Business, Energy and Industrial Strategy Committee
Oral evidence: Decarbonisation of the power sector, HC 283
Tuesday 7 March 2023
Ordered by the House of Commons to be published on 7 March 2023.
Members present: Darren Jones (Chair); Alan Brown; Jane Hunt; Mark Jenkinson; Andy McDonald; Mark Pawsey; and Alexander Stafford.
Questions 271 to 339
Witnesses
I: Chris Burchell, Managing Director, Scottish and Southern Electricity Networks (SSEN) Distribution; Alice Delahunty, President, National Grid Electricity Transmission; Basil Scarsella, Chief Executive, UK Power Networks; and Lawrence Slade, Chief Executive, Energy Networks Association.
Witnesses: Chris Burchell, Alice Delahunty, Basil Scarsella and Lawrence Slade.
Q271 Chair: Welcome to this morning’s session of the Business, Energy and Industrial Strategy Committee for our latest hearing in our inquiry into how we decarbonise the UK’s power sector. Today we are talking to transmission and distribution networks, the system operator and the energy regulator, Ofgem.
We begin with four witnesses on the first panel: Chris Burchell, the managing director of Scottish and Southern Electricity Networks Distribution; Alice Delahunty, the president of National Grid Electricity Transmission; Basil Scarsella, the chief executive of UK Power Networks; and Lawrence Slade, chief executive of the Energy Networks Association. That represents pretty much everybody in this sector. Good morning to you all.
Just to warm us up, we have had lots of evidence from all the other stakeholders in the energy system that, on the whole, when it comes to financing and generation there are some issues around planning consent and some business models for potentially innovative technologies. But everybody has said to us, “We can’t connect to the grid; we just can’t get a connection in time. We can build all these things, but we can’t plug them in, and that means we can’t meet our targets in time.” Chris Burchell, do you agree with that?
Chris Burchell: Good morning. It is probably worth starting with what we have managed to achieve so far and where we are at this point in time. Over the last few years, there has been a significant increase in the amount of connection requests that have come our way, both in generation and in demand. When I look at our particular networks in the north of Scotland, both at transmission and distribution level, in the last decade we have connected three times as much—our demand has tripled in that time. In our south England licence area, we have connected five times as much over the last decade. An awful lot of success has happened in that time.
We are now at a point where we are seeing significant growth and significant increases in connection requests, and there are some challenges associated with delivering on them all, so it is important that we look at all our options to try to reform the way in which we approach connections.
There are issues with queues in connections, and there are ways and means by which we can facilitate the process and ease those queues. There are also challenges with the way we assess the system. At SSE, we very much support the ESO’s five-point plan to reform the connections approach. We also think there are other opportunities to facilitate quicker connections, particularly looking at things like planning reform, but also at how we approach our investment mindset.
Up to this point, over the last couple of decades, demand and growth has been relatively incremental, we might say, and our approach to planning and delivering capacity has been relatively incremental to match that. That has been entirely appropriate because it has protected customer bills and ensured that we have not been investing where it was not necessary, but we are now looking into a very significant growth period and now is the time to think perhaps a little differently about how we approach that challenge.
Q272 Chair: Alice?
Alice Delahunty: I have a very similar perspective. Let me expand on that for the transmission network. The pipeline of projects that want to connect to the transmission network currently stands at just over 170 GW, which compares to 65 GW installed today—more than double. Of those, over 60% have connection dates within 12 months of their requested date. That is more than enough to achieve the Government’s decarbonisation targets.
The issue we have is the remaining part; there will be viable projects in there that are not getting the dates they want. Within the part that have the dates they want, there will also be projects that do not actually progress. It therefore becomes a question of allocation and sequencing rather than true capacity of the grid. Notwithstanding that, to build the infrastructure required for those connections, there are other challenges that we must overcome together, such as planning and a more holistic anticipatory investment regime to deliver against that.
There are challenges, but there is more than enough capacity in the queue. There are plans to deliver against that capacity, but there are projects that will not progress potentially blocking other viable projects. That is where the frustrations that you have heard are coming from.
Q273 Chair: Thank you. Basil, do you have anything to add?
Basil Scarsella: Good morning, all. I think Chris and Alice have pretty much summed up the situation at transmission level. From a UK Power Networks and a distribution level, we actually don’t see the problem that customers cannot connect.
Today, we get 6,500 applications for connection for low-carbon technology, whether it be EVs, heat pumps or solar and wind generation, and we deliver—we connect the vast majority of those. We survey those customers to see what they think of the level of customer service that we provide, and we are actually getting 96.5% customer satisfaction. So from a distribution perspective—taking into account the issues that both Alice and Chris have highlighted at transmission level—capacity and connection to the network are not a problem.
Q274 Chair: So Lawrence, what’s the problem here? We are being told by a load of people that they can’t plug in, and we have been told by the previous witnesses that they can.
Lawrence Slade: Thank you, Chair. I think, first, we need to reflect on the fact that we have managed to connect 49.7 GW of renewable energy over the last decade, so we are able to work through the pipeline. I think the problem right now, as I think you have heard and has been recognised, is that the pipeline over the last few years has just grown massively, and the regulation—how the regulatory regime sits around that—has not changed.
I think what we are all saying—I am sure you will hear it later from Ofgem and the ESO—is that we can see where the problems are; the issue is accessing the capacity that is really going to make a difference to that, and working through innovation and delivering the change that we all need. But we are only going to be able to do it if we can work together—that’s ourselves on the DNO side, the networks, Ofgem and the Government—to really bring change through and to make that happen fast.
There are some things happening today. You will hear about the ESO and its five-point plan, which is designed to help fine-tune the pipeline and to get more projects through. There is some work that we at the networks association are doing in terms of our strategic connections group, which is challenging and trying to get some of the innovative thinking that is going to transform things.
We had 450 innovators in Birmingham last week; they were looking at 50 different problems across the networks. And then there is the longer-term area, which sits more with Government. It’s about how we actually structure our investment. I think Chris said this. We are now in a different world, where we have very, very clear targets. We know the demand is coming. We know we need to increase the capacity across the network. We should be looking at it in a more strategic fashion, to really start building out for the future now.
