Charles Wood, Energy UK.

Q1 The Chair: This is the Industry and Regulators Committee of the House of Lords. We are looking into the energy grid and grid connections. This morning we have a witness, Charles Wood, who is deputy director of policy with Energy UK. Welcome.

We have been talking about these issues among ourselves and looking at some of the problems that exist. One of the issues that we are particularly interested in connections. We have been told that there is quite a queue for connections, that people are very frustrated that they cannot connect to the grid, and that NESO is talking about reforms and doing things differently. My opening question is: knowing that everything in terms of green energy and the future is very challenging, what do you think of the proposals to change the regime and the way in which connections are considered?

Charles Wood: Thank you for the question, Chair, and thank you for the invitation today. As an introduction, Energy UK is the trade association across energy supply, generation, and increasingly a lot of new entrants into the market for heat networks, electric vehicles, and a whole range of supplies.

I sit on the connections delivery board, which is the main body that is delivering the connections reform process under Ofgem and NESO. To date, the work that has been put in in the connections reform process has been very welcome. The queue at the moment stands at around 760 gigawatts of connections across all levels of the system. That is around four times what is needed by 2030. Currently, the connection timelines are as long as 14 years for a connection to the grid, which is fundamentally a significant challenge when you are looking at around two years to actually build a wind farm and it then takes you 14 to connect.

The current proposals are expected to reduce the number of projects that are going forward for connection down to around 388 gigawatts, but that is still well above the 227 gigawatts that is needed under the Clean Power 2030 assessment that has been published. We are still looking at an oversubscription to connections and some of the reforms are looking at effectively picking and choosing from those connecting parties to say which technologies are needed in each region. Based on that, there will be almost subsets of queues around the country in order to make sure the right assets are in the right places at the right time.

It has been a long and challenging process. There are two elements to it. The first is simplifying the actual process of applying for a connection, streamlining that process to ensure that it is simple and straightforward and, I hope, consistent wherever you apply for a connection across the country. The second element is looking at that enormous queue of projects and moving from a case of “first come, first served”—which is why we have such a long queue—to “first ready and most needed, first connected”. There is a fundamental change in the way that networks and NESO are looking at the connections queue in order to pick and choose how they go about that.

There are existing challenges, such as to investor confidence in the sector. There is a need to ensure that projects are still coming to the fore. Even if you are picking only projects up to 2030, we will still need connections in the 2030s and the 2040s to get us to net zero 2050 as increased demand comes on to the system.

The second area is looking at the risk that the approach put in place would not be flexible enough if things change. A case in point would be the AI strategy that was announced yesterday, I believe. The fundamental nature of AI is that it will require a lot of energy. There will be data centres located across the UK. That is a sudden uptick in demand. There are also other factors such as the industrial strategy, housebuilding projects, the desire to build new hospitals and for new businesses to locate in the UK. All that will change how much demand is on the system by 2030. There needs to be a level of flexibility in the approach.

Finally, an element that needs to be considered beyond this is the challenge for embedded connection, generation that is not connecting at the highest level—the transmission level of the grid—but is at the distribution level. There is still a lack of clarity on how those projects will be prioritised and how some of those processes will be standardised. I am sure we will come on to that in more detail later.

So far, we very much welcome the effort that has been put in by NESO, by Ofgem, and by DESNZ to address this challenge. There is a need for urgency at this stage. Much of the project has been delayed, whether it is the transmission acceleration action plan and the expected public communications that will come to basically prepare the country for new pylons and overhead cabling, or the actual connections offers that are now pushed back a few months; we will see those revised offers being given in the middle of this year. There are delays already; we just need to see a pace of change that at the moment is potentially lacking.

The Chair: Thank you. I understand why you are supporting the idea that readiness and the appropriate need there should be a priority. Do you think that there is a real possibility and potential for legal challenge to some of these decisions that we are talking about? Even if they are logical in terms of what the country needs or the industrial strategy, people who have been in the queue, who will now be lower in that queue, might not be very happy.

Charles Wood: Certainly, “not very happy” is potentially an understatement for some of those projects that are trying to invest in order to get that return in future. There are a few specific areas where risk exists. I am happy to follow up with these afterwards just to ensure you have the correct documents. The primary legislation would be Sections 16 to 25 from the Electricity Act 1989 and the retained EU obligations Articles 23 and 32. We can send over further details there.

In secondary legislation, the licences and licence conditions for transmission and distribution networks will need to change. There is a risk with international agreements that Article 306 of the trade and co-operation agreement with the EU would also be in conflict with these changes. All those are essentially under the same approach. The trade and co-operation agreement is slightly different. The legislation in the UK and the licences state that you cannot unduly discriminate against projects. There is a due reason for discriminatory practices, so you are picking the best possible technologies in order to get us to net zero. That is potentially less of an issue, but further guidance around that to clarify that point would be useful.

In the trade and co-operation agreement, there is a bit more specificity about non-discrimination and ensuring that everyone has equal access to a connection to the grid. There is a fundamental risk there that has to be discussed in negotiation. It is worth noting that the rest of the EU is also looking at this challenge. They are also trying to decarbonise and ensure that they are reforming their processes to connect the right things in the right places. There is room for negotiation and discussion on that.

