16
Examination of witnesses
Rachel Fletcher and Chris Hewett.
Q14 The Chair: Good morning. This is the Industry and Regulators Committee of the House of Lords. We have been looking at energy and, in particular, some of the issues surrounding the grid. This morning the Committee is going to hear from two witnesses: Rachel Fletcher, who is the director of regulation and economics at Octopus Energy, and Chris Hewitt, who is the CEO of Solar Energy UK. Welcome to you both.
This is an incredibly complex area, as we are learning very quickly indeed. One thing that we have honed in on and become interested in are the proposals from the National Energy System Operator—NESO—about connections and some of the problems. We were hearing more about them and the changes there in the news just last week. Could you give us your impression? Do you feel that NESO’s proposed changes to connections are sufficient? Will they help to meet the clean power targets? Where do you think we are going on that?
Chris Hewett: I will start. There is no question that connection reform is required. Everyone is on board with that. NESO, to its credit, has done an incredible amount of work on the details over the last six months, which has been welcome. The speed and level of detail of that work have meant that some things have not necessarily been done as well as would have worked from our perspective. The main point I want to make is about the targets and NESO’s analysis of what is needed. We started off the connection queue with first come, first served and now it is first needed, first connected. NESO has been given the task of defining what we need to deliver decarbonisation by 2030.
NESO’s original scenarios were published in November and came out with some numbers for solar and battery that were quite a long way from where the market was. There was a real disconnect there. That was largely because it was done very quickly and it was based on NESO’s modelling assumptions. We challenged the modelling assumptions on the 2030 numbers because we felt they were out of date. The clean power action plan has reflected quite a lot of what we challenged in terms of numbers between now and 2030, because that is what we thought was the most important number. In the annexe to the clean power action plan, there is also a column that talks about the numbers for 2030 to 2035, which is obviously not very far away. Those numbers were not scrutinised in the slightest. They were not even published, I think, in the scenarios in November. They have just popped up in the clean power action plan.
Those numbers trouble us because they are based on the original flawed assumptions that went into the November scenarios publication. That needs to be fixed between now and the May deadline for the connections reform. If you have a project that you would like to build in 2031 or 2032, there is a real risk—those projects have already been developed and are quite a long way along the line of planning. If you have a project that you would like to build in 2031 or 2032 there is a real risk that some of them will be told they are no longer needed for no apparent good reason, as far as we can see. That is our main critique of what NESO has done in terms of what is needed. That needs more work.
Our other criticism is that it has been a very fast process. It has been a very detailed process. There has been some engagement with generators along the way but it has been felt frequently that the views of generators have not been fully taken into account, not just on solar but on batteries, wind, and other technologies. The view that NESO or other network operators came up with in the first place has been the one that has prevailed. We think that the system does not reflect the speed at which the technology is developing and that it needs to catch up with where we are as an industry. Sometimes that view has not been taken seriously enough.
The Chair: You mentioned that priority is now given to the most needed. Is it a combination of how much it is needed but how ready it is as well? Does that factor come in also?
Chris Hewett: The 2030 numbers that were originally published in November by NESO missed gigawatts of solar projects that we knew had to come into commission and had already been given grid connection agreements; there was money and investors behind them, and they were going to happen. They were not even factored in, neither at the national level nor in the regional spread.
For example, the Secretary of State approved three large solar plant projects in July. NESO’s numbers published in November deemed that they were not needed and would not be getting a connection by 2030, which was nonsensical. That has been corrected and fixed in the clean power action plan. However, the same mistakes are likely to be made for 2030-35 and that is what we are worried about.
Rachel Fletcher: Last year, we, as an industry, connected just under 10 gigawatts of projects to the system. That is half of what is going to be needed each year to get to 2030. We have a big gap and big changes are needed. What NESO has proposed is a step in the right direction but, in effect, what they are doing is freeing up bona fide needed projects that were being blocked because they were sitting behind a so-called zombie project—a speculative connection that is hoarding that place in the queue.
That is an important part of the reforms but it is not sufficient to address the issue. Lots of other factors impact the speed of connections beyond the challenge of sitting behind a zombie project. We also note that the qualification criteria which are now going to be applied are very much focused on land rights, but that is something that a project that never really expects to get off the ground could secure. There are much more stringent criteria that could have been applied, such as capital commitment to the supply chain. We also note that a lot of these connections are going to rely on a very extensive transmission build programme. I suspect that we will come on to talk about that this morning but we feel that that transmission build is almost certainly not going to be achieved on time.
