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HC 1040 Published on 22 September 2011

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House of Commons

Energy and Climate Change Committee

A European Supergrid

Seventh Report of Session 2010–12

Volume I

Volume I: Report, together with formal minutes, oral and written evidence

Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/ecc

Ordered by the House of Commons to be printed 7 September 2011

The Energy and Climate Change Committee The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.

Current membership

Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)

The following members were also members of the committee during the parliament: Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West)

Powers

The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publication

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only.

Committee staff

The current staff of the Committee are Nerys Welfoot (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant) and Nick Davies (Media Officer).

Contacts

All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]

A European Supergrid 1

Contents

Report Page

Summary 3

1 Introduction 5

2 Background 7 What is a supergrid? 7

3 The benefits of an integrated solution 10 Helping the UK meet its renewables targets 10

Offshore wind ambition 10 The advantages of an integrated approach 11

Renewing the onshore grid 12 Landscape and transmission assets 13

4 The benefits of increased interconnection 15 Balancing intermittency 17

Reducing the need for backup generation: reserve sharing 18 Economic opportunities 19

UK comparative advantage 20

5 Barriers to the development of a supergrid 22 Technological barriers 22

Interoperability 23 Supply chain constraints 26

Costs 26 Construction costs 27 Anticipatory investment 27 Cost sharing 29 Price arbitrage 31

Regulatory challenges 32 Political commitment and timeline 35

Conclusion 37

Conclusions and Recommendations 39 Barriers to the development of a supergrid 40

Annex I: Terms of Reference 43

Annex II: Different supergrid proposals and work streams in 2011 44 The North Seas Countries’ Offshore Grid Initiative 44 The All-Island Approach 44 The UK-Baltic Cooperation 44 The Irish-Scottish Links on Energy (ISLES) study 44 DESERTEC 45 Greenpeace proposals 45

2 A European Supergrid

Formal Minutes 46

Witnesses 47

List of printed written evidence 47

List of additional written evidence 47

List of Reports from the Committee during the current Parliament 48


Summary

In July 2011, contrary to the advice of the Committee on Climate Change, the Government increased its ambition for the deployment of offshore wind generation by 2020 from 13 GW to 18 GW. This is part of a plan to meet the UK’s commitment to generating 15% of energy from renewables by 2020.

This strategy is a big gamble. On the one hand, the encouragement of offshore wind makes sense. Renewable energy is vital for climate change mitigation and the UK has a potentially huge resource that could amount to the equivalent of a billion barrels of oil each year. However, offshore wind is also a notoriously expensive and intermittent source of electricity, which could end up reducing the reliability of our electricity supply and imposing an unacceptable cost on consumers. The Government is banking on reductions in the cost of offshore wind and improvements in efficiency to make the numbers add up.

This report shows that to make the gamble pay off, it would help if an ambitious transmission system was developed to match the ambitious plans for offshore renewables. This system could deliver electricity efficiently onto the grid, help to balance out intermittency and provide a route to export when supply is abundant. Only this way will our electricity system be able to cope with increasing penetration of intermittent renewables, situated far from where the electricity is needed.

At the moment, the UK is virtually an electricity island. While the rest of Europe is increasingly interdependent, sharing electricity resources across borders, in the UK we continue to rely on our own power plants to produce our energy and our own transmission system to deliver electricity to where it is needed. The Government has only just begun to consider the options for interconnection and creating an offshore grid. It must agree to meet European targets for interconnection and set out further plans for the period up to 2050.

We demonstrate that immediate action will be necessary if the kind of offshore grid required to connect up new renewables and interconnect with other electricity systems is to be developed. While we applaud the Government’s involvement in negotiations such as the North Seas Countries’ Offshore Grid Initiative, these make no concrete commitments to new infrastructure. The Government must pursue the development of an integrated grid in home waters and begin bilateral negotiations to create new shared infrastructure with our European neighbours. The development of a methodology for sharing costs is particularly urgent.

At the moment, we use point-to-point connections from a single offshore wind farm to the land, but this approach will reach its limits in the near future. It is costly, inefficient and requires a huge amount of infrastructure, particularly where electricity cables come ashore. By sharing transmission assets, we can save money and reduce the environmental impact of network reinforcements. The Government must undertake to calculate the environmental and social savings that could be made through offshore grid reinforcements and set this against the costs of construction. By integrating these lines with interconnectors, we can sell electricity when supply is abundant and import it when


demand is high.

Such a network brings its own risks. We believe that the cost of creating a European supergrid will be very high indeed. The Government should analyse carefully if the benefits are sufficient to justify the costs before proceeding down this route. We also recognise that reaching international agreement about the necessary regulatory and market frameworks will be extremely difficult.

If we do not build as much offshore wind as we expect, new transmission systems built in anticipation of this generation could be left stranded at considerable cost to the consumer. This means that investment is unlikely to be forthcoming for the early stages of an integrated offshore grid. The Government must give certainty to investors about the long-term support on offer for offshore wind. It must also consider how to encourage early investment in offshore grid infrastructure, either through regulation or improving access to public finance for pioneer projects. To ensure that early investments do not become redundant, the Government must analyse how offshore networks can be combined with future “smart grid” and electricity storage technologies and how early assets can be made “supergrid ready”.

In 1933, the “national gridiron” began operating as a series of regional grids with interconnections for emergency use. By 1938, these separate systems were linked up to form a truly national system. The national grid was, in its time, a model for the world. In the 21st Century, however, the UK is moving toward a system where major intermittent sources of supply are concentrated offshore, in the north of the UK and abroad. We can no longer afford to be an electricity island.

A “supergrid” is an international network of electricity cables, which integrates offshore renewables generation into the transmission system, as well as allowing electricity to be traded across borders. It is extremely unlikely that a full-scale European supergrid could be developed by 2020 and very uncertain whether such a system could be economically justified. However, we believe that there is a strong case for working quickly to achieve much more interconnection and integration of offshore networks, the building blocks of a supergrid. This kind of network will not develop by itself and the current approach has left the UK electricity system one of the least interconnected in Europe. The Government must end its laissez-faire approach to offshore transmission and set out a plan for developing an interconnected, integrated offshore network in time to make the most of our renewable resources.


1 Introduction 1. The role of transmission networks in deciding the future of Britain’s energy system is often overlooked. Before 2020, billions of pounds of investment are needed to renew and reinforce the pipes and wires that deliver energy to our homes. The way we make those investments will affect every aspect of our energy future, influencing costs, sustainability, security, our landscape and the mix of generation itself.

2. In our work on the UK electricity sector, the Committee has identified a number of serious challenges:

• First, there is a need to reinforce existing onshore transmission assets with new lines and cables in order to deliver electricity from areas of excess supply to where it is needed. This could cost at least £32 billion by 2020 and change our landscape.1 In Chapter 2, we look at the potential for a supergrid to reduce the need for new transmission assets, thereby saving money and reducing the impact on landscape and ecosystems.

• Second, we need to address the problem of intermittency, as an increasing amount of renewable generation is added to the electricity mix.2 In Chapter 3 we explore the ways that an integrated offshore grid could help to balance out the problem of intermittency by integrating a broader range of renewables, while added interconnection could help to balance supply and demand.

• Third, there is an urgent need for decarbonisation. We believe that it will be necessary to reduce emissions in the electricity sector to about 50gCO2/kWh by 2030 in order for the UK to meet its climate change targets.3 In Chapter 2, we demonstrate that incorporating offshore renewables in an integrated offshore grid can maximise our renewable resource.

• Fourth, we are very aware of increasing costs to consumers, caused by volatile energy costs and problems in the electricity market, which will be exacerbated by the need for new investments to be funded by the major energy suppliers.4

3. It has been suggested that a supergrid could help to address these issues. In this inquiry, therefore, we investigated the possibility of investing in integrated offshore transmission networks, which could combine international interconnection with national grid reinforcements and offshore renewable generation technologies. This kind of project—often known as a “supergrid”—has the potential to contribute to decarbonisation, cost-reduction and energy security in a way that minimises the visual impact of transmission assets on our natural environment.

1 Energy and Climate Change Committee, Third Report of Session 2010–12, The revised draft National Policy Statements

on energy, HC 648

2 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742

3 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742

4 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem's Retail Market Review, HC 1046


4. The current approach to connecting offshore wind generation encourages the installation of single user point-to-point (radial) sub-sea connections to each individual wind farm. Equipment is designed and installed sufficient to allow access to the market for 100% of the potential output from the windfarm, but remains unused when there is no wind.5 A more integrated approach would involve linking interconnection to overseas sources of electricity directly with offshore renewables generation. We have heard that a system that integrates a meshed offshore grid with interconnection offers a range of potential benefits, including:

• Increased competition and cross-border trade, leading to lower energy prices;

• Increased security of supply;

• Access to a greater amount of renewable resources;

• More rapid decarbonisation;

• Access to lowest cost low carbon generation wherever it occurs within Europe;

• Increased reliability of the connection for the wind;

• Increased overall utilisation of the assets by sharing them for wind connection and cross-border trade; and

• A route for the UK to become a net electricity exporter, creating economic growth.

5. All of these potential advantages must be balanced against the considerable cost of a supergrid and the uncertainties associated with such an enormous project. Chapter 4 sets out the range of costs associated with potential supergrid projects, but also how this may possibly be balanced by savings.

6. The idea of a supergrid is still in its infancy. Many technical questions remain about the viability of using High Voltage Direct Current (HVDC) undersea cables to link up different countries with our offshore renewables. The costs of such a project are highly uncertain, but are likely to be very high. The regulatory system needed to underpin multilateral transmission projects would be extremely complex.

7. In this report, we look at the uncertainties that surround the development of an offshore integrated grid, its prospective advantages and the next steps that the Government should take to ensure that the transmission system we build for the 21st century is as efficient and ground-breaking as the National Grid was for the 20th.

8. Our terms of reference for the inquiry are set out in Annex I. We held three oral evidence sessions, with industry experts, national and European regulatory bodies and System Operators and, finally, with the Minister of State for the Department of Energy and Climate Change. A full list of witnesses can be found on page 47. We also received 29 written submissions which are published with this Report. We are very grateful to everyone who gave evidence to our inquiry.

5 Ev 68 (National Grid), appendix


2 Background

What is a supergrid?

9. The term “super grid” was first used to describe the unified British national electricity transmission system over fifty years ago. The concept of a UK supergrid is defined in the British Grid Code as a transmission system operating at voltages above 200 KW. In the 21st Century, however, the term “supergrid” is used to describe a number of different kinds of interconnection between international electricity systems, often incorporating generation assets as part of the system. In other words, the same transmission lines would connect up different countries’ electricity systems as well as a variety of power generators such as offshore wind farms. Ideas range from a more integrated offshore grid in the North and Irish Seas to a network of “super highways” across Europe and into Africa and Asia.

10. A supergrid was defined by the Friends of the Supergrid as an electricity transmission system, mainly based on high voltage direct current (HVDC), designed to facilitate large-scale sustainable power generation in remote areas for transmission to centres of consumption, one of whose fundamental attributes would be the enhancement of the market in electricity.6 As well as enabling the transmission of electricity from areas of excess supply to where it is needed, a supergrid could also enable wider access to physical electricity storage options, such as pumped storage in Scandinavia and the Alps. This could help to balance out fluctuations in intermittent renewables supply with affordable, low-carbon generation.7

11. Friends of the Supergrid have set out suggestions for Phase I of a supergrid, which would integrate the UK’s offshore renewables resources with interconnection with Germany and Norway.

6 Ev 68 (Friends of the Supergrid)

7 Ev 47 (DECC), section 17; Ev 56 (Ofgem), section 1.12


Figure 1: Friends of the Supergrid, Phase 1

UK

GERMANY

NORWAY

Munich

Source: Ev 68 (Friends of the Supergrid), section 3

12. A supergrid could represent a revolution in the scale and ambition of interconnection and offshore grid integration. At the moment, national electricity systems remain largely separate, each state providing for its own supply to meet demand. The UK is particularly insulated from its neighbours. A supergrid implies that a much greater degree of interconnection between national electricity systems would be possible, allowing them to draw on shared resources to meet demand. John Scott, of the Institute of Engineering and Technology, told us that whilst the UK currently had a 2 GW link with France, a 20 GW link could be possible.8 He suggested that “you have to think of [a supergrid] as a system, not as a series of electrical pipes. It has to become a system, which means that it has to be balanced in real time between generation and demand”. 9 In other words, a supergrid could be a complex transmission network, potentially coordinating dispatch and supply of electricity across several jurisdictions.