That is where the most substantial legal risk remains. Certainly, we are expecting a significant number of projects to get a revised connection offer that will push them back in the queue. We do know that some companies will be looking into the options for legal action as the connection offer they have currently could be deemed as a contract and changing the contract after the fact would be grounds for a legal challenge.

The Chair: However well intentioned, there are vulnerabilities and difficulties potentially.

Q2 Lord Agnew of Oulton: Good morning. If I asked you to give me a percentage chance of getting these 230 gigawatts connected by 2030, what would you give us?

Charles Wood: A percentage chance, I would say with the amount of commitment and dedication, is 100%. We will connect what we need to connect by 2030. The challenge is how many legal challenges we will see, how many delays we will see, and what effect this will have on the cost of energy for consumers. The net cost of building out all that network—where we need effectively five times the amount we have invested in the past or we have built in the past three decades—in such a short period of time will bring its own challenges, whether it is the cost of delivery, the skills required, the number of electrical engineers we simply need, or the supply chains for some of the materials and technologies, such as transformers that are in high demand across the world as the transition continues.

There are risks and challenges, but within the current change processes all those risks have been noted and there are actions being taken in order to mitigate those challenges. It is really about how dedicated we are to that CP 2030 target, and how willing are we to effectively build, build, build.

Lord Agnew of Oulton: If you were in charge of delivering that 230 by 2030, what would you do in addition to what has been announced over the last few months?

Charles Wood: That is a good question, Lord Agnew. I think that, in addition to what has been done already, the first thing is a holistic engagement with the public to give them the understanding that it is not just about building new pylons, it is about making sure that we have enough electricity to meet our needs in future. It is about electric vehicles and heat pumps. It is about ensuring that industries are able to continue, that businesses are able to decarbonise.

I grew up near Scunthorpe and the steel mill is effectively the only large provider of jobs in the area. For me, it is getting to that local level and explaining why it is important, what we are doing, and how it is being developed. I believe in the 1960s there was a campaign of a similar type talking about pylons being built and trying to get the public on board with it. That is the first element I would look at.

In addition, look at distribution and, in particular, the demand connections that will need to be added to the grid. It is very much focused on generation and the supply of electricity. We have not seen enough detail when it comes to making sure that businesses can connect a new site or can decarbonise their existing site. Continuing with the example of the steel mill, regardless of what technology they use to go away from their current blast furnace to electric or hydrogen, they will need at least five times the capacity for their grid connection. Looking at alternatives and looking at ensuring that there is advice and simplicity in the process for demand connections would be the next step as well.

Lord Agnew of Oulton: Do you think it can be viable for an electrically generated arc furnace to be connected under the current infrastructure and the costs that they will have to pay? My concern is that we are creating a new generation of electricity infrastructure that costs at least double that in the US and more than that across many other economies.

Charles Wood: There is a significant risk there, and we are in the process of looking to businesses. We have expanded the amount that we engage with business representative associations as well across the sector—across UK plc really—to try to get a better understanding of how big of a challenge that is. The sheer cost of connection for projects such as a steel factory would be, at the moment, untenable.

There are alternatives such as putting generation on site. Companies are looking at those options, putting solar panels on factories and looking to effectively reduce the amount of energy they need from the grid. They need a lot more support when it comes to understanding the options. They need much better understanding of how those costs could be reduced and there needs to be a lot more simplicity when it comes to the processes. While the cost may be high, some of the processes would be one of the more fundamental challenges as it is very difficult to get an understanding of how much this will actually cost until you apply for a connection. Until that point, there is not much visibility of what the actual impact might be for each business.

Q3 Lord Cromwell: Good morning. My question follows on from Lord Agnew’s. You say distribution and grid extension is not just about pylons, but it will also be quite a lot about pylons, particularly in the public eye. That brings us to Government proposals to address the planning side of things. I would be interested in your view on whether those proposals are enough or we need more.

Charles Wood: That is an excellent question. There are many challenges within the existing planning system, and we are all aware of those, including the Government. The planning Bill that is currently going through the process is very much welcome and we need to see further detail of how exactly that will be implemented in order to understand the challenges. There are challenges when it comes to some specific rules around permitted developments and around wayleaves, getting access to land. At the moment, if you want to go through a farmer’s land, you will send them a letter and they may or may not read that letter or respond to that letter. It is a very long process that needs to be streamlined as far as possible.

There is also a lack of resourcing when it comes to local planning authorities and some of the requirements that are expected to be met. As the challenges of the connections queue are resolved, that will result in more planning applications. It will result in a sudden flurry of activity for those planning authorities and environmental regulators to get involved with. Resourcing has to be considered there.

There is a real need for that community engagement as well. It is not just about building pylons. We have to get across to consumers why we are building all this infrastructure and what it means for them as a person. There are some real challenges there with getting consumers on board and getting right down to the local level when it comes to engaging communities ahead of building any new infrastructure.

Lord Cromwell: Communities will definitely resist in some cases. They may be persuaded in other cases, but at the end of the day you are looking at placing something on land that probably belongs to somebody or some organisation. In your opinion, do you think that can be achieved on a voluntary, negotiated basis, or will it lead to a significant increase in compulsory purchase use?

Charles Wood: I cannot speak to the amount of compulsory purchase use that may come into effect, but I can speak to previous projects such as the Viking Link, the interconnector that was switched on last year from Norway to England that landed in Lincolnshire in a very rural area. Talking to some of the communities there and some of the landowners, they were actually quite happy with the process. The process ended up with them being paid for their inconvenience and the use of their land and they were quite satisfied by the end of that process.

