17
Examination of witnesses
Frank Aaskov, Teodora Kaneva and Andy Manning.
Q57 The Chair: This is the House of Lords Industry and Regulators Committee. We are looking at issues surrounding the grid supply and the ambitious target for clean energy by 2030. Our witnesses are Frank Aaskov, director of energy and climate change policy at UK Steel, Teodora Kaneva, head of smart infrastructure and systems at techUK, and Andy Manning, head of energy systems transformation at Citizens Advice. Welcome to you all.
Perhaps we could start in general terms by talking about the companies and consumers that you represent. How do you think they interact with the energy networks? Do they get a good service? Would you like to open with an account of where you are coming from in terms of grid issues?
Frank Aaskov: The UK steel sector is relatively energy intensive, and steelmaking is particularly electro-intensive compared to a lot of other manufacturing processes. We use about 2.3 terawatt hours of electricity per year, which is equivalent to about 800,000 households, and we expect that consumption will roughly double as the sector invests in electric arc furnaces and decarbonises through that route. Connecting an electric arc furnace to the grid is particularly complicated, often bespoke, and needs a transmission connection because of the very high load. Among our chief concerns are the fees and costs that we face from the network, and connection issues in particular.
Generally, our members say they have a very good service from the networks and are pleased with the service we provide, but there are some issues I would like to emphasise before I let the other panellists speak. At the moment, the system is very congested. We get very long lead times—often a quote of up to 10 years—when we are trying to connect or upgrade a connection; we are told that local connection capacity is taken up so companies need to access connection points 10 kilometres to 20 kilometres away. There are also issues around the cost of connections themselves. When an inquiry is made about a connection, an initial figure is quoted but the final figure is substantially higher. This is partly caused by the global supply chain, which is overheating at the moment with a lot of grid connections happening globally, and that means an increase in the cost of connections. However, there is an obvious issue around the difference between the cost faced at the beginning of the quote and at the end.
Finally, I want to touch on requirements for securitisation, which is an issue some of our members have flagged to us. When a steel plant, for example, wishes to connect to the grid, as a demand user it is often asked to securitise that investment in order to protect the national grid from any costs should the contract be terminated. Generational assets are treated very differently. If you connect a wind turbine, the securitisation requirements will decrease throughout the build of that grid connection, whereas for demand users such as ourselves it will increase. It seems bizarre that demand users are asked to securitise VAT in their accounts. Basically, that locks up capital which could have been invested in other things but has to be held back while the connection is being provided.
Overall, however, I would say we are very pleased with how the energy systems work. Our chief concern is really around the cost of network charges and fees that we face.
Teodora Kaneva: We are similarly concerned about transmission network costs. To give you an overview, techUK represents the digital tech sector with over 1,100 members, many that are global tech companies. However, 60% are SMEs, homegrown technology companies. Our digital economy is currently valued at £99 billion gross value added. We employ around 1.7 million people in the UK, and we make substantial investments, particularly now with the AI opportunities action plan. We see this specific point of time as a great opportunity for the country to accelerate its investment and create the underlying infrastructure that is required to attract foreign investment to the UK.
Our members represent different stakeholders; we have some technology integrators within the energy space, and we represent most data centre operators in the UK. The data centre industry is the core of a digitally enabled economy. It is very important for cloud services, data and national security, and essential for accelerating digital adoption and supporting various industries. We have major concerns about energy policy being designed without industry in place, and I will go into more detail about that. We have substantial issues with grid connection. Largely, we see very different methods and operations between networks. Data centres largely connect on the distribution level and later on the transmission level, but as of late, they have been skipping the distribution level because there are so many issues, of which I will give some concrete examples. There are other issues also, such as changes in contracts, times and investment, concerns about transmission and distribution charges, and of course, energy prices in the UK are some of the most expensive in Europe.
Andy Manning: Citizens Advice is a statutory advocate for energy consumers in the GB market. Consumers have two key interactions with the network companies: the service they get and the price they pay, because everything is funded through energy bills. Fundamentally the service is about having a reliable network at its heart. I agree with my colleagues that we have a reliable network, and reliability has improved over a number of years now. In terms of service, the way consumers are going to interact with the network is changing and will change. Customers are looking to connect low-carbon technologies, for instance heat pumps, solar panels, and electric vehicle chargers, to local networks, and Ofgem’s review shows that there are some issues emerging there, which perhaps we can touch on later.