13. However a supergrid is not just about increased interconnection, it is also about integrating offshore renewable generation into the transmission system in order to optimise the output of technologies like offshore wind, marine and tidal energy. At the moment, these resources are connected to the onshore system individually by “radial” or “point-to-point” connections.10 A supergrid could integrate these connections into the transmission system itself, saving money, reducing the need for new connections and enabling more efficient sharing of resources.

8 Q 2 [John Scott]; Ev w32 (Centrica), section 14

9 Q 2

10 Q 1 [Eddie O’Connor]


14. Stuart Cook, from Ofgem, explained that a supergrid could entail different mixes of interconnection and integration of offshore renewables within the transmission system:

The range of options that the transmission companies in Europe have looked at span from, at one end, something that simply is point-to-point, which is more or less the way that the system has evolved so far; to a system that involves optimisation of the onshore connection; to a system that involves the optimisation of the onshore connections and the interconnections across countries; to something that, at the extreme, is a meshed system looking like a grid on the sea.11

15. In this Report, we will refer to an offshore grid, integrating renewable generation and interconnection, as a kind of “supergrid”. Further details of the different visions for a supergrid currently under development can be found in Annex II.

11 Q 62


3 The benefits of an integrated solution 16. This chapter looks at how the integration of generation assets in a grid system—a “meshed” grid—can help to reduce the amount of new transmission assets that are required and maximise access to renewable generation resources.

Helping the UK meet its renewables targets

Offshore wind ambition

17. The UK’s renewable energy generation targets are very challenging; we are committed to achieving 15% of energy from renewables by 2020.12 In 2009, renewables supplied just 6.6% of electricity generation, 1.6% of heating and cooling energy and 2.5% of transport energy. In total, renewables provided 3% of total energy consumption.13 In its Renewable Energy Roadmap, published in July 2011, the Department of Energy and Climate Change increased its ambition for the rollout of offshore wind generation to 18 GW by 2020 in order to help meet our targets.14 Scotland has ambitious targets of its own to source 80% of its electricity demand and 20% of all energy consumption from renewables by 2020.15

18. Currently there is 1.3 GW of operational offshore wind capacity in the UK, with almost 6 GW more in the planning process.16 The Crown Estate announced the winners of their Round 3 tender process on 8 January 2010, with leases awarded for sites for an additional 32 GW of offshore wind, on top of 8 GW planned from previous rounds.17

19. The Committee on Climate Change (CCC) recently concluded that the previous level of ambition for offshore wind (13 GW capacity installed by 2020) remained appropriate given uncertainties about the feasibility of increasing ambition on other lower-cost options. However, they argued that a reduction in 2020 offshore wind ambition would reduce the costs of meeting the Renewable Energy Directive target.18 They also recommended committing to further investment in the 2020s given the long-term importance of offshore wind.19

20. We believe that a supergrid must be considered in the context of the UK’s renewable energy objectives. National Grid told us that an integrated offshore grid was key to the UK meeting its renewable targets and that it sees “a very big potential for offshore wind [amounting to] 16 GW of offshore wind by 2020, rising to some 37 or 38 GW by 2030”.20

12 Council Directive 2009/28/EC

13 Department of Energy and Climate Change, Digest of United Kingdom Energy Statistics 2010, July 2010, Table 7.7

14 Department of Energy and Climate Change, UK renewable energy roadmap, July 2011, p 42

15 Ev w44 (Scottish Renewables)

16 Department of Energy and Climate Change, Renewable Energy Roadmap 2050, July 2011, section 3.53

17Department of Energy and Climate Change, Offshore wind farm leasing, http://www.decc.gov.uk

There have been three rounds of leasing for offshore windfarms carried out by The Crown Estate, the landlord of the seabed.

18 Committee on Climate Change, The renewable energy review, May 2011, p 15


20 Q 56


Daniel Dobbeni of the European Network of Transmission System Operators (ENTSO-E) agreed that without new offshore grid transmission assets “Member States will not achieve their [renewable energy] target. You cannot have one, the new energy mix, without the other, more transmission capacity”.21 The Minister of State for Energy and Climate Change also believed that an integrated offshore grid “is a critical part of being able to develop the offshore wind sector”.22

The advantages of an integrated approach

21. The present system for connecting offshore wind generation encourages the installation of point-to-point connections to individual wind farms, designed to allow access to the market for 100% of the potential output from the wind farm, but which remains unused when there is no wind.23 This often leaves up to 60% of the offshore grid connection unused with a simple grid connection to the offshore wind farm.24

22. This has implications in terms of cost and in terms of the sheer scale of transmission assets that would be required if point-to-point connections continued to be made. According to National Grid, an integrated network for the UK’s offshore wind delivery could provide a 25% discount for the UK consumer on the capital cost compared to connecting each offshore wind farm with a dedicated radial connection.25 By integrating the offshore wind farm grid connections with interconnectors, when the offshore wind farms were not generating at full rated output, the available capacity on the grid connections could be used to trade electricity and other services. The Crown Estate expected that this kind of connection could be used up to twice as heavily as conventional wind farm connections.26

23. Daniel Dobbeni, President of the European Network of Transmission System Operators (ENTSO-E), anticipated that between 80 and 280 wind farms were likely to be constructed in the North Sea in the next twenty years. The cost and size of these new assets would be prohibitive if single connections to the shore were made.27 Alberto Pototschnig, Director of the Agency for the Cooperation of Energy Regulators (ACER), agreed.28

24. The future of the electricity transmission system must be considered within the context of the Government’s renewable energy objectives. If it hopes to deliver its aspirations at all, let alone in a cost-effective way, it will be necessary to develop a transmission system commensurate with the scale of offshore renewables expected. A more efficient way of connecting wind needs to be planned for generation further offshore and the increased volumes of wind expected. It makes sense to develop new means of connection to support those developments before the capacity has been

21 Q 107

22 Q 130 [Charles Hendry MP]


24 Ev w7 (The Crown Estate), section 3.3; Offshore wind have capacity factors of 40–45%.

25 Q 64 [Alison Kay, National Grid]

26 Ev w7 (The Crown Estate), section 3.3

27 Q 98

28 Q 99


developed. The Department of Energy and Climate Change should therefore undertake to assess the advantages of a meshed offshore grid as opposed to radial connection within the next two years.

Renewing the onshore grid

25. As the UK develops its offshore networks, we must also update its onshore transmission assets to deliver electricity from supply centres to where it is needed. An offshore supergrid could play an important complementary role to onshore regeneration by helping to reduce congestion in the system.29

26. Today, the national grid is struggling to cope, because so much of our electricity is produced in remote areas, especially the north, and our transmission systems do not always have the capacity to deliver power to where it is needed. The problem of congestion is already costing the consumer as generators are sometimes paid to stop producing electricity. In May 2011, for example, six Scottish wind farms were paid to stop producing electricity on a particularly windy night as the National Grid was overloaded. Their transition cables did not have the capacity to transfer the power to England and so they were switched off and the operators received compensation. One operator received £312,000, while another was paid £263,000.30 While congestion also leads to other generators being asked to reduce their supply, the problem is exaggerated in the case of wind because there are no savings on fuel costs and there is the extra cost of lost renewable obligation payments, which mean that operators need to be paid extra to curtail their supply.

27. Transmission tends to run from the north (where most energy is produced) to the south (where consumption is highest). An offshore grid which had multiple links between offshore generation assets and large, shared connections to the onshore grid could provide alternative transmission routes from areas of excess electricity supply to areas of high demand. This option would be enhanced by the use of High Voltage Direct Current technologies, which allow large amounts of power to be transported across long distances with relatively small losses.31 We also heard how, during periods of excess supply, electricity could be transported to storage “hubs” such as hydro reservoirs in Scandinavia and the Alps and called upon at times of low supply.32

28. However, National Grid emphasised that an offshore network would not be a substitute for ongoing onshore reinforcement. ENTSO-E agreed that offshore grids would not altogether replace the need for new onshore transmission lines.33

29 Climate Policy Initiative [ESG 02] described congestion as the situation when technical constraints (e.g., line current,

thermal stability, voltage stability, etc.) or economic restrictions (e.g., priority feed in, contract enforcement, etc.) are binding and thus restrict the power transmission between regions; congestion management aims at obtaining a cost optimal power dispatch while accounting for those constraints.

30 “Wind farms paid £900,000 to switch off for one night”, The Telegraph, 1 May 2011

31 Ev w4 (Alstom)


33 Q 119


29. Congestion is also a problem for trading electricity across borders, when intermittent renewables in one jurisdiction are producing so much electricity that transmission capacity to other countries is exceeded. Congestion costs across the most congested interconnectors in Europe are currently estimated to be €1.3bn each year.34 According to E3G, if only half of the estimated requirement for inter‐regional transmission capacity was built, the result would be that 15–20% of renewable power generation would have to be curtailed off the system because of transmission bottlenecks, at a cost significantly exceeding the cost of the transmission capacity.35 In other words, the cost of development of offshore grid assets could be partially or wholly offset by savings on curtailment costs from a constrained electricity system.

30. The UK electricity transmission system needs to be updated. It is no longer good enough to patch up the old system. The Government must produce a new plan for electricity transmission that includes interconnection and integrated offshore assets and the development of a supergrid could help achieve this. In particular, it is utterly unacceptable that large costs are incurred by the System Operator and consumers to curtail wind supply because the system cannot deliver the electricity to where it is needed. The problem of transmission is turning a potentially profitable resource into a potential liability. Unless this problem is addressed there is a risk that public scepticism about renewable energy and wind in particular will grow. The Government should commission an assessment of the most efficient way that offshore connections via a supergrid could be used to ease onshore congestion.

Landscape and transmission assets

31. The creation of an integrated offshore grid could also help to reduce visual and physical impacts on the landscape. When north-south reinforcements are made onshore, National Grid’s current policy means more overground electricity lines, towers, poles, new substations and other above ground installations. The National Policy Statement on electricity networks infrastructure (EN-5) recognised that these developments would involve environmental and social costs.36

32. An integrated offshore grid could reduce the amount of intrusive overland assets that will need to be built and also reduce the effect of bringing power from offshore renewables and interconnectors onto the onshore grid. Ofgem has estimated that £32bn of investment in transmission assets will be needed by 2020. The footprint of new transmission assets could be particularly intrusive if new offshore wind assets all bring their electricity ashore in separate radial connections. These converter stations are twice the size of a football pitch.37 National Grid estimated that a supergrid could reduce the number of necessary sites by half.38

34 Ev w52 (WWF-UK), executive summary

35 Ev w47 (E3G), section 24

36 Department of Energy and Climate Change, Appraisal of Sustainability for the revised draft National Policy Statement for Electricity Networks Infrastructure (EN-5), October 2010, para 3.2

37 Q 59 [Alison Kay, National Grid]

38 Q 59


33. The Campaign to Protect Rural England (CPRE) added its advocacy for a supergrid “where this reduces the need to construct new onshore transmission lines and supports the wider decarbonisation of the power sector”.39 CPRE noted that an integrated solution would require around half the number of substations and one quarter the distance of overhead lines compared to a traditional connection regime.40

34. Moreover, the number of acceptable landing points appears to be limited. Dr Harrison of the Institution of Engineering and Technology told us that landing sites were a “really scarce resource” and argued that “finding landing sites for cables that are environmentally and socially acceptable is increasingly difficult”.41

35. The need to transmit electricity from north to south and from offshore to onshore could have a very damaging effect on the landscape. An integrated offshore grid could minimise the environmental impact of new transmission assets. We recommend that the Government should produce a cost estimate of the value of the social and environmental savings made by reducing the intrusion of onshore transmission assets and publish its assessment of the relative costs of different transmission options: overhead lines; undergrounding; and offshore High Voltage Direct Current lines.

39 Ev w28 (CPRE), section 1

40 Ev w28 (CPRE), section 3c

41 Q 16


4 The benefits of increased interconnection 36. Some witnesses identified the integrated offshore grid as the most important part of early offshore transmission developments. Others, such as RenewableUK, highlighted the importance of interconnection and emphasised the economic case for increasing linking between national electricity systems.42 In this chapter, we look at the economic and energy security rationale for building increased interconnection into an offshore grid.