Due to the pace of change, there needs to be a considered look at how much we will have to go beyond a voluntary approach. We must start to think about what is most cost effective and therefore what has to happen, and after that point engage with those landowners to see if we can do it in a voluntary manner. However, where necessary, I fear that there will be a level of pushing ahead such as we have seen with onshore wind.

Lord Cromwell: That sounds like compulsory purchase to me because, of course, with a network you only need one piece of it not to work and you have broken the line. You will have to compel along that route where you cannot get voluntary agreement. Do you agree?

Charles Wood: I think that would be a question for National Grid, but we are happy to come back with some further detail later.

Q4 Viscount Thurso: As it is our first public evidence session, I should declare my interests. I own ground on which I hope next year a wind farm will be built. I also have been recently a director of a cell manufacturer, so I am quite involved in various aspects that touch on the inquiry.

My question comes off the back of something that you said in your reply to the Chair, which was about the right assets in the right place at the right time. You also went on to talk about the extra generation that will be necessary for AI, for example. It seems to me that where generators are and where the energy is needed need to be in some way brought together. For example, in Scunthorpe you need to put the generation near it, but if you have lots of wind in Caithness, where I come from, you might want to build a data centre up there. My question is: what incentives need to be introduced to encourage generators to be in the right place relative to need, but also the consumers to be in the right place according to generation?

Charles Wood: Thank you for the question, Viscount. The approach so far, as I said, is focused on generation; it is focused on energy supply. There are a lot of discussions about the existing processes, whether it is the network charges that are applied for utilising the network or some of the processes within connections in order to direct generation as to where to locate. Those processes are already ongoing. There is a lot of work being done to try to give those price signals.

What needs to happen beyond that is aligning all the price signals, so that the markets for energy are aligned with the approach that is taken to giving price signals ahead of connection—saying, “It is cheaper to connect here”, or when you apply for a connection, “Oh, actually, if you go 100 metres down the road, you can connect for half that cost”, as is the case for a lot of EV rapid chargers. Giving better clarity on where the capacity is on the system is critical there.

When it comes to demand, there are a few different elements to consider within that. The challenges with data centres go beyond energy. There is a need for telecommunications infrastructure to also be built. Particularly when you look at Scotland, there is a massive amount of wind generation that could be utilised brilliantly for data centres, and those data centres have a massive amount of heat coming off them that could be utilised in warming homes and businesses and retail centres.

How you co-ordinate all that and how you create the economic case for a business to invest in all those processes is a challenge. How you co-ordinate across regulators such as Ofgem, Ofwat and Ofcom to ensure that the right assets are in the right places and you are connecting water resources and telecommunications resources, which are needed for data centres, all at the same time, is in dire need of a real review. The previous Government was looking at smarter regulation and how those cross-utility applications could be done.

Viscount Thurso: I want to ask you what part locational pricing might play in this. Very quickly, I can tell you there is a fibre-optic cable that runs up the A9 that could deal with the telephony. The average temperature in Caithness across the year is 5 degrees lower than London; therefore, you do not have the heat problem. There is a lot of thought gone into that. It makes a great deal of sense.

Coming onto locational pricing, there are clearly different views in different areas, but would that not be an incentive to try to get people to put the energy generation nearer to where it is being consumed, or the consumption nearer to where it is being generated?

Charles Wood: Energy UK recognises that there are significant potential benefits from the approach to locational pricing. However, at this stage, with the amount of urgency to get to 2030, it is such a fundamental shift in the way that we approach pricing that we believe it would not be in place until after 2030. At the moment, there is a need to use existing price signals through various methods within the various charges to generation and demand based on where they are located, in order to do what we can with the existing tools before then potentially introducing a locational pricing approach in future.

The strategic alignment of the connections reform process with the new process under NESO of strategic spatial planning of the whole energy system needs to be as effective as possible to give those signals and to define what is needed in which areas before we can then give those price signals. Within connections, there will in effect be the greatest measure in order to ensure generation is in the right places by simply connecting things in places where there is space to connect first. That will fundamentally change where things are connected across the UK.

For demand, there is not currently that signal and it would be very useful to see how Ofgem and NESO will better incorporate things such as demand-side response to consider different behaviours from demand, whether it is industry or domestic, and ahead of that to try to look at things such as the AI strategy that was put out yesterday to specify where we need this new demand, and in particular for data centres. Can you identify specific areas that would be data centre zones or AI zones? It is very welcome to see that approach for data centres, but there is a broader need to think about that for housing, for hospitals, for new businesses, and for any other new connections that may come.

Q5 Viscount Chandos: I should declare my interest as a shareholder in Greencoat UK Wind plc. The industry will require huge amounts of capital. Are Ofgem’s price controls sufficiently attractive to ensure the necessary network investment in the UK’s clean power target?

Charles Wood: Thank you for the question, Viscount. There has been a fundamental change in the approach to price controls in recent years. We do feel that they are robust enough to ensure that consumers get the best value for investments. With previous price controls, there was, in effect, an approach that if you do not spend the money, then that money would be potentially accrued to the network and split between the network and the customer through energy bills. There was an encouragement to not spend the money previously. There has to be a fundamental shift to say money can be spent ahead of need.