Q275 Andy McDonald: Good morning. You have addressed to some degree the scale of the problem and started to look at some of the obstacles that need to be overcome. Could you add a little more about why customers are facing excessive delays to connect to the network? And what particular challenges are you facing when delivering projects? Can you give us a little more about that? I don’t know who would like to start—perhaps Chris?
Chris Burchell: To illustrate this in a bit more depth, if we look at our—as Basil says, our distribution network in the north of Scotland typically has no particular constraints, in terms of people needing to connect, for demand. What we are finding is that our pipeline has grown very quickly. In the last 18 months, our generation pipeline in Scotland has grown by three times. In our south network, we have contracted twice as many batteries in the last year as in the previous year. So it is growing quickly and the net zero transition is under way.
What that means is that we have large queues to process. Typically, at distribution, we will have the capacity to connect them, and if we don’t, we are able to build out that capacity in the time that the project is running. What we are also finding is that we need to refer increasing numbers of those projects to our transmission colleagues, to assess the capacity at that level. Quite a few of those projects now are subject to extra work, extra investment, that is needed at transmission. Sometimes that can take a little bit longer.
You may challenge us: “Why does that work take so long?” The real issue here for us to address—I will use a different illustration, a metaphor, if I may. If you are to travel from London to Scotland on the train, you can book a seat; you can reserve a seat in a carriage. We have the situation, potentially, with our energy queues that lots of people have booked seats on the train, and it looks as if—in theory at least—that train is completely full.
Now, we do not know how many of those passengers are going to turn up or how many of these projects are going to be built, so when another person comes along to say, “Can I get on?” in theory it looks full, but in practice we know that only 30% to 40% of these projects will actually build out. There is capacity there, but we need to reform the way our connections processes work to unlock it, and that is one of the key action plans that we need to progress as an industry.
Q276 Andy McDonald: Does anybody else want to come in?
Alice Delahunty: I can expand on that slightly in terms of the action plans. What is already in progress with the ESO to unblock that situation that Chris described about tickets being taken is, first, an amnesty to allow those who have taken capacity in the queue, but who do not intend to use it, to leave for free, with no penalty.
Secondly, that comes with a likely move to queue management whereby we will have stronger contractual obligations on them to use it or lose it, effectively—take up your capacity, move on your project, or move out of the way for other, more viable projects. That, combined with changing how the background is modelled to take into account that fewer projects will come true, will also free up capacity. There are significant steps already in place and, of course, the ESO can expand on this to unlock that.
Q277 Andy McDonald: What are these projects? Are they big housing developments or commercial developments? What do they look like?
Alice Delahunty: This challenge is largely on the generation side, actually. It is different across different technologies, but what you see in general is that where there are lower barriers to entry—lower-cost technologies—it is more attractive for people to develop multiple projects and hold that optionality.
Andy McDonald: Okay, so it is at the generational level.
Alice Delahunty: One of the things that we are then pushing for is higher barriers to entry for making a connection to the grid to ensure that that connections will really be used.
Q278 Andy McDonald: We talk constantly about the planning processes and about them being a barrier, and yet you are telling me that people are actually putting forward propositions that are never going to come to fruition. They are not really helping the process. For those things that do need to go ahead and that everybody will support, what has to happen to expedite the planning process? We hear it constantly that this is just far too long a process.
Alice Delahunty: If you do not mind, I will pick up on that one first, as planning challenges are most significant for the transmission network. In order to support this growth of renewable energy—offshore wind is in a very different location to where coal and gas was typically located—we need to build new infrastructure, and there we see three opportunities to improve.
One is to put net zero at the heart of the refreshed national policy statements, so that that solidifies the need case for these projects. At the moment, we need to justify each individual project’s individual trigger associated with a customer, so putting the strategic need in will allow us to break that connection.
Secondly, we think the process itself can be streamlined and sped up, and there is good work under way with the networks commissioner. To illustrate that, it currently takes about 10 years to build a new transmission line, of which only three is construction, so the remaining seven years is typically the planning and consenting process. We can package applications up differently, but we also need the inspectorates to be able to deal with that in a different way.
Thirdly, we think there is a real opportunity to align the regulatory process with the planning and consenting process, so that both bodies are seeking to optimise for the same goals, looking at the trade-offs of cost and community impact, and putting the communities that are being asked to house this at the heart of things. And there is also a time saving to be gained on sequencing timelines.
Q279 Andy McDonald: Does anybody else want to comment?
Basil Scarsella: I would say that a lot of work is going on between the distributors, the transmission companies, the ENA and, I think, Ofgem, the regulator, to ensure that, as an industry, we unblock those road blocks to enable people who want to connect and are ready to connect today to be able to connect, whether to the distribution network or the transmission network.
Andy McDonald: Basil, I hope you don’t mind but may I ask you a question about the Cheung Kong group? We just had a visit to Brussels, where we had a discussion that was pivoted around Putin and his manipulation of the gas market, and so on. You are a Hong Kong-based organisation. We see the remit of the PRC embracing Hong Kong. I have some reservations about our security of supply. You are right in there and I know you have a lot to say about this question. I hope you don’t me asking you as you are here—
Basil Scarsella: No, not at all. I have been right in there for 23 years, both in Australia and in the last 18 years here—I have been working with the group. I recognise your concerns and some of the community concerns, but importantly, I ask you to look at the performance of UK Power Networks or, for that matter, other investments for the Cheung Kong group. You will find that the Cheung Kong group are long-term investors. The management of those companies—in the case of UK Power Networks, that is me—are left to get on and do their job, and we do.
When we look at the performance of UK Power Networks and the improvement in performance, whether that is safety of the public and our employees, the reliability of the network, the customer service and the costs, you will find that those measures have improved significantly over the last 12 years, since the Cheung Kong group bought the assets from EDF, the French company.
I read the media and I recognise the sentiment, but importantly, I ask you to look at the performance of those assets. Your fears about securities are not, in my view, valid.
