17
Examination of witnesses
Raj Roy and Matthew Ball.
Q22 The Chair: Good morning. This is the Industry and Regulators Committee of the House of Lords. We are looking at energy issues and this morning we are taking evidence particularly on issues surrounding the grid. Our witnesses are Raj Roy, who is General Counsel for UK and Ireland at Centrica, and Matthew Ball, who is Senior Manager for Grid Policy at EDF Energy. Welcome to you both.
We will start with one of the issues that has come up in some of the discussions and the information we have been getting, and that is about connection. NESO (the National Energy Systems Operator) has recently been talking about this and changes are being proposed. Could you give us some indication of what you think of the changes that are suggested and whether these will help to meet the clean power targets, which we know are there and we know are challenging? I do not know who would like to start first.
Matthew Ball: I am happy to start. EDF supports the connections reform process. As a long-term developer of big projects, renewable projects and all sorts, we know there are lots of dud projects getting in the way of getting real projects going, and so we definitely support the principles of connections reform.
Our key point is to avoid any unintended consequences from the reforms. In particular, there are two main horizons in the reform programme, 2030 and 2035. We want to make sure that the reform programme that gets introduced allows for longer-term development as well and keeps those generation developers ticking along in the background because we know that we need to continue to add generation in the coming decades.
Raj Roy: Good morning, Lady Taylor, and thank you for the opportunity to be here today before you. I would start by observing that the question you have raised goes to the heart of two intertwined objectives. One is the issue of investment and economic growth, and the second is obviously the expansion of our energy infrastructure in the UK.
I will open by saying that the issue is not a new one. Access to connections to essential facilities is something that we have known about for some years and have been pressing for, for some time. What NESO has proposed, moving away from “first come, first served” for access to “ready and needed”, is sensible and certainly welcome from our perspective, particularly with that focus on the strategic need for the UK. There are some areas where we would say the proposed reforms could go further—I will touch on those in a minute—but the fundamental premise is right.
If we are looking at how oversubscribed the queue is, we have 750 gigawatts, which is four times what is required for the UK’s needs. We can see that in our day-to-day operations as to what the implication is for the management of the queue.
There are some areas, which I will just touch on briefly and we can explore further if that would be helpful, where I think the reforms could go further to flush out which projects are essential. First, we could look at the nature of the financial commitment that should be provided by anyone who is investing. Could we look at mechanisms such as “use it or lose it”, if you do have capacity but choose not to use it? That is a well-established mechanism. I used to work in telecoms before I worked in energy. That is a principle that applies to radio spectrum, which is an essential asset in telecoms. It is not a new principle.
I think you have had evidence before about the importance of the thresholds for when a project should come to the queue or not. We have certainly observed that with some of our business customers, private and public sector, which have relatively small projects. They do not necessarily have an impact on the distribution networks or the transmission network but they are thrown into the queue and their decarbonisation commitments are delayed as a result. There are some areas where certainly further work could be undertaken.
The overarching objective I would point to right now is the importance of execution. Ofgem first proposed action in 2023. Looking at it, I do not think it has moved much further along. These proposals are definitely welcome. We have to get into the zone now of implementation. I completely agree with the point about making sure that we keep an eye beyond 2030, but there is also an imperative to move forward now at pace.
The Chair: Do you get the impression that there is concern out there that there may be legal challenge here from people who are taken off the priority lists, lose their place in the queue or slip down in the queue?
Raj Roy: I look at this from the angle that any new policy intervention or regulation will always have an adverse impact on some stakeholder. Depending on the nature of that impact, they may well be considering their legal options.
What I would say here, though, is that the Government have said that they will look to underpin connections reform with legislation. If that is the case, that legislation will obviously be subject to a consultation process. That is the right route to understand the views of stakeholders. That will flush out whether anyone does have a credible challenge and whether that has legal merit or not.
Obviously, I cannot comment on what that challenge might look like at this point, but my starting point would be that the reforms are sensible. Any party that has thought about its investment, and can demonstrate and meet the criteria, should come from a starting point of recognising this as being a positive development.
Q23 Lord Altrincham: Thank you for coming in. We keep coming back to planning and building, as you can imagine. What barriers to delivering network infrastructure are imposed by the planning and consenting system? To what extent do these barriers relate to the resourcing of the various planning authorities, environmental considerations, or levels of community consent? What is your view of the Government’s proposals to address the barriers imposed by the planning and consenting system?