There is a challenge in the approach at the moment that the investment returns for those networks or for the shareholders within the networks is, in effect, the same as a fairly low yield bond or stocks. It is not particularly attractive, but it is certain. It gives that level of certainty that is very welcome for investors.

The fundamental thing that we have to think about is the cost to consumers. How much does all this cost and how do you recover it in a fair and just way as we go forward? Only around 10% of the actual cost of building these networks will be pulled back through bills in the next five years, with the rest being spread out over a much longer period. There is a real challenge there when it comes to the customer outcomes.

In terms of the price controls, the change in approach has been very welcome. There needs to be a much greater level of flexibility, simply because things such as data centres, new demand and changes in generation patterns are so uncertain that the number of reopeners and the level of flexibility to allow for additional funding has to be very clearly thought out. There has to also be the resource available at Ofgem and within the networks to process those changes in approach as quickly as possible. That also requires an amount of funding that may or may not be sufficient at it yet.

Viscount Chandos: Investors are clearly used to thinking about risk-adjusted returns. To your point about transmission networks being low return but relatively low risk, is it still enough of a return if there is, however huge the numbers, a finite amount of money available for investment? Is there a danger that that money will go to the generating sector rather than the transmission sector? It may be higher risk, but equally it may be higher return.

Charles Wood: We can come back in writing with some more detail on specifically how appropriate the approach is, but I would be hesitant to say that it should be a higher return simply based on the historic returns that have been made. I think that the general profit margin for all networks was 10% for each of their shareholders. It has been high enough for many years. It is right that is brought down to a more reasonable level, but it is right that that is considered throughout the process, not just at the beginning of the RIIO price control but as risks change and as factors outside our control change the investment landscape. It is right that that is always in consideration: is it high enough, is this attracting the investment that we need, and is it giving this level of certainty that networks require? You are entirely right that generation will have a much higher level of risk that is taken on by the organisation, but potentially higher returns as well.

Viscount Chandos: Does the Accelerated Strategic Transmission Investment framework incentivise pre-emptive build sufficiently as opposed to reactive?

Charles Wood: The ASTI framework has been very welcome. It has been a brilliant addition to the approach, and it has helped to look at some of those real strategic connections, say from Scotland into the demand centres in the south of England, and give that approach a much faster process. We would like to see that expanded. We would like to see a lot more of that approach, and within the transmission acceleration action plan there is the intention to effectively identify those strategic projects that would be applicable under the ASTI framework. We would like to see it expanded. We would like to see a lot more of that approach of investment ahead of need in some of those real strategic large-scale projects that, without that mechanism, just would not be built.

Viscount Chandos: Earlier you expressed 100% to Lord Agnew’s question. Is that 100% confidence based on the existing ASTI regime or an enhanced one?

Charles Wood: It is based on an enhanced one. It is based on the existing recognition from Ofgem, NESO and the Government that there is a need for expansion of that project and a much clearer strategic approach to delivery of transmission infrastructure in particular. There is recognition that as long as those processes continue at pace then I will continue with my 100%. If there are further delays, then that percentage will drop very quickly.

Viscount Chandos: Your view, therefore, is that that enhanced ASTI is highly probable?

Charles Wood: It is highly likely, yes. The revised ASTI would be a significant part of that investment ahead of need, and it is very likely to be the case that it will come to the fore. There also needs to be that level of flexibility I mentioned earlier as things change in the coming five years or 10 years to ensure that networks, where they have underestimated the amount that they need, are able to access additional funding for specific strategic projects, beyond ASTI as well.

Q6 Lord Clement-Jones: Good morning. You represent transmission network owners and there has been quite a lot of attention focused on transmission network investment, including through Ofgem’s Accelerated Strategic Transmission Investment framework. You touched on distribution networks earlier. Do you think there is a need for greater focus on distribution networks?

Charles Wood: A point of clarification first, Lord Clement-Jones. National Grid transmission is within Energy UK membership because of its cross-sectoral influence and the need to include it in many discussions, but we do not necessarily represent all transmission operators. However, your question is a very apt one.

The delays to connections at distribution can be months, can be years, and that can change almost street by street, even within a distribution network operational area. This is because of the level of resource within distribution networks and the complexity of some of the existing processes. There is a need for a much more detailed look at distribution networks across the country. We very much welcome the National Infrastructure Commission review of electricity distribution that should be published in late February with some recommendations on how those processes could be standardised and what could be done to streamline some of those approaches.

At the moment, there is a lack of communication between Distribution Network Operators (DNOs) and third parties, challenges when it comes to different costs in different areas, depending on your luck effectively, and even some challenges where it is believed that distribution networks have offered the incorrect connection based on out-of-date guidance. There are genuine challenges here, not just for generation that is increasingly distributed, such as onshore wind and solar, but also for demand as businesses try to decarbonise their fleet of vehicles to electric and they put in heat pumps and various other technologies. There is a significant challenge there with the communication, the transparency and the effectiveness of those network processes.

Lord Clement-Jones: You have quite a wish list. Would they be the same as the Energy Networks Association? You obviously have a different perspective, but how much of a common view is there about what needs to be done in the evidence that you have given to the review?

