Business, Energy and Industrial Strategy Committee 

Oral evidence: Leaving the EU: energy and climate negotiation priorities HC 909

Wednesday 25 January 2017

Ordered by the House of Commons to be published on 27 January.

Watch the meeting 

Members present: Mr Iain Wright (Chair); Richard Fuller; Peter Kyle; Amanda Milling; Albert Owen; Amanda Solloway; Anna Turley; Chris White.

Questions 1 - 42

Witnesses

I: Paul Hallas, Regulation and Strategy Director, Centrica, Kevin Dibble, Director of Strategy and Communications, Engie UK, Phil Sheppard, Director of System Operations, National Grid, Ian Graves, Director of Business Development, National Grid, and Martijn van Gemert, Electricity Committee Member, European Federation of Energy Traders.

• Centrica plc - written evidence | PDF version (150 KB)
• National Grid - written evidence | PDF version (111 KB) National Grid also submitted to the ECC Committee’s energy inquiry.
• EFET submitted evidence to the ECC Committee’s energy and climate inquiries.
• ENGIE submitted written evidence to the ECC Committee’s inquiries on energy and climate.

Examination of witnesses

Witnesses: Paul Hallas, Kevin Dibble, Phil Sheppard, Ian Graves and Martijn van Gemert.

Q1                Chair: Good morning, gentlemen—it is all gentlemen, I am afraid, in terms of diversity. Thank you very much for coming to this first public session on our inquiry into exiting the EU and the implications for Energy and Climate Change; we are very grateful.  For the purposes of the record—I hope this does not take too long—could you just introduce yourselves and tell us which organisation you represent? 

Martijn van Gemert: Good morning.  My name is Martijn van Gemert.  Today I am representing the European Federation of Energy Traders.

Phil Sheppard: Good morning.  My name is Phil Sheppard.  I am the director of SO operations and I am here representing National Grid in a system operating capacity.

Ian Graves: Good morning.  My name is Ian Graves.  I am the director of European business development for National Grid, which is a completely separate ring-fenced part of our business that develops non‑regulated assets.

Paul Hallas: I am Paul Hallas from Centrica, parent company of British Gas. My current role is trying to understand what Brexit is likely to mean for the company, our customers and the market in which we operate.

Kevin Dibble: Good morning.  I am Kevin Dibble from Engie UK.  Engie is an international energy and services company based in Paris.  In the UK, we are a generator of 4,000 MW, the seventh largest supplier to business and the largest district energy provider as well.

Q2                Chair: Thank you.  Can you help us in setting the scene when it comes to our gas supplies? How reliant is the UK today on continental gas supplies?  Could you give us some figures?

Phil Sheppard: We export and import gas throughout the year.

Q3                Chair: Do we tend to be a net importer, certainly at this time of year?

Phil Sheppard: We are a net importer.  About 10 years ago, everything would be from our own continental shelf; we still had interconnectors.  Now at least 50% of our gas can be imported.  During the summer, we tend to export gas.

Q4                Chair: Please forgive me—it is my own ignorance—but 50% of total UK gas requirements is imported?

Phil Sheppard: It can be imported, yes.

Q5                Chair: Would that be predominantly from the continental gas supply, as opposed to other sources?

Phil Sheppard: Yes, we have much more import capacity or sources of gas than we need during a winter.  Just to set the high-level context, we have around 600 million cubic metres of gas capacity for importing and supply; and our demand today, for example, is around 360 million cubic metres.  On the coldest day, in a one-in-ten type winter, it may be around 465 million cubic metres.  That is made up of continental shelf, so mainly from Scotland and St Fergus.  We have the capacity to import a large volume of gas from Norway. We have two interconnectors to Europe that can supply gas that we can also export on. We also have three liquid natural gas terminals importing gas from around the world in ships that can land both at the Isle of Grain and in Pembroke.

Q6                Chair: I am trying to get a sense of how important that continental gas supply is relative to other sources, whether domestic or international. You mentioned Norway. How important is Norway to our gas supply?

Phil Sheppard: Norway is an essential part of the mix.  Because of that flexibility, the market can choose where to import gas from. At the moment, we are importing a large volume of gas from Norway.  That is the economic thing to do.  We are also importing gas from continental Europe, but at the moment there is not much liquid natural gas being imported from the three terminals. At the moment almost all of the gas that is not supplied indigenously in the UK is coming from Europe, including Norway.

Paul Hallas: The numbers come and go a bit from year to year, so bear with me because I am going to be approximate: roughly 50% from our indigenous sources and 50% from imports. Of that 50%, typically 30% might be from Norway, 10% from the continent and then 10% liquefied natural gas that is effectively frozen natural gas coming in on boats.  That is roughly the breakdown.

Q7                Chair: That is really helpful. Is this purely a commercial transaction?  Is this demand and supply where we require gas and Europe can sell it?  Is that just trade? To what extent is this reliant upon EU regulatory policies such as the gas solidarity mechanism? To what extent is it purely trade versus being governed by a regulatory environment?

Phil Sheppard: The trade happens underneath that regulatory framework.  Due to the integration of the market that is happening within Europe, there is standardisation.  For example, in order to facilitate trading, the trading day changed in the UK.  It used to be from 06.00 until 18.00 and it is now 05.00 until 17.00 because that is what the rest of Europe does.  There is a gradual direction of harmonising to facilitate the market and to make the market as open as possible to facilitate that.  That is one of the reasons that remaining as part of the European Network of Transmission System Operators for Gas to help set some of that framework—some of the codes that align the markets and make sure that we are talking about the same products and the same gas quality—is important in order to continue that trade.