Q280 Andy McDonald: Okay, that’s fine. All I would say to you is that we have had the TikTok conversation and similar sorts of things were said in that environment. There is an apprehension that we have swapped one security risk for another—perhaps not now, but if, ultimately, the Chinese state were to say, “Your duty is to us above all else,” that would leave us in a very precarious position. That was my challenge, Basil.
Basil Scarsella: Mr McDonald, I repeat that I see your problem. I been with the same group for 23 years. I have never had the experience of anybody telling me that I should do something that is against the law or against what we think is a good thing for the customers we serve and, importantly, the employees. We have 6,000 employees and the focus of those employees is to provide great customer service to 8.4 million households.
Q281 Andy McDonald: I have one more question. I want to ask about the holistic network design. I wonder what steps are needed to take the design plans to fruition. I don’t know whether you would like to comment on that, Lawrence, and perhaps Alice.
Lawrence Slade: I am happy to kick off and then maybe Alice can come in. From our point of view, on holistic, we think that some form of overall design is absolutely critical in getting a sense of what is needed across the whole GB and the move to the FSO in that respect. The future systems operator is something that we support.
What goes through all of this, though, from our perspective—looking at it as a whole as the association—is that there is not just one body that can solve the issues that we face. It is really important to get over in this Committee that we will only really solve the challenge that we face in hitting our long-term targets if we all work together. It isn’t, “You need to do that, and you need to do that.” We all have a role to play and it is only by working constructively that we can deliver on behalf of our customers and continue the satisfaction ratings that we get as a sector.
Alice Delahunty: The holistic network design is a fantastic step forward because it gives that certainty—a pipeline of work—and that allows us to mobilise the supply chain against that whole programme, so that they can invest in the skills, the local manufacturing and the facilities that are needed to deliver against that. That certainty and programme pipeline of work is a really positive step, so that is something that we would want to see extended to other upgrade requirements of the network, with that net zero ambition in mind.
To make it really work, the next steps are: tackling the planning reforms that we have discussed; truly mobilising the supply chain, so not undermining that positive step in any way, but allowing the supply chain to really get going with it; and working on the community benefits of the infrastructure being built. Those will be really key steps to making it work.
Q282 Chair: Alice, you talked about the amnesty for the queue. As I understand it, it has not really worked. You have given people the chance to leave without paying a fee, but no one has really, have they?
Alice Delahunty: At the moment, no. Uptake has been lower than we would have wanted, so we have extended it. We are now looking in a more targeted way at sectors of that pipeline where the blockers may be, making those direct contacts and strengthening.
It is clear that queue management will come, so it is clear that if you do not take up the TEC amnesty, you are likely, if your project is not progressing, to have to leave anyway but then pay your penalties for that. The ESO will be able to comment much more on this in the next session, but encouraging further uptake of that is a key next step.
Q283 Alexander Stafford: You talk about the delaying of the process. What role have the network owners played in the process? I am looking at underspends in capital projects such as in network infrastructure.
Chris Burchell: As we have touched on so far, if we reflect for a second, a tremendous amount has been achieved. The point we have reached is, as Alice has been saying, that the pipeline of projects has way exceeded the capacity that is needed on the network overall, in the most ambitious scenarios that we see coming through. It is really a case of how we can pull together and try and find a way where we can start delivering the projects that will make the difference.
I do not think I see a world where the networks are being the blockers; I see a world where we have actually had a pretty great amount of success. We are all sitting here recognising that there are some things that we can do today—the ESO five-point plan in particular. There is the medium-term work that we are pulling together with the strategic connections group to really get under the skin of how we improve our modelling, our forecasting and therefore the deployment of different technologies across the system, and how we can use innovation. Ultimately, there is how we ensure—if I can borrow a quote from Chris Stark from the Climate Change Committee—that we get the right level of investment in the right place at the right time and in the right way.
Basil Scarsella: I think networks have done a very good job so far to get us where we are, with the electricity system pretty much already 50% decarbonised. That is way ahead of any other sector that I can think of. Importantly, what got us here will not necessarily get us where we need to be by 2035.
We have heard today that we are working together to make sure that we make changes—especially at transmission level, but in conjunction with the distributors—to make sure that we can and will deliver by 2035. However, I think we should not be walking away from here saying that the networks have been a blocker. The networks have not been a blocker so far, but if we do not evolve, there is a risk that that could happen.
Q284 Alexander Stafford: If you are saying that networks have not been a blocker, what have the networks put in place to unblock some of the queue? We have heard about the five-point plan, but I am talking about increasing numbers of staff, spend and processes. What are networks doing across the business to unblock the queues?
Basil Scarsella: From a UK Power Networks perspective, we are entering, in a couple of weeks, a new price review, termed ED2—electricity distribution two—for the period from ’23 to ’28, where we will spend some 25% more than we spent in ED1, which has been from ’15-’16 to ’23. That will require some additional 1,200 employees. It will require additional apprentices.
We need to expand our training facilities to make sure we have the right skills to be able to deliver. We have just signed an agreement with contractors to help us deliver over the next five years. Included in those contracts is the request from us for those contractors to train apprentices so that we do not create an internal market where we train apprentices and then contractors come and pinch them.
In short, even before we expect the amount to continue to increase with the take-up of EV heat pumps and other low-carbon technologies, we are getting ready now to ensure that we continue to deliver customer service at 90%-plus customer satisfaction.
Q285 Alexander Stafford: How much of this planning is involved in that forward thinking when it comes to net zero and reskilling your force? How much of it involves unblocking some of the jams and just keeping things going? How much of your attention and strategic planning is going towards net zero?
Basil Scarsella: A significant amount. Utilities traditionally experience growth of 1% or 2% in customer numbers. But with the transition to net zero by 2050—and specifically 2035—we expect significant growth of our distribution level with the take-up of electric vehicles and heat pumps. To manage that growth, we will need different skills. We are getting ready now to ensure that we continue to deliver as we have in the past.
Alice Delahunty: On top of all that—and I completely agree with the fact that we have extensive apprenticeship programmes, which are expanding, as well as a bundling of work efficiencies—the other element that you will see across our businesses and others is more digital products to support that.