Charles Wood: That varies, I believe. Even within the Energy Networks Association, its members disagree. There are some DNOs who are leading the way and have standardised their processes and become more transparent, and there are others who are more hesitant and have a slightly more monolithic approach to change that is like turning the “Titanic”, a very slow process that takes a long time. We would like to see Ofgem take a more interventionist approach in order to regulate and make sure that all those distribution networks are meeting the same best practice standards. In recent years, the ENA has been given a lot of power to effectively self-regulate that part of the sector, and we would like to see that resolved, with Ofgem taking a sterner stance when it comes to standardisation.

I believe we do differ in approach. We would like to see Ofgem weigh in a little more, and the Secretary of State as well, to apply pressure to those organisations, whereas the ENA would potentially like to continue its own approach of discussions within the DNOs and best practice guidance being developed, with varied levels of success I would say.

Lord Clement-Jones: That is useful. Before I ask my next question, Chair, I need to declare an interest as chair of the board of Trust Alliance Group, which delivers the energy ombudsman service.

Following up on that particular question, is there sufficient anticipatory investment in distribution networks through Ofgem price controls?

Charles Wood: The simple answer to that is no. The more detailed answer to that is there is an ongoing change to the approach for distribution networks, but fundamentally we have to be looking at the likely change in demand when we are looking at 400,000 public charge points, millions of private charge points in businesses and homes that are changing to electric vehicles, and 5 million homes that will have a heat pump by 2030, which will triple by 2035. The rapid pace of change that is expected does not align with the current approach for DNOs of “when it breaks, we fix it”. It has to be a much more considered strategic approach.

We are very much looking forward to the development of regional energy system planning, which will be a much more strategic approach to each region being given a plan of what is likely to happen, what housing projects are likely, how much demand there will be for electric vehicles and heat pumps, and what businesses could locate in that area, in order to better understand if we should just be investing, and particularly if we should be digging once and putting in a larger cable in order to make sure that it is future-proof.

Lord Clement-Jones: Do you have some faith in that new set of proposals?

Charles Wood: I have some faith and some remaining questions. There is a lot more detail that needs to be set out, particularly for things such as the data streams. How do we get that understanding of what is likely to happen from everything from transport modes and the patterns of who goes where across that region, right into what the local authorities are doing in their planning processes and what they hope to build in their local area? Do they have housing targets that should be factored in and is there an industrial strategy element that needs to be considered? There are further questions about how exactly that is delivered, what resources are dedicated to it and how effective those will be. Those questions need to be answered before I can give my full confidence in them.

Beyond that, how do those regions then align with the national plan and the devolved nations and the combined authorities? There are many layers that are emerging, and we simply need to get an understanding of which ones feed into which, who is in control, and where the resource is to deliver all this.

The Chair: When you talk about distribution networks and the need for Ofgem to be more proactive and more involved rather than self-regulation, you said there is a wide difference of approach. Can you explain or give us any idea of why there is such a difference of approach? Is it just culture? Is it traditional? Is it regional? Is it connections with other industries? What is behind that? Is it just the way things have always been?

Charles Wood: To answer that, Chair, I have to look to the history of the price controls and the politics surrounding those price controls. The political and regulatory focus at that time for the first price control, the RIIO-1 framework, was on keeping costs as low as possible in the immediate term, keeping the cost of delivery as low as possible for customers. That has led to a desire to not spend money rather than a desire to spend money in as cost effective a manner as possible in the long term. Short-term cost savings were prioritised over long-term efficiency. That has been recognised by Ofgem and by the Government, so we welcome that recognition. More work has to be done to effectively look at the trilemma, as it is called—the balance between cost, carbon and effectiveness—so we have to ensure that the price controls in future are encouraging that strategic approach.

Because of that historic approach, there are some challenges within the culture of the regulator, the system operator, and the networks themselves that do need revising. They need to effectively change the entire organisation to ensure that they are thinking about whole-system costs in a long-term approach, rather than that short-term approach that is quite often driven by the latest news story or the latest political gambit that needs most attention. A little bit more long-term certainty is required, but it is very welcome to see that is the direction of travel in the change process. It is simply a challenge of how quickly they can make those changes and whether they are making those changes at that cultural level within the organisation to really live that view rather than simply write it down on a piece of paper and ignore it.

Q7 Lord Best: You have already covered a lot of the question about your members’ experiences, your members being the people who want to connect to the distribution networks. You have already expressed your members’ views. The only bit that is outstanding from my question is: as well as standardisation of the process between the different distribution network operators, is cash compensation for the network operators not meeting their deadlines an important ingredient in this? Should they have to pay up if they do not deliver?

Charles Wood: This is a very apt question, Lord Best. We would like to see more regulation and incentives in that manner, whether it is financial incentives and compensation or it is simply the rewards awarded to that network after the fact. At the moment, distribution networks in particular are encouraged to deliver a connections offer within a certain amount of time. After that, there is no real time limit on how long it takes to do the next steps of the process, which is getting access to land and building out the network. We would like to see much more specificity on how long it should take from getting a connection offer to having that bit of network built to being connected, and for there to be incentives and obligations on the DNOs to push that right behaviour and some compensation. I am certain that some of our members would be very much in favour of that and we can follow up with a bit more detail, but we expect the National Infrastructure Commission’s report to have some of those recommendations within it.

Q8 Baroness Armstrong of Hill Top: Good morning. You have already said quite a bit about this, but can you say a little more about the strategic planning for distribution networks and what you would hope these regional energy strategic plans will come up with in order for this to be a success?