Martijn van Gemert: It is the same for power, which we can talk about later.  For gas, as you said, the European regulatory framework is now being rolled out and what we want is that the rules for things like allocation of capacity on this side of the border are pretty much consistent with the other side of the border. You do not want to have different rules on each side of the border. We do not want to harmonise all the rules just for the sake of harmonising but, if you harmonise the rules, it will lead to more efficiency and more use of the physical interconnection. The physical interconnection is very important.  You also want to make sure that the use of pipelines is efficient as possible so that you are reducing the costs.

If you will allow me, I have a second point.  The physical aspect is quite important when it comes to numbers.  We can also provide numbers in writing afterwards to help.  There are also trading places, such as the national balancing points or the TTF, and those are places where you can trade contracts.  You can, for example, buy the gas on the TTF in the Netherlands and supply it in the UK or the other way around. From a trader’s perspective, it is absolutely necessary that there is enough depth in the market, meaning that there are sufficient players trading on one trading place. If there are sufficient players, the price signal is more efficient and it can go to the lowest possible price.  The relevance of the contractual liquidity in the market is also important.

Q8                Chair: To what extent is that contractual liquidity, as you call it, reliant on our membership of the EU and how much will that be at risk as we leave it?  Does that put at risk the short and medium-term supply of gas to the UK?

Martijn van Gemert: That is the million dollar question.

Chair: It is probably more expensive than a million dollar question.

Martijn van Gemert: It is too early to say.  I do not know where we will end up in the UK when it comes to Brexit and the outcomes.  Currently, there is uncertainty in general terms, which is a killer for investors being active in the market. If you have more uncertainty, the chances are greater that there will be fewer players and therefore less liquidity.

Q9                Chair: Gentleman, can I ask your opinion on this?  The Government have said that the security of supply is the key priority for their energy policy, quite understandably.  To what extent is security of supply at risk as a result of leaving the EU, certainly for the medium term?

Ian Graves: From the point of view of electrical interconnection, which is one of the primary activities that my team and I are associated with at the moment, the business case for building electrical interconnection is still good regardless of a Brexit decision because we build capacity and it exploits differences in prices in markets. It does not matter where the difference is nor what the flow is; it is just the fact that there is a difference.  The conditions for continuing to develop interconnectors still remain good and the general feeling across Europe and in the Government’s policy, I believe, is to continue to develop interconnection, and we welcome that.

Chair: We would like to pursue that.

Ian Graves: That should be part of a balanced energy policy where we also develop our own generation and renewables and other things.

Chair: Interconnection is a key point in this.

Ian Graves: It is, but it is not the only part.

Q10            Albert Owen: I have a series of questions, primarily to Grid but for others to comment on as well, of course, on both the interconnectors and the internal energy market, if I can link them both.  Grid has submitted a report to us in the written submission about the benefit of participation in the internal energy market. Can you set out the findings of that report to us?

Phil Sheppard: The Vivid Economics report?

Albert Owen: Yes.

Phil Sheppard: That was an independent report generated for us, before the outcome of the referendum.  It was based on a series of assumptions that were considered relevant at the time.  We are now working through the changes against what we currently know and we will happily share the outcome of that, once it has been completed, with the Committee.

The high-level findings were that being outside the internal energy market could cost consumers around £500 million a year, based on a number of aspects to do with interconnection, the alignment of products and services and market coupling. Those are the aspects of the things that we benefit from by having no tariffs or no taxes on trading electricity.  Ultimately, that report was looking at what would be in the best interest of consumers. It also helps highlight the things that we would like to try to preserve whether we are inside the internal energy market or something similar to that. What are the things that we ought to try to preserve in the interests of consumers?

Q11            Albert Owen: Do others on the panel agree with those findings and the starkness of them?

Paul Hallas: It is definitely correct to highlight some risks. I personally think that it is at the bleak end of the plausible envelope of possible outcomes.  Perhaps I can comment on that. In the big picture, the European internal energy market rules have worked pretty well to date in the interests both of the UK and its consumers as well as the interests of the rest of the EU. In a rational world, you would not like to think that the current beneficial arrangements would be dismantled or undone.

Perhaps it is worth highlighting, if you are not aware, the example of Switzerland.  I know the starting position is slightly different because they are not an EU member state, but there are very technically uncontroversial proposals that have been on the table for some time to allow Switzerland to benefit as a non-member state from these efficient electricity trading arrangements, and they have basically been stymied because of a political difference of opinion over things like immigration and jurisdiction of EU institutions. 

I just raise that as an example of saying that, in a rational world, it would be in the mutual benefit of the UK and the remaining EU to preserve the beneficial arrangements that we have.  This is a political negotiation, though, so you never know.

Albert Owen: We have been made aware of the Switzerland example and it is very interesting.  I want to get back to Grid on the submission that it gave to the Committee where it described market coupling as mutually beneficial to the UK and to the EU. To what extent are those benefits mutual? Is there any advantage to continental Europe from restricting the UK’s access to market coupling?