Raj Roy: First of all, I think the essence of your question is also recognised by the Government, in terms of the role that planning plays in whether projects move forward at pace or not, and the extent to which they can be an impediment to projects moving forward.
We do observe issues regarding resources and skills in local authorities and planning teams. There are a lot of consultees which have to be engaged in the process. If they are under-resourced and do not have the right skills to look at issues such as drainage or perform environmental impact assessments, those timescales get pushed out.
I think the best proof point I can give you about how important this is is that when a proposal comes forward to us for investment, the question that we and certainly I would always ask is, “Does it come with planning consent already baked in or not?”. We know that these processes can take a long time.
To bring it to life for you, we had a business customer who wanted to install a solar installation in their factory. In 2023, we put in a planning application in relation to that. We are now 15 or 16 months past that and still no further along with that planning application. I hope that gives you a sense of the fact that this is a real issue. The Secretary of State’s comments on 13 December about seeking to turbocharge the planning process are definitely very welcome and much needed.
Matthew Ball: I would definitely be supportive of that. We would defer to the network companies on their specific challenges, but what we are looking for as a generation developer is realism in the timelines that they give us. If they know they will have challenges in certain areas, they should give us a realistic timeline for delivering the infrastructure there. Again, from the generation side, we know that resourcing in planning departments in local authorities and other spaces is a big challenge. We definitely welcome the moves from Government to support that, whether through legislation or guidance changes, or through specific funding as well.
Lord Altrincham: That is very helpful. Do you think it is a resourcing issue more than an environmental or community problem?
Raj Roy: You have a couple of issues there. You have a resourcing issue and we also have to look, in this overall package of measures, at whether we have the right skills. That is something that should be looked at because this transformation that we are undertaking as a country—and it is a collective national endeavour—will require us to look carefully at our skills and capabilities. That principle should apply when we are looking at the planning process as well.
The Chair: Do you think it makes a difference to the planning delays that you are talking about whether it is a solar farm on the ground or whether it is somebody putting solar panels on the top of a building? Do you detect a general delay overall across the board, or is it for certain types of projects more than others?
Raj Roy: I do see general delay. That is absolutely right, Lady Taylor, in that regard.
This is where the point about skills comes in. As we start to think about potentially larger projects, more specialist skills are required. That is why, in the context of looking at planning, we should also look very carefully at what sorts of skills will be needed in order for us to get the views of consultees. To bring it to life for you, if those processes take a long time, we and other investors or developers will have to put together a second set of drawings and a second set of plans, and so it goes around again.
There is a genuine issue to look at here. When we undertake matters such as environmental impact assessments, do we have all the right capabilities?
Lord Cromwell: Just quickly on skills, is there not a differential between the commercial sector and the planning people in terms of the reward somebody can expect? This happens across all industries, that the commercial sector hoovers up all the good people. Is that an issue?
Raj Roy: I think that at the moment we do not understand what exactly is required going forward. When I look at this more generally, NESO has come forward with a SSEP (Strategic Spatial Energy Plan) and to me that is a very welcome development because what it is saying is, “We want to look at the system much more holistically”.
You are right, that is a consideration that we absolutely have to understand. What are the sorts of skills that are required? Are they distinctive? Are they likely to be more absorbed in the private versus the public sector? That is the analysis that is required—quite deep forensic analysis.
Lord Cromwell: My point is that you as a commercial operator will appeal for better expertise within the planning authorities, but you are part of the problem because the expertise they need is much better paid working for you than for them.
Raj Roy: I recognise the point that you are making in terms of contention for resources, but I would make the more general point that that will exist across all the different dimensions of this transition and it is something that we have to tackle.
Lord Best: The Government are bringing forward a planning and infrastructure Bill in this Session of Parliament. If there are legislative changes that will be needed, we have one shot at this. There will not be another one for a few years. If there are things to do with the planning system that require legislation, the industry needs to speak up. Now is the time.
Raj Roy: Yes, I would completely agree. It is very important that as part of this process, there is a full and wide-ranging consultation so that all of the relevant inputs can be obtained, so that we can design a system that is fit for purpose and as future-proofed as we can make it. We obviously live in a very dynamic and fast-changing world, but your point is well made.
Matthew Ball: I would just add that the changes introduced in the latest National Planning Policy Framework were welcome. EDF provided quite a big response to that as well and we are looking forward to seeing some of those changes bedding in. If there is a good step change in the coming year, for instance, in how that starts to flow through, maybe the conversation around legislation might be slightly different.