Charles Wood: Yes, of course. There are a number of elements that need to be considered. The first is: who do you engage with? Each region will have, effectively, a panel set up of experts to feed into the plan. Who sits on those and how are they resourced? If you went to 100 different local authorities, they would give you 100 different answers as to their available resource and their understanding of some of the fundamental challenges within this approach. Ensuring they have equivalent resources will be critical to ensuring that it is not a postcode lottery of whichever local authority has the best resources gets the best outcome.

There needs to be clarification on which elements of policy will filter down to the Regional Energy Strategic Plan (RESP) framework. Will that include net-zero targets? Will that include industrial strategy? There will be some of those challenges around where you locate data centres and demand. We need more clarity about what the duties are considered within demand in particular.

There has to be a consideration of local politics and community engagement within that approach as well. How will those projects, those regional approaches, actually get communities on board to understand that this is for the benefit of the local area and why that is a benefit? What it is that this will actually deliver has to be clarified to the consumer and businesses in the area to get them on board. If there is a lack of co-ordination across different sectors and the consumer and the local authority and then the energy sector itself, then it will not be effective. That level of co-ordinated engagement has to be clarified in the next stages of that process in order for us to fully back it.

There are also challenges with simply how you allocate what region is what, and then how that then filters down to local area energy plans, of which many local councils and combined authorities have their own approach to delivering net zero. How do those factor in? Does the RESP allocate resources and focus towards those areas? Does that leave the areas that do not have time or resource to create their own plans behind, or is there something there in terms of getting shared information and learnings of what went well and what did not go well, to share across other local authorities to ensure that everybody is on a level playing field? There are significant challenges when it comes to that, but we do have faith that it is a better approach than is currently in place.

Q9 Viscount Trenchard: Good morning. We have talked a lot about the generator side of things. I would like to ask: do you think that there is sufficient focus on connecting businesses and users, those who have demand for energy, to energy networks? Could you answer with regard to both the grid and private wire or conceivably even small nuclear or such, as we have heard some data centres, Amazon, are talking about? How can the needs of potential consumers of energy be balanced with the need to ensure adequate supply?

Charles Wood: Excellent question, Viscount. There is not enough focus on demand as yet. There needs to be a much greater focus on how we co-locate those and how we consider options such as what has been seen in Spain, where connection charges are exempted if you locate generation or demand next to its counterfactual. If you put a data centre right next to excess generation, you do not have to pay as much for your use of the system, so there are different considerations that could be used.

There is around 20 gigawatts of demand connections within that large queue at transmission level, so there are projects that are very large connecting to the transmission level. They may well have a better outcome than projects trying to connect at distribution, so we need to get into the detail of the local and regional areas and how we ensure businesses have a route to connection across the country. I mentioned public charging and heat pumps and heat networks are also within that. There are a lot of different approaches that need to be factored into the planning approach under the regional approach in order to be as effective as possible and to give businesses the understanding of what network capacity is available before they have to apply for a connection and go through the long process. They should have a lot more understanding about where they should connect, rather than trying to connect somewhere because it is best located for them but then finding out that there is not enough capacity and it takes a very long time to connect.

The end-to-end review from Ofgem of connections has increased the amount of focus on demand, and that is very welcome, but there is further work that needs to be delivered. The National Infrastructure Commission report will go into a lot of detail on how challenging that may be in future.

There is a real need for silos to be broken down beyond the energy sector, ensuring that the consideration of housing targets, the industrial strategy and industrial decarbonisation strategy are factored into system planning. That is completely critical. Identifying which sectors we want to protect and which sectors we want to encourage to invest in the UK will also help us give specific targeted support to businesses to connect, to decarbonise and to come and locate in the UK. There is incredible potential when it comes to the UK’s potential for manufacturing of things such as heat pumps, electric vehicles and some of the surrounding technologies in the sector. How we encourage those companies to locate in the UK is an ongoing challenge for Government to resolve, and as part of their priorities when it comes to economic growth in the UK our view is that an effective approach to planning out the system and delivering net zero will effectively deliver on all those economic targets.

Q10 Lord Altrincham: You have talked about having a holistic approach with the public. Could we take you back to the Government guidance topic? Should the Government provide greater strategic guidance to the sector on how to drive growth and good expansion? What change would you like to see as a result of the Government’s review of Ofgem?

Charles Wood: Thank you for that question. To your first point, Lord Altrincham, it is something that we have been very involved in for many years. The strategy and policy statement for energy policy was a great step forward in Government giving a bit more direction to Ofgem in how it approaches grid connections and drives growth under its new growth duty. We also were fundamentally involved with the development of the Energy Bill that passed through Parliament in recent years, including the net-zero duty that is now applied to Ofgem.

The strategy and policy statement as it stands is not detailed enough. It does not give the amount of specificity that the industry would like to see in terms of bringing down the cost of private investment. We would like to see further work by Government, by the Secretary of State, to effectively lead that discussion and direct Ofgem in which way to deliver on its targets. There is a specific need within that review of Ofgem to give much more clarity on how Ofgem balances the different targets. What effect does balancing growth against net zero have on the approach, and likewise balancing net zero with energy bills and the best outcomes for consumers? How are those decisions made? What is the methodology that Ofgem will use? That would give a lot more certainty to the industry about what is likely to happen in future.