One of our biggest high-level concerns is that we would like to see a broader approach focusing on, as we seek to accommodate and incorporate all these much-needed new renewables on to the system, how we do so in a way that makes the best use of the grid that is already there, both at transmission and distribution levels. How do we make the most use of that grid and therefore reduce the need for some of this transmission build? We feel that aspect needs to be brought into a much more holistic, joined-up approach because otherwise we are going to be saddling customers with costs and that risks public support for the decarbonisation project. Equally, the more we are dependent on new transmission, the more likely it is that our decarbonisation project is delayed by transmission delay. We will improve our ability to hit 2030 targets, for example, if we can find other approaches. We will never avoid the need for lots of transmission builds but at least we can be reducing the need for them.
The connection reforms need to be more ambitious and more hard-hitting, but we would like to see that accompanied by zonal pricing or other pricing signals that help to make better use of the grid. We would like to see charging reforms to do something similar. We would like to see more competition in the build of new networks and delivery of connections and much stronger incentives for network companies to maximise the capacity utilisation of the networks that we already have in place, alongside more efficient and timely connection processes.
The Chair: Thank you very much. That is quite a range of topics and we will be following up on some of those later. Before we leave the changes to connection procedures, is there a fear that a lot of this may be subject to legal challenge?
Chris Hewett: A lot of goalposts have been moved, I think it is fair to say, and clearly some needed to be moved but I think the speed of the process has been hard to keep up with, particularly for those smaller players. I do not know if anyone is going to legally challenge them but it would not surprise me. Some investors have already spent tens of millions of pounds on some of these projects. Spending on planning and all the assessments you need to do is a significant investment. Those who feel that the goalposts have been unfairly moved may look to challenge. It is possible.
Q15 Viscount Trenchard: Good morning. It is very clear that one of the principal challenges to delivering the necessary grid upgrade is the planning and consenting process. My question is in two parts. First, to what extent do you think the barriers formed by the planning and consenting process relate to the resourcing of the various planning authorities, environmental considerations or levels of community consent to the increased infrastructure.
Secondly, what is your view of the Government’s proposals to address this problem and to address these barriers? What community incentives or obligations might best enable grid expansion and how should they be decided?
Rachel Fletcher: I can kick off. I am not an expert on the details of planning arrangements but we can definitely see that the scale of transmission build that is being planned—I think about 88 projects over the next five years are due to be delivered if we are going to hit our clean power 2030 targets—is going to put huge strain on planning resources. I can absolutely see that that could be a factor slowing things down.
We are also very keen to see approaches that try to secure public support rather than override it. In our own world, as a developer, we give customers who are sited close to our small wind farms discounts on their energy bills when the wind is blowing. Not surprisingly, that has led to about 36,000 letters to us from the public asking us to build wind turbines near them. I use that as an illustration of how creative and intelligent thinking about how communities and individuals benefit from infrastructure delivery can change NIMBYs into people who are actively asking for infrastructure development in their areas.
I wanted, though, to underline the seriousness of the issue you raise about delays to transmission builds. The system operator has said that if there is a delay to only three projects in its list of 88 projects to 2030, we could have constraint costs going from about £1.2 billion at the moment to nearly £8 billion, just through the lack of that transmission infrastructure. That illustrates the imperative, for not just speedy connections but for keeping costs down for consumers, that we find a way of delivering transmission quickly and make sure that the transmission that we are delivering really is needed and that we have made the best use of the capacity that is already there before we go through planning consent and incur the expenditure.
I also want to raise another couple of things. Even if the Government get the planning arrangements perfect, which will be challenging, there are a number of other challenges to getting transmission built quickly. Supply chain problems and workforce shortages are widely recognised and need to be addressed as well as getting the planning arrangements in place. That is why, as a company, we are very exercised on the need for a proper strategy to reduce our need for additional transmission as far as we possibly can.