Viscount Thurso: Before I ask my question, I want to ask a very quick follow-up on the questions you have just had. I presume you are talking about the English planning system, bearing in mind that it is wholly devolved in Scotland and, I think, also in Wales. Therefore, my question is: do you have the same problem in all the countries, or do you see differences in approach across the different nations?
Raj Roy: It is a general point that we would observe. If you wanted more detail, I would be very happy to furnish our experience in different locations, if that would be helpful to you, in writing.
Q24 Viscount Thurso: Thank you. Do we need to introduce incentives to encourage generation and energy demand to be located closer to one another, reducing the need for additional grid investment, bearing in mind that, as you may by now have guessed, I come from the far north of Scotland, where we have a great deal of wind energy being generated and would very happily have businesses located. We heard in the previous session that zonal or locational charging would make our electricity very cheap. There is an obvious attraction in bringing the two together. What are your comments on that? Should it be done by locational or zonal pricing, and if not, how should it be done?
Matthew Ball: I am happy to start. There are some natural limits to where you can site generation. Solar is more efficient in the south and wind in more remote areas. CCGTs with carbon capture and storage have to be in certain locations. There is only so much you can achieve in terms of pushing siting to other places.
We already have strong siting incentives through the TNUoS[1] charging system. There is quite a steep gradient across the country on how much you pay for your TNUoS there. EDF’s view is broadly that we can get the benefits of better siting through reforming the TNUoS system and the geographical scope of the charges there, rather than moving towards something a bit more radical through zonal pricing. Our key ask is to make sure that TNUoS is more predictable and gives a slightly longer-term view that lets people see, “Okay, we know the next 10 to 15 years’ worth of charges are this”, and therefore we might site our generation slightly differently.
At this stage on the zonal pricing—I think you mentioned it, Chair, at the start—there is a lot of generation required to be installed up to 2030, and a lot more uncertainty about the revenues that might be derived for different generations in different zones. It will increase costs, we suspect, across the piece, and may also delay some of that investment as people understand what it might mean for their projects. I do not think this is necessarily the right time to introduce a change like that.
Viscount Thurso: At the moment I pay more for my electricity by being in Scotland, on the old basis that it is generated somewhere down in the south and it has to be sent up to me. In actual fact, we have been a net exporter of energy or electricity for a decade and a half now. Why am I paying more for stuff that we make and you are paying less in the south for the stuff you do not make? Is that in your company’s interest? Clearly, as previous witnesses have said, other people have interests in different directions.
Matthew Ball: Unfortunately, I am not a charging expert but it is definitely something that NESO could provide views on: how we have ended up where we have ended up, with the system that we have today.
Viscount Thurso: The transmission charges are greater for people in the north than in the south. I am not sure from the answers you have given whether you think it would be a good idea to put the consumer—which is basically business because domestic is domestic—closer to generation or to have fewer new wind farms in Scotland and have more of them in England, to be near where you might like to put a business. That is what I am driving at.
Matthew Ball: Yes. Probably the answer is both: move generation closer to demand where you can and incentivise demand to move closer to generation where you can, especially making sure that the distances between them are not too big so that you can minimise the amount of transmission that you need.
For example, the demand floor price on TNUoS charging is zero. One of the things that you could explore is releasing that floor and allowing the demand TNUoS charges to go negative, for instance, which would help with some of those issues that you have described.
Viscount Thurso: EDF would not be opposed to a proper system of zonal or locational pricing?
Matthew Ball: Probably we see reform of the existing system better than a move to a full zonal system.
Viscount Thurso: Mr Roy?
Raj Roy: I will just start by answering your question. I recognise there are lots of different views on this and some of them divergent.
Where we come at it from is that first, as Centrica, we are a current and future investor in energy assets, and we have a significant customer base of 7 million-plus customers in the retail supply market. Those are the two prisms through which we look at this. We do not have a fixed and ideological starting point for this. We are led by the risks and the benefits of changes to pricing arrangements, including the introduction of zonal pricing.
Through that lens, at the moment, we would say that the case for moving away from the current arrangements that we have is not established, is not made out. I think that is the right test to apply whenever you are moving from one policy to a new policy. Are the benefits likely to outweigh the risks and the costs? That is the angle that we have not yet established.