Ian Graves: From my point of view, we have been developing a project, as you know, with RTE in France.  What has been interesting about this process is that the Brexit news happened during the final stages of that project.  The French have been extremely keen to ensure that this project proceeds as well.  We are building capacity between two connected nations, which means that the electrons can flow both ways as we said.  It provides both populations the opportunity of benefiting when prices are higher in their country and prices are lower elsewhere.

That is important at times of system risk. There are some well publicised things going on in France at the moment with regards to nuclear outages and other things. The French are obviously anxious; and having a connection to the United Kingdom and to other countries in Europe gives them extra confidence that they will be able to maintain supply.  In fact, one of the things that we are keen to emphasise when developing interconnectors with any country is that it is not just for the benefit of UK consumers but for the benefit of consumers on the other side of the link, particularly as our renewables industry grows and we start to have more diverse energy sources in the UK, which then creates markets for them.

Q12            Albert Owen: The wider question is: are there any benefits to the rest of Europe for restricting UK access to market?

Ian Graves: We do not think that it is in either market’s interests to put any restrictions on the flow of those electrons, as we said.  We cannot imagine why they would want to restrict the flow so that it becomes potentially one way, and that changes the market dynamic and would be clearly to the detriment of their own customers.

Martijn van Gemert: Maybe I can add two points.  First of all, the good thing about electricity is that, with market coupling, it always flows from the low price area to the high price area.  If you refined the rules of market integration, you would actually come into a situation where there would never be a case that it would be the other way around. That is beneficial.

Over the last few years, the price difference between the UK, continental Europe and Norway was about €10 to €20.  The spreads, or the differences between the prices, were significant, so there is a large potential, if you couple those markets, that the prices will converge in the end.  Of course, total conversion depends on the total interconnection.  Currently it is 4 gigawatts of interconnection power, but if you increase that you may expect that the conversion will be heavier, and therefore you have a larger potential for lower prices in the UK.

On the other hand, your question was more about the benefits of Europe. There was a day—I think it was 12 December; I can get that straight in writing if you are interested—this winter when it was not only about the UK being dependent on the power flows from Europe, but the other way around.  You saw in one day that the power flows were such that the UK was helping the continent by exporting to France and the Netherlands during times of high demand, where they had some problems with their nuclear power plants in France.  A few hours later, the direction was totally reversed to help the peak hours in the UK when demand was at its highest.

Going back to the question, it is quite crucial that you have the flexibility of flows up and down, towards the UK but also the other way around. I do not know how Brexit will end up, but any impediments that lead to fewer possibilities for those trades will be a pity.

Q13            Albert Owen: That is very interesting.  I understand the flow of electricity, but what about the flow of gas?  Does that work in the same way?

Phil Sheppard: It does, but may I just finish off the electricity point around coupling?  We need to remember that the Republic of Ireland is part of Europe.  At the moment, the Republic of Ireland and Northern Ireland have a single market. They are effectively dependent on gas from the UK into Ireland.  There is also a market coupling project being run at the moment to try to integrate the total island of Ireland market with the UK market. Again, it is in the interests of consumers across both of those that we have that type of integrated market.  It is important to talk about going east but we need to look west as well.

Q14            Albert Owen: If we do not have the same arrangements, are you confident that alternative trading arrangements could exist?

Phil Sheppard: There will be alternatives.  Whether they are as beneficial as an integrated market is questionable.

Kevin Dibble: Can I comment on the benefit point again?  These things are notoriously difficult to quantify. We have gone through a period where we have seen net imports to the UK on electricity interconnectors and therefore, based on those assumptions, there is a benefit to the consumer in the UK. As we have said, we have seen signs where at times we have been exporting, so the benefit at that point moves to the opposite side.  That is where the mutual benefit comes about.

A lot of the price differential that we have seen over the past few years has come about through carbon tax policy and the differentials in the UK compared to the rest of Europe. Again, it is worth noting that, in a situation where there is more harmonisation across Europe either though changes in the UK regime or with the European scheme, there are some benefits, although the price differentials move away and you start to get a situation of perhaps more volatile flows and more marginal flows.

Q15            Albert Owen: Can I pursue the Irish dimension very briefly? You mentioned the coupling between the United Kingdom and the Republic of Ireland and, in particular, the internal market in the island of Ireland. Post-Brexit, once the negotiations are finished and the UK is no longer a member of the European Union, that means that Northern Ireland is no longer a member of the Union.  Would there be a special trading arrangement and do you see that involving the rest of the UK because it is importing via Northern Ireland from Scotland?  How do you envisage it?  I know it is complicated, but how do you envisage it as planners of the grid?

Phil Sheppard: BEIS is aware of the issue around how this might work and what the options are; and we are happy to work with BEIS through that.  However, until we are clearer on what the model might look like, it is difficult to say what the rules might be that benefit consumers on both sides of that, as well as traders. We do not want to make it more difficult than it needs to be.  The more complex it gets, the less liquid markets typically become.  We want to make sure that that is retained.

Q16            Albert Owen: I understand that you do not know the details, but there would be a special deal between the UK and the Republic of Ireland. You have talked about arrangements that work between France and various states, so why not have new trading arrangements post-Brexit with non‑EU members?

Phil Sheppard: Yes.

Paul Hallas: That is essentially the current plan.

Q17            Albert Owen: Who is planning that?  We have not heard many plans.