For example, that means self-service for customers, to see where the best place is for them to connect and what that would look like, and also for our engineers, to support rapid development of connection offers and to move to much more standardised connection offers. We want to bring that even further along. At the moment, they are quite bespoke, and we think there is a real opportunity to standardise, which speeds up things even further.
Transforming for net zero is at the heart of everything we are doing now, but there is operational and construction excellence running through everything that we deliver.
Q286 Alexander Stafford: On net zero, 2050 seems quite far away. Will you reach net zero by 2050? Are you confident that you will do that, or could you bring it forward if you had more resources?
Basil Scarsella: I wish I could give you an answer on that, but it is clearly not the electricity networks on their own that will deliver net zero. Certainly, our objective is to make sure that the electricity networks are fit for purpose to enable the community to achieve net zero. I do not think you can hold the networks accountable for whether the community takes up electric vehicles or heat pumps. That is not our accountability, but importantly, we must ensure that the electricity networks are fit for purpose.
Q287 Alexander Stafford: You are not accountable for net zero, but, frankly, you are accountable if people want electric vehicles and cannot use them. If the demand is there, are you on target for 2050?
Basil Scarsella: No question, from our perspective.
Q288 Alexander Stafford: Could you bring it forward any earlier?
Basil Scarsella: We will respond to demand. Alice has talked about the digital revolution. We have seen a take-up of electric vehicles; two years ago, we used to get 1,500 requests for EVs a month, and now we get 6,500. The approval, from a network perspective, for those EVs to connect to our network happens instantaneously in 90% of cases, because they can do it online.
Q289 Mark Pawsey: I have some questions on the role of Ofgem, but I want to put a question to Lawrence, because he referred to innovation. One of the issues with how we transmit electricity is that there is some loss of electricity from the cables. Clearly, the longer the distance over which we transmit it, the greater the loss. I understand that there are some cables—CTS cables—that can reduce the amount of loss, but they are rather more expensive. Should we be considering that?
Lawrence Slade: I am not an engineer. I will come back to another point allied to that, in terms of innovation across the board. So far, we have talked about the scale of investment that is needed across the networks for building out new kit, such as new cables. It is also worthwhile that we mention the scale of innovative expenditure or work that is undertaken by the networks, in terms of offering other services such as flexibility.
Someone else may be able to answer the specific question about the cabling, but it is worth mentioning to the Committee that, in the last year, we were able to tender, for example, 3.7 GW of flexibility services, which obviously don’t require new kit being built out.
Q290 Mark Pawsey: Does anybody want to address the issue of cables?
Basil Scarsella: I will try, but I am not an engineer either. From a UK Power Networks perspective—a distribution perspective—there is lots of new kit with new technology that reduces power loss, whether it is transformers or cables. Demand is expected to increase by 100%—it is expected to double—by 2050, and the more electricity that flows through the cable, the more losses you are likely to get. Some of the cable technology is not proven yet, but we are at the forefront of testing it to ensure that once we can prove it commercially, we can install it in our network at a distribution level.
Q291 Mark Pawsey: Could you address the issue of whether there are sufficient incentives to look at innovative ideas such as this, or are there inadequate incentives? Is the best thing for people to simply carry on with the same old technologies we have been using for years?
Alice Delahunty: I can absolutely address the losses question. Older equipment tends to have more losses, but not to the degree that they alone would drive a replacement.
Q292 Mark Pawsey: I understand that. It is about when we introduce new infrastructure. I don’t think there is a case for replacing the existing infrastructure, but when we put in new infrastructure—we have already heard about the massive increase in demand—should we not do that with the latest and most efficient technologies?
Alice Delahunty: We seek to install the most efficient technologies. We look at economics both in terms of cost to install and true-life costs to maintain and operate, including losses, so losses are taken into account in the calculation.
Q293 Mark Pawsey: Just so my colleagues have sense of what we are talking about, what are losses?
Alice Delahunty: In the simplest terms, when you put electricity through a cable, that heats the cable, so some of the energy doesn’t arrive at its end point as electricity; it is lost as heat on the journey.
Q294 Mark Pawsey: What percentage of the power generated is lost in that way?
Alice Delahunty: That will vary on the technology.
Q295 Mark Pawsey: Let’s say across the system as a whole—the system that you are familiar with—how much is lost?
Alice Delahunty: I don’t have the figure off the top of my head. It is small.
Basil Scarsella: At a distributional level, we are talking roughly 5%, but you should be aware that losses are technical losses, which are from cables, and non-technical losses, which are customer theft, and so on. Again, it is 5%—roughly 2% technical losses and 3% non-technical losses.
Q296 Mark Pawsey: Chris, are there incentives? Does the price control system encourage the investment that we all need?
Chris Burchell: We are encouraged to think about our broadest sustainability credentials. SSE is the first DNO to sign up to a science-based target to limit warming to 1.5°C. Within that sustainability action plan, there is a significant amount of work to look at our losses and supply chain losses, whether that is through the vehicles that we use, the equipment we buy or the materials we put into the network. We are incentivised. It is a requirement to have a sustainability plan. We work across resilience, environment and all other aspects of sustainability to improve the situation.
Q297 Mark Pawsey: The price that you can receive for the work you do is set by Ofgem. Can you tell us a little about what the relationship is with Ofgem? Is it moving at a sufficient pace to reflect the changes you have been telling us about?
Chris Burchell: We have regulated price controls at both transmission and distribution. That involves a process whereby a methodology is set with some particular requirements.
Q298 Mark Pawsey: Is that methodology changing sufficiently fast to deal with the changes in the layout that we have heard about from your colleagues?
Chris Burchell: That is a critical point. As Basil said, what got us here won’t necessarily get us there. The regime has been incredibly successful in protecting customers, in terms of bills going up. Bills have been pretty flat for the last decade. In distribution, they are expected to be broadly flat again for the next five years as part of the current price control that is about to start. At the same time, costs have gone down, reliability has gone up and customer satisfaction has gone up, but we face a very significant period of growth.