37. In 2002, the EU Council set the target for all Member States to have electricity interconnections equivalent to at least 10% of their installed production capacity by 2005. In 2010, nine Member states still did not meet this target including the UK where total interconnection amounts to around 1.5 GW compared to around 85 GW installed capacity.43 The UK has proportionately less interconnection capacity than all the other main European electricity markets, partly because of the higher costs of sub-sea interconnection compared with links between Member States on the Continent.44

38. The Minister told us that the UK “should be taking forward bilateral negotiations on some strategic interconnectors to begin with: to Norway, potentially to Iceland, to Denmark, additionally to France”.45 The UK is also one of the signatories to a Memorandum of Understanding on delivery of an integrated offshore grid in the North Seas [see Annex II]. However, the National Renewable Energy Action Plan for the United Kingdom (required under the Renewable Energy Directive 2009) and DECC’s Renewable Energy Roadmap 23050 included no explicit targets or plans for interconnection.46

39. In the past, the UK has been able to achieve a balanced electricity supply independently: enough reserve capacity has been available to meet fluctuations in demand and supply. While the rest of the continent is becoming increasingly interconnected, the UK only has a few gigawatts of interconnection to the Continent and Ireland:

a) Interconnexion France-Angleterre (IFA) (2 GW);

b) The Moyle Interconnector (between Northern Ireland and Scotland) (0.6 GW); and

c) British-Netherlands interconnector (Britned) (1 GW).

40. Balancing the UK’s electricity system in isolation has been possible because the system has been based largely on predictable and flexible fossil-fuel and nuclear supply. In future, however, the increased proportion of intermittent renewables needed to meet the UK’s targets will mean greater fluctuations in supply and demand.

42 Q 38 [Alex Murley, RenewableUK]

43 Department of Energy and Climate Change, Revised draft overarching National Policy Statement for energy (EN–1), October 2010, paras 3.3.22 and 3.3.7; Ev w52 (WWF-UK), executive summary; EU Commission, DG Energy, The Internal Energy Market—Time to Switch into Higher Gear, Non-paper,2011.

44 Ofgem, Electricity interconnector policy, ref 12/10, January 2010

45 Q 131

46 National Renewable Energy Action Plan for the United Kingdom, pursuant to Article 4 of the Renewable Energy Directive, Council Directive 2009/28/EC


41. A supergrid could provide a much wider range of opportunities to export excess electricity when the wind is blowing and new routes to import electricity at times of low-supply. Dr Harrison of the Institution of Engineering and Technology told us that coverage across time zones could exploit time differences in demand across different parts of Europe.47

42. A supergrid could also contribute to security of supply. John Scott of the Institution of Engineering and Technology explained that “an interconnected mesh […] is much more secure against shocks, like severe events or geopolitical disruptions but, more than that, it is strategically much more flexible for the long-term”.48 Eddie O’Connor of Mainstream Renewable Power argued that a link with Norway, which has a substantial hydro resource, and another to Germany (a large demand centre and source of wind energy) and the Alps—where the Swiss are developing pump storage—would further enhance minute-by-minute security.49 Iceland, Finland, Estonia, Latvia and Lithuania are potential partners for interconnection.50 Such links could provide access to a number of different kinds of renewable generation—including wind, solar, geothermal, marine and hydroelectric—as well as access to more conventional generation such as gas, coal, oil and nuclear.

43. However, complex regulatory arrangements would be needed to ensure equitable access and prevent nationalistic behaviour. Moreover, in times of supply shortage, imports from further afield (such as North Africa) could increase geopolitical risks.51

44. Furthermore, increased interconnection through a supergrid would not guarantee supply at times of peak demand. Alex Murley from RenewableUK drew a comparison with gas interconnection, arguing that “when you call upon an interconnector, there is no guarantee it will supply you any power at your time of need.” He gave the example of “the gas interconnection between Netherlands, GB and Belgium, where quite often at times when our system needs—it gets very cold in the UK; it is also very cold on the continent—the gas isn’t there”.52

45. However, WWF noted that it was unlikely that exports from the UK electricity market would occur unless there was sufficient capacity. At times of high demand and low supply, there would be “a price barrier preventing export of electricity out of the UK system”.53

46. The UK is far behind the EU’s targets on interconnection. The Government should agree to meet European targets for interconnection by 2020 and we recommend that in its Response to this Report that it sets out its own expectations for interconnection up to 2050.

47 Q 2

48 Q 5

49 Q 6; Ev w52 (WWF-UK), executive summary

50 Ev w11 (Association of Electricity Producers); Ev w30 (DONG Energy)

51 Q 6

52 Q 48

53 Ev w52 (WWF-UK), section 2


Balancing intermittency

47. Intermittency—when a particular source of energy is not constant and may well be unpredictable—will be one of the major risks to security of supply in future, as an increasing proportion of variable generation such as wind power is added to the system.

48. Intermittency poses two problems: first it will increase price volatility; second it will damage grid stability, increasing the challenge of system balancing and system reliability.54 Renewable energy has prompted additional demand for reserve and response operations in order to balance out unpredictable peaks and troughs in supply. This will be expensive and present challenges in terms of achieving adequate supply when it is needed. This trend will get worse as EU member states increase the deployment of wind power and other intermittent renewable energy sources to deliver the 20% renewable target formulated in the European Renewables Directive of 2009.55

49. The Committee on Climate Change has argued that the challenges presented by intermittency should not be overstated. It has suggested that aggregate intermittency from geographically dispersed sources will be lower than intermittency at individual sites due to different wind patterns at offshore wind sites near shore and in deeper waters and that different intermittent renewables have different availability patterns. This would reduce overall variability in a diverse portfolio.56

50. A supergrid would be able to contribute to achieving a diverse portfolio of renewables by linking up different kinds of renewables across a wider geographical area. Eddie O’Connor of Mainstream Renewable Power illustrated the advantages of linking up UK renewables not only around the UK but with other countries such as Germany for the management of intermittent capacity. By connecting up with 25 GW of wind in Germany there could be 1,500 miles in the system—enough to overcome the problems of localised intermittency.57

51. Increased interconnection with European and Scandinavian systems could offer scope for flexibility, given that load factors for renewable generation and storage technologies were likely to vary significantly across systems. We heard that interconnection could provide 16 GW of flexibility by 2030 and 35 GW by 2050.58 A supergrid could help to take advantage of geographical and technological diversity, providing a natural risk mitigation measure by ensuring that wind generation was spread across wind zones and weather systems—some kinds of renewables would be likely to be generating somewhere whenever they were needed.59

52. However, other witnesses argued that a supergrid would not be a complete solution to the challenges associated with intermittency. Pöyry, the consultancy firm, recently assessed the impacts of intermittency based on the level of renewables set out by European National

54 Ev w21 (RWE npower), section 4.1

55 Ev w1 (Climate Policy Initiative), section B

56 Committee on Climate Change, Renewable energy review, May 2011, p 55

57 Q 3

58 Q 128 [Daniel Dobbeni, ENTSO-E]

59 Q 114 [Daniel Dobbeni, ENTSO-E]; Ev w21 (RWE npower), section 4.1


Renewable Energy Action Plans (NREAPs). Its report concluded that “in Northern Europe the overall output of the renewable generation will be highly variable, and will not average out because of weather and geography”.60

53. WWF, however, argued that the Pöyry report only considered the situation in Northern Europe and therefore failed to consider the benefits of interconnection with the vast renewable and especially solar resources of Southern Europe and Northern Africa. WWF also argued that the report under-estimated the benefits of an integrated European market model and that it did not look at the effect of aggregating demand patterns across Europe.61

Reducing the need for backup generation: reserve sharing

54. Up till now, the typical way of dealing with the variability of intermittent supplies (and other volatility in supply and demand) has been to call upon flexible backup capacity to fill the gap when the wind is not blowing and the sun is not shining. As the amount of intermittent renewable generation increases as a proportion of total installed capacity, it will be necessary to maintain increasing amounts of backup or “peaking” plant that can be dispatched quickly to meet demand when renewables are not generating. Currently installed capacity in the UK is considerably greater than peak demand, because quick to operate, flexible generation is needed to respond to fluctuations in demand.62 This backup generation is usually gas-fired or coal-fired.

55. Sharing electricity across Europe could reduce the amount of back‐up generation required in each Member State, reducing costs and emissions. Pöyry argued that in periods of low wind generation across Europe, substantial backup would still be required to meet demand.63 Other witnesses were more optimistic. For example, the European Climate Foundation Roadmap 2050 report found that increased interconnection could limit the “load factor” (or utilisation rate) of back‐up plants to 5% in an 80% renewable energy scenario and reduce total reserve requirements by 35–40%.64 E3G estimated that this could save €34.3 billion in backup generation across Europe.65 In a 100% renewable energy scenario, load factor of back up plants could be reduced by up to 8%.66

56. At the moment, battery technology for electricity storage is expensive and inefficient. The availability of hydro facilities in the Alpine region and in Nordic countries was highlighted for its potential for electricity storage.67 Pumped storage, which can be topped up when electricity supply is abundant and cheap during sunny, windy periods, offers a

60 Pöyry, The challenges of intermittency in North West European power markets, March 2011


62 Ev w1 (Climate Policy Initiative), section B

63 Pöyry, The challenges of intermittency in North West European power markets, March 2011






low-carbon and flexible resource that can be called upon quickly to meet peaks in demand.68

57. According to WWF, a European supergrid was the key physical pre-requisite for improving electricity resource sharing across Europe and that new infrastructure could allow substantial savings in the long‐run by substantially reducing the amount of “back‐up” peaking generation required to support an increasingly higher share of renewables.69

58. We recommend that the Government investigates more thoroughly the potential impacts and costs of intermittency on maintaining the energy supply when there is more renewable generation and analyses the contribution that increased interconnection could make to evening out intermittency.

Economic opportunities

59. One of the key advantages of promoting integration and interconnection through a supergrid would be the economic opportunities associated with exporting technology and electricity. The offshore renewables resource around the British Isles is potentially vast. This includes five main technologies: offshore wind with fixed foundations, offshore wind with floating foundations, tidal stream, tidal range and wave power. According to National Grid and the Offshore Valuation Group, the UK’s offshore renewable resource has the potential to transform the country from a net energy importer to a net energy exporter over the next four decades.70

60. The Offshore Valuation Report (commissioned by DECC) found that in harnessing 29% of the practical offshore renewable resource by 2050 the electricity equivalent of 1 billion barrels of oil could be generated annually, matching North Sea oil and gas production and making Britain a net electricity exporter, generating around 145,000 jobs and £62bn of annual revenues for the UK. The report estimated the UK’s full practical renewable energy offshore resource at 2,131 TWh/year, which is six times the current UK electricity demand.71 WWF argued that a European supergrid was key to unlocking this electricity generation potential and the benefits it could provide to the UK economy.72

61. In general, witnesses agreed that an integrated offshore grid could help the UK to maximise access to its potential offshore resources and that increased interconnection could help to export the large amount of electricity produced. National Grid argued that “it is likely that, for the UK, somewhere around 10–15GW of interconnection would enable the UK to transition to a low carbon energy mix in an affordable and secure manner”.73




71 The Offshore Valuation Group, The Offshore Valuation: A valuation of the UK’s offshore renewable energy resource, 2010, p 6


73 Ev 68 (National Grid), section 10


62. Moreover, the opportunities to export electricity would be an important aspect of the investment case for new offshore renewable technologies, offering a route to market when UK demand was low or when power could not easily be delivered ashore in the UK. As the ISLES Project put it, “a key driver for investing in harvesting a renewable bonanza is export”.74

UK comparative advantage

63. The second element of export potential associated with the supergrid is the ability to capitalise on technological developments in the offshore transmission sector. The UK has a well developed offshore oil and gas sector, with substantial engineering know-how which could be transferable to other offshore industries, particularly as output from the oil and gas sector continues to fall.

64. Some key technologies for offshore grids are in their infancy, particularly HVDC transmission technologies. However, large scale demand for these newer technologies is still expected as other countries move toward a low-carbon economy. IMarEST argued that an integrated AC/DC grid could be a template for what will be needed later in the rest of the world, particularly in US and China.75

65. We heard that investment in offshore transmission could create 775,000 jobs in Europe by 2020 and add €19bn to European GDP by 2020, compared to growth under a business‐as‐usual scenario. By 2020, we were told, the offshore industry could create 50,000 new jobs in the UK alone. Alex Murley from RenewableUK suggested that:

[…] we have significant engineering capacity; we have the ability to have half of the global market for the next 10 years in our country. If we can develop the level of annual deployment that encourages manufacturing to take place, and companies like Siemens and GE to come and put their factories here, for the short term it will grow to provide export opportunities across Europe and the world. I think the Carbon Trust have recently been doing a piece of work for BIS, for DECC, for the Technology Strategy Board, in terms of where to focus strategic R&D investment, and they are positive that, by 2050, the global market for offshore wind is going to be worth £170 billion annually. If we can just get 10%, 20% of that, that is creating 250,000 UK jobs by 2050. We suggest that by 2020, with the levels of deployment that we foresee in offshore wind, with 24 gigawatts generation by 2020, that jobs could be upwards of 50,000.76

66. The UK has already missed an opportunity to become a major manufacturer of onshore wind turbines. Alex Murley of RenewableUK, for example, commented on the failure in the UK to develop the onshore wind industry. He argued that “we failed to develop manufacturing and export opportunities, and therefore the jobs, because we did

74 Ev w60 (Scottish Government), section 3.1.3

75 Ev w36 (IMarEST), section 10.2

76 Q 46


not support our indigenous market at the very outset of that technology. All the jobs now exist in Denmark, Germany and Spain”.77

67. The UK is experiencing a reduction in its energy independence as North Sea oil and gas supplies are depleted. The offshore renewables resource is potentially vast and offers an important element of a future energy mix. The Government should set out its expectations for the development of the offshore renewables resource detailing support measures and expected capacity out to 2050.