Paul Hallas: I am talking particularly about Northern Ireland and the Republic, building the integrated market on an all-island basis so as to comply with the EU market rules. There is a target date that has now been moved back to 2018. Those arrangements will comply fully with the EU rules.  It is important to recognise that, from a Northern Ireland consumer’s point of view, there are huge benefits in being interconnected with Great Britain in gas and electricity and with the Republic.  It is both of those things.

Q18            Albert Owen:  It is, while we are both members of the European Union.  My question is: does it change when one is no longer a member of the European Union?

Paul Hallas: That is the question. It should not in the sense that there would be mutual benefit in preserving the efficient trading arrangements, and it will be important both for competition in Northern Ireland and supply security that that is maintained as far as possible.

Albert Owen: The UK aspect of it would have to comply with the rest of Europe.

Paul Hallas: In general, if we can maintain coherent, consistent and efficient energy trading rules, that would be in everybody’s benefit.

Q19            Peter Kyle: Moving back to the UK and the continent, the infrascture that has led to the interconnectors and interconnections with the continent seems to have provided a security of supply but also some quite considerable cost efficiency implications.  When we get to Brexit, I can see the clear supply advantages because there is a mutual benefit, and we have talked about the mutual arrangements and the mutual need, but what about cost? Does anybody on the panel believe, once we take regulatory independence, that it will have a negative impact on the cost of supply to Britain of energy from the continent?  Ian, you look like you want to leap forward.

Ian Graves: There are two elements to the cost.   There is the question you were asking around the cost to the consumer.  If levies were introduced, which we unanimously advocate should not be the case, then of course those levies would be passed on to the customers and bills would likely go up. It is certainly too early to say whether they will be.  We have all stated a case where there is mutual benefit of those things not happening. That cost element should remain the same and energy should be traded freely between the two markets accordingly.

Where we have seen changes in cost, of course, has been due to the devaluation of the pound following the decision. These are significant projects, and any capital project or infrastructure project developer sitting in front of you will say that, since the Brexit decision, the value of the pound has changed and, as a consequence, the goods they buy in euros and the goods they buy in dollars have changed. Every time we see a major change in currency valuations, we re-evaluate projects and see whether or not it is still worth us investing the millions and billions of pounds that the National Grid seeks to do with our partners.  Going back to the actual question, until we see what those arrangements are, it is very difficult to say.  We would hope that it could be done in such a way that it did not increase the actual cost of the utility service.

Q20            Peter Kyle: Everything comes down to that period of ambiguity that we are going into now.  Everybody nods every time you mention “mutual benefit.” I can understand mutual benefit from one energy market to another, but these decisions are being taken above the heads of the energy market by Downing Street and Brussels, and the national Parliaments and Heads of State or Government across the 27 nations on the other side.  To what degree are these decisions about energy independent from the decisions that are taken above by the national state and the supra-national state?

Ian Graves: I will start off but Phil is probably closer to this from a system operator perspective. When I talk to other energy developers in Europe, if they are part of the national transmission business or the national system operator, they are much closer to their Governments than we are.  We are a private company as the National Grid. Clearly we have many close affiliations and we want to represent the UK well, but it is very much more intertwined in other countries.  In fact, I am doing a project with the Danes, and the Danish Government sit on the board of the Danish utility that we are working with and are actively involved in the project. Some of our partners are representing their nation, their electricity industry and their customers when they are talking to us.  That changes depending on the different nations that one is dealing with.

Q21            Peter Kyle: I asked the question—Martijn, you might want to come in on this—because we are assuming that there is a mutual benefit here, which indeed there is a strong case for, but, as a European ambassador said to me, “You have to accept that Britain is going into these negotiations, in terms of the big picture, wanting to have more freedom over the control of its border and immigration and maximum access to all the European markets. Our first priority is to protect our political project that we have across the continent.”  That is contradictory to the mutual benefit argument because there is another factor above it.  I do not know, Martijn, whether you believe that the higher level politics is going to impact the energy market and the supply, but particularly the market value of the product.

Martijn van Gemert: If it stays uncertain, it will definitely have an impact. There is also an institutional aspect of it, and please say if you are interested in that or not. Currently all the European TSOs and regulators are co‑operating in ENTSO‑E.

Q22            Peter Kyle: Sorry, what are TSOs?  We are all new to this.

Martijn van Gemert: Transmission system operators—I am glad you asked. The same is true for gas.  All the national regulators are united and co‑operating under the name ACER. It is not certain, but it could be the case—National Grid can comment, if you think otherwise—that we no longer join ENTSO‑E or that Ofgem, as the regulator, no longer joins the European regulators. In the mid to long term, that means that you are getting a bit disconnected from the discussions that the Europeans have on the continent about future market rules. You are a bit more disconnected and you are not at the table anymore when Europe decides to go left or right.  There is therefore an institutional inefficiency, and I cannot foresee the real risks, although you can imagine, when you do not have a place anymore.

Q23            Peter Kyle: Senior figures in large European countries, such as the German Finance Minister, have suggested that Britain needs to feel some pain from Brexit in order to disincentivise any other countries wanting to go down the same route and to show the benefits of membership. It seems logical that energy is one of those areas in which they might want to inflict a bit of pain.