Chris Hewett: I can add more on the planning point. Yes, there are constraints in the planning system. I should preface this by saying the vast majority of solar farms get community consent and get it quite easily. You can hear some stories where they do but the vast majority do. Recent reports from MHCLG looked at the deficiency in the workforce in the planning sector. Some 72% of the local authorities that answered the question said they had gaps in their ecology and biodiversity knowledge. That is particularly important for solar because solar farms generally massively increase biodiversity where they are built: once you have a solar farm in place there are no pesticides, no fertilisers and they are usually seeded with wildflowers, all of which generally greatly increase nature. That resource is lacking. Another 50% of respondents said that they did not have enough expertise in energy. The amount of energy—whether from transmission, solar, wind farms, or batteries—coming into the local planning system now is huge and there is action now from the Government to try to address this.
Another point about planning is that it is not just about getting the planning approval itself. Take the example of some of those large solar farms that were approved by the Secretary of State in July. There are then planning conditions to fulfil and that is where sometimes you get disproportionate power from bits of the council that you are not expecting. The county archaeologist seems to be a very powerful person in many local authorities. A solar farm can be asked to do trial trenching, to dig up 1%, 2%, up to 5%, of the land area of a solar farm, to check that there is nothing in there of archaeological interest. That is a huge expense and it is very inconsistent across the country. It seems to us quite often a disproportionate effort and expense. Sometimes you are wasting the crops. It is done even before the planning commission is granted sometimes, but there are conditions after the planning is granted. That really does need attention because that is slowing down and adding expense and there needs to be a sense of proportionality. That is one example; there are many other similar issues.
Q16 Lord Agnew of Oulton: Good morning. Rachel, I am interested in your comments on the transmission build cost to us and I am keen to peer into your previous regulator’s mind. Why is there such a doctrinal objection to the regional pricing of energy? For example, if we could build data centres in Scotland, where we have tremendous amounts of power from wind, it would reduce the number of transmission lines we need. What is the problem? No one has explained it to me. Why are people objecting to it?
Rachel Fletcher: Perhaps others can answer that question, but Ofgem and NESO both support the move to regional pricing and have done analysis to demonstrate that they think that this would bring benefits to consumers and overall to the country. The challenge is coming from investors who have become very used to the current arrangements and who would have to consider how they mitigate new risks associated with zonal pricing. Our view is that those new risks are largely mitigatable and that we should be cracking on with it. In fact, we should have made the decision already to do it. The decision on this is still pending within Government and I understand that advice will be put to Ministers some time in the early spring. This an area of very hot and current debate.
Your point is well made. Analysis shows that if we had zonal pricing, Scotland would most likely have some of the cheapest electricity prices in Europe. It is almost inevitable that that would result in some large users of electricity, such as data centres or electrolysers, choosing to locate in Scotland rather than elsewhere in Britain or indeed elsewhere in Europe. That would use some of the excess renewable generation, for which at the moment there is no source of demand in Scotland and it needs to be transmitted to the south of England.
We do think that if you can attract a higher wholesale price in parts of the country that are short of generation on the margin, that might entice some renewable developers to consider locating elsewhere and closer to demand. However, even if you do not believe that zonal pricing would have an impact on the location either of large demand or indeed of some generators, we have recently seen some research in looking at five transmission lines that are currently planned and at whether they make sense from a consumer point of view under zonal pricing regime; of the five, two do not make sense and are not needed. This is simply because under zonal pricing not only might you change where investment happens, you are changing the day-to-day operational decisions of flexible assets, such as batteries or flexible demand. Indeed, you could be influencing the way the interconnectors are flowing. That means, therefore, that you are going to be making better use of renewable generation in the locality it is generated in and you need less transmission line to transport it somewhere else.
Lord Agnew of Oulton: Are you saying there is no alignment of interest between the taxpayer, the cost of building the transmission lines, and the energy developers? In other words, they do not care that we have to spend tens of billions of pounds putting in these unsightly transmission lines across the country because they are not paying anything towards that. But if they knew that they had to pay a levy, they might change their minds, be a little bit more supportive and, as you say, help us to bring down our cost of energy, which is a huge drag on economic growth and will get worse under this current rationale.
Rachel Fletcher: Developers do pay towards the cost of transmission. One would like to think that overall they would want a leaner and more efficient transmission system. Under the current market arrangements, generators face no consequences when they are generating but there is transmission capacity to take it to market. That creates a bit of a misalignment of the incentives, as you mentioned.