There are some very difficult trade-offs, and I do not envy Ofgem or NESO in trying to balance those objectives, but they are the right objectives. How we deliver them is critical. We hope to see that review give a lot more detail on how Ofgem should balance its duties and give a much better understanding of how it should engage with the sector to make sure it is being as transparent as possible and giving us as much certainty for the future as it can.

Lord Altrincham: How does it balance its duties if, as you just explained, the aspiration at the start is not properly costed? How does that work?

Charles Wood: There is a long process within Ofgem of looking at those priorities. We do find that in the past decade, I would say, there has been a slight behavioural change in Ofgem, where it has followed the most politically salient priority. That was, for many years, keeping costs low on bills, and that has left us in a worse situation in terms of the long-term cost of delivery of net zero. There is a fundamental change happening within the regulator, and that is very welcome. They are much more engaged with the sector. They are much more transparent about how they are making those trade-offs and about what is being done to correct when issues do come up about the cost being incorrect in the first estimate. That is very welcome, but more could be done to be more transparent about that process.

Lord Altrincham: Just to understand your language, when you say “balance its duties”, do you mean balance its political duties—its political objectives?

Charles Wood: It is the fundamental duties that govern how Ofgem operates, so the duty for growth, the duty for the best outcomes for consumers, for competition in the market, and for net-zero duty as well. There are trade-offs within those about how you deliver. We very much see growth and net zero as aligned and we would like to see a lot more focus on both of those, but how it makes those decisions, I will be quite frank, is not particularly transparent to the sector. I would direct that question towards Ofgem to see if it can give you a more detailed response to how it makes those decisions.

Lord Altrincham: That is very helpful. Thank you.

Q11 Lord Cromwell: It is me again, I am afraid. Managing, operating and overseeing the accountability of and dealing with the trade-offs in energy networks, as has been covered in our discussion, involves a large number of regulators, bodies, organisations, authorities, and layers. Is that plurality not going to be an impediment to the hoped-for pace of delivery? If I am right in asking that, what is the solution?

Charles Wood: You are right in asking that question. It is very much something that we have significant concerns around. We do not feel that the current approach of communication and integration across the many bodies and institutions in the energy sector is effective enough, and we would like to see a lot more co-ordination, not just within the energy sector and its many institutions but also outside of the energy sector with planning, environmental, and with business users as well, to ensure that there is much better communication.

There have been improvements in recent years, particularly with the creation of NESO and that being brought into public ownership once again. That has been very welcome to see, and the amount of transparency and engagement with the sector from both NESO and Ofgem has improved in recent years. There is much more that could be done. More transparency would be the solution—being as clear as possible with the industry, talking to us before making decisions, and trying to get into the granularity of the actual implications of decisions before then going to a minded-to decision. There are certain decisions that have been taken in previous years by Ofgem and NESO that industry has fundamentally disagreed with because of anything from technical capabilities of the technologies they are talking about, to some of the commercial implications for the decisions that they make.

Much greater engagement with the sector is needed. However, I will say there are significant amounts of engagement and the industry is struggling for resource because of the sheer number of consultations and calls for evidence that are currently active. My team is working endlessly to try to make sure that we input into all those.

Lord Cromwell: We look forward to your response to our upcoming call for evidence, in that case.

Can we turn to the energy codes, which is another area of complexity? Legislation was passed and Ofgem has taken on the role to consolidate and reform those codes, but Ofgem told us that it is only at the early stages of doing that. Will that hinder the flexibility that we need in a fast-changing system? Can you give us any insight—I appreciate you are not here representing them—into Ofgem’s plans, to use your earlier phrase, to wade in and make this happen at the necessary speed to drive change forward?

Charles Wood: Yes, energy codes are a considerable part of the challenge, primarily because of the sheer administrative burden of trying to abide by them all. They are incredibly complicated and for new entrants that is effectively a complete barrier to entry. For existing entrants, it is a significant cost to abide by them.

Ofgem’s intended work to consolidate codes and simplify the processes is very welcome. We fundamentally agree with the proposals that it put forward and would like to see those implemented at pace. There were delays to that process, whether it was energy gas prices and the crisis that ensued or the various other crises that we have seen across the past decade. It is very welcome that Ofgem is now returning its focus to that area, and we expect to see some further work in that in the spring and summer this year in order to start implementing some of those changes.

We would like to see that happen at pace. There is an urgency to delivery of that, and there is a need to consider all the moving parts in the sector at the moment. Whether it is code changes to enable NESO to effectively operate or it is changes to enable connections reform, there are many changes ongoing that have to continue through that process of changing the code approach. It is a very delicate ballet of attempting to put all the pieces in the right place, but we are very glad to see that Ofgem has reprioritised that work and increased the size of its team working on that in order to deliver it this year. We will be engaging with that throughout the year but hope to see some movement and implementation, at least for some of those codes, by the end of summer.

Lord Cromwell: Thank you. As you very poetically pointed out, there are a lot of moving parts here, and Ofgem needs to crack on with this. You said “end of the summer”, or “end of the year”. Do you think it is realistic that by autumn, perhaps, it may have actually completed this process? Or is that perhaps not a fair question to put to you?