Where we have some concern is whether the charge for utilising the network represents value for money. What we have seen over a long period of time is that network companies are able to outperform their regulatory deals. Just recently we produced a report showing that the network companies have enjoyed a £4 billion windfall in their current deal, most of which is linked to the impact of how inflation works in the deal. We are getting a good service but have concerns about whether it represents value for money, and that is important for maintaining public confidence in the regulatory arrangements.
The Chair: What would you each give as your main priority for improving this situation? What change would make a significant difference to the people you represent?
Frank Aaskov: When we compare the UK energy network to similar European countries—for example, France and Germany—in general they are not significantly more expensive. Germany and France have similar costs. The issue that we face instead is in how those costs are distributed. In a very electro-intensive industry such as steel, our French and German competitors are exempted from network charges and network costs by up to 90%. The UK has only this year introduced an exemption of 60%, meaning that our network charges are three to 10 times higher than they are in Germany and France. So, if you were to fix an issue for us, it would be around the cost.
We are very supportive of connection reforms that have been put forward to try to weed out ghost applications plugging up the connection queues. These are early days, however, and it is difficult to predict how well these reforms might work. We must wait and see.
Teodora Kaneva: Data centre operators do not receive any transmission charge easement. We do not fall into the energy-intensive industries category—it would be great if we did—so we pay the full extent of transmission network costs, policy costs and distribution costs. We want to see a world-class infrastructure that supports the digital tech sector, specifically when we have such a big ministerial ambition to become a world leader in artificial intelligence and emerging technologies. We only have a very small window of opportunity to do that, and to leverage the UK’s world-class engineering and industrial significance. We are competing with global leaders, and we have to not only compare energy costs to them but the cost of our networks and how we manage and create policy.
Andy Manning: As you would expect, all local network companies maintain a priority services register of customers who may need more assistance, say, in the event of a power cut. However, if you look across the utilities, they all have similar but separate registers. We would like to see progress towards a universal priority services register to allow customers to register in one place and get the additional help they need, regardless of whether that is with an energy, water or telecoms company.
In terms of the points made about financial performance, we are calling on network companies to use some of the gains they have made under the current regulatory deals to support customers either through debt relief schemes or through targeted bill support.
Q58 Viscount Trenchard: Your customers are all different from each other, so my observation is that you do not have much in common. Could I first ask each of you about the experience of your members in seeking connections to the energy grid. What impact do delays to connections have on customers, and does this affect the attractiveness of locating a business in the UK?
Frank Aaskov: As I mentioned earlier, we are seeking to electrify our production alongside many other energy-intensive industries, which requires either increased connections or new connections. It has been particularly problematic because of the very high lead times we are quoted. What binds us here together is that we are all users of the energy network—domestic tech and traditional industry—but we are all suffering from significant delays, whether it is a household being told they cannot put in a heat pump because the local distribution network cannot support it, or a data centre failing to make an investment because there is no connection in the area they are looking to invest in. With an industrial process like steel, we are being told we have to wait 10 years to get a connection and ultimately the result is that the investment goes elsewhere.
Viscount Trenchard: Do you have one example of a company that has located elsewhere? The same business?
Frank Aaskov: I would just point out that the electrification of steel processing is relatively recent. It only started within the last couple of years, and we only have a few members doing it. However, a case has been publicised where British Steel was quoted a lead time in the mid-2030s. Obviously it is still negotiating with the Government over how to materialise that investment. It is also an issue downstream. All our steel companies are part of multinational companies, competing for investment with their sister companies across Europe and globally. If you are being told that it takes 10 years to get a connection in the UK, you are going to invest elsewhere.
Teodora Kaneva: For data centres, the experience of distribution networks and transmission operators is very different. Contracts change constantly. Even when you secure a grid connection, the contract may change, the contract dates and costs, the phased connections, so nothing is assured. For instance, one of our members obtained a grid connection offer and later the first part of that offer was delayed for nine months. A second tranche for the same campus was delayed for another eight months, and now the third tranche has been given a connection date beyond 2037. That has not only caused significant reputational damage, but data centres also make substantial investments in grid reinforcements, investments which cannot be recovered. On another occasion, a member was given a grid connection contract for a 10 megawatt upgrade, only to be told later that the DNO (Distribution Network Operator) could not provide the upgrade because it had to do a reinforcement on the grid. Our member was quoted £150 million, which is a substantial amount of money for a 10-megawatt upgrade. This is happening consistently across the board; different members have been quoted crazy sums for grid upgrades.