Work recently done for us suggests that if you look at the five lines in the test case and apply them to the suite of transmission bill programmes that are currently on stock, some 17 large transmission lines might need to be reassessed and they account for a total of £50 billion in capital expenditure. This is a new part of the benefit of moving to zonal, which has not been factored into analysis to date by the Government or Ofgem, and which we feel is highly pertinent, not just in the interest of bringing down costs but also in reducing the disruption to customers from having large transmission projects and, again, it starts to derisk our 2030 and overall net-zero plans. The more we can reduce our reliance on new transmission build to get renewables accommodated on to the system, the more secure we can be about those plans—those renewable investments actually being online on time. This is why I mentioned zonal at the beginning as needing to sit alongside connection reform—and other measures, indeed—to make better use of the of the grid capacity that we have.
Lord Agnew of Oulton: Would it help to align interests if we reduced the subsidy that was paid for them to not generate or contribute energy to the grid? Obviously, that is what is happening. They do not care because they are getting paid even though we are having to pay them to not put the energy into the grid. Somehow, we have to improve the alignment, do we not?
Rachel Fletcher: Yes. I think Government officials would agree with you that we cannot continue with the current arrangements. There has to be some material shift in the status quo. My understanding is that the alternative on the table would involve creating sharper locational price signals in the transmission charges; in other words, Scottish generators that are triggering the need for new transmission lines would face a higher proportion of those costs. My suspicion is that that alternative is not welcomed either, but we have not seen very much development of that alternative.
The thing that is really important is if the Government make a decision against zonal—which we think would be the wrong thing for customers and wrong for net zero—there has to be a decision to do something else to address that misalignment of incentives.
Chris Hewett: I can put the counterpoint. Octopus is one of our members and it is a fantastic company but its views do not necessarily represent everyone in the industry, so I guess I should put the counterweight. There are other investors and developers in the space which are more cautious about the benefits that zonal pricing might create. This is a fantastically complicated system and lots of development and investment decisions have been made based on the rules that were in place. We are seeing connection reforms as a major shake-up. Another major shake-up in the market at the same time may be just an extra uncertainty for those investors, so there is that.
The curtailment of renewables—the wasting of good wind power, particularly—is clearly a massive issue and we have to solve that as a nation. One way is to reform some of the pricing. Another way is to look at siting batteries and look at demand so we start to move that up. Having some more networks, which will enable the transfer of some of that power at the right time, is also important. I think there are many ways to skin this particular cat. That is the counterweight.
What we absolutely agree on, I think, is that we have renewable generation. It is the cheapest form of generation possible in the energy market now. Solar and onshore wind are the cheapest ways to generate power, offshore wind is pretty close behind. It is way cheaper than gas. It is way cheaper than nuclear. We need to make sure that we are maximising the use of those technologies for price alone, not to mention the climate change and the emissions benefits. We need to stop burning gas when the sun goes down and the wind drops.
Lord Agnew of Oulton: You do not convince me about zonal pricing, Chris. You are just saying it is inconvenient for you, the developers of new power. According to Rachel, there is £50 billion worth of potentially unnecessary transmission lines, which the taxpayer is going to have to bear the cost of.
Chris Hewett: I absolutely agree with Rachel about the fact that we need to ensure that we are using the networks more efficiently. There are ways we can get more power through this.
Lord Agnew of Oulton: You are very vague about that.
Chris Hewett: I confess that I am not an expert in this area. Rachel is probably more expert than I am. However, I am reflecting the views of other investors. There is a global race to invest in the renewable sector across the world. Some $500 billion was invested in solar last year, which was more than in oil production globally. Huge amounts of money are going in and those investors can, frankly, put their money in whichever country they want to. Some will put it in Texas, some will put it in Spain, some will put it in Australia. They can move their money very quickly. I think that uncertainty factor should be weighed with all the potential benefits as well.
Viscount Thurso: A very quick question to you, Rachel, please. You have been using the terminology “zonal pricing” and a lot of the witnesses we have had have used to terminology “locational pricing”. Are the two the same thing or is there a difference between them?
Rachel Fletcher: Zonal pricing is a subset of locational pricing. At the moment, we have one wholesale price that you face wherever you are in the country. Even if you are having to turn wind off in Scotland, Scottish customers are paying the same as we might be paying in England when we are having to import from the continent. Anything that breaks that down to reflect geographic realities is locational pricing.
One form of locational pricing is nodal, which tends to be very disaggregated. In a country the size of Britain, you might end up with hundreds of different markets. The favoured option for Britain is zonal pricing, which is seen as being achievable relatively quickly and with relatively little disruption.