As well as the reforms around connections that we have talked about, it is important that every aspect of the system—we can’t do this all as individual operators—including Government, regulator, operators and system operators, needs a very much net zero mindset around this, because incremental, reactive approach to investment is almost inevitably going to lead to some kind of delay.
I feel that the work that has happened around the holistic network design is a big step forward, as Alice says—I completely agree with that—but we need to do more of that as we look to 2050.
Basil Scarsella: Can I comment on the point that you mentioned about whether Ofgem is evolving and changing enough? I have experienced regulatory regimes in other countries. I have said publicly that the regulatory regime that we have in this country is second-to-none in the world.
Q299 Mark Pawsey: Can you elaborate on that? Tell us why.
Basil Scarsella: Sure, let me explain. Western Europe, the US, Australia and Canada are following our regulatory regime—for networks, I should stress. Why? Because it has evolved to take into account the changes that are taking place in the industry.
I can go back—I am old enough—to 30 years ago, when the regulatory regime was set up. It was rate-of-return regulation. To Ofgem’s credit, back in ’15-’16, they introduced incentive regulation, where they provided incentives for all of us to drive performance improvement. If you delivered that, the organisations were rewarded. If you didn’t deliver, you were penalised.
Out of the ED2 price review that I talked about earlier, it has gone from incentive regulation more to what I would describe as adaptive regulation, where there is growth in demand, because of the transition to net zero, but forecasts are invariably incorrect. Therefore, the regulatory regime that will go live in a couple of weeks, on 1 April 2023, will actually change depending on the take-up of electric vehicles, heat pumps and other low-carbon technologies.
That is the reason. The regulatory regime has evolved; it needs to continue to evolve, but we should have every confidence that that is going to continue, because we can see the past, and we are seeing this changing as we speak.
Q300 Chair: On the investment question, there is criticism of Ofgem from some of the consumer groups that the regulator is excellent for business but not very good for consumers.
From looking at the information we have available, I seem to be able to connect a thread between how much consumers pay you guys, how much of an underspend there is on your investment—we have the data for the last investment period—how much of that money you are allowed to keep, and then how much you give to your shareholders. Do you agree or disagree—Chris Burchell?
Chris Burchell: When you look at the deal for customers, the cost of networks has reduced over the last decade. Customer satisfaction has improved. Performance of the network has also improved. At the same time as bills have remained flat, investment in the networks has increased. You talk about where money hasn’t been spent, and it is important to look at that in a bit more detail, perhaps. There are many reasons why that may be the case.
If we take our transmission business, SSE, for example, in the last price control, we are incentivised, quite rightly, by the regulator to create as much efficiency as we can in the delivery of the projects that we set out to build. In our transmission business’s case, we delivered all of the projects, but we did so more efficiently. The benefit of that is that any saving is then shared with customers, so customers get money back—
Q301 Chair: It is shared with you, though, as well, isn’t it? In ED1, from ’15 to ’23, your company had a 25% underspend on your investment allowance. The money for that was provided by your customers. I think half of that went to your profits, didn’t they?
Chris Burchell: In ED1, we will have overspent our allowances overall, in fact, in distribution—
Q302 Chair: This is Ofgem data that I have. Is Ofgem wrong on distribution data? There was an underspend for SSE.
Chris Burchell: I think you are referring to a specific part of the expenditure. For our overall expenditure in ED1—
Q303 Chair: I am looking at the load-related investment, for future business.
Chris Burchell: The load-related investment—indeed.
Q304 Chair: The whole point of this inquiry is about hitting our targets for future investment. There was an underspend on your load-related investment.
Chris Burchell: There is an underspend on our load-related investment.
Q305 Chair: And that money came from your customers in the standing charge.
Chris Burchell: Well, it’s provided as part of all the allowances. Let me explain how that occurs. You can either outperform your settlements; you can deliver the work but do it more efficiently. You can introduce innovation, which we are incentivised to do because that is to the benefit of customers. If we can introduce flexibility, for example, into the network to defer investment—
Q306 Chair: I understand that, Mr Burchell. I am just trying to understand the consumer argument that we hear from Citizen’s Advice and others. I think we are getting there but let me just try again. Customers pay money through their standing charges, which ends up in your bank accounts.
You are allowed to spend money on investments to make sure the grid is able to meet public policy net zero targets in the future. You have recognised that on the distribution side of the business, for your future investments you underspent the money you were given, and half of that goes to your profits. Is that right?
Chris Burchell: We are incentivised to outperform the settlement, certainly.
Q307 Chair: Can you tell me in English—am I right that half of that goes to your profits?
Chris Burchell: Yes.
Q308 Chair: Right, okay, so customer money is coming in for investment, you are underspending and that is going to your shareholders. That is an accurate reflection of what happened in that period.
Chris Burchell: Well, it is not the whole story.
Q309 Chair: But what I’ve just said is true.
Chris Burchell: No, because it is not the whole story. In actual fact, we have spent all our allowances; we have spent all the money allocated and a bit more, actually, that Ofgem has given us.
Q310 Chair: For the future investment, Ofgem is saying there is an underspend. I don’t have time to keep going round in circles, but the Ofgem figures says there is an underspend. You don’t dispute that, right?
Chris Burchell: There is an underspend in our load category, but overall we have spent all the money needed in ED1.
Q311 Chair: Can I track a pound from a customer that goes through your business that is not spent, and then 50p of that going to your shareholders?
Chris Burchell: No, because it hasn’t gone to profit because we have spent that money on something else.
Q312 Chair: As I understand it, between ’17 and ’21 the distribution companies gave £3.6 billion in dividends to their shareholders. Where did that money come from?
Chris Burchell: It varies across the different DNOs. What I am describing to you is that at SSEN we have spent all our allowances in ED1. There are obviously variances up and down in terms of the different categories. In load-related expenditure, there are ways to outperform that settlement, so you can use innovation, which is to the benefit of customers, because it is deferring reinforcement and you can use flexibility.