Kevin Dibble: We obviously do not know how that dynamic will play out and whether it will affect energy.  We have not really heard much about energy in the whole debate.  That is why this inquiry is welcome, in that context, in raising the profile of the sector, the trading arrangements that we have described and the importance of maintaining them as best we can. There is a risk down the line, if any of those risks were to materialise, that those trading arrangements are not as efficient as they are today, which would affect the case for interconnection and would potentially impact somewhere down the line on cost to consumers.  For electricity, it would not necessarily affect the security of supply in the sense that we can develop our sources domestically. Gas is a bit more tricky because we are a bigger net importer of gas; so there is a more complex set of market arrangements. That is the broad picture with a lot of uncertainty.  Certainty on these things would be very helpful and energy is part of the negotiations.  Setting that stall out is why we are here.

Q24            Peter Kyle: I realise you will not be able to answer questions that Heads of Government are unable to answer at the moment, but we need to get a sense of the potential for danger and for risk in the period that we are walking into, which is why this report is happening at the early stages of this process.

My final line of inquiry is about where regulation is going.  We are not at the single market yet.  I believe it was promised by 2014, but it is now 2018 or perhaps a bit later.  Where is the future for the regulation of the energy market on the continent?  If we are separate from it, what would we miss out on or what would be inflicted on us?

Martijn van Gemert: Of course, we are in the process of implementing the so-called third energy package, the legislation package of liberalisation, and the UK was always a leader in setting those rules. We learnt a lot as a continent from the UK.  Currently, we are implementing all the network codes, and this is especially important for the National Grid. On the other hand, you have something like the EU ETS, so the regulatory framework for the price of carbon. In the end, that should incentivise renewables and carbon-free generation.  We are currently negotiating the regulatory framework after 2020, so every four years there will be a new form of European price for carbon. I know you have a carbon price floor in the UK, but that is related to the ETS: if you change the ETS, your carbon price will change and therefore the price of gas and coal will also change.  That is just one example.

Paul Hallas: We were talking, just before we came in, about the latest proposals from the European Commission which, for the time being, are mainly on the electricity side; so you are right in the sense that the EU energy market rules are not going to be static. They are evolving over time and will continue to do so. One of the primary drivers, for example, of this so-called winter package on the electricity side, in terms of electricity market design, ensuring that renewables are much more integrated into the wholesale market, which everybody would say is a good thing.  In the UK it is already the case. In that respect, it is mainly about bringing some of the other EU member states into the sort of position that we already see in the UK today.  I just give that as an example.

Q25            Peter Kyle: I have one final quick question.  Richard Fuller is not in his place at the moment, so I feel obliged to question on his behalf. Are any of you licking your lips for a freedom from the regulatory burdens of the present system within the European Union, which you believe is going to liberate us post-Brexit and allow us opportunities to do energy in a new way that you cannot at the moment?

Chair: Richard would be proud of you.

Kevin Dibble: I do not think we are licking our lips. The industry is already heavily regulated, as you would expect, and a lot of the regulation that we have in place in the UK, as has just been said, has led the way in terms of the model that Europe has gone towards. In that sense, there is not a huge cloak of regulation that would suddenly change how things happen. That is a direction that has been largely set by the UK in any case. There may be some individual examples that could be given here and there, but I do not think it is a major change.

Ian Graves: I would echo that.  As an independent developer, it has not really changed the portfolio figures that we are interested in. We are always looking to see. There will be opportunities as a consequence of these negotiations and all parts of business will seek to take advantage of those when they come along, but at the moment it is so early that it is difficult to see what they are going to be.

Q26            Chair: Peter embarked upon a series of questions that I think were important in terms of investment and infrastructure.  I want to pursue that quickly.  The Government’s industrial strategy, which was published this week, talks about changes to energy infrastructure and smart systems. The Government, quite rightly, want to “take advantage of the opportunities for a more responsive network. This offers the further prize of bringing prices down by making more flexible alignment of demand and supply—meaning less need for costly permanent stand-by capacity”. How is that compatible with leaving the EU and being part of an internal energy market?  Is it?

Paul Hallas: It should be compatible. Up until now, the EU energy market rules have focused mainly on what we call the wholesale end of the energy industry, i.e. the bulk end, and a lot of the running in terms of smart energy and so on has been done on a national basis. The Government have a firm commitment to see smart meters rolled out, with a target date of 2020. That will not change. There is a general trend of consumers and businesses finding more opportunities to produce energy for themselves, whether that be solar or battery technology. That trend will continue. I do not particularly see Brexit disturbing it.  My sense is that, at least as we see things at the moment, I doubt if Brexit will have a fundamental impact there because the trends towards de‑centralised energy and giving consumers more control of their energy are fundamental trends that will not go away.

Q27            Chair: In terms of de-centralised energy, will that be organised on a national basis or would it be on an EU-wide basis? In order to really reap the rewards, would we have to be a part of that?

Ian Graves: The money will be organised on a local basis, within a city or a community. It really is a 180 degree change in the way that customers, as us in this room, will start to think about energy over the next decades. The projects that Kevin’s company is involved in and other things that I am looking at for the future of National Grid are all associated with how we can work with customers and shape the right energy solutions in the future, which may or may not be part of a grid connection.

Kevin Dibble: I would agree. It is not really at risk from Brexit. There are social and technological drivers that are changing things already. We would say that the Government, with the regulators, should call for evidence on developing smart, flexible systems. There are a number of ideas and proposals for that, some regulatory and some stimulating innovation and technology, that would sit well, Brexit or otherwise.