Q17 Lord Gilbert of Panteg: You describe a very complicated landscape and price controls are one part of that. I would like to ask about price controls and the incentivisation of investment. Is the Ofgem price control regime sufficiently attractive to incentivise investment to the level needed to meet the clean power target? Is the regime stable or does it need to change?
Moving away from the transmission network, people have told us, as we prepared for this inquiry, that we ought to be as focused on the distribution network. Do the price control regimes incentivise the right level of investment in the distribution network?
Rachel Fletcher: I will kick off on that. We believe that recent changes to the transmission price control arrangements should be more than sufficient to attract the necessary investment into transmission and we are seeing a shift towards a mantra of “invest ahead of need”, which I think should mean that to the extent that if price controls were ever the barrier, they are no longer the barrier.
In a price control period, the network companies have typically underspent on their capital allowance, hence my note of scepticism about how big an issue the price controls have been in terms of holding up network investment. The changes, including the introduction of the ASTI (accelerated Strategic Transmission Investment) programme, should mean that that is no longer an issue on transmission.
On distribution, perhaps there is more thinking to be done. We may come on and talk about the RESPs, the Regional Energy Strategic Plans, and whether there is a need for more of an input from the Regional Plans into the overall capital expenditure programme at the distribution level. There is perhaps some thinking to be done there.
I would like, though, to repeat a point that I have made before. We think the incentives to invest in new transmission are very strong; however, the incentives to utilise existing transmission and distribution networks are not nearly strong enough.
Going back to the concerns about the cost to consumers and the risk of delay, we would like to see Ofgem give much more attention there. For example, a transmission line that is operated according to what is called dynamic line rating, where there is a real-time assessment of the temperature and impact that that has on the capacity of the transmission line, could increase capacity on a given transmission line by around 30%, which is a very sizable increase. Yet we see that network companies are very reluctant to use dynamic line rating. We have had a project that assessed the ability to connect under dynamic line rating arrangements. This was in Scotland, where cold temperatures are particularly helpful in increasing grid capacity. We found that our project could have connected just with a few hours of disconnection at times of high temperature. Yet, the DNO (distribution network operator), when it assessed our project, assessed it against the hottest day, which would have meant a transmission upgrade and that transmission upgrade failed on planning permission. So a project that could have been on the bars in 2020 now might not get built until 2028.
That is just one example. We think Ofgem could, in effect, be putting in a network utilisation incentive on companies so that they get rewarded, depending on how highly utilised their assets are, and that would encourage them, not just to use technologies such as dynamic line rating but to maybe use flexible demand to make better use of excess capacity on their networks. That might allow co-location of batteries and demand or batteries and projects to make better use of existing network capacity and encourage them to be more ambitious in offering so-called non-firm connection offers.
Lord Gilbert of Panteg: What is your assessment of the reason that Ofgem is not as responsive on this as you clearly think it should be? Is it about capacity or is it that Ofgem does not share that analysis?
Rachel Fletcher: I cannot speak for Ofgem, but I think this is just an area that has not received enough attention. The focus has been on new lines and rightly the link has been made between the need for more transmission capacity and the speed of connections. We think more nuanced thinking is needed here.
Chris Hewett: In part, the entire energy system, whether it is Ofgem or particularly the DNOs, has not caught up with the speed of technological advancement in renewables. We are still living with a system that is basically designed around a few large power stations that you turn up and down when the demand changes. That is it. That has completely changed. There is solar all over the country, there are batteries everywhere, there is onshore wind, there is offshore wind; energy is coming from different places at different times. The technology is capable of handling a lot more than the networks are allowing.
This knocks on to the connections agreements. We will get members who are turned down for a connection agreement because the DNO says, “There is no room on the system for you”. When someone digs into the modelling, they find out that the modelling for the solar farm around the corner suggests, much as your Scottish example suggests, that it will be exporting at 9 pm in January because that is what the spreadsheet says. It has no bearing on reality whatever. This happens across the piece. The networks need to catch up to understand what the new technologies are capable of. They are the cheapest technologies. It is gas that is driving up the price at the moment. That is what is causing consumers pain. The more renewables we get on the system, the less gas we burn, the faster we reduce those bills.
Lord Gilbert of Panteg: Just one very brief point of clarification from Rachel on a point you made earlier, please. You were talking about zombie projects previously getting in the way of connection to the grid and you indicated that the issue had been dealt with. Is it still a problem or has it largely been dealt with?