It might be that actually that demand has not appeared. When that allowance was effectively set nine or 10 years ago, there was assumption around what load would appear in the eight-year period of ED1. If that demand does not appear, we are not encouraged to build infrastructure that isn’t needed for customers, and that is why that money is returned.
Q313 Chair: So it is because Ofgem lets you keep customers’ money to go to your shareholders that 100% of the underspend is not being either given back to customers or kept for—
Chris Burchell: If you have underspent all your allowances and you have underspent your load-related allowances, I think what you are saying is reasonable, but we have not underspent all our allowances, so that money has not gone to profit for SSE.
Q314 Chair: Okay. Alice, for transmission companies, I understand that between 2014 and 2021, £3.7 billion of dividends were paid, and there was an underspend on investment again. Do you refute those figures? We have been given this data by Ofgem and the consumer groups are telling us there is a problem, and so far we have been told there is not a problem.
Alice Delahunty: I don’t refute the figures or the mechanism you have described. However, in context, throughout that period we have averaged £1 billion of investment a year and we will invest £16 billion over the next five years across ED and transmission. In the T1 period, we have voluntarily handed allowances back where the need for that work had dropped away. Where we achieved efficiencies and innovation in delivery, that benefit was shared with customers through the mechanism you have described. Importantly, those reduced costs to deliver are locked into this regulatory period, so that rolls in and there is an enduring benefit to consumers in terms of that efficiency.
Q315 Chair: Part of the criticism of Ofgem is that it has been quite good at assessing whether your rate of return is too low, but it has not been very good at deciding whether your rate of return on behalf of consumers is too high and that consumers are paying too much money to you and your shareholders. National Grid has bought a distribution company—I should declare an interest—in my region. You paid a significant premium for that as opposed to the value that Ofgem asserted to the assets. That is right, isn’t it?
Alice Delahunty: We did not see it as a significant premium, but we saw it as a strategic acquisition to support our strengthening of our ability to support the electricity transition to net zero. It was a very strategic move for us. Because we believe we can unlock real customer and consumer benefits of understanding that full value chain from transmission through to distribution, we paid what we thought was a good value for what was a very strategic move for the business.
Q316 Chair: As I understand it, the assets that were valued by Ofgem were given a certain price. Do you know what percentages above the value of the asset from the valuation you paid for it?
Alice Delahunty: I cannot recall the exact percentage off the top of my head.
Q317 Chair: I think it was about a 50% to 60% premium. That suggests that your internal investment decision looked at those assets, and it might have been a strategic asset, but just on the money, they must have thought, “Hey, we’re going to get a pretty good rate of return on that. We are going to pay more money for it than it’s worth.”
Alice Delahunty: What we saw as attractive about the business, as I described, was its strategic fit with our pivot away from gas into being at the centre of the electricity industry’s transition to net zero, and the good growth opportunities associated with that. We saw growth associated with that business because of the transition to net zero. That was what fed into our valuation of the business.
Q318 Chair: Basil, you probably know what’s coming: in the same dataset that I’m looking at, UK Power Networks was the worst offender, with a 40% underspend in the ED1 period for future investment. As I understand it, part of that just gets to go to your shareholders. From a consumer perspective, that is unacceptable, isn’t it?
Basil Scarsella: Let me explain what that means. You’re referring to load-related reinforcement—let me give you an example that I think will help. Let’s assume for a minute that Ofgem allowed load-related of £100 based on estimates of the increase in peak demand, and therefore you need to reinforce the network to the tune of £100 to provide the additional capacity based on forecasts back in ’15-’16 in ED1. That forecast of load-related and, importantly, low-carbon technologies has come to pass to the tune of only 20%—so 20% of the forecast has come to pass.
Peak demand over the past 17 years has actually decreased by 12%, and therefore there has been no need to invest in load-related reinforcement, and therefore we haven’t spent it. As a result, of the £100, we have spent, say, only £60—a 40% underspend. We then share the first 20% with the customer—we keep £20; we give £20 back—but anything above that all goes back to customers. We could have gone ahead and spent it, but it wouldn’t have been necessary because the capacity is not there, and customers would have been paying more.
As a result, because peak demand has decreased rather than increased, because of efficiency and so on over the past 10 years or so, we haven’t spent the money that we thought it was necessary to spend based on forecasts. As a result, customers are better off—yes, the organisation is also better off, but significantly less so than customers. I think it is important to point out how the regulatory system actually works for the benefit of customers. Earlier I talked about adaptive regulation, and that is an example of adapting regulation to the demand from customers.
Q319 Chair: Thank you. Lawrence, from our constituents’ perspective, you have two investment periods: ED1 and ED2. Customers are paying their bills every month, and there is enormous pressure on their home bills. We are told that we need to increase and speed up investment, and therefore people will have to pay more in this new investment period.
But you just looked back to the previous investment period, and—although I’m not surprised the companies have said it was all legitimate—the data shows there was an underspend, and part of that money went to shareholder dividends. Surely you can understand why the public think that’s not fair.
Lawrence Slade: I understand why we need to have the regulatory scrutiny that we do. I understand why we do not always agree with the regulator, which is appropriate in this kind of entity. I think the businesses we represent have made, on average, a return of around 5%. If you look forward and at the scale of investment that is needed in the country for us to hit first the 2035 target and latterly the 2050 target, it is many, many tens of billions.
It’s fair to say that right now, with the public purse under significant fiscal pressure not just here but in the US and Europe, if you look at the impact of the Inflation Reduction Act in the States, which is drawing capital into the USA out from the UK and Europe, we need to ensure that we have a competitive regulated market that can attract the international scale of investment that we need if we are going to achieve this.
That is not to say in any way, shape or form that we do not consider it absolutely critical that we look at how we deal with vulnerable customers across our society and across our regulated entities—energy is obviously a case in point here. We have to drive the best possible deal. We know that through Ofgem’s regulatory process, costs across the sector have been driven down. They continue to be driven down.
When Mr Pawsey asked me about innovation earlier, I mentioned that we are also spending a considerable amount of time and effort on the 2,500 projects that we have through open networks, our innovation programme. That has delivered 3.7 GW, which is equivalent to something like Hinkley Point C in terms of flexibility that has not required new kit to be built out. The networks are doing their bit.
