Electricity System Resilience (S&T Committee Report)

Earl of Selborne Excerpts

Tuesday 3rd November 2015 Lords Chamber

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[The Earl of Selborne]

That this House takes note of the Report of the Science and Technology Committee on The Resilience of the Electricity System.

[The Earl of Selborne (Con)]

My Lords, the electricity system of this country is embarking on a period of profound change over the coming decades. This change will be driven by technological development such as the increasing penetration of automation and intelligent systems, the deployment of advanced fast-acting control systems, dispersed generation and the transition to a smart energy system. This will increase complexity enormously. We will be increasingly reliant on electricity for transport, heating, air conditioning and much else. This change will also be driven by our national commitment to decarbonise electricity systems, yet our record for anticipating supply and demand, and for ensuring that the desirable capacity margin is in place, has in recent years been unimpressive; and this at a time when these far-reaching changes are really starting to make an impact.

It was against this background, and with some speculation in the media that the country might be subject to national blackouts, that the Science and Technology Committee decided to undertake an inquiry into the resilience of the electricity system. I refer to my interests as listed in Appendix 1 to our report as an honorary fellow of the Institution of Engineering and Technology, a fellow of the Royal Society and a shareholder in two companies. I thank our specialist adviser, Professor Jim Watson, and our clerk, Chris Clarke, for their invaluable contribution to producing our report.

The Government have spoken of the need to “reset” policy and have initiated a number of energy policy changes mainly designed to cap costs to the taxpayer, but have yet to set out a long-term vision for energy policy. Until a comprehensive long-term energy policy has been formulated, there is a danger of the momentum on new investment in the energy sector being lost. The record is quite impressive: more than £42 billion has been invested in renewables since 2010, with more than £8 billion being invested in UK-based renewable energy in 2014. Every Government must be prepared to formulate and articulate a clearly understood energy policy that results in an optimal balance between the three interconnected and competing demands of security of supply, sustainability and affordability, widely known as the energy trilemma.

The fact that security of supply has become a real issue for the next few winters demonstrates that previous Administrations have failed to get it right. Had not demand—that is, industrial demand—been reduced by the economic crisis of 2008, the capacity margins would have been even tighter or non-existent. Obviously, a commitment to nuclear power at £92.50 per megawatt hour, and to some of the more expensive renewable energy technologies such as offshore wind, currently costing around £118 per megawatt hour, has to be reconciled, at least in the medium term, with the requirement for affordability.

We concluded that successive Governments might have anticipated the shrinking margin earlier and taken steps to address it. As a result of inaction, the narrow capacity margin that emerges poses a threat to resilience. The coalition Government addressed this failure of previous long-term planning by introducing at short notice and at considerable cost, and in a way that conflicts with the decarbonisation agenda, the capacity market, also known as the capacity mechanism. From 2018 on, an income stream will be available to capacity providers for keeping capacity available to meet demand when the system is stretched. Interim measures known as new balancing services have been introduced to plug any shortfalls in the period to 2018. The capacity market provides no incentive for the building of new generating plant, the development of demand response or the extension of interconnectors. Instead it rewards incumbents, including coal-fired units, thus acting as a counter to decarbonising policies.

Professor David Newbery of Cambridge University warned us that if the capacity market overprocures, the consequences would be higher prices to consumers, the undermining of renewable energy by transferring support to conventional generators and the weakening of the business case for other options, including future interconnectors, which will be increasingly important as the share of intermittent electricity from renewables rises.

We were surprised by the paucity of information on the true costs of electricity shortfalls. The potential contributions of interconnection with foreign suppliers and of industrial back-up generation need to be rigorously assessed to make the appropriate decisions on the procurement of capacity. We recommended that the Government review the contribution that interconnection and industrial back-up generation could make to capacity margins. Since our report, the national grid has published some helpful information on interconnection in its 2015 Electricity Capacity Report.

In the medium to long term, new technologies and the development of existing technologies will be the key to achieving a resilient electricity system. As with every aspect of our economy, we will depend on investment in research and development to be competitive in the long term. We must ensure that we attract to this country the innovative companies that are most likely to advance these technologies. Investors value continuity of policies and want to be assured that whatever national energy policies are put in place will stay in place for at least the medium term.