Rachel Fletcher: The reforms that NESO have put in should make that situation better. However, if you really want to secure your position in the queue on a speculative basis, you could meet its new criteria and find ways of doing so. There are some loopholes. Its criteria could be tighter. I think that NESO has said that its reforms will remove about 50% of the zombie projects. It had originally hoped to be removing 70%. There is room for some further thinking about the criteria here.
Chris Hewett: There are also babies being thrown out with the bathwater. There are perfectly good projects that are likely to go ahead that are being told they are not needed, being called zombies when they are not. Yes, it is complicated and it is not all working.
Q18 Lord Cromwell: Just going back a step on the final point, Ofgem has not yet published its final version of its policy framework. Rachel’s crusade to get Ofgem to pay attention to dynamic line rating and the existing network is a very interesting topic that has come up today. I wish you luck in penetrating in the meantime and to get that considered.
If there were one word that I think would encapsulate what I am getting from you today, it is a deep sense of frustration: the assumptions are wrong; it is not holistic; planning is delayed; it is expensive; it is a nightmare; all of those things. Do you feel in your heart that there is any chance that we are going to meet the targets by 2030 or would you like to give a percentage probability of doing so?
Chris Hewett: I think absolutely we can. We are probably both optimists in this sense. Take the speed at which the technology can be deployed, particularly solar and batteries, in comparison with lots of the other technologies. You can build a solar farm and co-located battery very, very quickly. With the right framework, with the right connection agreements, we will build this stuff really quickly.
While Britain has been thinking about this, Germany has deployed 14 gigawatts of solar in 2023 and 16 gigawatts of solar in 2024. Germany has built 30 gigawatts, which is more than 50% greater than the UK has in its entire solar fleet. It has done that in two years. There is no reason why, from a solar and batteries perspective, we cannot deliver it very quickly.
Lord Cromwell: You are an optimist but there is too much in the way?
Chris Hewett: Yes.
Rachel Fletcher: I am also an optimist. The issue is not with delivering the projects when they have got the connection offer. The capital is there, the will is there and the cost of this technology is coming down all the time as well, which is another really exciting thing.
Alongside the frameworks that we have been talking about today, we need leadership. We need leadership right from the very top in Government and through Ofgem and NESO. The sense of frustration, perhaps, that you are picking up from us is because none of these issues is new. None of these ideas is new. As an industry, we have been talking about these issues now for at least five years, if not longer.
One of the things that has delayed progress is that a lot of the changes—for example, in technical assumptions when coming up with a connection offer for a project—have been left to the network companies to make. Frankly, that has not been high enough at the top of their agenda. As Chris says, a lot of their way of thinking about networks and network connections and development is based on decades of history and has not caught up with the times. I get the sense that one of the great things about the clean power 2030 mission is that it has mission control, it has central leadership, it has attention right at the top of Government. With that leadership filtering through, perhaps we can move a lot faster than we have done in the past.
Lord Cromwell: Could we just come back to the business of connections? I think we have talked about this and you have covered quite a lot of what I wanted to ask you already. I wanted to ask you about what your experience has been but I think we have done that.
You said, particularly Rachel but both of you, that it is not just about shuffling the queue, that there are all these other areas of the pricing and charging reform, a more holistic approach, more hard-hitting. I am just quoting back to you what you said earlier. Do you think that a standard process with deadlines and compensation payable if they are not met, would stand up and work?
Chris Hewett: I think it is necessary, yes. I must say a word in defence of the DNOs before we start criticising them.
Clearly the speed of change that is required is a strain on their workforce, and their resources and perhaps the skills to deliver some of this are lacking. Whether or not that is because Ofgem has not necessarily helped in them investing in this early enough, they have that challenge. That said, however, the service levels that our members receive from network companies are extremely varied—that is a polite way of putting it—and very bad in some cases. Months can go by; we do not get a response to emails. There are no regulatory incentives for them to deal with that. There are lots of regulatory incentives to protect the consumer, which is a good thing—we should obviously have that—but service to the generators which are trying to get the cheapest possible technology on to the network, which will help consumers, is absent. That needs to be improved.