There are a number of issues that we need to look at. One is investor confidence, obviously. You introduce uncertainty and you have to look at the extent to which that has a chilling effect or otherwise, including in relation to financing and cost of capital. I believe that both the assessments undertaken or commissioned by the regulator and the Government show that the case for this is very sensitive to even a very small increment in the cost of capital. That potentially wipes out some of the benefits.
There is a very important consumer angle here, which is that at the moment we are not having this debate looking at the system in the round and looking at the retail market together with the wholesale market. We have a retail energy price cap in place today that is fundamentally national. If you introduce zonal pricing, with all of the novelty, it is unclear how those two things will interact with one another. We would say that that analysis and investigation must be undertaken before we make quite a sizable step to a different system of pricing arrangements.
There are other angles to this. A lot of the benefits that might arise are dependent on actions at the consumer level. If you think about the key infrastructure that is required at retail-consumer level, smart meters are very important if you want to start to realise the benefits of some of these changes. In our customer base, 40% of customers still have not elected to take one. We need to look at all of these things.
I would completely agree with the point that has already been made, which is we are not that far away from 2030. We are beginning to realise that time is passing quite quickly. Introducing this level of change, while we have all these other issues that the Committee is rightly talking about and has seized of, feels not to be the right thing at this point in time. Therefore, it needs much, much greater analysis to make sure that we understand the implications of what is being proposed.
Viscount Thurso: Can I just test that argument with you? That is the perfect argument for keeping the status quo for ever on everything. One thing, say, that Highlands and Islands Enterprise wishes to do is attract data centres to be near where there is a lot of surplus generation and use a battery interface. Under the current system of pricing, there is not a lot of benefit to Amazon, Google or whoever in going up to that part of the world. However, if one does say that in principle this is something that might be looked at, suddenly that changes that whole investment pattern and you start to put the jobs where the energy is, which is what is at the back of all of this.
I absolutely take the point you make that we have to get it done by 2030, but would you take the point that if we do not start looking at it seriously, we end up baking in the status quo by 2030?
Raj Roy: I think the status quo involves no change. So the other point I would make to you before I come back to your question is that some of the other proposals that are on the table will achieve some of the desired outcomes as well. One of the key principles that I would always say is relevant to any policy intervention is the principle of proportionality. What is the least burdensome or least intrusive way of getting to the desired policy outcome in this place?
We have a large series of transmission network upgrades that are planned. I believe that about 80 projects are planned. Nine are already well in train and we have another 68 that look like they are progressing well. We are making progress with the reform of the connections regime. Those are the things that in the first instance will start to encourage us to think about whether production is matching demand geographically. I think we have to look at that first. Then, as I said, if we want to look at zonal pricing, a lot more analysis needs to be undertaken because of the sorts of issues that I have highlighted here today.
The Chair: Lord Agnew, you wanted to come in?
Lord Agnew of Oulton: Yes. You speak in a wonderfully mellifluous and reassuring way, Mr Roy, but the reason it is urgent that we do something now is that we heard that there are potentially £50 billion of transmission upgrade costs that could be avoided if we used zonal pricing. The idea that you say, “Let’s just leave it, we have so much else going on”, I do not think is acceptable.
There are many priorities—far too many—but surely spending this sort of money on things that are extraordinarily ugly and intrusive and will remain an eyesore for generations, as well as costing a colossal sum of money, simply because it is inconvenient for people, maybe such as yourselves, to have to contend with zonal pricing; and then across on the wind side, which probably is not you, I do not know whether you do a lot of wind in your business today, but nonetheless we are paying huge subsidies for these remote transmission generators to not contribute to the grid. The whole thing is tied together. You made the point about subsidies being paid on domestic energy but surely this is equally important.
Raj Roy: The issue is very important, and it is right that it has been looked at. The point I am simply seeking to make here is I do not think that all of the analysis has been done that needs to be done. You have talked about costs that could be avoided. There are also costs that have to be borne and I think we need to understand that. It is also worth looking at other jurisdictions where this has been introduced. I am very happy to supply the Committee with some of the evidence we have gathered in that regard.
The Chair: By all means. Yes, we would welcome that.
Raj Roy: We have looked at, say, the case of Sweden, which did introduce zonal pricing. In some parts of the country, production did not match demand and you see much higher prices as a result. All these things need to be looked at properly before we make the change.
I am not saying at all that we maintain things unchanged. All I am saying in the context of the 2030 target is, “Let us prioritise appropriately”.