The most concerning part is that the cost of grid upgrades is not visible to us and therefore we do not know how the DNO arrives at the final amount. In addition, there is no dispute mechanism. In some cases, when you apply for a grid connection you may not receive any communication for eight months or be allocated a case officer for six months. That lack of communication not only puts your own investment at significant risk, it also makes it very difficult to secure other investors. It is quite important to standardise those processes and create visibility for such large investments.
The Chair: If you have any further details, an overall picture rather than just the odd example, it would be quite useful.
Teodora Kaneva: Yes, I can provide written evidence.
Andy Manning: This translates to domestic premises mainly where customers are looking to connect low-carbon technologies such as heat pumps, solar panels and electric vehicles to the grid. Ofgem recently completed a review in which some themes have emerged that chime in similarly although, as you have noted, at a very different scale.
Some issues that emerged were avoidable delays to connections, delays getting things done, and inconsistencies between the networks about how they handle things—for example, whether the network company has to do a fuse upgrade or a third party can do it. Sometimes connections cannot be allowed because of a lack of network capacity. So, there are similar themes.
The one thing I would say, in all openness, is that we do not see significant numbers of clients directly contacting us for assistance at the moment, but that may change as more people look to connect low-carbon technologies.
Viscount Trenchard: I take it that you all think there should be stronger incentives and standards placed on networks in relation to the quality of service provided to connection customers, including compensation for customers if specific connection deadlines are not met, or the network has failed to stick to the original budget or cost.
Teodora Kaneva: From our perspective, if it were any other industry, it would not operate in that manner. But again, some networks are much better than others. I do not want to generalise overall, but there is a significant reason to standardise operations between networks. Different types of industries located in different UK areas should not have to go through very different processes for grid connection. Contracts should be binding. Even if networks recover some costs for delaying, the amount will not be substantial; networks cannot cover the millions of pounds of investment that could potentially be lost given such massive delays.
Andy Manning: I will just add a couple of observations. Although, clearly, we do not have domestic customers wishing to connect to the transmission network, the incentives and rewards and penalties will end up getting funded through bills, so we are looking into this. To play to your point, if you look at the size of incentives, rewards and penalties under the current set of arrangements, they are pretty close to zero when you add them all up across the transmission system. So I tend to agree that there is a need for reform. I do not think anyone is particularly comfortable with how connections are working and yet the current incentive regime is not providing that signal.
Specifically on the issue of domestic consumers, there is a strong argument for looking at whether the guaranteed standards of performance can be extended. These are the payments you get automatically if you have a power cut that is over a certain length, so we should consider looking at that regime and how that could apply in this space as well.
Frank Aaskov: I would refer back to what I mentioned earlier around cost, the uncertainty of the initial quote and the substantial increases we have seen at times. In terms of making transparent investments, you need transparency on cost and costs that are binding, rather than initial quotes that subsequently increase substantially down the line.
Q59 Baroness Valentine: Are energy networks transparent enough about where they have existing capacity for new connections, and would it be helpful for businesses to have information on where they could more easily connect to the grid?
Teodora Kaneva: Some networks publish quite a lot of data but again, it is not standardised across the industry. There are naturally larger amounts of projects connected on distribution networks so we think those networks should be 100% digitalised and oversee 100% of their assets on the network.
Historically with a low-voltage system, predictability has been pretty easy, but now with decentralisation and having a lot more assets, including in particular the adoption of smart energy appliances, networks cannot predict supply and demand so well. We think real-time data should be publicised to make it much easier for businesses to see where there is capacity. The data does not always include grid applications, but we have been told that currently there is around 50% network visibility. In some areas networks have been seeking spectrum access for over five years now but because spectrum policy sits between different departments there has not been full recognition from the Department for Energy Security and Net Zero (DESNZ) and a policy direction from the Department for Science, Innovation and Technology (DSIT) to allocate specific access to networks to be able to use radio frequencies.
Baroness Valentine: You have sort of commented on this already, but should there be a greater standardisation of connection application processes by networks and better advice on those processes? Do you want to say anything further on that?