68. The UK currently enjoys a real comparative advantage in the offshore technology sector, but this advantage may be short lived. The Government should develop a plan for supporting the scaling-up of the offshore technology sector to ensure that the UK’s expertise does not vanish overseas.

77 Q 46


5 Barriers to the development of a supergrid 69. Despite the potential economic, energy security and environmental advantages of a supergrid, there still remain very substantial obstacles to the construction of a European integrated offshore grid. In this chapter, we consider the technical, economic and political challenges that would need to be overcome before a supergrid could be developed.

Technological barriers

70. Matthew Knight of Siemens told us that “everything that we need [to develop a supergrid] is available now or certainly within the lifetime of a project”.78 However, the development of a supergrid would entail a number of technical challenges, including the development of “missing technologies”. Witnesses to the inquiry thought that these could be brought forward by the industry provided there was a perceived demand for them.79

71. Most witnesses agreed that a supergrid would need to employ High Voltage Direct Current (HVDC) systems with multiple points of connection (referred to as multi-terminal schemes).80 According to Dr Harrison from the Institution of Engineering and Technology, there are many examples of very large point-to-point connections using HVDC technology, but “what we don’t have at the moment are large meshed DC systems [...] that is something new”.81

72. A HVDC electric power transmission system uses direct current for the bulk transmission of electrical power, in contrast with the more common alternating current (AC) systems. For long-distance transmission, HVDC systems may be less expensive and suffer lower electrical losses.82 For shorter distances, the higher cost of DC conversion equipment compared to an AC system may be warranted where other benefits of direct current links are useful. In 2012, the longest HVDC connection is likely to be the Rio Madeira link connecting the Amazonas to the São Paulo area. The length of that DC line is over 2,500 km.83

73. A HVDC supergrid would be a “low inertia” system. This means that within milliseconds a fault within the DC network would give rise to a very large fault current. According to Alstom, it would be necessary to develop very fast detection techniques to operate the correct DC circuit breaker at the correct time. Whilst such protection methods exist today for point‐to‐point HVDC converter schemes, for a complex, meshed, HVDC grid there are likely to be challenges in terms of detection and discrimination.84

78 Q 7

79 Q 119 [Alberto Pototschnig, ACER]; Ev w21 (RWE npower), section 1

80 Ev w9 (E.ON UK), section 1

81 Q 10

82 Q 12 [Matthew Knight, Siemens]

83 “Rio Madeira: the longest transmission link in the world—2,500 kilometres”, ABB, http://www.abb.com/industries

84 Ev w4 (Alstom)


74. Cables at the required rating and other technologies such as voltage source convertors are not yet in service, but this technology is already in development, and orders have been placed for 1GW cables and associated convertors. National Grid did not believe this development would be significantly challenging, a view in which they said was supported by all major European manufacturers.85

Interoperability

75. At the moment, a rapid roll-out of offshore wind and other renewables technologies is taking place in several Member States and each is developing its connection regime differently. Construction of a supergrid would require common technical standards to be agreed and implemented to ensure that all component parts work together, even if provided by different technology providers.86

76. At present each HVDC project constructed is specified in a way that maximises the investor’s return on investment. Hence, each HVDC interconnection is bespoke. According to Alstom, one of the largest companies supplying transmission technologies, for a supergrid to become a reality there would need to be some level of standardisation in the specification of HVDC equipment to ensure that equipment from different suppliers could operate together, allowing for competitive bidding at each stage of the development of a HVDC supergrid.87 However, Alstom also warned that too much standardisation could lead to stranded assets if current installations were rendered obselete. 88

77. In Europe there are at least 27 kinds of power system transmission and distribution networks. Transmission System Operators now have the opportunity, whilst working towards supergrids in the sea and electricity highways, to define commons standards. This could significantly reduce the overall costs of a supergrid as well as encouraging greater competition in the supply of components.89

78. Greenpeace emphasised that options for a future supergrid should also take into account expected developments in smart grids and electricity storage technologies (see Figure 2). The benefits of this could be:

a) smart management could work with big electricity users, spreading out their peak demand to a different part of the day, evening out the load on the overall system; and

b) electricity from renewable sources could be stored and dispatched to where it was needed in a number of ways, using advanced grid technologies.90

79. Friends of the Supergrid agreed that new elements of smart grid technologies could form an important part of a supergrid system. For example, smart technologies may be able to respond to changing supply across the system by implementing demand-side


86 Ev w30 (DONG Energy), section 3

87 Ev w4 (Alstom)

88 Ev w4 (Alstom)

89 Q 111

90 Ev w19 (Greenpeace UK), section 3


responses.91 The use of smart technologies could also help to enable large scale electricity storage as part of a supergrid, so that electricity produced at times of peak supply can be called upon when supply is reduced.92

80. So far, DECC has mentioned that more interconnection would be needed as a supply option but has given no detail on how interconnection or an integrated grid would be able to contribute to “smart” functions such as demand-side management.93 However, in the Electricity Market Reform White Paper the Government committed to develop an electricity systems policy in 2012, “looking at the future system framework and focusing on challenges around balancing and system flexibility”. This would include clarifying the role of demand side response, storage and interconnection, and the development of a smarter grid.94

91 Ev 68 (Friends of the Supergrid), section 4.1; Ev w47 (E3G), section 12


93 Department of Energy and Climate Change, Smarter grids: the opportunity, December 2009, p 14

94 Department of Energy and Climate Change, Planning our electric future: a White Paper for secure, affordable and low carbon electricity, July 2011, section 42


Figure 2: The integration of smart grids, storage, and a supergrid

Smart grid using micro grids and virtual power plants

CITY

CITY

CITY

CITY

CITY

SMARTGRID

CITY

CITY CITY

CITY

North Sea wind turbines and offshore supergrid

CSP in Southern Europe and Africa

North Sea wind turbines and offshore supergrid

existing AC system

Source: Energynautics.

NEW HVDC SUPERGRID

VIRTUAL POWER STATION MICROGRID

APP MINIGRID

DISTRIBUTED GENERATION GRID

16kWh battery bank

1kW solar PV

1kW windturbine

1kW verticalwind turbine

3 x 20kW wind turbine

90kW solar PV

2 x 60kW gas turbine

30kW gasturbine

23kW solar PV

64kW testload bank

minigridcontrol room

power grid

site loads

++ --

SMARTGRID

SMARTGRID

SMARTGRID

SMARTGRID

SMARTGRID

SMARTGRID

SMARTGRID

SMARTGRID

Source: Greenpeace, ‘Battle of the grids’, January 2011

81. The UK has agreed substantial development of offshore wind. Connections for these and other developments will need to be compatible with any future grid initiatives. In its electricity systems policy DECC must set out how plans for offshore grid developments and interconnection will be coordinated with “smart” improvements. We recommend that the Government considers how offshore generation could be integrated with electricity storage technologies.

82. The Government should ensure that Offshore Wind Round 3 grid connections are super-grid compliant to avoid locking out potential future electricity sales to Europe. Working with Ofgem, the Crown Estate and other stakeholders, it must identify the minimum requirements for ensuring that present developments could be connected into a future offshore grid.


Supply chain constraints

83. More pressing than the problems of underdeveloped technologies are potential problems with supply chain constraints. The delivery of the large HVDC cable currently in design between Hunterston in Scotland and the Wirral is expected to take up the UK supply capacity for high capacity HVDC cables for at least three years.95 Timely signals will be required to ensure sufficient supply chain capacity is available and asset standardisation is developed.96 If this capacity is not developed, the construction of offshore transmission systems may be delayed, or significant imports of components may be required.

84. Daniel Dobbeni, President of the European Network of Transmission System Operators (ENTSO-E), of argued that recent policy decisions in Germany, Switzerland and Italy—where politicians were moving faster towards a new energy mix—would affect manufacturing capacity among the companies who would have to deliver those new grid products. He was sure that there was not enough manufacturing capacity today to answer all of Europe’s needs, “because we should not expect China or other countries on this planet, to stop investing in their networks”.97

85. The technological challenges associated with the development of a supergrid are not insurmountable. The basic kit is available and the industry is confident that other solutions will become available once a market is clear. To unlock the private sector investment the Government needs to decide whether the supergrid project will go ahead and, if that is its intention, it should make a public commitment to it.

Costs

86. Whilst the economic opportunities associated with a supergrid may be large, there are also tremendous uncertainties about the balance of costs and benefits, especially for UK consumers who may have to bear the cost of investment. Centrica in particular warned us that “the total costs of a supergrid may outweigh the benefits”.98 Others were more confident about the overall benefits. RWE npower suggested that although costs would be high, “the benefits of providing energy stability, price control, capital cost savings from integrated infrastructure and realising long term renewable energy targets whilst ensuring security of supply outweigh these costs”.99

87. Daniel Dobbeni argued that the decision to go down the renewables, decarbonised route in the EU meant that “you need to tackle measures in terms of how to ensure that the power system will work with the same reliability with this new energy mix. In that sense, the cost issue is to be linked to the political decision to move towards renewable energy sources”.100

95 Ev 68 (National Grid), section 18; Ev w32 (Centrica)


97 Q 106

98 Ev w32 (Centrica), section 11

99 Ev w21 (RWE npower), section 3.1

100 Q 97


88. At a time when there are still significant doubts about the economic viability of huge expansion of offshore wind, it is clearly essential that these are resolved before huge extra investment in transmission capacity is undertaken. We recommend that the Government commissions and publishes an updated analysis of both the costs of offshore wind and of the costs and benefits of early investment in transmission networks compatible with the eventual construction of a supergrid.

Construction costs

89. DECC has estimated that the cost of connecting our renewables resources in the North Sea could be in the region of £15–20bn over the next decade, but has not made any assessment of the costs of a more integrated grid including interconnection.101 Eddie O’Connor of Mainstream Renewable Power claimed that the costs of “phase 1” of the supergrid, suggested by Friends of the Supergrid, would be about €28bn.102 The EU Commission referred in its Infrastructure Communication to the Offshore Grid study which estimated that offshore grid development in the North and Baltic Seas would cost €32bn by 2020 leading to a total of €90bn by 2030 with radial connection of offshore renewables, which could be reduced by €15bn (to €75bn) with clustering of wind farms.103 We heard that the additional cost of integrating future generation in a coordinated grid in the North Sea could range from €63bn to €70.5bn depending on the design. The cost of these projects is expected to be borne by the industry developing them, and then passed on to consumers.

90. Some witnesses suggested that since transmission costs represented only a small proportion of consumers’ bills—around 4% to 6% or 7% across the EU—the impact of offshore grid developments would be less than current volatility in electricity prices.104 WWF and E3G agreed that transmission investments would amount to a small part of total infrastructure spending.105 However, in our work on Ofgem’s Retail Market Review, SSE blamed rising transmission costs for increases in consumer prices.106

Anticipatory investment

91. One of the main cost risks associated with the development of a supergrid is that in order to achieve a coordinated grid, some investment would need to be made in transmission assets before generation assets are ready. There is a serious risk of “stranded assets” if investments are made in cables which are not used because the offshore industry does not develop as expected. There is a particular risk that offshore assets will be left stranded if the offshore wind sector does not expand as rapidly as anticipated. Building

101 Ev 47 (DECC)

102 Q 4

103 Ev 47 (DECC), section 14

104 Q 120 [Daniel Dobbeni, ENTSO-E]

105 Ev w52 (WWF-UK), section 3; Ev w47 (E3G), section 23

106 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem’s Retail Market Review, HC 1046, Ev 96


cables capable of transmitting large amounts of electricity that never gets developed could leave generators and consumers exposed to major financial liabilities.107

92. Certainty in the Government’s intentions for the offshore sector would reduce the risks associated with anticipatory investment. According to the Committee on Climate Change “firm commitments on support for offshore wind and marine generation through the 2020s should be made now”.108 As our inquiry came to an end, DECC announced that it would establish an industry Task Force to set out a path and action plan to reduce the costs of offshore wind to £100/MWh by 2020 and announced its intention to provide up to £30m of direct Government support for offshore wind cost reduction over the next four years.109 However, DECC has not committed itself to levels of support through the 2020s as recommended by the CCC.