Investors will also be attracted to this country by the quality of our publicly funded research. There is a case for public funds also to contribute to development and to the demonstration of new technologies, but such support should be given only if, in the medium term, it reduces the costs of these new technologies. A technology with long-term reliance on subsidies is clearly not sustainable.

Our national record of improving energy efficiency of buildings compares unfavourably with that of most other European countries, yet energy efficiency can make the greatest contribution to the affordability of electricity. Improving energy efficiency is also often the cheapest way to bring down emissions. The Committee on Climate Change has noted that industrial energy efficiency lacks effective policy. The Government have terminated the Green Deal, while the energy company obligation is due to end in March 2017—both measures aimed at improving energy efficiency in the built environment.

The key message from our report is that we need to improve our long-term planning of the electricity system. This requires clarity of the roles of the many participants in the electricity market and openness about the present and foreseeable state of the technology. It is imperative to look at the electricity system as whole so that complex interactions are not missed between the many components of the system.

The Institution of Engineering and Technology made the case to us for an “electricity system architect”. This architect would have responsibility for embedding whole-systems thinking across the whole electricity system. We agreed, as did the then Secretary of State Ed Davey, that the IET was asking the right questions, and that it is imperative that the electricity system is looked at as a whole to enable effective engineering integration across the electricity system as changes occur.

The major players involved in maintaining resilience are the Government, of course, the national grid, Ofgem, the electricity generators and the distribution network operators. The IET in supplementary evidence said that while there was wide industry consensus on the need to introduce effective whole systems, there was continued debate on the role of government and industry self-regulation in delivering this. The network companies, for example, would be concerned about the possibility of close government engagement in aspects of their business that require specialist technical knowledge and experience. However, given their policy objectives, the Government have had little choice but to play a greater role in managing the electricity system. We therefore endorse the Government’s adoption of a managed market and stress that it is explicitly for the Secretary of State to provide leadership and clarity on responsibilities.

The Department of Energy and Climate Change has asked the Energy Systems Catapult to investigate further the concept of a systems architect and to provide evidence of what functions will need to be performed in the future power system as a result of transformative change, and by when. This is a helpful response. The sooner this exercise can be undertaken the better. Can my noble friend the Minister tell the House when he expects the Energy Systems Catapult report and what its role might be thereafter in this respect?

Many believe that we should be heading towards a system of small-scale, decentralised power generation, with an integrated grid based on flexibility. New nuclear power plants have the potential to provide greater flexibility through emerging technologies such as small, modular reactors, yet we seem to be favouring large-scale block generation such as at Hinkley.

Demand-side response describes the process of electricity users adjusting the amount of electricity they use at certain times in response to incentives. We heard that while demand-side response has significant potential, current policies do not set it on an equal footing with generation and more could be done to harness its potential. We recommended that the Government develop a plan with specific targets for the public sector to implement demand-side response measures and so set an example to others. Technologies such as electricity storage, interconnection, carbon capture and storage, and demand-side management will all be key to a resilient electricity system.

I said that it is incumbent on each Administration to formulate a clearly understood energy policy, which results in an optimal balance between the competing policy demands of security of supply, sustainability and affordability. Investors in big projects for post-2020 electricity generation and transmission—indeed, any investors—need to understand what policies will be in place and to have confidence that such policies will not be overturned by short-term considerations. We need to seek consensus on UK energy policy based around the trilemma and we need to achieve this consensus soon. I beg to move.

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[The Earl of Selborne]

I thank the Minister for his very constructive response. I agree that this has been an interesting debate and we have benefited enormously from a great deal of expertise and experience of the energy sector from around the House. I join in the appreciation for National Grid. My noble friend Lord Howell drew attention to the fact that we should not be facing these capacity margins, but we recognise and respect the expertise of National Grid and the way it is approaching this.

As my noble friend has just explained, the Government are looking for a reset of energy policy. We are looking for a realistic, fully costed energy policy which recognises the complexity and wide range of scenarios which we could face over the next two decades.

Motion agreed.