Frank Aaskov: We need to differentiate between the type of steel companies and production that is connected in general to the network. On the low-voltage side, standardisation would be very welcome. There are a lot of demand users that do not have the experience of making new grid connection applications and do not know what questions to ask and what information to get because it is usually a one-off application. Some members report that pre-application services are very helpful.
There are also limitations in terms of standardisation. When you connect a new electric arc furnace, it is transmission-connected, it is a very large connection and it is bespoke. There is really no option for standardisation there because it is a case-by-case basis. We would generally welcome it for the vast majority of business connections and low-voltage connections, but the type of connections we are looking at would always be bespoke.
Andy Manning: From a domestic customer point of view, this is often going to be part of connecting something else, so the advice needs to be part of that wider thing. We see from all our research that people are crying out for independent advice about the process of connecting low-carbon technology, and this should be a part of it. Similarly, people need a single place to contact if things go wrong, regardless of whether that is with the installation or the network. We need to make the domestic consumer part of that wider piece about connecting low-carbon technology as part of home upgrades.
Q60 Lord Best: You represent the businesses, the customers and the consumers; do you feel that the voices of those are being heard sufficiently, as balanced against those who represent the sources of energy supply? Who would like to go first?
Frank Aaskov: I am happy to go first. It is quite an easy answer: no. Often the energy code panels are obviously dominated by generators, network companies, and users at best will have one representative, often from Citizens Advice. In having one person to represent all types of consumers, whether it is large businesses with very large connections or medium, or whether it is down to the domestic consumer, there is perhaps a little imbalance there.
Lord Best: How could that imbalance be rectified?
Frank Aaskov: Citizens Advice perhaps has more of a view on this, but some of the energy codes panels do not have industry representatives at all. This could be made a requirement, and the necessary funding provided as well. It is very time consuming to be on these energy code panels, and some issues require deep expertise.
Andy Manning: You are right that there are some structural problems there, and in the role of a consumer advocate there is often an information imbalance. Companies will always have more money, and there is very definitely a resource imbalance whereby essentially they can get more people to look at those issues.
We need to look at the process, which should be actively designed in a way that tries to address those imbalances. So at the point decisions are made it needs to be easier for parties representing the consumers, like us, to appeal if we think a decision is not in the interest of consumers. At the moment it is very difficult for us to take that sort of action if we think it necessary, primarily due to the fact that you can open yourself up to costs, and things like that.
So a higher level overview is needed to look at the processes with a critical eye, that looks to specifically address the structural imbalances which we know exist, by making sure the processes actively seek to balance that back out.
Teodora Kaneva: The latest energy policy design—for example, the publication of Clean Power 2030, Connections Reform and the Strategic Spatial Energy Plan, all those very substantial and important pieces of work—mainly references energy supply and generation. For example, even in Clean Power 2030, data centres have been classified as critical national infrastructure, but the critical national infrastructure is not referenced in CP2030 as a priority project.
Further to that, CP2030 acknowledges that demand has historically been oversighted, but we still do not see enough emphasis on demand industries being strategically referenced in those documents. That creates a significant gap between critical national infrastructure recognition and grid connection as well, because the National Energy System Operator’s strategic alignment criteria for grid connection prioritisation largely references CP2030, which naturally also gives priority to supply and generation.
We want to see a whole-system approach where generation is planned with industry based on economic signals rather than where generation needs to be placed locationally. The Strategic Spatial Energy Plan considers industrial demand and specific spatial needs but does not fully align with specific industrial pockets of the UK and the industrial strategy. Those strategic elements should align between departments specific with the industrial strategy, otherwise industry has no voice in strategically feeding into those policies and localised growth is limited, so we see that there should be an alignment between both.
Andy Manning: Can I add a comment? I do not know if the other panellists agree, but I think that the new structure we have with the National Energy System Operator—NESO—will be a force for good in this with its now complete separation from all the commercial parties and sitting as arm’s length from Government. It is tasked with and will look at the interests of different consumers, including domestic consumers, so that structure will definitely help.
Lord Best: Would that be a step toward the triage system that the connections action plan recommended a couple of years ago?
Andy Manning: I do not have any particular insight on the triage system. Do my colleagues?
Frank Aaskov: No, it is still too early for us. To my knowledge, our members have not used it yet, but we welcome the reforms and ultimately think they might be good.
