some states, I gather, where there is only one supplier and they really have a monopoly. That is right, is it not? I must say, when I lived in America I had not the faintest—

Professor Mitchell: You usually have area-based suppliers, so in the area that you live.

Lord Peston: But you could not switch?

Professor Mitchell: There are different companies. No, but you cannot switch. That is as domestic customers. There is usually retail competition for bigger customers everywhere.

Lord Peston: Let us concentrate on domestic for the moment. As an economist, I would define a monopoly as a single supplier.

Professor Mitchell: Yes.

Lord Peston: If we then compare with Europe, typically how many suppliers can a household choose between in a typical European country?

Professor Mitchell: I think Greece is the only country now where domestic supply is with one company.

Lord Peston: If you live in Germany, how many companies would you be choosing between?

Dr Staschus: In Germany, most cities might have around 30 or 50 different—

Lord Peston: Fifty producers of electricity?

Dr Staschus: Yes.

Professor Mitchell: Producers or suppliers?

Dr Staschus: Suppliers.

Professor Mitchell: Yes, so that would be someone you buy from.

Dr Staschus: Also, keep in mind that several countries put a lot of emphasis on municipal utilities. In Germany you have 800 municipal utilities. Some of them are big enough to be active on the nationwide market. Also, some other countries have municipal utilities and if you abstract from the municipals you might, in many countries, have five or 10 offers. I am sorry that this is not exactly my field of expertise, how many there are.

Professor Mitchell: In Britain we have, I think, either 23 or 27. We have the big six, and then you have a number of other small suppliers.

Lord Peston: The fact that I do not know the names or how I get in touch with those other than the one I have means that I am genuinely in a tiny minority.

Professor Mitchell: Yes. I think you are with EDF, actually.

Lord Peston: Everybody else in this room knows the names of 20-odd companies they can go to.

The Chairman: We will give you the address of the change website.

Professor Mitchell: I think it is an interesting fact—

Lord Peston: No, the fact is that I am not convinced of this. The point I am trying to make is I am not convinced of the market versus the non-markets.

The Chairman: We had better move on.

Lord Peston: I have made my point, I think.

Professor Mitchell: I think an interesting point, though, about that is that there is no easy way for you to undertake a comparison. I think Ofgem should have on their website a comparison, because there are many comparison sites but they are comparing different things and often being paid for by companies on those sites. Having a good comparison site that Ofgem sets a template for would be absolutely brilliant for customers.

The Chairman: Comparison is extremely complicated.

Q144 Baroness Sharp of Guildford: In many senses we have covered the question that I was due to ask, which was about capacity markets, but there is one remaining from it that I would like to ask, which is: if Professor Mitchell is right in saying that we are using, in a sense, the methods that are now a decade old or more than that, does this not have very serious implications in terms of the choice of infrastructure that we are now due to make? This is a very real problem because if we are going to in a sense install an infrastructure that is much less flexible than the way the market is developing and the need to have this enormous flexibility, as you were saying—things like the development of solar on the one hand, or heat pumps on the other—the microgeneration issue perhaps is not at the moment captured within the model that DECC is using.

Professor Mitchell: I agree. I should say that Margaret was a role model for me. I used to work with her in my very earliest stage a long time ago.

Can I just say two things? One is about the capacity market that we have in Britain, and the other is about the innovation side of things. The capacity market that we have in Britain now is a market-wide system, which simply gives money because they are there. It is not asking them to do anything about their capacity, their capabilities or what makes the system more flexible. It is a very poor system, and I have written on that. I am very happy to send stuff in to you if you want to have more on that.

Because it is the kind of system it is, it is not supporting flexibility. Really what you need in this rapidly changing world is a combination on the one hand of an overseer, some kind of framework that is trying to keep everything together, and flexibility around the edges so that you can keep up with these enormous changes that are going on. I like the Energinet model in Denmark, whereby Energinet is a system operator. It is a state-owned system operator. It has been given the responsibility for security and for transition, the transition to the low-carbon system. You have something that is technically able to keep track of what is going on, and at the same time the changing rules to do with codes and licences and all the rest of it feed into that. That seems to me to be a way that keeps the flexibility to whatever might suddenly happen and at the same time ensures security. Unlike having the GB market-wide payment, what the targeted strategic reserve mechanism is what most states in the US do or what many places in Britain do. If they feel that they need some more capacity of some other capability requirement, Energinet the system operator, is able to say, “We need 300 megawatts of this”, and then that can be competitively put out to tender if you need it. Then, if you do not need it, you do not have to tender for it, whereas our capacity mechanism is just based on giving out this money, even though things change all the time and it may be completely unnecessary, and it is the customers who pay in the end.

Baroness Sharp of Guildford: Would it be possible for you to do a short paper on that and let us have that?

Professor Mitchell: Yes. I can send that.