Martijn van Gemert: I agree with what has been said. If you look at de-centralised energy and the development of that, there is another trend that is closely related to it and that is the word “flexibility.”  It gets a bit technical but I will try to explain. We would like to end up in a situation where every user of the system, whether they have a wind farm or a de‑centralised solar panel, is responsible for its balance.  You know that you cannot store electricity so, every 15 minutes, the grid has to be stabilised.  We would like to have, both on the continent and in the UK, a system where you are responsible for your own balance and you can manage your balance by buying or selling on the market or selling to someone else.

This might be far off, but it is interesting.  In Europe, there will be a cross-border intraday platform, meaning that, on the day, you will import and export flexibility over the border more efficiently than you can now. I can give an example of the Dutch and German border to make a point. It is actually quite difficult to import flexibility from Germany to the Netherlands because it takes an hour or even more. The solution of the cross-border intraday platform, which is part of the European project, means that this will be far more efficient and faster. One of the consequences of a possible Brexit, which we are already seeing right now, is that this platform will not be a reality between the UK and the continent.

In addition to the de-centralised trend, there is another trend ongoing of flexibility, asking for more flexible cross-border trade than we currently have.

Phil Sheppard: One of the things National Grid does, as a system operator, is publish future energy scenarios, which some of you may be familiar with.  In two of those scenarios, by the time we get to 2030 we are still expecting 50% of generation to be embedded in the distribution networks and 50% transmission connected. That trend is likely to continue because of the social drivers, regardless of Brexit.

Chair: Brexit is not relevant in this scenario.

Phil Sheppard: No.

Q28            Amanda Solloway: I would like to move on to governance of interconnectors and cross‑border trading arrangements.  Looking at the cross-border trading rules under the IEM, they are still being drafted, implemented and may be subject to future amendment.  I am just wondering: are there any significant areas of existing or potential divergence between the UK and the EU for the interconnection and cross‑border trading rules and policy under the internal energy market?

Ian Graves: From my last meeting over in Brussels about this, there has been some concern in the EU that the wrong incentives have been in place in mainland Europe, where interconnectors have been built between countries and they are just not utilised. The utilisation factor of some of the interconnectors on the continent is extremely low.

Q29            Amanda Solloway: Do you have an example of that?

Ian Graves: I do not off the top of my head, but we can follow that up later on outside the meeting. The legislation that was being developed in the third package is very much around the principle that, if we are going to build these assets, they should be used for the benefit of consumers. Purely from a UK perspective, our interconnectors are built as commercial entities so there is an incentive, whereby I build capacity and then let traders use that capacity to trade, make money, optimise their position and benefit consumers on both sides of the link. 

When I used to run a power station for a previous employer, I had an incentive to ensure that my links were not only built, but were available, flexible and ready to be used at any time.  We feel that that incentive is the right one because it encourages us to build the right assets and to make sure that they are available and have high levels of utilisation. That should continue regardless of the Brexit situation.

Q30            Amanda Solloway: Does continual abidance by the EU’s interconnector rules pose a significant risk to the UK if the UK is no longer able to directly influence the development of these rules?

Ian Graves: There is always a risk about what may happen further down the line but, fundamentally, the types of interconnectors and the way we use them is the goal of the European Union. Even if we were not in the debate, we would see things move towards that basis. As we have all said earlier in various different ways, both ends of the cable have benefits of it working in the way it works now in the United Kingdom and with the countries that we connect with. It would be hard to see why anybody would want to move away from that and introduce further barriers or changes. There is a risk that conversations will take place in 10 or 20 years’ time when we are not in the room and something could emerge differently, but it is hard to imagine why it would.

Q31            Amanda Solloway: Are there any viable alternatives to cross-border trading outside the rules under the IEM?

Martijn van Gemert: In principle, there are always alternative arrangements.  I am more interested in the slightly bigger picture in terms of what the key requirements are for security supply, liquidity and the lowest prices. I would not say that there are no alternative arrangements; they are always there and perhaps you miss out a bit if you do it differently.  Having access to the single market is the only road to fulfil those points that you have just mentioned like security of supply, lowest prices and liquidity.

Ian Graves: I would agree that it is about those three factors. If we decide that we are going to turn the page and start to design something new, whoever was designing it would still start with those three principles, whether it is an interconnector or another type of trading arrangement. I am sure economists will come up with some great things in the future, but at the moment there are not that many levers you can pull that drive those three things any better than the way we do at the moment.

Paul Hallas: What we are saying is that the arrangements that we currently have, and that the Government intend to retain through the great repeal Bill, and the arrangements such as these intraday things that are currently in flight, look like the most efficient ways to trade energy cross‑border, with benefits on both sides. As colleagues have said, there are always alternatives. If, for example, cross-border interconnector projects do not get developed as rapidly as some people think, then I suppose, with the advice of National Grid at the end of the day, the Government would have to procure more UK generating capacity via the capacity market auctions. We would find a solution.  It might not be quite as efficient as the arrangements that we have all been talking about but there would be alternatives. I would not worry about there being some fundamental risk to electricity supply security, for example.

Q32            Amanda Solloway: I have one final question.  Are the benefits of interconnection and cross-border trading rules under the IEM greater than the risk of becoming a rule-taker under the IEM? Paul is poised to answer.