Lord Best: So nothing much has happened?
Frank Aaskov: No, not from our side.
Teodora Kaneva: We still do not know enough on the triage system, and Ofgem has recently published a fast-track grid connection system for critical national infrastructure. However, we do not know much detail about it.
There are new consultations, and NESO has significantly changed the connection process. Now it is through a milestone process rather than “first come, first served”, which is very welcomed from our sector. It is making some significant progress, which will definitely discourage a lot of land grabbing and projects being filtered through the system. But, again, the gated processes are largely based on need and the assumption that you have to have a strategic importance referenced in Clean Power 2030, which data centres do not have.
Q61 Viscount Thurso: We have had a lot of evidence through our inquiry regarding the potential benefits of locational pricing, or reforms to the network charges in order to reduce the amount of investment needed by incentivising generation and demand to move closer together. So, what would your view of these proposals be, and what would be the potential impact of these changes on your constituencies? I know what the answer is from steel, so let us start there.
Frank Aaskov: We recognise that ultimately we will be decarbonising the grid. There are loads more connections with demand increasing about four times as much as normal. There is a demand for more investment in grids, and questions about whether that can be reduced, and the constraint cost paid to renewable generators, for example, if you introduced locational pricing.
However, that being said, we are perhaps a little sceptical about the analyses presented so far because we have not yet seen an analysis by the Department for Energy Security and Net Zero to suggest that network electricity costs would be reduced through zonal or locational pricing. What we have seen, in effect, is the opposite. The evidence presented in the research paper published alongside the consultation documents suggest the zones that the steel industry operate in would have high electricity prices compared to the counterfactual.
This is the crucial thing, as you rightly said, about whether demand users can respond to that. The steel industry is not going to move. You are not going to move a mile-wide steel plant with existing assets, environmental permits, skills, jobs, people working there, ports, wider connections across the country because it may have slightly lower electricity prices for maybe a decade until investment catches up.
Viscount Thurso: Can I just follow through on that point? If you start at the beginning, pre-renewable energy all our energy requirements came from fossil fuels: coal was where Britain started, then gas, and so on. Obviously where you build that is where it is most efficient: nearest where you are going to use it. We are now in a world where, actually, the generation of electricity will be by the non-fossil fuel methods, which could be nuclear or renewable, and they are not near where something like a steel factory is.
But we have an obvious possibility of saying, “Well, we need a lot of data centres, they consume a lot of energy, so actually it is a very good idea to encourage them to be built where the energy is. On the other hand, we have a steel works which cannot be moved, so it would be a good idea to put a small nuclear reactor (SMR) into your mile-wide what-not”. In other words, there is a set of theories and principles that could actually be applied, but it requires long-term thinking by the planners starting now. Is that a thesis that you recognise?
Frank Aaskov: I very much recognise that if you started from scratch with new energy systems, without demand users and suppliers, the most efficient way of creating an energy system would be through locational pricing, whether it is zonal or nodal, and so forth.
The problem is that we do not have a blank piece of paper; we have existing demand users that are where they are. We have existing generational assets that are located where they are. We also have to recognise that the North Sea is not going to move: there are wind speeds, there are seabed leases up there that will be there regardless of whether we introduce zonal pricing or not, and it is most likely that that is where most assets will be placed in the future.
The question is then: do you want to introduce reforms which will ultimately be very disruptive and take the better part of 10 years to implement, cause uncertainty and penalise the existing users for the locations they have chosen based on past investment decisions or not?
In terms of your suggestion that perhaps you could have small nuclear reactors closer to demand centres, potentially you could, but first they are still in the very early days. The question is: how do we get there? If you are going to introduce zonal pricing now, you create a signal in, let us say, about 2030 or 2032. How long does it take to then build the SMR close to it? Is that a decade? So we are going to be penalised with higher uncompetitive electricity prices for a decade while we wait for generational assets to be located in our zones. That is why we are very concerned about this: while we recognise that potentially it could be a more efficient system if you started from scratch, ultimately we will be penalised with higher prices while we wait for generational assets to be completed.
Viscount Thurso: We will come on to the others, but would it be unfair or fair to characterise your view as saying that it is a great idea and a great theory but we need protection between now and then?
