NATIONAL GRID – ESI0026 - WRITTEN EVIDENCE – UK ENERGY SUPPLY AND INVESTMENT

Executive Summary

National Grid sits at the heart of Britain’s energy system, connecting millions of people and businesses to the energy they use every day. We understand our responsibilities[1] to the environment and future generations, so we are working to develop solutions that enable an effective transition to a secure, clean energy system, in which nobody is left behind.

National Grid is supporting the UK’s economic recovery through investing and innovating across strategic infrastructure solutions which support key decarbonisation technologies, such as offshore wind connections, hydrogen, electric vehicles and Carbon Capture, Usage and Storage (CCUS), and electricity interconnection with our neighbours. In combination, these solutions will position the UK as a net zero leader globally, whilst delivering clear benefits locally.

We welcome the opportunity to respond to this House of Lords Economic Affairs Committee inquiry on energy supply and investment. While progress has already been made and the Government has published a raft of strategies over the last 12-18 months, these strategies now need to be translated into tangible steps to stimulate and support the significant levels of infrastructure investment and innovation required to achieve economy-wide emissions reduction at the best value to consumers, whilst retaining security of supply and climate change resilience both in transition and at net zero.

In summary, our submission to this inquiry sets out that:

• Clarity on business models and policy frameworks are required as soon as possible to enable cost effective private capital investment and therefore rapid at-scale deployment of key low-carbon technologies, including hydrogen, CCUS and Multi-Purpose Interconnectors (MPIs). We welcome the recent updates and consultations from Government which broadly support steady progression of these technologies, however, we are now entering a critical phase where speed and coherency are essential for their successful deployment across the UK before 2030.
• Delivering net zero requires a step change in how industry plans, consents, consults on and constructs infrastructure. But without considerable refresh, current planning policy has the potential to act as a barrier to infrastructure investment at pace. The draft revised National Policy Statements (NPS) fail to enable delivery of the scale and pace of energy Nationally Significant Infrastructure Projects (NSIPs) required to meet Government’s net zero target. We therefore support the recent BEIS Select Committee[2] recommendations to further amend the NPSs to make the Government’s commitment to net zero more explicit and to provide a clear and unambiguous direction to the Secretary of State to prioritise the importance of climate change in decision-making.
• Consideration should be given to the strategic underpinning issues such as reform of governance, regulation and markets, that can set us up for success in delivering net zero, whilst retaining security and resilience of supply both in transition and at net zero. Effective net zero governance with clear roles, responsibilities and accountabilities is essential to stimulate and support the significant levels of infrastructure investment and innovation required to achieve cost-efficient decarbonisation. Making net zero a central priority of the regulatory framework will also ensure the energy transition is delivered in the best interests of both current and future consumers and the wider environment. Equally a holistic review of the energy markets is required to support the delivery of the transition at the lowest cost for households and businesses.
• Climate adaptation and energy network investment is critical to ensure the resilience and reliability of all strategic infrastructure across the UK. Increases in pluvial flooding, storm events, temperature and water scarcity, among others, will all impact the operation of existing energy networks and associated assets. Without sufficient investment to maintain flexibility, availability and resilience, the aging energy network infrastructure may be more likely to fail under the stresses of weather and supply/demand pattern related risks.

The rest of this response provides detailed views on key themes relevant to the questions raised in the inquiry and on which National Grid has a shared interest.

Clarity on business models and policy frameworks are required for key low-carbon technologies

There is need for clarity on business models to enable and attract timely investment in UK infrastructure required to reach net zero such as hydrogen networks, CCUS transport and storage and MPIs.

Networks for Hydrogen

Hydrogen has the potential to help the UK to become a world-leading net zero economy, exporting low-carbon energy solutions in a global market and creating UK employment and supply chain potential.

Research to date both in the UK and abroad[3][4] suggests that the phased repurposing of existing natural gas transmission infrastructure to hydrogen, rather than building new, is the most cost-efficient way to deliver a hydrogen backbone[5]. National Grid Gas is running a full technical study to explore the capability of converting the National Transmission System to transport hydrogen and devising how to efficiently deliver hydrogen networks and overcome any barriers[6]. Efficient sequencing of the transition of this backbone is critical to allowing parts of the natural gas infrastructure to be freed up for the transportation of hydrogen whilst maintaining security of natural gas supply.