Paul Hallas: I suspect I have to value the question at more than a million dollars but that is obviously the critical question.  It is very difficult to be that categorical about it at this stage.  This is a negotiation that, as we know, will be quite political and has not even started. It is difficult to speculate precisely as to how we should react when we get to the end.  In my view, the outcome that we ideally want in the interests of the UK economy and its consumers is where the UK in the future adopts the vast majority of technical internal energy market rules in order to continue to make efficient use of capacity and encourage investment.

I personally think that it would be quite risky to put ourselves in the position where we are a pure rule-taker and have to adopt rules that are made in future in Brussels where the UK will necessarily have less influence than we do today, but the devil is in the detail on that.  It is difficult to predict precisely how the negotiations will go.

Ian Graves: We would all be uncomfortable about merely following other people’s rules without the change to influence them, so we would urge the opportunity to have that influence wherever possible.

Touching on another point that you have suggested in the questions around certainty, any time these debates happen and there is uncertainty, major investors become nervous.  If there can be opportunities taken to re-assert our ambitions on interconnectors and other energy-related technologies that would benefit our customers at this time, then that would be most welcome, because we think that investment needs to continue during this negotiation period.  While the business case remains strong, there is nothing better than getting the support and clear direction that it is still British Government policy and the UK would welcome this sort of investment. That would encourage not only us but other people in the sector as well.

Q33            Peter Kyle: I have a very quick question. You have spoken about the uncertainty. You have spoken about the high stakes of the period we are entering into and the high stakes for our nation in terms of energy security, cost and the organisations that you represent. Are you actually engaging with Government?  Rather than passively waiting for them to decide what the outcomes are, are you telling them what outcomes you need as an industry and we need as a country in this process?

Phil Sheppard: Yes.

Martijn van Gemert: Yes. The electricity and gas markets have evolved into quite complicated markets, so the first stage is to have a good conversation about how it works physically, how it works contractually and what the risks are. It is not explained enough in 50 minutes. The first stage should be about asking whether we are on the same page and whether we understand the real risks. That takes time and we, as EFET, are trying to make them aware of the potential risks and benefits of this chapter.

Kevin Dibble: Engie UK are working on that as well.

Q34            Chair: Can I follow on from Peter’s question, which is an important one? At what level are you engaging with Government?  Is it at No. 10?  Is it BEIS officials or Ministers?  Is it the Exiting the EU Department?  Where are you doing this?  Is it aligned and co-ordinated?

Phil Sheppard: From my experience, we are talking to elected Ministers within BEIS.  We have been asked lots of questions and we have provided lots of information as opposed to clarity around what a position might be.  With all the questions that we are being asked, we ought to be sharing our opinions around what is in the benefit of consumers, what is in the long‑term benefits of the country, and how we keep prices affordable or drive that aspect of it.

Ian Graves: All the developers have come together and we hosted a meeting with BEIS—or rather it was hosted by BEIS—in London just after the vote where all of the interconnector developers talked about Britain being open for business as usual.  National Grid and other interconnector developers participated in that to show that our plans were still ongoing and that everything was not going to go on hold until after these conversations.  We continue to have dialogue with Members of Parliament for the areas where we are trying to connect from in the UK, as well as our peers on the continent. The system operator is another stakeholder for us and we are making sure that they understand, in National Grid system operations, the requirements of all the independent investors in this technology so that they can also make sure that our views are clear.

We have also not stopped investing in our European dialogue. I am in Paris tomorrow.  I am still very active in Brussels and in those countries where we are connecting, so that they understand the UK position and National Grid’s corporate position in investing in these assets, and we understand their consumers and their requirements so that, when we develop these projects, we get the right solutions.

Q35            Peter Kyle: You are a walking, talking interconnector, which is great. Do you get the sense from your correspondence and engagement with BEIS that they are equipped for the period that we are entering into?  Considering that negotiations could start within the next fortnight, do you get the sense that they have the personnel, the expertise and the resources that it will take to cope with the complexity of the negotiations that they are imminently going to be engaged in?

Phil Sheppard: They have asked us lots of questions and we have provided lots of answers. We are not in a position to work out how much commitment it is going to take from them to provide whatever the Government need overall to do the negotiation, I’m afraid.

Ian Graves: We will all have to work together.  This is a large challenge and, as with all large challenges, everybody has to work together.  As Phil has said, there is no evidence that they are not ready, but we will work together and I am sure that we will get there.

Q36            Chair: Gentlemen, I have two final questions.  The first one relates to finance. Yesterday the European Investment Bank announced that it had invested over £1 billion in the UK in 2016, which included £500 million for electricity transmission in northern Scotland to improve connections and another £500 million for the Beatrice wind farm off the Caithness coast.  What impact do you think leaving the European Union will have on investment from European sources, particularly the EIB?

Phil Sheppard: When we are seeking to fund large infrastructure projects, the EIB is just one of the sources that we would go to for the funding.  The treasury team in our organisation—I am sure there are similar arrangements in other organisations—will seek to draw funding from a wide range of things, and we are still confident that the UK is a good place to invest.  We also work in the US, of course, so in the two regions where National Grid are active in business development we are confident that we will be able to attract investment for the project.  Most of this sort of investment is done on a project-by-project basis.  The projects are attractive in the regions in which we work and they will get investment; and if they are not, then we probably need to re-think some of the projects that we are doing. At the moment, we are not seeing any lack of appetite in energy related projects.

Q37            Chair:  Is there a general sense that we can get finance from the EIB for particular projects, but if we cannot get it from there we will get it from somebody else, so Brexit will have no impact on this?