Frank Aaskov: If the Government are going to introduce zonal pricing, they need to consider shielding options for existing industries. I will let others speak—I appreciate this is a very contentious issue—but ultimately the concern that we have is that we are two and a half years into this and the Government have still not provided a cost-benefit analysis for energy intensive industries, nor for domestic consumers. We do not have a decision on it yet and for the first two years of this process they insisted that we would be better off under zonal than the counterfactual every time we spoke to them, when their own evidence suggested otherwise. We are now finally discussing shielding options: finally they recognise that if you introduce zonal pricing it will actually increase prices for energy intensive industries, which is perhaps not what the Government’s manifesto suggested that they wish to do.
Viscount Thurso: The plea is duly heard. Andy? Or would you rather stay out of this?
Andy Manning: No, I am quite happy to engage in this one because it gets back to your opening point about system costs: there is a “size of the prize” issue here, is there not? This is an opportunity to reduce systems costs by billions, and consumers pay for this so this is very definitely a consumer issue. That is broadly how we see it: we need improved locational signals to reduce overall system costs by incentivising flexible parties, interconnectors and storage to behave in the most efficient fashion. I recognise that it brings uncertainty which can impact investment costs so that is a genuine trade-off, but we need to do something about the locational costs.
Then, looking a bit more at the impact on consumers directly, the first observation, as Frank made, is whether there are options about shielding. We should not be ruling it out because of impacts on consumers, because you can just choose to shield it, but we do not think we should be looking to shield it: there are consumers out there who can be flexible with their load—with how they use the system—so they should be rewarded for that. This could be another tool for improving affordability.
The other aspect which is potentially underexplored in the REMA discussion is how we improve accessibility to that consumer flexibility. There are things we can do in terms of providing better information—consumer frameworks that make it more likely that more consumers engage with that and spread those benefits around more fairly. So we think the REMA programme should be looking more actively at not just assuming which consumers can make use of flexibility but whether we can we make policies that change that to make it a fairer distribution.
All that said, we have to remember that some consumers who cannot be flexible will need protection and we have to make sure they are not worse off through that. But a cleverly designed, targeted bill support programme, which is necessary anyway, can then hopefully protect those who may lose out.
Viscount Thurso: Presumably tech is highly mobile because a lot of what you need is in data centres, and the actual operators can be in any city in the world on a laptop. That is how Gen Z works.
Teodora Kaneva: There are very different data centres. So what we call co-location data centres host data of multiple companies, which service larger cities naturally, in the financial sector or others. They need latency, which means that they need to be in a proximity to the client to service them in a split second, so the transfer of data needs to be very fast. The location of data centres is based not only on energy capacity but also where their clients are located, what is the underlying infrastructure, skills, water supply and fibre connection.
There is a specific type of data centre which is called the language modelling one, or the training of language modelling—the training algorithms for artificial intelligence—which do not particularly need latency. Those are the types of data centres that, in some way or form, have been thought could be pushed up to Scotland given that there are the other underlying conditions of the infrastructure—skills, water and fibre connection—in proximity.
First, locational pricing would certainly not be something that will push us to go into any particular location, but our members do not hate the idea. In fact, a lot of them think that this is probably where we should be going to. Currently we do not see a lot of incentives for industry to move closer to generation. Yes, you will probably have less transmission and balancing costs, but other than that there is not much more incentive to be located near generation.
We certainly approve of decentralisation but we are also mindful that, even through reformed national pricing, Department for Energy Security and Net Zero has recognised that we may need a much larger system.
Viscount Thurso: Can I just ask, from memory, the parliamentary cloud system is a data centre in Dublin, is it not? It is not in the UK. There is quite a lot of government cloud that is actually stored in Ireland—certainly for the Scottish Government.
Teodora Kaneva: I am not sure, I will check and provide written evidence.
Viscount Thurso: There was a great security concern as to whether something in Ireland would actually be susceptible to the US laws on data. Anyway, the point is that is quite a long way away.
Teodora Kaneva: I am actually not sure. I will double check and come back to the committee.
Viscount Thurso: I think Ireland is quite a long way away compared to Wapping or whatever.
Teodora Kaneva: I will come back to you on that. However, I highly doubt that might be the case.
Viscount Thurso: It is different for the Bank of England systems, which are next door and are co-located.