Yes, we have to be scrutinised, and yes, it’s fair that people like our Citizen’s Advice raise this up. It is an important relationship between us, our stakeholders in the wider community, Ofgem and the Government to make sure we get the investment we need to deliver for net zero.
Q320 Chair: Thank you. Alice, just briefly, why have transmission costs gone up 800% since 2010?
Alice Delahunty: I do not recognise that number. We are about £20 on the average annual bill, and that has held steady through this period.
Q321 Chair: We have been given information that suggests that the cost to the customer of running the transmission network has gone up significantly. Specifically, there has been a huge spike in costs for turning off generation sites, which has gone from £300,000 in 2010 to around £1 billion, and is anticipated to be around £2 billion a year in the future. Again, from a customer or constituent perspective, you are building these wind turbines and then paying to turn them off. The customer is paying for that and it has gone up by 800%. We are trying to make the public agree with the net zero transition. You are making it very difficult, aren’t you?
Alice Delahunty: Sorry; I misunderstood the origin of the question. I was referring to the costs to operate, maintain and construct the network. Those costs are associated with balancing the network and balancing the different types of generation and the flows, and that is a question that the ESO in the next session will be much better placed to answer.
Q322 Alan Brown: Basil, can I start with you? In your answer to Darren’s questions, you tried to explain the underspend incentive. You said that peak demand forecasts from, say, 2015 were not realised. Does that not suggest it is the forecast that’s wrong, rather than anything that you have done to merit keeping that money?
Basil Scarsella: There is no question that the forecast was wrong. The industry forecast a certain take-up of low-carbon technology and a possible increase in peak demand as you transition and electrify transport, but that has not eventuated. The demand has not come about. Peak demand has decreased. Therefore, on spending the money, the regulatory regime, as I said, basically says the first 20% underspend you share with customers. There is an incentive, in other words, to deliver as efficiently as possible.
Q323 Alan Brown: Yes, but you have just said that the forecast was not right, and you are keeping 20% of that money that was not needed to reinforce the network. Why do you get rewarded for that forecast not being right? In future, you will come back at some point, when that peak demand will be realised, and you will say, “Mr Regulator, we need money from the customers to pay for this investment. We kept 20% of that money previously because it was not needed then.” You are getting a 20% return on not upkeeping it.
Basil Scarsella: The first 20% is shared with customers, and that is delivered through efficiency improvements. Anything above that is 100% returned to customers. The first 20%—
Q324 Alan Brown: You still get some money by not spending—
Basil Scarsella: The first 20% is shared with customers, roughly 50% each. You are expected to deliver more efficiently. You are incentivised to deliver more efficiently. The regulator allows you—
Q325 Alan Brown: Can I just be clear? You are getting a portion of money that is not spent because it was not needed for peak demand at that point. As a company, you get a portion of that, and the customer has a portion.
Basil Scarsella: Yes, correct.
Alan Brown: So for not doing work that was forecast—it just so happens that it was not needed—you still keep a portion of that money?
Basil Scarsella: You are making the assumption that it is just work not done. I am saying that it is both: it is efficiency improvements that you are delivering a certain level of work at this—
Q326 Alan Brown: You’re the one who said it was a peak demand that wasn’t required.
Chris, you mentioned flexibility in terms of deferring investment. Is that not the same thing as what I am trying to get at with Basil? If you are just deferring investment, all you are doing is kicking it into the next investment period. Again, it is not really saving customers money, but it is incentivising yourselves because you get a reward for deferment, and customers pay for that at a future date.
Chris Burchell: The principle is that we are not encouraged to spend customers’ money if it is not needed; that principle is sound. If we can use flexibility to defer that investment, that is to the benefit of customers as well. We have a “flexibility first” mindset across all our investment decisions, so we ask, “Do we need to invest at all?” and, if that demand is needed, “Is there another way of meeting it without having to build more network?” It is only at the end of that that we then—
Q327 Alan Brown: Yes, but the very word “defer” means delay or put back. If you are deferring, you are actually saying, “We’ll still do that in the future,” so surely it is better value to get it done rather than paying companies to defer it?
Chris Burchell: Possibly it is deferred temporarily or possibly it is deferred permanently. Where we need to get to, though, is having a more holistic view of our network—taking a net zero first approach, looking well ahead and saying, “What do we actually need to build here?” Then we can work through.
We do not want to be the blocker. SSE has a very ambitious net zero acceleration programme. We are spending up to £25 billion this decade. We are absolutely at the forefront of wanting to be the green energy champion for the UK, so there is no shortage of appetite to invest, but we need to invest at the right time, in the right place and in the right way.
Q328 Alan Brown: That suggests it is not getting identified properly at each investment phase—if you’re saying, “It’s not the right time to invest; we should delay that.”
Chris Burchell: It is using technology and emerging technology to look again. The original demand forecast that we are talking about was set—I don’t know—nine or 10 years ago. Obviously a lot has changed since then, and there has been more innovation in technology. If we can apply active network management to manage that demand in a different way, and if we can work with suppliers to find different ways of offsetting that demand, that is a good thing and customers benefit from that.
Q329 Alan Brown: Lawrence, Ofgem have said that Energy Network Association’s open networks programme “is not progressing at the necessary pace or being implemented consistently. This has created complex, uncoordinated, and hard to navigate markets”. What do you say to that?
Lawrence Slade: As I said earlier, the open networks programme has generated some 2,500 projects that are live on our system at the moment. Last year it was able, off the back of work that the open networks project had undertaken, to deliver flexibility services to the tune of 3.7 GW. Where I think it is fair is that, as with any project—and as we have heard this morning—the whole landscape that we operate in is changing massively quickly. It is therefore right and proper that we, Ofgem and our members look at programmes such as open networks and think, “Okay, how do we move it on to the next level? How do we upgrade? How do we move this on to keep delivering the kinds of services and cost savings that we’ve done so far for consumers?”