Q145 Lord Willis of Knaresborough: May I ask Professor Mitchell and indeed Dr Staschus a simple question? I was particularly interested in this issue that you brought from the States about demand as a market lever. Could I ask this question? If in fact demand becomes a major market lever—and 12%, as you were talking about, is a very significant market lever—would there be sufficient resilience in the current interconnector system to avoid you having to increase significantly base load capacity?

Professor Mitchell: The situation about interconnectors is, I think, incredibly interesting. Somebody was asking about the cost of electricity in Europe. We are middle-ranking in terms of our retail price of electricity, but if you look at our wholesale price, I think there are only two or three countries, Cyprus and somewhere else, that are higher than us. We have very high wholesale prices. One of the reasons why we have very high wholesale prices is that, I think, 2% of our total capacity is interconnected, and the Commission wants to have roughly 10%. In my view, and I am sure many people would say it is very simplistic, I think it has been in the interests of the large generators in Britain not to have interconnectors, because if you were to have interconnectors then cheaper electricity would come in from the continent.

The regulation of the way that we fund our interconnectors has always been that it is a market system based on the interconnector itself, as compared to the whole of the rest of Europe, which sees interconnectors as part of the transmission system. So they go along to their regulator, their regulator says you can have the money to do that and then they socialise the cost of the interconnector over the cost of electricity. We have now been forced to go down a third way because our British system has not fitted with the European system, and now we have some fudge between a market and a regulated mechanism.

Overall, this is part of the issue that I am talking about. We have a set of regulations that are based on older technologies and we need to move into regulations that fit the world that we live in. We need to sort out our interconnectors in order to do that and at that point, if we were to go up to 10% of our supply with interconnectors and being able to move power around, which is good in every way, then yes, obviously you do not need to have what would have been 10% of generation, absolutely.

Dr Staschus: Could I add a few thoughts to that?

The Chairman: Yes, please.

Dr Staschus: Relating to the role of Energinet.dk in Denmark, they are the TSO identified by the Danish Government, just like National Grid is the TSO identified by the UK Government for Great Britain, and they have very similar roles. The transmission system operators in all of Europe have been unbundled in three waves (i.e. in the three EU Internal Energy Market legislative packages). As I mentioned, the idea originally came from the UK, and Europe has largely copied that, along with other parts of the world, where if you want to have competition in electricity the only way to get the power from a competitive producer to any customer is through the grid. So the grid has to be neutral, and that is why it needed to be unbundled in the past decades from the interests of supply and from the interests of generation in particular. That has happened all over Europe in ways that are rather similar to each other, even if not entirely identical, and that is why then the TSOs here in the UK and in Denmark and elsewhere have very similar roles: keep the lights on, first and foremost, and facilitate the market functioning, and support the energy policy goals.

If the energy policy goals in all of Europe and in the UK say, “Decarbonise as much as you can the electricity sector”, then that becomes—I know that is the case in the UK—a big objective driving the regulator, Ofgem, and it becomes a big objective driving the TSO, National Grid, just like in Denmark. That is why the transmission system operators believe and try to prove through cost-benefit analyses that, under different future scenarios, transmission helps to keep the transition to a low-carbon future affordable. That is why they also strongly support the introduction of more and more innovation and smarts into the distribution grid and into the interactions of the customers with the market.

We do not talk often about the smart transmission grid because we like to think that it is already very smart. Every two or three seconds measurements from the entire system come together in the control centre and get used to keep the system resilient. They get used, as National Grid I believe explained to you already, to make simulations for the next minute and the next hour to make sure that whatever happens in the grid—a line going out because of a storm, a power plant having a forced outage, whatever single thing happens—will not lead to an overload on any part of the system and will not lead to a blackout.

Some of the network codes I mentioned earlier are describing, based on the best practice Europe-wide and the best anticipation of the challenges of the future with more renewables, how precisely to run the software in all the control centres in Europe so that also we avoid the situation in which one with less optimal processes becomes a blackout risk for their neighbour, even if they may have better processes.

Can demand-side response avoid base load capacity? We feel that is another reason why our 10-year network development plans might be useful to policymakers, political deciders like you, but also to the market participants, because we try to open up a broad range of scenarios of how the future might develop and then show through the precise simulations how the market prices are in this future and how they fluctuate from one hour to the other.

If there are more and more renewables, the market prices will fluctuate a lot and there may not be so many of what we call base load hours left because, once you subtract from the load the generation coming from zero-operating cost renewables, you may, in some or in many hours, have very little left. That is why the economics of base load generation have been changing slowly throughout Europe. Our 10-year network development plans try to give a picture of how this would look in the different scenarios with the foreseen amount of base load generation and the foreseen amount of renewables. But I would strongly agree that demand-side response is a necessary ingredient to keep the system manageable.