Matthew Ball: It is possibly worth recognising that there are changes coming down the line such as the SSEP, the Strategic Spatial Energy Plan. We welcome a focus on better spatial allocations of generation, which will help with some of those issues that you have talked about there.
Q25 Lord Best: Are Ofgem’s price controls sufficiently attractive to ensure the necessary network investment on the one hand, and distribution network investment on the other hand, to meet our clean energy targets? Are they sufficiently attractive? Does Ofgem’s Accelerated Strategic Transmission Investment Framework provide not just for today’s needs but, ahead of need, the anticipatory investment that would attract businesses to come here, in relation to both the network investment and distribution networks?
Matthew Ball: I am happy to start. I will probably leave the network companies to comment on the kinds of incentives and the price control returns that they are looking to get. Obviously, it is a role for Ofgem to set allowances that achieve what it wants to do.
We welcome a sensible level of proactive anticipatory investment in the network. That has been sorely missing for a while and moves toward that are very sensible. We have Clean Power 2030, which broadly relies on all of these projects going forward and being successfully delivered. There is already quite a big dependency for the UK or for GB on achieving that. What we do not want to do is forget the individual generator connections that need to be made. A focus on the big, interzonal transmission or cross-boundary transmission projects is welcome, but making sure that there is equal focus on getting projects connected is important.
On the distribution side, we think ED3, the electricity distribution price control that is coming up, will be very important. We will be putting quite a lot of focus on that through this year and next. At distribution level, it is making sure that the companies are investing ahead of time to make sure that when a customer comes to them and says they want to connect a heat pump, a battery, an EV or other technology that comes through in the coming years, they are able to do that very quickly, with limited bureaucracy and limited delays. Making sure that there is more of a focus on distribution is important.
There has been a lot of work on transmission in the past years. Hundreds of documents have been published by various people on that. We are now looking forward to a bit more focus on enabling the distribution journey for customers too.
Raj Roy: Thank you, Lord Best, for the question. There are two dimensions in relation to the price control regime and the scheme and incentives that surround it. One, as you have said, is investment. The other one is performance, particularly in relation to the distribution side of the house.
Historically, when we look at price controls, they have fundamentally been designed in a way that seeks to focus networks on maintaining operations. The shift that we see, with Ofgem towards looking at anticipated investment is a welcome one and, I think, one that is required if we are going to deliver on the targets that that we have. It is definitely a step in the right direction and I think it engages some of the other questions that you are interested in, in relation to Ofgem’s duties and objectives.
There is a separate question, though, about how price controls are designed with regard to incentivising performance levels. Although we completely recognise that some of these challenges feel quite new, both in transmission and distribution networks, there is an uplift in performance that will be required to deliver the outturn that we are seeking in the next four to five years. If I think about how connection offers are put together by distribution networks, how well they are attended to and how long they take, currently there is very little sanction or penalty for non-performance or underperformance. I would also say that when looking at network price controls, that is a very important element for us to be looking at.
I will give you a real-world example of that. We had a battery project that was scheduled to be ready for 2024. At a relatively late stage, the network operator notified us that it had not acquired the relevant equipment, and so the delivery date is pushed out by a year. Now, one of the things, as you will appreciate, that I looked at immediately was: what is the consequence of that? There is none. I hope that is a practical example for you of why I think there are two dimensions to your question.
Q26 Lord Cromwell: I think the connection queue, the congestion and the need for a reshuffle of that is widely accepted. Something needs to happen. I would be interested in your views. Are you happy with progress on that? Is too much focus being put on that and not on other things that need to go? Would a degree of standardisation and—going back to your last point—compensation where things are not delivered to time help unblock what feels like one big log in the jam here? Matthew, please go first.
Matthew Ball: Am I happy with progress? No, I think we would like to see more progress. Perhaps echoing some of the points my colleague made here, we would like to see better performance by the network companies overall. We do see delays to our projects, both transmission and the customers’ business. Those are barriers to getting new renewable generation on the system, which is what everyone wants and what the DNOs (distribution network operators) and the TOs (transmission operators) say they are also trying to facilitate.
Standardisation is quite an interesting one. We do know there are differences, particularly in the distribution networks, around how they treat customers, whether that is in timings or requirements for paper forms, you name it. Even those small differences mean that when EDF is helping a customer with getting a new heat pump, for example, they have to deal with these differences in different regions, which just add a bit of sand into the wheels of getting that done. Yes, we definitely encourage further standardisation, where that is achievable, by networks. I do not think that they are so dissimilar from each other that that could not be achieved.