Q330 Alan Brown: That suggests that this is not progressing at the necessary pace, so how do you take it to the next level? How do you get it to progress at pace?
Lawrence Slade: That consultation has only just come out, so I have literally only had one or two reads through it, Mr Brown. We will sit down with the regulator and our member companies, and say, “Okay, what do we need from this? What resources do we need to put into it?”, and we will deliver. I hope that you heard this morning that there is an absolute commitment from not just my association, but the membership, to deliver on the part of consumers. If we have to take challenging decisions and say, “That isn’t working. We need to go back and do something different to speed it up”, we will do so.
Q331 Alan Brown: One quick question to Chris: in the wider SSE group, Coire Glas pumped storage hydro is needed for flexibility across the entire system. How long has that been sitting ready to go—consented but waiting in some sort of route to market?
Chris Burchell: I do not know the precise answer to that question. We have business separation between our networks and generation business. You mention long-term duration storage. In fact, the ESO has said that we need a lot more of that. It addresses some of the Chair’s earlier questions around potential constraints from wind farms, so it is one of those flexible natural resources that can help balance the system. But it is not an area that I can particularly speak on as the network organisation, I am afraid.
Q332 Chair: I am conscious of the time, but I want to revisit some things. This is a complex policy area and I want to ensure that I have understood it properly. I will come to you, Chris Burchell, because we had this conversation. Where we got to earlier was that for your future investments—your load-related investments—you are given an allocation for investment by Ofgem, which is funded by customers. If you underspend that budget, you are allowed to use that customer money for other investments in the business. Is that right?
Chris Burchell: We have an overall expenditure regime, yes. It is an overall allowance.
Q333 Chair: Okay. What is the rate of return that your customers get for their money?
Chris Burchell: Ofgem will allow us a rate of return that is around 3.5% to 4%.
Q334 Chair: You are spending customer money. What rate of return do your customers get for funding your investment decisions?
Chris Burchell: I do not have an answer to that question.
Q335 Chair: The answer is probably 0%, isn’t it? But if you were to get money from banks or private finance, they would want an interest rate on their debt. You would have to pay for that borrowing, wouldn’t you?
Chris Burchell: Yes.
Chair: So it is cheap money if you use customers’ money to pay for your broader investment decisions, isn’t it, because you do not need to pay other people interest rates by using their money in that way? When customers are paying for that future investment, you are incentivised to underspend your allowances.
Chris Burchell: It is important to recognise that the regime has specific outputs that we are required to achieve, so it is not just the case that we can decide what to spend and if we underspend it, that is great; we can keep it. There are very clear outputs, standards and targets that we need to achieve. The regulatory regime holds us to account for that. We are just about to finish the ED1 price control. There is a whole process that follows where the regulator scrutinises what has been delivered, what has not been delivered, what has been spent and what has not been spent, and they will close out that control with great scrutiny. It is not as free-for-all as perhaps you imagine, Chair.
Q336 Chair: So it is a regulatory design issue.
Basil Scarsella: I think it is important to point out that customers pay for the money that has already been spent—for the assets that are in the ground or up in the air—over 45 years. They only pay for the money that has already been spent, not for the money that has not been spent. The customers pay, in round numbers, about £100 per year for distribution charges. That is for the cost of the assets that the distribution business or, for that matter, transmission businesses have already invested. To earn a return, customers pay £100 per year for those assets that are already in use.
Alice Delahunty: That was also what I wanted to clarify. The sequence of events is that we go to the market and we raise debt and equity to invest. It was about £1 billion a year; it is now ramping up to £2 billion a year. That is charged back to consumers over 45 years, so for transmission that is about—
Q337 Chair: So customers are paying the cost of your debt?
Alice Delahunty: Yes, they are paying the payback. They are repaying the loan over a very long period—longer than any mortgage you would get. That is the mechanism. It is not that we access consumers’ money for free to invest. In fact, we raise the money on the open market at the best possible rates we can, and Ofgem ensures that that is charged back to consumers in a fair and adequate way over a long period.
Q338 Jane Hunt: My question is about the review of the electricity market arrangements, and it is for Chris and Alice. What outcomes would you like to see from the review, and what would you like to see avoided?
Chris Burchell: In the light of recent events, it is entirely appropriate that the market is reviewed. Clearly, some effects on customers need to be looked at. As I say, we are entering into a period of great change as well, so it is appropriate that we have a full review.
A lot of levers and mechanisms need to be looked at as we do that. It is not just around the market arrangements; we can also look at the way in which we design incentives, contracts for difference or the balancing mechanism, or at the way that network charges are undertaken. The key thing for me, however, is that when we look at the targets that we are trying to achieve for the energy transition, there is no time to waste.
I am very keen that any of the changes or evolutions that we might see through the market review do not do anything to disincentivise investment in the right places—that they do nothing to discourage investment, such as from our country to another one, perhaps—but enable us to do more, more quickly, and deliver the energy transition. At SSEN, we are very much committed to the UK and to investing in the just transition of our energy system.
Q339 Jane Hunt: Is there any low-hanging fruit? You said that you want to keep incentives and so on, but is there any low-hanging fruit—“If they only did this, it would really help us”?
Chris Burchell: The key thing for the decarbonisation of the energy system is what we mentioned previously: we need to reform the connections approaches that we have, because what we had to get us here is not going to be fit for purpose going forward; and we need to continue the evolution of our mindset to be more forward thinking and more “net zero first” thinking in the way we prioritise investment. The low-hanging fruit is tackling things like planning reform, not just in England but in Scotland as well.
Alice Delahunty: Similarly, we welcome the review. The areas that we are very focused on do not fit within that review—the connections process that we talked about, planning reform and so on. I will not recap all that. It is important that it makes changes only where changes are necessary, and we have one worry: locational marginal pricing. In a world where we know where offshore wind and, largely, nuclear will be, the worry is that that could introduce more uncertainty. Right now, we need to be pinning things down and building towards that certainty. That is that one concern—the weight that is being put on it.
Chair: Thank you. We have timed out for panel one. Thank you, all four of you, for your contributions this morning. We are grateful.