The publication of Government’s Hydrogen Strategy was an important signal to the local and international investment community of the UK’s commitment to developing a low carbon hydrogen economy, however, there remains a lack of regulatory and funding models for larger scale hydrogen transport and storage investment. These will support early demonstration of hydrogen across the value chain, which could unlock further innovation and cost reductions (such as coordinated and integrated network and storage activities) vital to enabling rapid at-scale deployment of hydrogen. This approach will also reduce disruption, minimise the risk that early assets are inefficiently sized and allow whole energy system optimisation as well as optionality to be built out for whatever pathway for hydrogen emerges.

The lack of business models for large and medium transport and storage for hydrogen networks also risks deployment of CCUS ahead of hydrogen and therefore could be a missed opportunity for dual development which would reduce costs and disruption for consumers.

Transport and Storage for CCUS

CCUS will play a critical role in decarbonising the economy, protecting and creating thousands of skilled jobs, and breathing new life into industrial heartlands. National Grid is an active developer in CCUS and is working with a broad range of energy and industrial companies to develop the world’s first net zero industrial cluster through the East Coast Cluster (ECC). Now selected as one of the first two clusters to be taken forward by Government, the ECC will play a major role in levelling up across the country as well ensuring UK leadership in the energy transition and the emerging global low-carbon and hydrogen market. The cluster will decarbonise almost half of the UK’s industrial emissions, whilst delivering more than 25,000 jobs per year by 2050 with an average Gross Value Added (GVA) of £2bn up to 2050[7].

We welcome the recent updates and consultations from Government which support steady progression of the CCUS transport and storage framework. However, we are now entering a critical phase where speed and coherency are essential for the successful deployment of CCUS technologies across the UK by mid-2020s. We are keen to work with Government to accelerate thinking towards the finalisation of agreeable business models and funding mechanisms by mid-2022.

Multi-Purpose Interconnectors

MPIs are subsea cables which can link up clusters of offshore wind (OSW) farms directly to two countries at once, thereby enabling offshore wind and interconnection to work together as a combined asset. By doing so MPIs ensure that the use of renewable generation is maximised and will support UK and EU efforts to meet 2030 and 2050 OSW targets while reducing the impact on coastal communities with fewer individual connections and less construction needed.

Whilst we welcome Ofgem’s recognition of the potential role of MPIs in its Decarbonisation Action Plan, MPIs still need a route to market and regulatory regime in place to enable the relevant investment for a new generation of interconnector to begin connecting large volumes of offshore wind by 2030.

MPIs are being considered within BEIS’s Offshore Transmission Network Review (OTNR) and in Ofgem’s Interconnector Policy Review. We recommend flexibility in the application of existing legislative and regulatory frameworks to enable the development and delivery of first of a kind MPIs. We are encouraged that Ofgem has indicated that it will open a pilot window for regulatory assessment of MPIs later in 2022 and would welcome certainty of long-term business models as soon as the assessment allows.

A step change in planning policy is required to deliver net zero infrastructure at pace

Delivering net zero requires a step change in how industry plans, consents, consults on and constructs infrastructure. The commitment within the Energy White Paper to review and update the energy NPS, was therefore most welcome. Whilst the revised draft NPSs made progress on several factors, significant further revision is needed to the current drafting to ensure timely planning, consenting and delivery of energy related NSIPs at the pace required to meet net zero.

As highlighted in the report from the recent BEIS Select Committee’s inquiry, we agree that the NPSs should be amended to make the Government’s commitment to net zero more explicit and to provide a clear and unambiguous direction to the Secretary of State to prioritise the importance of climate change in decision-making. The need case for energy NSIPs must be strengthened to reflect the urgency of the Government's decarbonisation targets, the need for new energy infrastructure and to ensure security of supply during the transition. Greater clarity and authority on the need case will ensure planning examinations focus on the impacts of infrastructure, as well as the impact of not investing in infrastructure on security of supply, rather than the principle of development. This will remove the need for often extensive and detailed debate during the project development phase and ensure that the NSIP regime works effectively and enables timely consenting for major projects.

We also support the BEIS Select Committee’s assertion that the NPSs should be further updated to ensure they are aligned with the latest policy developments and co-ordinated offshore transmission from the OTNR. We also consider that the outcome and recommendations of the Holistic Network Design (HND) should be embedded into the Energy NPSs. This would clarify the underlying need for the infrastructure within the planning process, and ensure this was considered alongside the societal, environmental and visual impact mitigations within the Development Consent Order (DCO) approval. Local consent officers should have due regard to the HND recognising the national requirement for the infrastructure, as well as the local impacts.  Clarity is needed on how these will, or should be considered by promoters, stakeholders, examining authorities and decisions makers involved in the development and delivery of NSIPs.