Lord Cromwell: What about penalties for failure to deliver to time? Is that pragmatic or not?
Matthew Ball: It is a really interesting one and something that we are wrestling with at the moment, thinking about Ofgem’s end-to-end review of connections that is out at the moment. One of our concerns about penalties is making sure that those would hit the companies, rather than just be recycled back through to consumers’ bills. If they are able to back those costs off to consumers, that is not a good use of money.
Raj Roy: Thank you, Lord Cromwell, for the question. Your question starts with a focus on the connections. I would just go back to where I started, almost at the opening, which was that this has been known about for five years at least, and Ofgem first advanced proposals in 2023. As you opened up your inquiry, it encouraged me to look at how much progress had been made since 2023. The answer is that it had not, which is what makes NESO’s intervention very welcome indeed. Now it has taken the right step of putting a pause on new applications. That sounds sensible to me. A tactical pause is a very sensible move, to say, “Right, how do we get on, order this queue appropriately, and enable parties to go forward with confidence and start developing and building?” That is definitely a step in the right direction.
One of the watchouts that we have to think about is that at the same time, NESO is also doing its spatial plan work. Do we worry that the work on connections will be held up while the spatial plan analysis is undertaken?
Yes, the focus on execution, appropriate governance and oversight will be important. If I look at this as being a very large change programme, we would say that you must have very good governance and very good oversight to ensure that we are starting to meet deliverables. Why is this important? Again, some of the connection timelines that we are seeing are very long. There are a couple of battery projects where we have been quoted connection dates of 2037. We will have to do a lot better going forward. So, yes, on that front.
You then asked about the distribution network regime and how that might be set. Matthew’s point about how you set incentives and penalties is absolutely right. What we are saying is that there has to be sanction and there has to be consequence for non-performance.
I also think there is an ex-ante set of measures that we should think about and Ofgem should be thinking about. What are the distribution networks doing from the moment that they put an offer forward? At the moment, an offer is put forward and it somewhat disappears into a vacuum. We would say: “Why is a project manager not appointed? Why is there not a project plan that you have to advance, which we can both monitor and track to?” Because the only obligation is to put forward the offer within a particular period, there is no consequence for the lack of resource or the lack of focus in delivering the access.
Lord Cromwell: I think that is the difference between speculative offers and the planning oven-ready version, which is, I hope, what they are trying to push further up the queue, but we will see.
Just going to a different log in the log jam, if I can continue that analogy, the Regional Energy Strategic Plans (RESPs) have to consider and engage with everything from industrial strategy to local communities. They have to consult a huge number of people and to do that, they need to be resourced properly. Are they adequately resourced? If they are not, they are just another log—or another brick in the wall, to quote a famous song. If they are unevenly resourced between them, you end up with a postcode lottery as to whose projects move forward at a different rate. Are they adequately resourced and are they evenly resourced?
Raj Roy: The starting point is that your question is right: have we got the right resources for these initiatives, the regional plans? Is it the right thing to be undertaking them? If you take a step back the answer would be yes because we need to engage communities and we need to engage individuals. If this becomes a collective national endeavour, it will require all of us to be properly engaged with it. At the moment, that is a question that needs to be explored. We have articulated the concept of it, but do we fully understand what is needed?
The principle of it is right, from my perspective. You must look at the impact on communities, where the demand is likely to be coming from and who the right stakeholders are to be talking to, whether that is housing associations, building developers, construction firms, or business. All these parties have to be engaged. At the moment, there is still a question to be understood. What is the resource? What is the capability that will be required? It comes back to the question we were talking about earlier, as to understanding that.
Matthew Ball: We are looking for transparency on their progress. I know NESO is starting to make appointments in this space. I have former colleagues who are being appointed as leads for given areas, which is good to see. On the RESPs, it will be interesting to see what output they produce. It will be very hard to strategically plan, particularly at that domestic level. It is an impossible job to try to micromanage that from regional centres, and it will be interesting to see what balance they strike in practice between focusing, say, on the transmission distribution interface versus trying to get down to street-level directions. It will be a very bottom-up transition, and the DNOs are probably better placed for those consumer-level changes.
Lord Cromwell: I think the industry will have to accept that that will take a long time, and any plan will be out of date long before it is even published. It is the whole thing about, “It is not the plan, it is the planning that matters”.