Paul Hallas: That might be going a bit too far. The EIB, since 2000, has provided something like €30 billion of funding to UK energy infrastructure projects, so it is pretty significant.  The EIB, as far as I understand it, finances projects in non-member states, so it is just a question of whether we will get a fair crack of the whip post‑Brexit. This is something that the Government will have to look at.  For example, there is a slightly technical thing where projects get designated at the European level as a project of common interest and then that unlocks sources of finance, so that is one of the things that needs to be looked into by Government. Can we continue to benefit from qualifying our projects in that way and therefore continue to access finance on a favourable basis?  The big picture is that, clearly, there is plenty of capital in the world and there are infrastructure investors falling over themselves to finance good projects.  Nevertheless, the EIB is not irrelevant.

Q38            Richard Fuller: Just to pull that out a bit further, is the issue with the EIB not that it is supplemental to a vast pool of global capital that is available to invest in infrastructure projects, but that it is available at a cheaper rate?

Paul Hallas: That is my understanding, but National Grid may be better placed to comment on the precise terms because they are more engaged in infrastructure projects.

Q39            Richard Fuller: The main attraction of the funding is that it is a lower cost form of financing.

Ian Graves: It can be, but we have confidence in our treasury teams to create the right deals that make the projects still viable.

Q40            Richard Fuller: We all know that there is plenty of money in the global infrastructure pool of capital.  I am just trying to tease out the specific attraction for private companies of EIB funding.  My suggestion is that it is because it is taxpayer-subsidised funding that you have got used to drawing on. Is that fair or are there other benefits of it being pooled capital?

Ian Graves: I would have to consult with the treasury team.

Richard Fuller: Perhaps you can consult and let us know.

Q41            Chair: That is an important point.  Would the EIB look at this on a project-by-project basis to assess how it prices risk, or is one of the criteria it would use that, if you are a member of the EU, you get a cheaper deal?  Therefore, would there be a cost to being outside that in accessing EIB funding?  That would be helpful.

Ian Graves: As Paul said, we enjoy the benefits of common interest funding at the moment for the projects; and some of those projects have been developed by states outside, but, because one of the member states has been involved, the project has still had that status.  It is unsure what will happen in the future but we will certainly follow that up.

Q42            Chair: Thank you. It would be helpful if all relevant people could follow that up.  I have one final question. Ian, you said quite early on, “Let’s see what the arrangements are” in respect of energy when we leave the EU. The purpose of this inquiry is to advise the Government on what is in the best interests of the UK economy, consumers both domestically and industrially, and in terms of our resilience with regard to energy. Give us advice. What do you think the arrangement should be? Is it the status quo?  Is it a change?  What should the priorities be as the Government negotiate an exit from the EU in terms of energy?

Ian Graves: We have all emphasised during the conversation so far that the current IEM arrangement has provided a solid framework for investments to be made.  The free trading of energy between markets has been helpful to everybody. We would all advocate—I am looking to my colleagues for suitable nods—that that arrangement continues because it is something that we have been able to build businesses in and we have seen benefits flow through to customers.

Paul Hallas: I would fully agree with that.  One issue that we have not touched on much this morning has been the carbon trading arrangements, so the European trading scheme.  The Government have still to take an official position on that issue, as far as I know.  Our view, and the view of a number of people at this end of the room, is that, if possible, the UK should try to remain within the European trading scheme.  One of the benefits of that will be that, from an economic competitiveness point of view, it is in the interests of the UK to have robust and consistent carbon pricing arrangements across Europe rather than having to paddle our own canoe.

Again, the devil is in the detail about whether we will be able to influence the rules sufficiently; but, for the time being, the UK is seeking to be very involved in those phase 4 negotiations. I am relatively positive. At the European level, the European Parliament, encouragingly, recently voted on some changes to the ETS for phase 4, which will be very beneficial and provide a more robust carbon price signal. Again, we have to see where the negotiation gets to, but our view would certainly be that the UK should try to remain in the ETS as long as it can.

Kevin Dibble: I would agree with that. Carbon pricing is an important point that I mentioned earlier, but I am sure it would be helpful to achieve a more harmonised approach and to recognise that domestic generation, which is competing with interconnection in terms of getting that right balance, is exposed to that tax, whereas interconnected flows are not.  At the moment, there is a bit of a mis-match in the arrangements.  Interconnection is obviously a crucial part of the diversity of supply that we have.  In terms of getting the right mix for post-Brexit, the harmonisation of carbon tax is really crucial. 

Phil Sheppard: If we cannot remain members of the internal energy market, we should keep as close to barrier-free trading as possible, with no taxes and no tariffs on imports and exports. We should keep as close as we can to market coupling, particularly for the island of Ireland, so that we can increase liquidity, reduce costs and improve affordability.  We need efficient trading, so we would still look to harmonising services and using common platforms. We need shared system services.  We have not touched on the security of supply but there are benefits for security in having common services across those interconnectors. Preferably, Ofgem should continue to represent the UK at ACER, the central regulatory authority of Europe, so that we have influence there. The National Grid should represent the UK in the ETSO organisations, with active participation even if we cannot be full members.  Being party to the working groups and being able to shape influence is still going to be very helpful.

Martijn van Gemert: I could not agree more. Do not play with fire on this topic.

Chair: Gentlemen, thank you very much for your time.  We are grateful.