Teodora Kaneva: It really depends how fast and how many transactions you are doing as a business or as a consumer. Our main concern is that transmission costs are extremely high. As I have mentioned, Department for Energy Security and Net Zero has recognised that we will need bigger generation and network built, even with reformed national pricing. Those transmission costs sometimes could be passed down to the consumer and then our consumers adopting digital services will pay twice: for high energy costs and for high services as well.
The Chair: Frank, you wanted to come back in?
Frank Aaskov: Yes, I just wanted to follow up on some points. The concerns that have been raised are around the impact of zonal and locational pricing on the cost of capital. The reports that the Government themselves have procured from consultancy suggest that basically, if there is a significant impact on the cost of capital, zonal pricing could be a net cost to the system and increase costs overall.
I would also add, when we are talking about shielding options, that our concern is again about how many people need to be shielded, because we are talking about some domestic consumers perhaps needing to be shielded. We are also talking about the fairness of whether consumers down south have to pay higher energy bills compared to up north. Then we are talking about energy intensive industries that need to be shielded, and about having to protect existing generational assets that also need to be shielded. All this needs to be paid for; you certainly used the benefit of zonal pricing several times over and we are concerned that the benefits will not necessarily be realised.
The last thing I would just add is that some analyses that have shown that zonal pricing would be beneficial have put in restrictions on the assumption of whether new grid can be built. In the past, the planning regime was very restrictive on that, so therefore we would assume that it would be very difficult and very tricky. The Government are trying to change that and wishing to have more pylons and connection throughout the country, so perhaps some assumptions in those reports around the benefits of zonal are a bit overstated.
Q62 Viscount Chandos: I would like to ask about the impact of network costs on energy bills, both for businesses and households, particularly in the light of the need for substantial investment in the networks. Should more assistance be given to both businesses and consumers that are struggling with energy costs?
Maybe we could start with you, Andy, in the light of Citizens Advice’s publication last week that has suggested that there was about a £4 billion windfall to the network operators as a result of the then Ofgem formula.
Andy Manning: Yes, I will pick that up first, then talk more generally about energy bills, if that is okay. Absolutely we are calling on the companies to make use of those gains to provide assistance to consumers. So there is the potential for contributing towards targeted bill support or looking at debt relief schemes.
More generally than that, there will be a need for bill support on an enduring basis as we go forward. As we know, bills overall are a lot higher than they were pre Covid. We welcome the Government’s announcement today on providing some support to broaden the reach of the warm home discount for this winter, but we believe the level of support needs to reflect people’s energy bills. So as well as going broader, the discount will need to go deeper. That helps with issues like REMA, because if you can relate the size of support to energy costs then it is an enabler for looking at beneficial changes. So network companies should voluntarily make use of their gains and we should be working towards a deeper and broader version of the warm homed discount.
Frank Aaskov: From an energy-intensive industries point of view, the question is obviously: do you wish to have a steel sector here in this country, with the resiliency that the steel sector provides, given the fact that we need steel for wind turbines, electric vehicles, for energy infrastructure in general, nuclear power plants, rail and so forth? If you do wish to have a steel sector, considering the resiliency that it provides to your general manufacturer supply chain, bearing in mind that both Covid and the Russian invasion of Ukraine suddenly severed loads of the global supply chain, you need to provide a competitive business environment for it to operate here.
One of the key factors of determining whether the steel sector could be competitive or not is the electricity prices that it faces. Overall, the sector pays between 30% to 50% more for its electricity compared to our key competitors in France and Germany. This is not compared to US steelmakers, or even Middle Eastern or east Asian steelmakers, but just to European steelmakers—which, by the way, also have elevated electricity prices compared to pre-pandemic levels. Part of what is causing that is the higher network charges.
A couple of years ago Ofgem introduced network reforms called the targeted charging review, where it moved residual charges on network cost from domestic consumers over to industrial consumers, in effect. That meant our electricity network charges increased by about threefold in a matter of two years and led to us having about 30 times higher network charges. The Government then intervened and said, “We will compensate you for some of those charges”, bringing them back down to previous levels. But that means we are still paying around three to 10 times higher network charges than our competitors in France and Germany.
Ultimately, if you want a successful electrified, decarbonised steel industry that actually supports the continuation of steelmaking in this country, you need to provide competitive electricity prices. That means that you need to compensate or exempt us up to 90%, like they do in Germany and France. So that is what we would point to as ultimately the key concern that we have on this issue: it is around the competitive landscape and the costs that we face.