Matthew Ball: Yes. There is an interesting link to ED3 as well. I think Ofgem has said that it wants the first RESPs to be a material input to that, and for that purpose, it is providing a transitional RESP to bridge the gap between where we are today and when the price controls need to be set. Again, we will be taking a good look at that and understanding exactly what that means for those DNOs when they are putting together their business plans.
Q27 Viscount Chandos: I am hearing that you feel the spirit is willing, but the flesh is weak. Is there sufficient co-ordination between Government policy and the regulatory processes and frameworks for energy networks? Should the Government be providing greater strategic guidance; for instance, through the strategy and policy statement?
Raj Roy: If I start with your observation on the intent and the delivery, the starting point is there is certainly the ambition, and I think we should be positive about what has been proposed for 2030. We certainly see it as a big opportunity. As with any change programme, there are dependencies, and the dependencies are quite rightly the ones that the Committee is exploring today, and the questions you are asking are the right ones to ensure that we can deliver on them. If the dependencies are met, there is no reason why we could not deliver on this.
To the point about the co-ordination between Government and regulator, there are a few observations I would make. First, it has been very helpful that the Government have been talking about growth duties for regulators. That is an important signal into the system as to how regulators design their models to encourage investment. The net zero duty is helpful in this regard, to align well.
There are some specific areas in regard to networks, where there is probably more of a role for Ofgem to lead and push that forward. A particular area that we can see is the interface between distribution and transmission. Sometimes, if you will forgive the expression, the connection is not necessarily always there between the distribution and the transmission level. Although Ofgem has a whole-system licence condition in place, there is a much greater opportunity to be driving that forward in a much more strategic way because we do see projects where the distribution network will see that there is a link into the transmission network, but on some occasions, it has not referred it onwards. Sometimes it can be a one to two-year wait before the implication for joining the transmission queue is properly understood.
There is work to be done in regard to that aspect of the design and operation of the networks, involving a conversation between Government and the regulator, but I think you have heard evidence generally that in approaching this we have lots of parties. It is very important that we are clear about the roles and responsibilities of all the different parties, and that the co-ordination and the level of dialogue are consistent.
Matthew Ball: Yes, I definitely agree with that. There are lots of new processes that have been set up recently for Government to give a strategic direction, whether that is through Clean Power 2030 or through its role in defining the eventual pathway through the SSEP, for instance. We are not necessarily short of direction.
Around your points there, particularly on the remit side of things, I think this is an interesting one where we do see, again, through the SSEP, for example, that Government, Ofgem, and NESO have slightly different roles and responsibilities. When we look at the SSEP methodology that came out at the back end of last year, for instance, you see quite a notable absence of NESO taking into account wider GB economy considerations—resilience, jobs, growth, et cetera. That would probably more naturally be a Government-type role, but NESO is providing that analysis to Government. There is possibly a bit of a missing link or a missing overlap between some of those things there.
Overall, we also definitely want there to be good independence of both NESO and Ofgem from the Government and from each other, to make sure that they are each providing scrutiny of the decisions that are being made, rather than progressing towards one goal without thinking about their individual remits and their individual roles in achieving that.
Viscount Chandos: Picking up on the issue of the independence of Ofgem and the role that it plays, which both of you have referred to, do you think the Government's review of Ofgem is an opportunity to address some of the specific issues that we are grappling with?
Raj Roy: Yes, the review is very timely in terms of the topics that we are talking about because it goes to the issues. Does Ofgem has the right resources? Are the duties appropriate for a net-zero world? Therefore, if we can approach that review understanding the implications of the topics that we are discussing for very effective sector-specific regulation, that strikes me as being an eminently sensible thing to be doing, to understand—reflecting some of the questions you have asked—do we have the right skills and capabilities within the regulator? Does it have the right focus on some of these sorts of topics going forward? One of the other issues that we can also discuss is code reform. What role is Ofgem to play in code reform? These are all the sorts of questions that I think we should be exploring.
It is critical that that review does not occur in isolation and that it is joined up with all the sorts of issues that we are looking at here today because I suspect it is being conducted in a slightly different part of Government as well.
Q28 Viscount Trenchard: There is a very large number of regulators and bodies involved in managing, overseeing and operating energy networks. Does the fact that it is a large number make it difficult to deliver at the necessary pace? Do you think these bodies work together smoothly to deliver network infrastructure?