Charles Wood: Whether or not it is a fair question, I think, is for debate. I am not Ofgem, so I do not know exactly how its inner workings are at the moment. I think that we will see significant progress by the summer and by the autumn. It is a phased approach as it consolidates some easier codes to consolidate and simplify, before then going on to the harder and more meaty challenges within code reform. I doubt that everything will be done and dusted by the end of the year, but we would expect to see significant progress. If we do not, then that would be cause for concern.

Lord Cromwell: And a serious drag on making things happen.

Charles Wood: Absolutely.

Lord Cromwell: Yes. Thank you very much.

Q12 Viscount Chandos: All this discussion is against the background of macro forecasts for demand, and there are an incredible number of moving parts within that. Taking one specific of topical sector data centres, how successful will the UK be in attracting data centres? Then, how much energy will those data centres consume?

There is a statistic, I think, that currently a generative AI search consumes six or seven times as much energy as a traditional Google search. We heard evidence in a private session from a major player in the data community that they are confident that that energy consumption will come down significantly over time. How does that get incorporated into the forecasts? What range do you think it is sensible to look at in terms of under and over that base case? Does Energy UK do its own work in looking at macro forecasts for demand?

Charles Wood: Our work—to answer that first, Viscount—focuses on using the existing resources and the datasets that come out from various organisations, whether it is the DUKES statistics that come from Government or it is the future energy scenarios from NESO. There are many datasets available. We collate and look at those and try to apply what that means to the sector. We do not necessarily do the macro analysis ourselves, but I believe at the moment data centres are expected to take up 1.5% of energy demand in the UK. They currently do. That will likely rise—potentially 6%, I believe, is the figure that we are looking at for a ballpark region.

If we look at Ireland, they did really push forwards with data centres and work as hard as possible to attract that industry to them. That resulted in about 5% of their energy demand being data centres. We can look at that as an example of a bit of a success story that could be replicated in the UK of up to 5% of energy demand in future being from data centres.

We very much hope that there is consideration within the approach under the AI strategy of reducing the impact of that data-centre investment in the UK by doing simple things such as putting generation on site, locating them near generation assets, putting energy storage in place, and utilising that excess heat where they are located near to demand for heat. There are various solutions that can be applied in order to reduce that number, but we are looking at a ballpark figure of around 6% in future. How that is applied, and how we ensure that it is allocated across the UK in the most appropriate areas that it makes sense where there is excess generation already, will be the challenge for Government, in terms of where they set out those AI investment areas and making sure that that is aligned with energy.

I would point out that in the AI strategy that was launched, you may note in the press release that there are no quotes from energy companies within that release. I do not believe they spoke to any before they decided upon it. There is a need to do a much broader engagement before applying that approach to AI and data centres in the UK.

Viscount Chandos: Back in the 1950s or 1960s, the Central Electricity Generation Board bought into projections for demand that were not met. There was, for a period, substantial overcapacity. If you wake up at 3 am in the morning, do you worry about the industry being in danger of investing and finding that that is overcapacity or not being able to meet the demand?

Charles Wood: The thing that keeps me up at night is an underdelivery, not an overdelivery. It would be that we do not get enough infrastructure in place in time to deliver for what we need. Regardless of whether or not it is data centres, manufacturing hubs or housing, Nick Winser, the editor of the Winser review, which was the first initial step in looking at connections reform, said himself, “Build it and they will come”. It does not matter what the demand is in future, there will be additional demand in future. How we plan for that and create new capacity in order to encourage companies to come to the UK, to invest here, and to build in those specific areas, it will place the UK very nicely in terms of being an attractive place to come and invest and build.

There is real potential that if we overbuild it will simply make us more attractive as an investment proposition, whereas if we underbuild then we are looking at a lack of supply and a lack of ability to connect. I believe there are nine data centres already being considered for the UK. Five of those are being held up by planning and the others are being held up by the connections process. It is clear that this is the crunch point when it comes to data centres locating in the UK and we need to get on with it as quickly as possible and build that capacity. If it is not for data centres, someone else will take it.

Q13 The Chair: Thank you very much. You have certainly confirmed my view that we are right to be looking into this, and there are quite a few things that you have said that we will want to be following up. Just before you go, can I ask you how much the skill shortage in various sectors actually impacts on how you think the future pans out? You talked about lots of opportunities and lots of challenges, but we know from previous work that we have done in other areas that there can be real blockages because of skill shortages. Do you think that is a potential problem here?

Charles Wood: Absolutely. You are correct to bring up skill shortages and supply chains, Chair. On skills in particular, we are looking at hundreds of thousands of electrical engineers, in addition to those who are already working in the sector, that are needed by 2030, let alone by 2050. Then beyond that we are looking at sales, we are looking at generation jobs, we are looking at jobs for installers of heat pumps and electric vehicles where there will also be 100,000 required by 2028 or 2030. There is a genuine deficit and a real concern that the skills that are required at the moment are not being brought to the fore in our academia, in the approach to skills funding, in the approach to apprenticeships and in the consideration of things such as retraining and upskilling of existing workers. If we look to offshore energy, oil and gas sectors have done a lot to retrain workers to effectively work in the renewables sector. If we can see more cases of that across the UK for the energy sector it would be very welcome. There is a need for a co-ordinated approach to skills if we are going to deliver any of the very necessary changes to our system in future.

The Chair: Thank you very much. As I say, you have convinced me that we are right to be looking at these issues, so thank you very much for your time.