93. The Minister of State for Energy and Climate Change recognised the difficulties associated with anticipatory investment because developers would potentially have to carry that extra cost without getting any benefit for it. He told us that DECC had “asked National Grid to help on this; Ofgem are helping on this; DECC is doing its work on this; so it is actually getting the building blocks in place in the right order”.110 However, this work will need to be undertaken quickly, if it is to match the anticipated development of offshore wind.

94. Greenpeace argued that the development of international transmission projects where the individual business case does not sufficiently reflect the wider economic benefit would require innovative financing mechanisms, as well as demonstration projects led by the European Commission.111 SSE also considered that there is currently little incentive for utilities to consider developing strategic connections rather than point to point interconnectors. SSE explained that creating assets that could form part of a wider grid “carries technical and commercial risk which needs extra support to become attractive” and suggested that “a compromise might be for some pre-investment in ‘hubs’ which would facilitate later connection of other offshore grids”.112

95. Certainty could reduce the risk of anticipatory investment in transmission assets. If the Government decides to pursue a rapid roll-out of offshore wind, coordinated development of an offshore grid would help to maximise the economic benefits of accessing that resource. A half-hearted approach to developing an offshore network may lead to inefficiencies. If the Government wants to minimise the costs of building a supergrid, it should adopt the advice of the Committee on Climate Change and make firm commitments on support for offshore wind and marine generation through the 2020s in order to create the confidence necessary for anticipatory investments.



109 DECC, Renewable energy roadmap 2050, July 2011, p 6

110 Q 134

111 Ev w19 (Greenpeace UK), section 1

112 Ev w26 (SSE supplementary)


96. We recommend that the Department of Energy and Climate Change consults on options for “oversizing” transmission assets in order to create the building blocks of a future offshore grid and sets out plans for anticipatory investment in its forthcoming electricity systems policy.

Cost sharing

97. One of the most intractable problems associated with the development of a supergrid appears to be the issue of dividing up the costs of shared transmission assets between different countries. The Minister did not believe that cost-sharing was a problem, pointing out that infrastructure investments would come from individual companies, so there should be no costs for the development of an offshore grid from the British Government.113 To us, this seems over-optimistic and completely ignores the fact that the substantial extra costs involved will eventually be borne by consumers. As our recommendations indicate, we believe that there will be some need for Government to provide a framework and some funding if a supergrid is to get started.

98. Many witnesses highlighted the considerable difficulty of cost-sharing. We heard concerns about how the costs (ultimately be borne by electricity consumers) could be allocated across Member States, especially when benefits are uneven.114 On behalf of the Agency for the Cooperation of Energy Regulators (ACER), Alberto Pototschnig told us that when infrastructure provides benefit for two or more jurisdictions there is a problem about how costs are allocated.115 He explained that ‘‘there is in operation in Europe, an interim inter-TSO compensation schemes since March 2002’’. However, Mr Pototschnig believed that this regime may need to be modified to take into account benefits that are not necessarily reflected in energy flows, such as ‘‘wider benefits of integration, of sustainability and security of supply’’.116 He pointed out that cost-sharing considerations for shared infrastructure usually came down to ‘‘What does this mean for country X?’’.117

99. There is enormous uncertainty about how transnational interconnection infrastructure will be financed and, in particular, how the costs would be allocated between Member states, transmission system operators (TSOs), taxpayers or consumers.118 Electricity infrastructure in Europe is generally built on the basis of “user commitments” following agreement between Transmission System Operators and regulators in each jurisdiction. Electricity networks are therefore financed through regulated tariffs that are collected from users of the network to recover the original investment costs—the “user pays principle”.119 Usually, countries that are net importers ultimately pay those that are net exporters via a centrally administered fund.120 International transmission lines may also be built through

113 Q 184

114 ESG 18 [Centrica], section 19

115 Q 101

116 Q 123

117 Q 124





the “merchant interconnector” model, in which operators may profit from the difference in electricity prices between countries.121

100. To date in the UK interconnectors have been developed as stand-alone projects outside the price controlled transmission business. The developer is fully exposed to the market demand for the capacity and the price determined via auctions. In other Member States, it is more common for interconnection to be developed by national transmission companies with revenues underwritten by consumers.122

101. Witnesses highlighted difficulties with both options. For example, price convergence may discourage further development of merchant interconnectors and make them unviable. The regulated tariff model may run into challenges where regulatory rules vary, benefits are more regional than national, or where a link between two countries primarily benefits a third country, or where projects are very risky.123

102. In order to overcome these difficulties, public financing support may also be needed in cases where market failures prevent the required investment taking place.124 At European level, there are already several sources of public support for network investment, including the Trans‐European Network for Energy (TEN‐E), Structural Funds, and the European Energy Programme for Recovery (EEPR). However, SSE argued that the current system of designating projects to be of “European Significance” must be revamped to allow non-TSO led projects to be included. They considered that early stage development funding must be channelled to help projects in the first months of their development and fund technical studies, as the current TEN-E funding scheme has project maturity as one of its key criteria, but once projects are “mature” they may not need extra funding support.125 The European Commission is currently considering a new financing and regulatory instrument on energy infrastructure.126

103. We do not share the Minister’s confidence that cost-sharing between European Member States will not be an issue. We believe that this view is mistaken and complacent, as the costs will be high investments by companies and by Transmission System Operators will ultimately be paid for by consumers in different countries, who may not benefit equally from the development of new infrastructure. The Government must work with its European partners to develop a methodology for cost sharing that is transparent and fair and takes into account how costs are passed on to consumers, not just government spending.

104. Public subsidy may be needed in order to overcome market failures and additional for investment in the first stages of a supergrid. The justification for such a subsidy needs to be examined carefully. At the European level, the Government should suggest that the European Commission changes its criteria for funding selection to include the


122 Ofgem, Electricity interconnector policy, ref 12/10, January 2010



125 Ev w24 (SSE)



early stages of projects and projects that are not being developed by the Transmission System Operator. In home waters, the Government should consider whether to promote integration of offshore networks through a combination of public finance and standards for shared capacity in new transmission assets.

Price arbitrage

105. For markets where prices are consistently lower than those in neighbouring markets it is possible that prices could rise with increased interconnection. On the other hand, markets with higher prices could see prices fall. DECC argued that, in reality, it is rare for prices to be consistently lower or higher, but instead differentials tend to fluctuate over years.127

106. Generally, in the EU-15, electricity prices (including tax) are higher than in the UK at the moment. The Minister told us that “If you look at the EU15 [...] we are fourth lowest in electricity prices across those and our prices are, on average, 20% below the median prices”.128 However, prices in key partners such as Norway tend to be lower than UK prices. At least in the short term, then, it is not clear what effect interconnection would have on UK prices. Theoretically, interconnection should result in more efficient use of resources across the EU and, in aggregate, reduce costs to consumers. Therefore, overall there should be benefits from joining up individual Member State markets, though these need to be weighed against the costs of more interconnection.129

107. James Cox of Pöyry explained that in several of Pöyry’s models for interconnection between the UK and Norway, energy prices had risen in both countries. He suggested that Norwegian prices were usually low because of the large amounts of hydro power available, so linking with UK markets would tend to raise prices. However, UK prices could also rise because, “if you assume there is a lot of wind in the UK, you start to get a lot of low-price periods where the price is zero or negative”. In this scenario increased interconnection could result in higher prices.130

108. We have previously raised concerns that effect of UK policies that distort the price of electricity may lead to perverse outcomes in the case of increased interconnection. For example, the Carbon Price Floor and a future capacity mechanism could increase the price of electricity in this country, potentially causing UK suppliers to import more electricity.131 Centrica shared our concern about the interaction between Electricity Market Reform and transmission policy options, saying that “it is not clear whether adequate consideration has been given to interconnection and market price convergence through a form of market coupling”.132

127 Ev 47 (DECC), sections 19–20

128 Energy and Climate Change Committee, Sixth Report of Session 2010–12, Ofgem’s Retail Market Review, HC 1046-ii, Q 191

129 Ev 47 (DECC), sections 19–20

130 Q 51

131 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742,16 May 2011



109. We also heard that a supergrid could help to reduce the volatility of electricity prices. As intermittent renewables constitute a greater proportion of generation capacity, electricity costs may be subject to more variability as output varies. In order to balance supply and demand, the System Operator may be obliged to call on relatively expensive flexible options. However, aggregation of demand and supply patterns through a European Supergrid may result in much lower overall volatility, leading to lower costs for dealing with both daily and seasonal fluctuations of intermittent generation.133

110. The effect of interconnection on consumer prices is largely unknown. We recommend that the Government undertakes further analysis of the expected effect of increased interconnection on consumer prices. It should set out parameters for the acceptable effects of price arbitrage on consumer prices and how they weigh those changes against expected reductions in price volatility.

Regulatory challenges

111. In order to overcome difficulties such as cost-sharing, interoperability and coordination of infrastructure planning, coordination at the European level may be necessary. Witnesses agreed that regulatory obstacles posed some of the biggest barriers to the development of a supergrid. Matthew Knight of Siemens told us that at the moment, “to make the business case to build any part of that network, you are trying to cope with nationally focused energy incentives in each country and trying to find a way to make the right thing fit what we have”.134 He argued for more harmonisation in regulation and in markets across Europe.135

112. There are several initiatives underway to develop regulations for future offshore grids. The North Seas Countries’ Offshore Grid Initiative (NSCOGI), The All-Island Approach and The UK-Baltic Cooperation are all investigating the potential for an integrated offshore grid [detailed information on these initiatives can be found in Annex II].. The North Sea Offshore Grid was proposed by the European Commission in the Second Strategic Energy Review, published in November 2008. Its purpose was to promote the “development of a blueprint for a North Sea offshore grid, interconnecting national electricity grids and plugging in planned offshore wind projects” as an energy security priority.136 According to the European Commission, the North Sea Offshore Grid should become one of the building blocks of a future European super grid. 137

113. It would be necessary to make sure that the access regime for shared infrastructure was consistent and equitable.138 An effective European supergrid would also require harmonised network codes governing generation dispatch rules, safety requirements as


134 Q 2

135 Q 2

136 Q 97

European Commission, EU energy security and solidarity and action plan: second strategic energy review, MEMO/08/703

137 European Commission, EU energy security and solidarity and action plan: second strategic energy review, MEMO/08/703

138 Q 101


well connection charging issues.139 The ISLES study (which is investigating offshore links between Scotland and Ireland) has identified challenging regulatory, territorial and political hurdles, and a complex patchwork of powers in three jurisdictions, including:

a) a mix of offshore generation and regulatory frameworks;

b) a mix of onshore grid capacity and regulatory frameworks;

c) a mix of interconnection and networks;

d) a mix of transmission pricing and market regimes, e.g. BETTA in the UK and the SEM on the island of Ireland;

e) a mix of subsidy/incentive and charging, and capital cost recovery schemes; and

f) a mix of sovereign state interest contributing to different targets—mutual and individual.140

114. To take one possible example of regulatory barriers, work in the North Seas Countries’ Offshore Grid Initiative has revealed that there is a significant difference at the moment in the regulatory regime applicable to connection of wind generation. We heard conflicting views about the appropriateness of the UK regime for offshore developments. The number of Offshore Transmission Owners (OFTOs) is potentially a problem for coordinating investments with European counterparts.