Additionally, we must ensure the NPSs reflect the need to bring communities, which host this infrastructure, with us. The draft NPS should look to provide clarity on the appropriate approach to community mitigation, currently they miss the opportunity to set out clearly in policy what the Government requires of developers and deems an appropriate approach to community benefits.

Comprehensive reform of governance, regulation and markets will underpin our success in reaching net zero

Net Zero governance

Effective net zero governance is essential to stimulate and support the significant levels of infrastructure investment required to achieve cost-efficient decarbonisation, whilst retaining security of supply both in transition and at net zero. Current governance must be reformed with clear roles, responsibilities and accountabilities established for all parties. There is a need to plan strategically across energy sources and different sectors of the economy; across central government, devolved administrations and local government; across regulatory regimes and markets; across the skills pipeline and the supply chain and to engage with the public to improve awareness and support for an effective net zero transition and destination.

Currently, there is no single body within the energy system which has overall accountability for providing a holistic and strategic view of how markets and infrastructure should develop over the long-term to achieve Government’s net zero goal in the most resilient, affordable and timely way. Provided it coordinates industry-wide inputs and views and has the right skills and capabilities, a Future System Operator could potentially fulfil this role, ensuring consistent and coordinated long-term advice and strategic planning across all energy systems, including identifying where investment ahead of need or to support a secure transition is required to deliver overall value for money for all energy consumers.

Government must also collaborate and co-ordinate across a range of actors and sectors to ensure effective alignment with regulatory frameworks and net zero delivery. We recognise that there have been recent examples of positive cross-Whitehall working including the work of the Office for Zero Emissions Vehicles (OZEV) and the OTNR. This co-ordination and collaboration between stakeholders ensure knowledge is shared, issues are identified early, proposals are developed which work across regions and sectors and are implemented quickly and effectively.

Regulation

Appropriate independent economic regulation, which is clear, stable and forward-looking will be vital to achieving the UK’s net zero target, as well as ensuring that the UK is seen as a positive destination for inward investment. Ofgem has an important role in supporting decarbonisation throughout the energy supply chain, from production, to transportation (via existing and new networks) through to end use by consumers in homes, businesses and industry. Ofgem’s role, responsibilities and duties will need to evolve to reflect this. To improve alignment between policy outcomes set out by Government, we support the recommendation by the National Infrastructure Commission and the House of Lords Industry and Regulators Committee for the strengthening of Ofgem’s statutory duties to explicitly support the delivery of the legally binding net zero target. This clarification of statutory duties, alongside the proposed Strategy and Policy Statement (SPS), as set out in the Energy White Paper, would help ensure that Ofgem has due consideration of the need to serve consumers through supporting efficient, timely delivery of investment to help meet decarbonisation targets through a fair and just transition whilst maintaining security of supply.

Regulatory support is also needed to provide early certainty to the delivery and supply chain to allow for innovation and efficiency in net zero technologies. A prime example is the effort to coordinate offshore wind connections in the North Sea to the East Coast, where regulatory clarity is vital to support innovation and delivery of the vast volumes of cable technology required to support the net zero infrastructure in the region.

Another example is the steep ramp up in growth of a hydrogen economy from 2030 required to meet 2050 projections. Given the long lead time associated with constructing shared network assets, and phased repurposing of existing natural gas assets the most efficient solution, the work underway today needs to continue at pace if conversion is to begin in 2026 to ensure the potential for a backbone network to be in place by mid 2030s. An appropriate regulatory and licencing regime that unlocks private capital for investment in hydrogen is needed by 2026, with a clear roadmap of ongoing regulatory commitments beyond 2030.

Market Design

The transition to net zero requires holistic thinking right across the energy system, including the design of the energy market, to ensure the transition is efficiently delivered, whilst maintaining security and resilience of supply. In the case of market design, we are at an inflection point where increasing volumes of renewable and low carbon generation are fundamentally altering both the physical and financial dynamics of the system, and the next generation of low-carbon and flexible technologies and business models need to be innovated at pace.

Existing market mechanisms (e.g. Contract for Differences) have proved highly successful in securing investment in renewable technologies since they were introduced, but as the energy system increases its reliance on renewable technologies, consideration should be given as to what changes may be needed to best serve the next phase of the transition. Energy markets must be designed to encourage investment in further innovation and in immature technologies that will facilitate the transition, as well as ensure stable and consistent supply. Any review must be done holistically, taking into account all parts of the energy markets (i.e. wholesale, retail, capacity and balancing) to ensure that we maximise the benefits, such as reduced cost and improved resilience.