Professor Mitchell: Can I just say one thing about that? The thing about Energinet is that it is state-owned. It is not a private company as National Grid is here so there is a difference of ownership first of all. Security is placed on them as a responsibility. It is not part of the market as it currently is here in Britain. As Energinet has been given both security and transformation as their responsibility, it gets rid of this incredibly unhelpful competition between transmission and the distribution network operators. That is why I like the Energinet model. I agree that there are all these transmission companies all over the place but, depending on the responsibilities that they are given and their ownership, they are very different animals. It is that particular sort of characteristic that is so good about Energinet going into the future, because it enables appropriate choices to be made to run this system most efficiently rather than this differentiation between DNOs and transmission.

Q146 Lord Patel: My question relates to electricity prices in the UK and the rest of the EU. To a degree, Professor Mitchell, you answered part of the question about electricity prices being higher in the United Kingdom. What do the other countries in the EU look like for electricity prices?

Professor Mitchell: For all the questions that you asked me, I looked at the websites for all the answers.

Lord Patel: Maybe we could have those later.

Professor Mitchell: Yes. You can see this set of average wholesale prices and then the additional taxes and levies on top of that. If you add the lot together then Britain is in the middle of all of these electricity prices. If you just look at the wholesale price, we are near the top and we have very little in terms of levies and extra bits on our prices.

Lord Patel: How does that reflect in consumer prices?

Professor Mitchell: In terms of consumer prices, the retail price, we are in the middle, roughly. There are two things going on. First, if there were more interconnection, then prices would come down and that would also be more secure. Secondly, there is this issue about variable power. If you are in a country with a lot of variable power, because markets are based on marginal costs, it takes the zero marginal cost electricity first of all, so it takes the renewables first and that shunts over the more expensive fossil fuel stuff. It just moves over the supply curve to the right. So fossil fuels, which have higher variable costs, will not get into the market any more. That is one thing, but the other thing is that often that variable renewable generation happens at the time of peak prices and because it is zero marginal cost, those peak prices come right down. That is why countries with a lot of variable power have much lower wholesale prices.

At the moment we are subsidising renewables, but once that subsidy has gone then you basically have the zero price marginal cost electricity, which is the goal of the innovation policy. When you have a marginal cost market, which tends to happen every half hour, you pay the price for that half an hour for that last bit of electricity you have bought in a traditional market, so absolutely all electricity used in that half hour is paid that high price. If, all of a sudden, you have more and more variable power and you are bringing down your peak price, then it is not just that your peak price is coming down but you are also paying a whole lot less for all the electricity as well. On the whole, as you are getting more and more variable power coming into the system, you are going to end up with lower wholesale prices.

Lord Patel: Why do some countries end up having higher taxes? Denmark, Germany—

Professor Mitchell: Germany is a really good example of a country that is just getting to the point where all the higher costs that it has added to electricity wholesale prices, not just for renewables and energy efficiency but also environmental things, are starting to come to an end so that it is moving into lower overall wholesale prices. Those extra bits that some countries are putting on will be, on the whole, to do with environmental levies or whatever it might be.

The Chairman: Lord Broers, do you want to come in? I am sorry, but we are running a bit late so we will keep it short.

Q147 Lord Broers: Just a quick question. US electricity is half our cost, both domestic and industrial. We are lower than Germany although the German generation cost is slightly lower.

Professor Mitchell: Yes, wholesale, that is right.

Lord Broers: What are the Americans doing? Is their electricity producing much more carbon? A factor of two is huge and for industrial companies it is a massive disadvantage. It is a massive disadvantage that Europe is setting itself against America. I think we have to try to understand that a bit.

Dr Staschus: If you compare especially industrial electricity prices, they will have a relatively smaller network component in them because they are connected at higher voltage levels and the higher voltage levels per kilowatt hour are relatively cheaper than the lower distribution voltage levels. So the wholesale price becomes a much more dominating part of an industrial electricity price than it is for household customers, where there is a lot more network fee. Some of the countries are trying to keep the renewable energy subsidies, to some extent, as far as is legal within the EU, away from the industrial power prices to at least keep them as competitive as possible. So comparing US and EU or British industrial customer electricity prices, they are dominated by the wholesale market price and, if your gas is a lot cheaper, as it is in the US now because of the shale gas than it is here in Europe, then the overall generation cost in the US ends up being cheaper, almost by necessity, than it can be here.

Lord Broers: It just seems the same when you look at it. The ratio is the same and presumably we can do the same thing. We can supply large users at higher voltage, can we not?

Dr Staschus: You do, but you do not have the cheap gas here, as they do in the US.

Professor Mitchell: I think it is a combination of things. It is partly resources. It is partly that they have something called public utility commissioners whose job it is to keep track of prices to customers. It is a sort of hybrid method, so although we would call it competitive in the sense of retail, every time anybody wants to sell to a customer they have to go through the public utility commissioner and that means that there is a very close look at the need a generators say they need to have another power plant. That is why the demand side is so much bigger in the States.