115. In most other EU countries, the building of electrical connection and interconnectors is the responsibility of the national Transmission System Operator (TSO). Uniquely in Europe, the current UK regime prevents the National Grid from building transmission assets offshore. Instead, the TSO is limited to building the necessary onshore equipment associated with the offshore assets.141 National Grid saw this as a problematic issue:

As you know, throughout most of the rest of Europe, the TSOs have been mandated to build their onshore network offshore. We believe [...] that there are some real benefits in allowing people to get on and do that. It then comes down to who is going to take the decisions on what the size of the link should be, and the TSO is very well placed to do that.142

116. The UK regime for the construction and operation of offshore transmission assets is designed to provide flexibility for generators in terms of who constructs the assets as well as cost-effectiveness to consumers from the competitive nature of the regime. Generators have a choice of constructing the transmission assets themselves or to opt for an Offshore Transmission Owner (OFTO) to do so. If they construct the assets themselves, then the generator must transfer the assets to an OFTO post-construction and pre-operation. OFTOs are selected on a competitive basis through a tender process. Ofgem, the energy




142 Q 88


regulator, estimates that such a competitive approach will result in savings of £350m to the consumer in relation to the first £1.1 billion of transmission assets tendered for Round 1.143

117. DECC and Ofgem have launched a project to undertake further work on coordination in 2011, to consider whether additional measures might be required within the competitive offshore regime to encourage the sharing of transmission assets within and across different offshore development zones in UK waters and, if so, how these measures might work in practice. The Offshore Transmission Coordination Group has been set up to assist DECC and Ofgem with this work.144 National Grid argued:

One of the problems that we do foresee is, when we are trying to co-ordinate around our transmission system operator colleagues around Europe, there will be 11 or 12 of them around the table, and with the current regime that we have, we could have 11 or 12 transmission system operators from the UK sitting around that table too, because we could have many transmission system operators offshore in the UK.145

118. DECC, however, suggested that any move to significantly change the offshore transmission regime between now and 2020 could provide unwelcome uncertainty.146 This was reinforced by E.ON who believed that clarity was important to the owners/operators and for generators who may want to connect to the supergrid.147

119. E.ON said that companies would also need to understand whether their offshore assets fell under the legislative framework of one or other Member State, as this could impact on the legal requirements that the plant has to meet, as well as the tax burden on it.148 They would need to understand the regime in which their plant would be operating, and would need to know who to approach for a connection, and be able to make a reasonable estimate of the likely costs of connection. Similarly, businesses wanting to trade across an interconnector would need to understand the regulatory arrangements of the connected systems and the charges that they would be expected to bear.

120. Centrica pointed out that it was unclear how an interconnector, that also connected an offshore windfarm, would be treated.149 To develop an integrated grid in the North Sea, it may be necessary to have consistent regulatory frameworks on all sides: “firstly, because that will make the development easier; secondly, because you don’t want to give spurious incentives for locating the capacity not where it is economically optimal but where there is a more favourable regulatory regime, for example, when it comes to access charges and connection charges”.150

121. It will be necessary to resolve regulatory issues in the next two to three years if work on an offshore grid is to begin in the 2020s. Without advances in these areas there is a risk

143 Offshore networks development, Department of Energy and Climate Change, http://www.decc.gov.uk

144 Offshore networks development, Department of Energy and Climate Change, http://www.decc.gov.uk

145 Q 88

146 Ev 47 (DECC), section 12




150 Q 102 [Alberto Pototschnig, ACER]


of lock-in to an inflexible and sub-optimal infrastructure that could be detrimental to meeting energy policy aims.151 Witnesses suggested to us that “to enable maximum benefit for the UK, the Government should play a proactive role in driving this system forward and provide resources to enable the initiative to undertake detailed energy system modelling”.152 Several were keen to emphasise that the first stages of offshore grid development would be able to evolve from the bottom up, without waiting for the completion of regulatory processes. This would need to be balanced against the advantages of a planned approach.153 E.ON UK believed that a “big bang” approach to the development of a European supergrid was probably not achievable. Instead, they argued, “consideration should be given to a more gradual approach, perhaps with clusters of offshore generating plant connected in phases, but in a way that will allow the supergrid to be expanded and extended later as demand for it arrives and the economic case is demonstrated for each extension”.154

122. The regulatory aspects of offshore grid development pose huge challenges and work on addressing these is in its infancy. It will be important to share findings between the different forums undertaking work in this area. There must be continued involvement at Ministerial level in the North Seas Countries’ Offshore Grid Initiative and in bilateral negotiations. In the meantime, we believe that progress can be made through an evolutionary “bottom up” approach, that would allow ongoing development in the offshore sector while further work on regulation proceeded.

Political commitment and timeline

123. Clear political commitment is needed if the development of an offshore grid is to go ahead. We heard that the European Commission and other institutions were politically committed to the development of new European transmission assets, but we heard less certain evidence about the strength of commitment among national governments.155 The North Seas Countries’ Offshore Grid Initiative includes commitments to investigate regulatory and technical issues, but no actual commitment to develop an offshore grid.

124. Norway is likely to be a key player in a European supergrid, as a provider of renewable hydro-electricity. Diversity in the kinds of renewable energy connected to the grid would have advantages for balancing out intermittency and controlling costs. There is 30 GW of installed hydro capacity in Norway. An interconnector is already planned between Norway and the UK “North Connect”, which is being developed by SSE in a partnership agreement with three Norwegian power utilities and Swedish developer, Vattenfall.156

151 North Sea Offshore Networks; Enabling Offshore Wind and Balancing Power: Key messages from the UK-Norway

Forum and Roadmapping Workshop, 6–8 June 2011, London


153 Ev w11 (Association of Electricity Producers), section 4; Ev w32 (Centrica), section 4; Ev w24 (SSE)

154 EV W9 (E.ON UK), section 4


156 “Vattenfall, SSE join with three partners to explore UK-Norway link”, Utility Week, 1 February 2011


125. However, in 2003, an interconnector was planned with Norway, which was vetoed by the Norwegian government after concerns about the effect on Norwegian electricity prices. Andrew Nind from Pöyry explained that:

The Norwegian Government stepped in 2003 and stopped it, because I think there was concern that Norwegian consumers would suffer as a result of the link. More recently, fossil fuel prices have been a lot higher and so there has been this assumption that the direction of flow would primarily be from Norway to Britain, helping British consumers, arguably at the expense of Norwegian consumers, but it all depends on one’s view of fossil fuel prices and also hydro conditions in Norway.157

126. James Cox, also from Pöyry, suggested that for Norwegian producers, for example, interconnection could be very lucrative as large amounts of low-carbon hydroelectricity was exported.158 However, according to Pöyry’s analysis, new interconnection would still be likely to raise electricity prices in Norway and so a consumer backlash against interconnection via a supergrid may still be possible.159

127. The Minister recognised that Norwegian (and British) consumers needed to be persuaded that greater interconnection would not push up their prices and it was not going to be taking electricity out of their system at a time when they may need it themselves. He believed that “they have to be persuaded that this is a good deal for them as well and so this has to be on a voluntarist approach and carrying consumers with us is part of that process”.160 However, he did not share with us any detail about plans to “persuade” consumers in the UK or in Norway of the advantages of interconnection.

128. Alongside the issue of consumer engagement and public support, timing will be critical in developing a supergrid. The Scottish Government saw it as “critical for the UK Government, in partnership with its devolved administrations, to identify a number of priority energy corridors in home waters to help accelerate the development of an offshore grid”.161 Alderney Renewable Energy pointed out to us that the Channel Islands and the Isle of Man were potential partners in a supergrid project, but revealed that “Alderney has hitherto been omitted from broader European plans to create a European supergrid”.162

129. For the first steps to be made and for investors to begin working on the first building blocks of a supergrid, confidence in the Government’s intentions is fundamental. Transmission System Operators usually invest in offshore assets anticipating a lifetime of 25 to 40 years. Current investments will affect the power system in 2030, 2040 or 2050.163 But long term expectations are not yet established.164 Centrica agreed that in-depth work would be needed on regulations before developers would have the confidence to invest in

157 Q 53

158 Q 53

159 Q 51 [James Cox]

160 Q 139


162 Ev w22 (Alderney Renewable Energy), sections 2.1–2.2

163 Q 101

164 Q 101


supergrid infrastructure, especially in the case of anticipatory investment.165 Daniel Dobbeni argued that manufacturers would “not invest unless they have more stable vision of the needs for the future”.166

130. We heard that the involvement of Ministers in the negotiation process at the technical level would be a “clear sign” of political commitment. The first European comitology process will be launched probably next year, “so we will have an immediate sign of how engaged the various ministries are and the various administrations are”.167

131. A powerful case has been made for an integrated offshore supergrid in the North Seas linking potential renewable sources of energy. Developing a North Seas grid may also prove to be a stepping stone to a much broader grid in future including other countries. As a first step, and in collaboration with the devolved administrations and the Republic of Ireland, the Government should set out plans for priority energy corridors in home waters. Crown dependencies like the Channel Islands also have substantial renewable energy resources and could benefit from interconnection and so they should be included in these discussions. The Government should consider options for ensuring that these developments will be “supergrid ready”.

132. The Government should not wait for multi-party European work-streams to come to an end before considering future interconnection and offshore grid collaborations. It should pursue bilateral cooperation with key partners, such as Germany and Norway, assessing these projects on their own merits.

133. Public confidence that the mutual benefits of interconnection justify the costs will be a necessary component of agreements contributing to the development of an integrated offshore grid. The Department of Energy and Climate Change must set out how it plans to inform the public in this country of the benefits of an offshore grid and how it will work with potential partners to pursue similar programmes in other countries.

134. Alongside public confidence, it is also necessary for potential investors to have confidence. The Government should bring forward a clear plan for interconnection and the creation of a meshed offshore grid, setting out which actions can be pursued unilaterally and which depend on agreements with other countries.

Conclusion

135. It is extremely unlikely that a full-scale supergrid will be developed by 2020. However, the Government’s ambitions for developing offshore wind resources by 2020 mean that the UK will need new kinds of electricity networks to deliver power where it is needed and take advantage of import and export opportunities. A market-led approach to transmission development is important for ensuring cost-effectiveness, but a strong political lead will be necessary from Government to overcome obstacles


166 Q 106



such as the need for coordinated anticipatory investment in shared assets. Companies will not undertake these risky projects without guidance from the Government.

136. There is some preparatory work that needs to take place before the Government can set out its detailed plans: it must assess the economic and energy security impacts of increased interconnection; and it must evaluate the benefits of coordinated offshore grids for optimising electricity transmission and reducing the scale of reinforcement required. A fair solution to the complex problem of cost-sharing will need to be found with other countries. This information should form the basis of open political debate to ensure that the public has confidence in the Government’s plans for shaping the grid.

137. Preparatory work must be undertaken expeditiously and it must be followed as soon as possible by an expression of political intent, detailing interconnection plans as far as 2050 and a means of ensuring that network integration can be achieved step by step. This should set up the building blocks of a supergrid. The Government will need to seek similar undertakings from European partners on a bilateral and multilateral basis, to underpin the regulatory work that has already begun with firm commitments. This will be fundamental to ensuring that integrated, interconnected networks are developed and that offshore resources are harnessed in the most efficient way possible.


Conclusions and Recommendations

The benefits of an integrated solution

1. The future of the electricity transmission system must be considered within the context of the Government’s renewable energy objectives. If it hopes to deliver its aspirations at all, let alone in a cost-effective way, it will be necessary to develop a transmission system commensurate with the scale of offshore renewables expected. A more efficient way of connecting wind needs to be planned for generation further offshore and the increased volumes of wind expected. It makes sense to develop new means of connection to support those developments before the capacity has been developed. The Department of Energy and Climate Change should therefore undertake to assess the advantages of a meshed offshore grid as opposed to radial connection within the next two years. (Paragraph 24)

2. The UK electricity transmission system needs to be updated. It is no longer good enough to patch up the old system. The Government must produce a new plan for electricity transmission that includes interconnection and integrated offshore assets and the development of a supergrid could help achieve this. In particular, it is utterly unacceptable that large costs are incurred by the System Operator and consumers to curtail wind supply because the system cannot deliver the electricity to where it is needed. The problem of transmission is turning a potentially profitable resource into a potential liability. Unless this problem is addressed there is a risk that public scepticism about renewable energy and wind in particular will grow. The Government should commission an assessment of the most efficient way that offshore connections via a supergrid could be used to ease onshore congestion. (Paragraph 30)

3. The need to transmit electricity from north to south and from offshore to onshore could have a very damaging effect on the landscape. An integrated offshore grid could minimise the environmental impact of new transmission assets. We recommend that the Government should produce a cost estimate of the value of the social and environmental savings made by reducing the intrusion of onshore transmission assets and publish its assessment of the relative costs of different transmission options: overhead lines; undergrounding; and offshore High Voltage Direct Current lines. (Paragraph 35)

The benefits of increased interconnection

4. The UK is far behind the EU’s targets on interconnection. The Government should agree to meet European targets for interconnection by 2020 and we recommend that in its Response to this Report that it sets out its own expectations for interconnection up to 2050. (Paragraph 46)

5. We recommend that the Government investigates more thoroughly the potential impacts and costs of intermittency on maintaining the energy supply when there is more renewable generation and analyses the contribution that increased interconnection could make to evening out intermittency. (Paragraph 58)


6. The UK is experiencing a reduction in its energy independence as North Sea oil and gas supplies are depleted. The offshore renewables resource is potentially vast and offers an important element of a future energy mix. The Government should set out its expectations for the development of the offshore renewables resource detailing support measures and expected capacity out to 2050. (Paragraph 67)

7. The UK currently enjoys a real comparative advantage in the offshore technology sector, but this advantage may be short lived. The Government should develop a plan for supporting the scaling-up of the offshore technology sector to ensure that the UK’s expertise does not vanish overseas. (Paragraph 68)