We have seen a change in the rules in one area, which is helpful. A change is proposed for the rules about on-site generation. There is a threshold for assessment of impact on the transmission system for smaller projects, which, up to now, has been below 1 megawatt, which is typically a large solar roof or a community solar farm, in our world. The proposal is to move the threshold to 5 megawatts, which is something we have asked for for a long time. That is a very welcome change that will hopefully streamline the process for those smaller projects on the distribution network and on-site generation as well. That is helpful.
Lord Cromwell: I want to ask you about one more area but first I will ask Rachel to respond to the last question.
Rachel Fletcher: We also very much support that change. One of our areas of frustration is with the poor co-ordination between the DNOs and the TOs (transmission operators). We have a number of case studies in which it takes the DNO a year or so to submit the necessary documentation to the transmission operator, the transmission operator then takes ages to get back with the information that is needed, and then you end up with a connection offer being pushed back by four or five years. Just moving that threshold from 1 megawatt to 5 megawatts would mean that far fewer of our projects get caught in between two network operators, not being properly joined up. I would say, though, that projects above 5 megawatts might still want better co-ordination.
A number of the incentives around timeliness in the connections process do not bite when there is a hand-off between the two transmission and distribution companies. There is a need for stronger incentives. We have seen incentives around the speed of getting connection quotations to developers but we have also seen, quite often, that result in quite shoddy quotations that have not been properly thought through. I know that Ofgem is currently thinking about the whole suite of connection incentives. That needs a very deep relook, looking at not just the timeliness of quotations but the timeliness of actual connections and the volume of connections that network companies are making. All of these need to be incentivised, alongside removing that threshold.
The other challenge that—
Lord Cromwell: I will have to ask you to be quick or my Chair will tell me that I am taking too much time with my question. I have one more. Please, just your last point on that.
Rachel Fletcher: The other challenge is around the lack of visibility as a developer. I liken trying to get a connection offer to playing pin the tail on the donkey. Most developers find it incredibly difficult to know how long the queues are in different parts of the network. Where is the capacity sitting? That leads to speculative connection requests, which have exacerbated the situation that we are in right now.
Lord Cromwell: There is a transparency issue there.
Rachel Fletcher: There has been some movement but, again, not nearly enough. Ofgem needs to keep pressure on the companies to achieve it.
Q19 Lord Cromwell: I will brutally move us on, if I may. I just wanted to ask you about the RESPs—yet another acronym. They have a lot to consider, from industrial strategy to local stakeholders. They are spread out. How confident are you that they will be evenly resourced between them—and adequately resourced anyway—to do this extremely detailed job with a vast number of stakeholders to consider different policies? Will they be able to do it? Can they deliver?
Chris Hewett: There is a fear that there are slightly too many layers of planning going on here because there is also NESO’s SSEP— Strategic Spatial Energy Planning—and that is not going to be completed until 2026. Then there are the RESPs. If everyone is trying to ask the same questions multiple times, the risk is not being joined up. That would be our comment on this.
Rachel Fletcher: I agree it is a very complicated task. If it is done well, it could be incredibly helpful, but to be done well it has to involve developers, it has to look at non-grid build options for meeting local demand and connections, and it has to be frequently iterated because it is the kind of plan that the minute it is written it will be out of date. I agree with your point about it being a challenge. I think that if it could be done well, it could be very helpful.
Lord Cromwell: If we are being optimistic, as you say you are, the price of success is participation by a lot of people and that does take time. There is a tension there that has to be understood. Thank you very much.
Q20 Lord Best: My question is about the perceived lack of co-ordination between government policy and the regulatory processes for energy networks. Should the Government be providing greater clarity and more guidance to the sector, perhaps using its strategy and policy statement to get its messages across more clearly? Indeed, would you see that help with bringing together policy and regulation might come from the review of Ofgem’s role in the future?
Rachel Fletcher: We need co-ordination between Government, NESO and Ofgem. They need to have the same vision, which is not just faster connections but building out the system to accommodate low-carbon generation in a way that puts as little burden on consumers as possible. We need co-ordination around that vision and then clarity around who is doing what because the National Energy System Operator is a new entity in the institutional framework and it is still early days as to exactly how it works with Ofgem and Government. There needs to be that co-ordination around vision and then clarity around who is doing what.