Energy network investment is critical to safeguard resilience of a decarbonised energy system

Our transmission networks are currently resilient and reliable. Robust design and operation standards help ensure security of supply while strategies are in place to adapt to climate change risks on infrastructure assets. However, the criticality of electricity to society out to 2050, where over 30% of UK citizens will likely have electricity as their only source of energy, will mean that any loss of electricity supply will have a much greater impact[8]. This shift in criticality, together with the need to adapt to the unavoidable impacts of climate change means we need to closely examine the resilience of our electricity system and not assume that current engineering and characteristics of the network will be fit for purpose between now and 2050.

While there are some measures in place to provide the resilience of certain aspects of critical national infrastructure (including energy), in terms of resilience to climate change, many of these measures are voluntary such as the Taskforce for Climate-related Financial Disclosure (TCFD) although government has committed to consulting on making this mandatory. As such, there are l gaps in policy that should be addressed to mitigate the potential risks associated with the transition to a decarbonised energy system while ensuring network resilience. We have identified a number of areas where more could be done to protect the resilience of our energy supply:

Network infrastructure update and transition

• Increased investment is required to maintain a secure and resilient network as the transmission network grows and becomes more reliant on computer systems for its operation and therefore the risk of terrorism and malicious attack through cyber-attack becomes an increasing threat.

Climate adaptation

• External analysis shows a threefold increase in significant events between 1980 and 2019. An increase in fluvial and pluvial flooding and storm events will heighten the risk to loss of supply by damaging energy assets and affecting above and below ground infrastructure.
• Without sufficient investment to maintain and enhance resilience, aging energy network infrastructure may be more prone to higher levels of failure under the stresses of weather-related risk.
• Gradual climate changes such as increases in temperature and water scarcity, will impact operational ratings of electrical circuits; operational risks to gas compressors; operation, availability and patterns of renewable generation, solar production and the requirement for nuclear and gas generators during the transition. For example, vegetation will grow faster in a warmer and wetter climate and strategies will need to evolve to avoid overhead line clearance or above and below ground infrastructure infringement and obscuration of gas pipeline marker posts which increases the likelihood of third-party infringement.

System interdependencies

• As electricity demand grows through adoption of EVs and heat pumps, the whole energy system will grow in complexity and interdependency. The amount of additional electrification that will be needed will also depend on the pace and pathway of hydrogen development.
• To ensure resilient networks we will need to improve how we collaborate across the whole energy system and understand interdependencies better, including with other sectors such as telecoms.
• There will be more touchpoints and stakeholders to consider when managing security of supply. Incidents and interdependencies will need to be well defined to ensure network/asset resilience.

Network evolution

• The journey towards net zero will transform the characteristics of the energy system.
• Changes to new generator technologies such as invertor-based generation resources and high penetration of renewables will impact system inertia which is fundamental to power system balancing.
• Changing energy demand will increase current in our overhead power lines, which presents an indirect risk to other energy infrastructure. For example, buried steel transmission pipelines are at risk of induced Alternating Current (AC) corrosion where they traverse overhead power lines, which accelerates the deterioration of the pipeline.
• In the transition the interaction between the gas and electricity systems will likely grow and place greater load on the available, but aging, assets that will be required to respond more quickly to peak load and drops in renewable output.
• Complexity in system operation will increase with distributed energy resources, such as community energy schemes, reducing visibility and control.
• Investment is needed in the assets and services which can deliver greater flexibility and efficiency in how and when we use energy, with demand side elements and electrical storage at scale playing a significant part in supporting the transition and security of supply by reducing the burden placed on the system.
• Changing gas flows, with the forecast reduction in gas flows from UK Continental Shelf needing to balance with increased supply from other entry points into the GB market (LNG importation terminals and EU interconnectors). This will require timely investment to transport the flows to centres of demand without creating entry constraints. Security of supply will also need to be ensured by maintaining secure pressures and appropriate levels of capability of the National Transmission System.

Geo-political instability

• We are cognisant of the unprecedented impact of the current Russian invasion of Ukraine on global energy supply and prices, including in the UK, and recognise the rapidly changing situation.
• We stand ready to work alongside the Government, the regulator, and stakeholders to enhance physical and price security for UK consumers.

18 March 2022

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