Barriers to the development of a supergrid

8. The UK has agreed substantial development of offshore wind. Connections for these and other developments will need to be compatible with any future grid initiatives. In its electricity systems policy DECC must set out how plans for offshore grid developments and interconnection will be coordinated with “smart” improvements. We recommend that the Government considers how offshore generation could be integrated with electricity storage technologies. (Paragraph 81)

9. The Government should ensure that Offshore Wind Round 3 grid connections are super-grid compliant to avoid locking out potential future electricity sales to Europe. Working with Ofgem, the Crown Estate and other stakeholders, it must identify the minimum requirements for ensuring that present developments could be connected into a future offshore grid. (Paragraph 82)

10. The technological challenges associated with the development of a supergrid are not insurmountable. The basic kit is available and the industry is confident that other solutions will become available once a market is clear. To unlock the private sector investment the Government needs to decide whether the supergrid project will go ahead and, if that is its intention, it should make a public commitment to it. (Paragraph 85)

11. At a time when there are still significant doubts about the economic viability of huge expansion of offshore wind, it is clearly essential that these are resolved before huge extra investment in transmission capacity is undertaken. We recommend that the Government commissions and publishes an updated analysis of both the costs of offshore wind and of the costs and benefits of early investment in transmission networks compatible with the eventual construction of a supergrid. (Paragraph 88)

12. Certainty could reduce the risk of anticipatory investment in transmission assets. If the Government decides to pursue a rapid roll-out of offshore wind, coordinated development of an offshore grid would help to maximise the economic benefits of accessing that resource. A half-hearted approach to developing an offshore network may lead to inefficiencies. If the Government wants to minimise the costs of building a supergrid, it should adopt the advice of the Committee on Climate Change and make firm commitments on support for offshore wind and marine generation through the 2020s in order to create the confidence necessary for anticipatory investments. (Paragraph 95)


13. We recommend that the Department of Energy and Climate Change consults on options for “oversizing” transmission assets in order to create the building blocks of a future offshore grid and sets out plans for anticipatory investment in its forthcoming electricity systems policy. (Paragraph 96)

14. We do not share the Minister’s confidence that cost-sharing between European Member States will not be an issue. We believe that this view is mistaken and complacent, as the costs will be high investments by companies and by Transmission System Operators will ultimately be paid for by consumers in different countries, who may not benefit equally from the development of new infrastructure. The Government must work with its European partners to develop a methodology for cost sharing that is transparent and fair and takes into account how costs are passed on to consumers, not just government spending. (Paragraph 103)

15. Public subsidy may be needed in order to overcome market failures and additional for investment in the first stages of a supergrid. The justification for such a subsidy needs to be examined carefully. At the European level, the Government should suggest that the European Commission changes its criteria for funding selection to include the early stages of projects and projects that are not being developed by the Transmission System Operator. In home waters, the Government should consider whether to promote integration of offshore networks through a combination of public finance and standards for shared capacity in new transmission assets. (Paragraph 104)

16. The effect of interconnection on consumer prices is largely unknown. We recommend that the Government undertakes further analysis of the expected effect of increased interconnection on consumer prices. It should set out parameters for the acceptable effects of price arbitrage on consumer prices and how they weigh those changes against expected reductions in price volatility. (Paragraph 110)

17. The regulatory aspects of offshore grid development pose huge challenges and work on addressing these is in its infancy. It will be important to share findings between the different forums undertaking work in this area. There must be continued involvement at Ministerial level in the North Seas Countries’ Offshore Grid Initiative and in bilateral negotiations. In the meantime, we believe that progress can be made through an evolutionary “bottom up” approach, that would allow ongoing development in the offshore sector while further work on regulation proceeded. (Paragraph 122)

18. A powerful case has been made for an integrated offshore supergrid in the North Seas linking potential renewable sources of energy. Developing a North Seas grid may also prove to be a stepping stone to a much broader grid in future including other countries. As a first step, and in collaboration with the devolved administrations and the Republic of Ireland, the Government should set out plans for priority energy corridors in home waters. Crown dependencies like the Channel Islands also have substantial renewable energy resources and could benefit from interconnection and so they should be included in these discussions. The Government should consider options for ensuring that these developments will be “supergrid ready”. (Paragraph 131)


19. The Government should not wait for multi-party European work-streams to come to an end before considering future interconnection and offshore grid collaborations. It should pursue bilateral cooperation with key partners, such as Germany and Norway, assessing these projects on their own merits. (Paragraph 132)

20. Public confidence that the mutual benefits of interconnection justify the costs will be a necessary component of agreements contributing to the development of an integrated offshore grid. The Department of Energy and Climate Change must set out how it plans to inform the public in this country of the benefits of an offshore grid and how it will work with potential partners to pursue similar programmes in other countries. (Paragraph 133)

21. Alongside public confidence, it is also necessary for potential investors to have confidence. The Government should bring forward a clear plan for interconnection and the creation of a meshed offshore grid, setting out which actions can be pursued unilaterally and which depend on agreements with other countries. (Paragraph 134)

22. It is extremely unlikely that a full-scale supergrid will be developed by 2020. However, the Government’s ambitions for developing offshore wind resources by 2020 mean that the UK will need new kinds of electricity networks to deliver power where it is needed and take advantage of import and export opportunities. A market-led approach to transmission development is important for ensuring cost-effectiveness, but a strong political lead will be necessary from Government to overcome obstacles such as the need for coordinated anticipatory investment in shared assets. Companies will not undertake these risky projects without guidance from the Government. (Paragraph 135)

23. There is some preparatory work that needs to take place before the Government can set out its detailed plans: it must assess the economic and energy security impacts of increased interconnection; and it must evaluate the benefits of coordinated offshore grids for optimising electricity transmission and reducing the scale of reinforcement required. A fair solution to the complex problem of cost-sharing will need to be found with other countries. This information should form the basis of open political debate to ensure that the public has confidence in the Government’s plans for shaping the grid. (Paragraph 136)

24. Preparatory work must be undertaken expeditiously and it must be followed as soon as possible by an expression of political intent, detailing interconnection plans as far as 2050 and a means of ensuring that network integration can be achieved step by step. This should set up the building blocks of a supergrid. The Government will need to seek similar undertakings from European partners on a bilateral and multilateral basis, to underpin the regulatory work that has already begun with firm commitments. This will be fundamental to ensuring that integrated, interconnected networks are developed and that offshore resources are harnessed in the most efficient way possible. (Paragraph 137)


Annex I: Terms of Reference

• What are the technical challenges for the development of a European Supergrid?

• What risks and uncertainties would a supergrid entail?

• How much would it cost to create a supergrid and who would pay for it?

• Will a supergrid help to balance intermittency of electricity supply?

• Will a supergrid reduce energy prices for consumers and businesses?

• What are the implications for UK energy policy of greater interconnection with other power markets?

• Which states are potential partners with the UK in a supergrid project?

• How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

• Would new institutions be needed to operate and regulate a supergrid?


Annex II: Different supergrid proposals and work streams in 2011

The North Seas Countries’ Offshore Grid Initiative

In December 2010, 10 European Member States (the UK, Germany, France, Belgium, Netherlands, Sweden, Ireland, Luxembourg, Denmark and Norway) signed a Memorandum of Understanding launching the North Sea Countries Offshore Grid Initiative (NSCOGI). NSCOGI is a collaboration to create an integrated offshore energy grid which links wind farms and other renewable energy sources across the northern seas of Europe.

The aim was for governments to work together with energy regulators, the Commission and industry, to tackle the technical, regulatory, market and planning barriers to different approaches to co-ordinated development of offshore grids in the North and Irish Seas. The project will also investigate costs and benefits. Detailed work will be carried out in three particular areas: grid configuration and integration; market and regulatory issues; and planning and authorisation procedures.

NSCOGI plans to identify a set of plausible scenarios for onshore and offshore grid infrastructure for 2030 and develop proposals to overcome barriers to the development of these potential grid configurations by December 2012. By this date, the project also aims to develop proposals for regulatory and market design for a coordinated offshore grid while also proposing methods for tackling issues such as cost allocation and anticipatory investment.

The All-Island Approach

On 20 June 2011 Ministers from the British Isles, Ireland, The Channel Islands and the Isle of Man pledged to cooperate on exploiting the wind and marine resource in and around the islands. The states involved agreed to co-operate in the “All Islands Approach” to energy.

The UK-Baltic Cooperation

Following the UK-Nordic-Baltic Summit in January 2011, DECC has proposed to continue cooperation in key areas of mutual interest, including identifying ways of accelerating the transition to a low-carbon economy. The partners are considering a high-level meeting in the next few months to discuss concrete ways of making progress on this shared agenda, building on the North Seas Initiative and a similar initiative in the Baltic region, the Baltic Energy Market Interconnection Plan (involving Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden and Norway).

The Irish-Scottish Links on Energy (ISLES) study

Supported by the EU’s INTERREG IVA Programme, ISLES is a collaborative project between the Scottish Government, Northern Ireland Executive and Government of


Ireland. It is assessing the feasibility of creating an offshore interconnected transmission network and subsea electricity grid to connect and transport electricity created from renewable energy sources in the coastal waters linking Scotland, Northern Ireland and Ireland. By delivering a credible and ground-breaking evidence-based assessment of the practical steps, challenges and opportunities to accelerate infrastructure development for 2020 and beyond, ISLES will investigate the steps needed to develop possible offshore interconnected grid networks.

DESERTEC

The DESERTEC concept aims to promote the generation of electricity in Northern Africa using solar power plants, wind farms and the transmission of this electricity to the consumption centres. The first region for the assessment and application of this concept is the EU-MENA region (Europe, Middle East, Northern Africa). Electricity would be transmitted to European and African countries by a super grid of high-voltage direct current cables. According to the Desertec Foundation, it could provide a considerable part of the electricity demand of the MENA countries and provide continental Europe with 15% of its electricity needs.

Greenpeace proposals

Greenpeace has developed two models of Supergrid: a “Low Grid” model focused on the centre of Europe; Germany, Netherlands, Belgium and France and a “High Grid” model incorporating North Africa.168

168 Greenpeace, Battle of the grids, January 2011


Formal Minutes

Wednesday 7 September 2011

Members present:

Tim Yeo, in the Chair

Dan Byles Barry Gardiner Ian Lavery Dr Phillip Lee

Christopher PincherJohn Robertson Laura Sandys Dr Alan Whitehead

The following declarations of interest relating to the inquiry was made:

Tuesday 14 and Thursday 30 June 2011:

The Chair declared the following interest: Director of Groupe Eurotunnel SA (non-executive) (of which Eurotunnel plc is a wholly owned subsidiary); company managing the Channel Tunnel.

Thursday 30 June 2011

Sir Robert Smith declared the following interest: Stakeholder in Shell Transport and Trading

Draft Report (A European Supergrid), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 137 read and agreed to.

Annexes and Summary agreed to.

Resolved, That the Report be the Seventh Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

[Adjourned till Tuesday 13 September at 10.00 a.m.