Viscount Chandos: But who is going to pay to lower the cost for business? Is that consumers, the network operators that, on the Citizens Advice analysis, have made at least one major sort of windfall, or is it the taxpayer?
Frank Aaskov: That is a very good question. What we point to is the fact that European countries make exemptions up to 90% available for network charges. Other countries have chosen to distribute to other consumers. Ultimately, it is up to the UK Government to decide how that cost is borne—whether by the consumers, the taxpayers or other funding is not for us to determine; that is a political choice. But we do point out that, ultimately, we have our hands tied behind our back when our competitors are exempted for a much larger proportion of their costs compared to us.
Teodora Kaneva: It is also a matter of how efficiently the networks are run, how we create and manage but also strategically prepare for this new kind of industrial revolution. We also do not see a lot of inclusion of local authorities that naturally create their own economic plans for the future and have their own local energy plans as well.
Through some modifications on how energy is planned, again considering those industrial pockets and the industrial strategy, some inefficiencies might actually be corrected in the long term.
In the connections action plan, it was actually highlighted that networks may have underestimated the requirement for investment in additional capacity, relying primarily on historical connections. So there is also a sense of, “Is there a coherent plan for energy, specifically to attract businesses in the UK, or to retain legacy businesses in the UK?” It is detrimental to manage those largely unpredictable and invisible costs, so we do not actually know how much it will cost to the businesses that we represent in the future.
Given that we are now part of the energy-intensive industry category, we pay the full extent of those costs, but also we are large investors and pay for a lot of the grid reinforcement. So there should be some kind of a financial motivation for industries like ours to benefit from all those investments.
Viscount Chandos: Should that coherent plan be coming from Ofgem, or does Ofgem need direction?
Teodora Kaneva: This will have to be a cross-collaboration of Ofgem, NESO and DESNZ, but also DSIT and local government. Ofgem and NESO are working on the Regional Energy Strategic Plans, but again, we do not know exactly what the remit of that would be, and how local authorities could be involved. We know that we need more investment and resourcing at local level to be able to execute those industry plans.
Now we have Artificial Intelligence growth zones which different locations of the country will have to bid for, and we see this somewhat on another level for local authorities having to think about that and attracting investment and resource in their locations at the same time.
The Chair: Finally, we just have time for Baroness Harding.
Q63 Baroness Harding of Winscombe: I shall be very brief as I am mindful of your time, and actually this might be quite a leading question. Do your members, businesses and consumers find it easy to understand the roles and responsibilities in this energy system? I suspect I know your answer, so how would you give further clarity? Teodora, would you start? You were alluding to it just now.
Teodora Kaneva: From our perspective it is quite difficult to understand the multilevel departmental responsibilities and roles—probably more so in the last six months when we have been massively inundated with different, very short-term consultations, some running for around four weeks. It seems to me that our sector’s voice is not particularly heard. Our global tech companies cannot provide a substantial response through their own legal departments in a week’s timeframe, so some of our responses and our members’ responses have been very brief. We think that there should be a greater engagement with industry from the different departments.
Andy Manning: It is clear that when consumers are looking to upgrade their homes to connect new low-carbon technologies, just dealing with the installation there are myriad different bodies and accreditation schemes, and sometimes no accreditation schemes at all. So, looking at it from the consumer point of view, consumers just trying to install a heat pump, for example, we have to find a single point of contact for the consumer to go to if things go wrong, regardless of whether it is with the installation or with the network part of it. We need to make sure we have that single route for redress.
Frank Aaskov: Some of my members are incredibly well experienced and very competent energy managers who know how to manage grid connections, grid applications and engaging with the various bodies they need to. But there are also members who have less capacity—in particular, SME businesses struggle to understand all the various roles and where to go to: whether it is Ofgem or the network company, which part of the network company they should speak to, whether there is part of it that is managed by the Government directly or different departments within the Government. If one has operated with energy policy for a while, initially you think you know what you know, and then you realise there are a lot of things you do not know, and then you suddenly realise that it is incredibly complicated. So I would say reforms to simplification are always welcome in this space.
Baroness Harding of Winscombe: We are certainly on that journey, that is for sure.
The Chair: Thank you very much, and thank you for the time that you have given from your diverse perspectives; it has been very interesting to hear all three of you together. I will close this session.