But it is also a combination of the pool. You have a different electricity market. You have different sorts of regulators that keep much closer track of prices to customers and, because of that, you have far better demand side. It goes back to this point that I was talking about: if you lower the peak price, that also reduces all the price of electricity in that half hour. The demand side response routinely brings down the price of electricity in that half hour by two-thirds or something like that in PJM. You know I gave that example of $12 billion saved? This derived from bringing down the peak price by two-thirds. The demand side is not just about creating more resilience; it is causing the whole price of electricity for that half an hour to come down as well. It is this combination of methods, which is why—given this complexity of the system now with the needs of climate change but also all these new technologies—we really should be rethinking the role of the regulator, the role of utilities and the role of customers.

Q148 The Chairman: That brings me to a question about EU regulation. You have given us some fairly firm advice that the regulators, not just in Britain but in Europe, should be trying to embrace the new technologies and develop the opportunities that other parts of the world seem to have done quite successfully. What is it that you would expect of the EU regulator if we are to achieve a greater resilience and to be able to capture some of these obvious benefits that you demonstrated elsewhere?

Professor Mitchell: I am fine about the way policies work, but I quite like the idea of a European regulator, a transmission regulator, like FERC in the States. What would you think of that?

Dr Staschus: There is already the Agency for the Co-operation of Energy Regulators, ACER, which has been instituted in the same internal energy market package of 2009 when ENTSO-E also was founded. They do what their name implies. They try to co-ordinate the various EU national regulatory agencies’ work so that it fits together EU-wide. They provide a lot of opinions and some oversight over the ENTSO-E work, but they also try to find consensus among national regulators when it is difficult. You may, for example, have transmission line projects that cover at least two or sometimes even three or four countries. Think, for example, about the North Sea offshore connections that will go among different countries through the middle of the North Sea. The regulatory details can differ quite a bit from one country to another and that may make it difficult for them to agree among themselves which part of the cost of such a subsea cable might need to be charged to the Belgians, the Dutch and to the British customers. If and when they do have trouble agreeing on something important like that, which can even block an investment if you are not careful, then that agency in Ljubljana can step in and hopefully bring them to a consensus.

My members in ENTSO-E, they are the regulated companies. Each one of them is subject to very important regulation in their country on tariffs, on procedures, on congestion management and many other things. We have been calling in international fora in Europe for a strengthened hand for ACER, for this regulatory co-operation agency, because we feel that the international co-operation needs to improve if we want to keep a low-carbon system affordable to the consumers for the reasons I have mentioned. International co-operation cannot prosper as well as it should if the regulators cannot agree with each other, so this function of making them come together more, agreeing more, is very important for us.

Q149 Lord Patel: This relates to research. Very quickly, who in Europe is doing research into new technologies to maintain resilience in the future and what contribution is the Horizon 2020 European programme making towards this R&D?

Professor Mitchell: I do not know about that. My view is that learning by doing is the best way forward. Those countries that start to do things and then learn on the job are the ones that show innovation.

Lord Patel: Which are they?

Professor Mitchell: Germany and Denmark probably but also Italy, Spain as well, to a degree. The thing about Britain is that Britain is good theoretically. We are terribly proud about finding out the problems before we do anything at all but then we do not actually do anything at all. We are just theoretically good at it. I am sure that is true and I would not just say that.

Can I just go back to having a strengthened European regulator? I support that but I also support a smaller regulator in member state countries. We have Ofgem, which is the economic regulator, which essentially is responsible for everything. It makes much more sense that that member state regulatory role becomes much smaller, as in Denmark in combination with a member state system operator that is responsible for transmission and security and so forth. Then you have a European-wide regulator. You will run into problems if you have a strong country member state regulator and a strong European regulator. It is good to have a strong one at a European-wide level and for the state regulator to have a different function—this is part of this whole thing of rethinking the roles of all these people—which, again, fits very much with the Danish model.

Dr Staschus: I know we are out of time but we have two documents that I would like to send your clerk for the record, one addressing the question of fostering investment in the grid as a function of how it is regulated—so that is the question of just now—and another one that gives data about next winter’s resilience in the power system, country by country, week by week.

The Chairman: We would be very grateful for those two documents but also the information that Professor Mitchell referred to earlier. You have brought some answers about comparative costs between countries that we would be very interested to hear. If you were able to give us your further thoughts about regulation and the relationship between Europe and national countries, I think that would be very helpful. I am conscious that we have had to curtail some of the discussion on some interesting issues that we could have discussed in much greater depth had we had the time. As it is, I am afraid we have impinged on your patience by going rather longer than we said we would. Thank you very much indeed to both of you. We have learnt a lot from your evidence. Thank you for taking the trouble to come.