Matthew Ball: We are not necessarily worried about the number of bodies that are involved. It is just making sure that they are each clear on their individual roles and what they are there to achieve, and that they are each hitting the right levels of performance when they are going through it.
As I mentioned earlier, there is a lot of change going on at the moment. One thing we are maybe looking forward to is a some of that bedding in and settling down over the coming years. Once we have made these changes and seen how they have bedded in and how they have made changes to the system, there might be, in the coming years, more opportunity to change a few more things.
Raj Roy: I would echo what Matthew said about the importance of clarity on roles and responsibilities. I do not think it necessarily is about how many agencies there are in these processes; I think it is about the clarity of the duty and the obligations and then, where appropriate, that there is clear co-ordination and proper hand-offs. The risk that you are rightly alive to is one of duplication.
Viscount Trenchard: Yes.
Raj Roy: That is something we should watch out for. The positive development has been the introduction of NESO, and we can see that in the work that it is doing. It has every prospect of going well but it should be paid attention to.
Viscount Trenchard: Could I also follow up on a reply you gave to Viscount Chandos about the energy codes? Do you think that the reforms to the energy codes have enabled them to be flexible enough to adapt to a fast-changing energy system? What do you think Ofgem will need to do to make these reforms a success, and to what extent will Ofgem need to direct change through its role in overseeing the codes?
Raj Roy: In dealing with the question of code reform, it is worth noting that the Competition and Markets Authority looked at the role of industry codes back in 2014-16 and identified that they needed to be made more transparent and to be streamlined. There is nothing particularly novel in what is being advanced here as regards code reform.
One way to think about the industry codes is that they are the arrangements that make the mechanics of the industry work. In order to improve them, transparency is critical. That is one element.
The second part, which goes back to the answer I was giving to Viscount Chandos, is: what is the role of the regulator? I do not necessarily see that you have to make wholesale changes. If we could understand that the regulator is well resourced to oversee code reform processes and to know when to intervene and to move things forward at pace, that could make quite a material difference.
You will have heard from me at the beginning about the threshold that is applied for some business customers, public and private sector customers, when they have decarbonisation projects, and the fact that they will end up being in a connections queue when their project does not have any material impact on the network at all and there is no reconfiguration that is needed. NESO has put forward a proposal that that threshold is raised so that these products do not end up in the connections queue. That change is being enacted through code reform, and that for me is a very good example. We will use the code process to deliver the outcome, the industry mechanics, but this is where it will eventually end up, with Ofgem. Provided it is appropriately engaged and has the right level of oversight, that change could go forward very quickly. I hope that brings it to life for you, how the role of the regulator and how it resources this area will make a difference.
Lord Cromwell: You heard the previous witnesses and one of them was quite emphatic about the fact that in their view, not enough consideration was being given to better use of the existing grid. Is that something you would also agree with?
Matthew Ball: Yes, and it features as one of the points on the transmission action plan, I believe. It is something we are definitely interested in. There are a scarce number of sites in substations where you can connect projects, and getting better use of those individual substation bays will be an important point. For example, we would like a bit more on allowing industry itself to arrange some of those things, if that is possible through the arrangement. Yes, it is definitely a thing we are very focused on, making sure that we are getting everything out of the existing network that we possibly can.
Again, with that 2030 view, I believe that is what the NESO has tried to do through its analysis. Again, at the end of this year, we will find out exactly how those spaces have been allocated. There might be some interesting lessons about how those have been used those most effectively.
Lord Cromwell: At a macro level, is there sufficient attention to this as an opportunity? That was behind my question.
Matthew Ball: There is now focus in the NESO on it. There is probably more focus in industry because it is struggling to get connections.
Raj Roy: Your starting point is absolutely right. Unused capacity within the existing assets is just inefficient and, therefore, in the context of a timeframe of 2030, we must look at all the options. That is right. The other point that I would just make in this context is one that we discussed earlier, which is the design of the price control regimes. What incentives does that create as regards the utilisation of capacity?
I completely agree with the premise behind your question and yes, I think it is going up the agenda. Ofgem is looking at all of these things. I would just encourage it to be focused on these changes because if we can create the right incentives to deploy and invest in our infrastructure, we will deliver the growth.
The Chair: Thank you very much indeed. It has been an interesting session and it followed on well from the previous one. Thank you very much for your time. I will draw the public session to a close.