I am not sure the SPS (Strategy and Policy Statement for Energy Policy in Great Britain) is the best vehicle. Quite often these things are quite hard to codify. I do not know what the plans are, by the way, to update Ofgem’s SPS—it has only just been approved under the previous Government—but I think what you are getting at is the need for co-ordination and clarity. It goes back to my point about leadership. If all three—Government, NESO and Ofgem—are pushing in the same direction, some of the delays we have had with implementation on the network side could be addressed that way.
Chris Hewett: Ofgem has a net-zero duty now. It has traditionally traded off the net-zero duty against consumer protection. There is an assumption that the stuff we are doing for net zero will incur costs to the consumer and therefore it needs to be traded off, which is no longer the case. I go back to the point that the cheapest way to generate electricity in this country now is through renewables. The net-zero duty is delivering the consumer protection duty, not just in the long term but the short term. I do not think that has filtered through the system yet. I think it is still seen in terms of trade-off. To quote Ed Miliband, it is now cheaper to save the planet than it is to destroy it. We should be doing this.
Lord Best: Ofgem’s role in that is fundamental.
Chris Hewett: Absolutely, yes. We have talked about incentives for the networks. Some of the fact that we have not invested in the networks—particularly the DNOs, the distribution networks—is because of that trade-off. There has been a reluctance to allow investment in the networks to enable the speed of deployment for renewables, and now we are paying the price for that. That is one example.
I agree with Rachel. This needs to be joined up from the top down. Everyone needs to be singing from the same hymn sheet.
Q21 Viscount Chandos: Very quickly, you mention co-ordination between DNOs, TOs and so on. More broadly, do you think the number of regulators and bodies involved in managing, overseeing and operating energy networks makes it difficult to deliver at the necessary pace?
Rachel Fletcher: I do not think it is the number that gets in the way; I think it is the clarity about priorities and what we are trying to do. We definitely see that some network companies are much better on this agenda than others, are much more innovative in their approach to connections and have tried a lot harder, for example, to give visibility of network availability in their area. Sometimes, having more players, when you have some which are pushing the boundaries and going a bit faster, can help to encourage the others.
As I mentioned, the NESO is a new entity. It has a very big role, particularly in the new plans that Chris was mentioning. Interestingly, Ofgem will regulate the NESO. That is an area that needs quite a bit more thought. What does that mean in practice? How does Ofgem regulate the system operator in a way that achieves what is best for the country, consumers and the energy system as well?
I do not think we have too many players. What we need is much more clarity about what we are trying to do, what is important, and hitting that sweet spot, as Chris says, between decarbonising and bringing costs down for customers. That needs a lot more attention.
Viscount Chandos: So it is poor co-ordination, not ill will between the different bodies—it is that lack of an overarching strategy?
Rachel Fletcher: I think so, yes. This is the kind of thing that can be solved with clarity of objectives and then somebody at the top who is willing to show a lot of leadership and keep people on track.
Chris Hewett: It is fair to say that it is a byzantine world, the regulation of the energy networks. We have talked about various different regulatory bodies and NESO. We have not talked about the code modifications. I will not go into detail on that, but basically there is a whole set of specific regulations that are deeply technical, for good reason, and quite often the devil lies in those details.
The management of that code system across the network is very hard for new players to enter. It is something that has basically been there for decades, and the people managing it are the networks and some of the companies that are large generators. Small generators do not generally get a seat at that table. Some of those tables are making decisions that can affect the viability of small generators, and small generators, in large part, are what is coming through. There is a whole new inquiry to be done on the code modifications and I advise it. I think it is worth doing. It is the complexity.
However, Rachel’s point is right. If there is leadership and there is clarity of vision from the top, which we are starting to get with the clean power action plan, that needs to be pushed all the way down.
Rachel Fletcher: Code governance can really slow things down when things are left at industry level. Ofgem has the power to step in and say, “There are some changes that are so important that we will force the pace and direction”. We need to see Ofgem using its muscle strategically to bring forward the changes that are needed.
Viscount Chandos: This is a subject probably not suited to added time, but this committee’s first report in the energy area, I think three years ago, identified concerns about codes. Am I picking up from you both that there has not been enough progress at all on that front?
Rachel Fletcher: The CMA picked this up in 2014. Again, unfortunately, there are very few new problems under the sun in the energy system; what is lacking is progress. The solutions are obvious. We need to get on with them.
The Chair: Thank you very much indeed. We have had a very efficient use of the time that we have had and you have given us some valuable information and some ideas to think about. Thank you very much indeed. I will close this session.