Witnesses

Tuesday 10 May 2011 Page

Eddie O'Connor, President, Friends of the Supergrid, Matthew Knight, Siemens Energy, Dr Simon Harrison, Institution of Engineering and Technology, and John Scott, Institution of Engineering and Technology Ev 1

Alex Murley, Head of Technical Affairs, RenewableUK, Andrew Nind, Director, Pöyry, and James Cox, Consultant, Pöyry Ev 10

Tuesday 14 June 2011

Stuart Cook, Senior Partner, Transmission and Governance, Ofgem, Martin Crouch, Partner, European Strategy and Environment, Ofgem, and Alison Kay, Commercial Director for Transmission, National Grid Ev 17

Daniel Dobbeni, President, European Network of Transmission System Operators (ENTSO-E), and Alberto Pototschnig, Director, Agency for the Cooperation of Energy Regulators (ACER) Ev 25


Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and Sue Harrison, Head of European Energy Markets Ev 35

List of printed written evidence

1 Department of Energy and Climate Change Ev 47

2 National Grid Ev 50

3 Ofgem Ev 56

4 The Institution of Engineering and Technology Ev 61

5 RenewableUK Ev 65

6 Friends of the Supergrid Ev 68

7 Pöyry (supplementary) Ev 75

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/ecc)

1 Climate Policy Initiative Ev w1

2 Alstom Grid UK Ev w4

3 The Crown Estate Ev w7

4 E.ON UK Ev w9


5 Association of Electricity Producers Ev w11

6 EDF Energy Ev w14

7 Greenpeace UK Ev w19

8 RWE npower Renewables UK Ev w21

9 Alderney Renewable Energy Ev w22

10 Scottish and Southern Energy Ev w24, Ev w26

11 Campaign to Protect Rural England Ev w28

12 DONG Energy Ev w30

13 Centrica Ev w32

14 Institute of Marine Engineering, Science and Technology, Offshore Renewables Special Interest Group Ev w36

15 Mainstream Renewable Power Ev w39, Ev w44

16 Scottish Renewables Ev w44

17 E3G Ev w47

18 WWF-UK Ev w52

19 Scottish Government Ev w60

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2010–12

First report Emissions Performance Standards HC 523 (807)

Second report UK Deepwater Drilling–Implications of the Gulf of Mexico Oil Spill

HC 450 (882)

Third report The revised draft National Policy Statements on energy

HC 648

Fourth report Electricity Market Reform HC 742 (1448)

Fifth report Shale Gas HC 795 (1449)

Sixth report Ofgem's Retail Market Review HC 1046

First Special Report Low carbon technologies in a green economy: Government Response to the Committee's Fourth Report of Session 2009-10

HC 455

Second Special Report Fuel Poverty: Government Response to the Committee's Fifth Report of Session 2009-10

HC 541

Third Special Report The future of Britain’s electricity networks: Government Response to the Committee’s Second Report of Session 2009–10

HC 629

Energy and Climate Change Committee: Evidence Ev 1

Oral evidenceTaken before the Energy and Climate Change Committee

on Tuesday 10 May 2011

Members present:

Mr Tim Yeo (Chair)

Dan BylesDr Phillip Lee

________________

Examination of Witnesses

Witnesses: Eddie O'Connor, President, Friends of the Supergrid, Matthew Knight, Siemens Energy,Dr Simon Harrison, Institution of Engineering and Technology, and John Scott, Institution of Engineeringand Technology, gave evidence.

Q1 Chair: Welcome to the formal meeting of theCommitee. Could you start by explaining what thedifference is between a supergrid and a series ofstraightforward interconnectors?Eddie O'Connor: If I might, I would like to say thatwhat we have been doing up to now has been buildinga series of point-to-point interconnectors. Theassumption made is that the world is composed ofindividual national grids and that it will remain so intothe future. The supergrid goes beyond that conceptand says we will finish up generating a huge amountof electricity offshore, that we are unable to do thatwith the current technology—that is alternatingcurrent—so we need to build a new grid. It is a stepchange in technology that would be built around DC;that is direct current. It will involve the supernodes,which will allow for electricity to be routed and tradedacross Europe. Of course, most of that electricity willfinish up being generated in British waters or in watersthat are quite close or certainly closer to Britain thanany other country in Europe.The supergrid is a meshed grid as distinct from aseries of point-to-point interconnectors. We will finishup probably building 1.5 million megawatts ofoffshore wind in Europe, and we will probably finishup with the same amount of solar in the south. Thisnew supergrid will connect up both of those and makeEurope energy independent and completely pollutionfree.

Q2 Chair: In terms of how you will design it, whatare the options about which way it goes?Matthew Knight: The option if we leave things asthey are at the moment is that we struggle to buildeven interconnectors, because you need twojurisdictions to both serendipitously come up with thesame market need at the same time and then two setsof regulators and two sets of consenting regimes toallow this to happen. What we need is a wider vision,because a supergrid makes sense of both individualcountries’ sustainable energy policies but it also givesthe opportunity for a sustainable Europe in a way thatwe will not get to piecemeal. So what we need are thestandards for the technology; we need someharmonisation of the way grid is regulated acrossEurope. That is not necessarily equivalent to a singleregulator but it is certainly harmonisation and a single

Christopher PincherSir Robert Smith

regulator would help. We then need harmonisation ofmarkets for energy because self-evidentlyinterconnecting Europe is a good idea. It has to reducethe cost of energy to customers all over Europe. Atthe moment, to make the business case to build anypart of that network, you are trying to cope withnationally focused energy incentives in each countryand trying to find a way to make the right thing fitwhat we have. We need more harmonisation inregulation across Europe and more harmonisation inmarkets across Europe to allow the right thing tohappen.Dr Harrison: I think also there is a need for visionand buy-in across Europe. There are all sorts ofpossible supergrid concepts. There is the North Seasupergrid, which I suspect we will spend much of ourtime talking about today. There is the so-calledDESERTEC initiative, which is all about north/southtransfers of renewable power from North Africa andelsewhere. There are possibilities to look east/west toexploit time differences in demand across differentparts of Europe. There are all sorts of options and onehas to start somewhere and get going, but there is alsoa need to think about what an endgame might looklike, or the different scenarios for an end game, andthat is something that needs to be considered atEuropean level.John Scott: May I add one more? I agree with all thathas been said this morning. You were asking aboutthe characteristics of a supergrid, what makes itdifferent. I think it is important to recognise the hugescale of this. At the moment, we have—measured ingigawatts—a two gigawatt link across to France. Weare probably looking here at something more like 20gigawatts. I think at the moment from Spain up intoFrance there is about a 1 gigawatt link, while someother studies are showing a need for 30 gigawatts.Now this is huge, and if you do that not only do youneed to form this interconnected grid but then thatgrid really begins to be a significant presence on thepower system, so you have to think of it as a system,not as a series of electrical pipes. It has to become asystem, which means that it has to be balanced in realtime between generation and demand. There is no realstorage in the system. It becomes a grid system, sowhatever is built has to integrate, has to conform tosome standards; there has to be an architecture. Even

Ev 2 Energy and Climate Change Committee: Evidence

10 May 2011 Eddie O'Connor, Matthew Knight, Dr Simon Harrison and John Scott

if that is implemented through a liberalised market, itstill has to have an architecture or it will not work asa system.

Q3 Chair: Given that you have set out severalalternatives about north, south, east, west, and so on,is there a priority ordering? You do not want to do allof these things at the same time, so do you have apreference as to when it would start?Eddie O'Connor: Yes, we have a very definitepreference and it is based on the needs of GreatBritain. Great Britain has awarded 50,000 megawattsto various developers for offshore plant. It proposesto build somewhere between 25,000 and 30,000megawatts offshore by 2020. Now, in collaborationwith National Grid, we have come to the realisationthat you cannot model a scenario without thesupergrid. You cannot build 25,000 megawattsoffshore in Britain without the supergrid. Just thinkabout it: it is 500 miles long; the supergrid of Britain,basically in the shallow part of the North Sea, wouldhave to be 500 miles. A big system of air is widerthan and has a bigger diameter than 500 miles, so infact you are going to suffer from all the variability ofwind if you just build a set of connectors into Britain.On the other hand, if you link via a supergrid intoGermany, connect up with the 25,000 megawatts ofwind in Germany, and take it all the way down toMunich, we then have 1,500 miles in the system.Here you are getting to a stage where the very extentof the supergrid begins to balance out because thewind is always blowing somewhere. It also allows youto piggyback on the spare capacity that is in Germany,so Germany will have hundreds of generators that willnot be in use all the time and Britain does not have tobuild that extra balancing generation capacity if youhave the supergrid. So the supergrid is absolutelynecessary for Britain to be able to meet its targets,which it has voluntarily set for itself and is nowembedded in European law.That is why we say Britain has a bigger vested interesthere and for a lot of other reasons as well, in terms ofthe employment, in terms of the new ports, in termsof the new ships that would get built here, in termsof the eventual exports that will happen from Britishwaters. The DESERTEC proposal is very interesting,but I notice that they are talking in terms of ithappening some time around 2030 to 2050. We aretalking about this first leg of the supergrid being inplace by 2020. To do that, we have to have all the softside organised. Who owns it? Who regulates it? Towhat standards will it be built? How do you protectthe customer? How is it to be planned for, and how isit proposed to be operated? All those soft questionshave to be answered within the next three years. So,whereas there are many proposals, this one has beenvery carefully thought out as to its necessity.Dr Harrison: I think I would agree that the North Seasupergrid is probably the right first step towards thedevelopment of a fuller European supergrid, for muchthe same reasons that Eddie has outlined. I would,though, suggest that in scaling that supergrid, inworking out exactly how it is going to be used, whatsize it is going to be, and so on, and in balancing thebenefits of that with the costs of deploying the

supergrid, looking at things like wind variabilityacross Europe and suchlike, there is significant studyactivity still needed. There are options that need to betraded in sizing the supergrid around the amount ofpeaking power it is worth building in the UK, forexample, to deal with when the wind is not blowingversus the benefits of sharing peaking power acrossEurope versus the costs of building the supergrid. Allthose things I think need further work and some ofthe urgency now is about pushing that work forwardto gain enough understanding to allow us to properlysize, scale, cost and then work out how to build thesupergrid.

Q4 Dan Byles: We have heard quite a lot, we haveread quite a lot as well, about the potential benefits ofsupergrid. I am particularly interested about thepotential impact on the UK’s renewable energy targetsand on our security of supply. I would be veryinterested in your thoughts on those two issues inparticular.Eddie O'Connor: I don’t mind taking that question. Itis a game changer for the UK, in effect. It allows youto tackle the greatest energy resource that Britain hasever had. There was a report published last year,which I am sure you have seen, which said that whenwe get this plant built out in the North Sea it will bethe equivalent of a billion barrels of oil per year. It isan enormous resource that we are tapping into here,and the supergrid is the only effective way of gettingthat deployed quickly.It also has a very big impact in terms of the cost ofelectricity because you tap into a free resource. Thewind is free. In fact, the payback period on the firstleg of the supergrid at €28 billion, which is a verylarge number, but actually if you don’t build thesupergrid and you build it for gas, the payback periodfor that leg of the supergrid is about seven yearsbecause that is what you will pay for your gas atnormal prices to build that first leg. What this givesBritain is a capability to be number one in the world,to develop new technologies, to tap into a free powersource, which is the first stage of a very much largertap-in going forward from 2020. Rather than get intothe big, long-term numbers, which are the relevantstrategy, you must cast everything that you do now sothat you don’t finish up with a bunch of strandedassets after 2020. If we do go down another pathwaylike betting on fossil fuels, I fear then we are going tofind ourselves with very expensive electricity that isconstantly varying in price.

Q5 Dan Byles: What about energy security inparticular? What will be the impact on security ofsupply of the supergrid?John Scott: Could I respond on that. I think one ofthe attractions from a broad—and a power systemsperson’s—perspective is that if you move to aninterconnected mesh, instinctively that is much moresecure against shocks, like severe events orgeopolitical disruptions but, more than that, it isstrategically much more flexible for the long-term.

Q6 Dan Byles: Are there any dangers? For example,you have mentioned us tapping in to Germany’s



excess capacity; therefore, not building some capacityhere that we might otherwise build. Is there a dangerwe might get lazy, start relying on other Europeans tobuild the generation and assume we are going to beable to buy it?Dr Harrison: Potentially, yes. The regulatoryarrangements would need to ensure equitable accessso there was not nationalistic behaviour if there weretimes of shortage. If you were to import from NorthAfrica, say, you would have geopolitical issuesattached to that, which would need to be handled andmaybe that would have an impact on the scale of whatyou would want to import from outside the EU. Thoseissues would all need to be handled, and I imagineone would want to strike some balance aboutindigenous versus imported. However, there is alarge—albeit, relatively high cost—resource in termsof offshore wind, not uniquely but substantiallyavailable to the UK and for the UK to export. It isrelatively easy to envisage a scenario where the UKis a net exporter, overall, while some times importingto deal with the variability issue for offshore wind.Eddie O'Connor: One of the key things is that, firstof all, the wind around Britain belongs to Britain andcannot be taken away. It does not matter what sheikhcomes to power in some sheikhdom in the MiddleEast or anywhere else in the world; it does not matterwhat the geopolitical relationship between China andthe United States is, once Britain has tapped into thisresource—as my colleagues have said—this is it forgood. You build a wind farm offshore, it is probablygood for 100 years. You will replace the blades maybeevery 25 years. The fact is it has an enormouslypositive impact on Britain’s security of supply, but viathe supergrid, if you link up with Norway, which hasthis great hydro resource, and then you go down toMunich and you link up with the Alps—and the Swissare very keen on the idea as well because they willbuild pump storage—you are then linked up, with theability to turn on and off electricity that we enjoy now,which will further enhance minute-by-minute security.If you are linked up to very switchable hydroresources this gives you added tactical security ofsupply, whereas we have already guaranteed thestrategic security of supply by tapping into this bigresource, which will always be ours, cannot beinterfered with and is free and sustainable.

Q7 Dan Byles: You do not see there being a danger,provided we get the regulatory system right, that attimes of tight supply—should there be for somereason a time of tight supply—we would beeffectively outbid? Suddenly we would be trying tocompete in a European-wide market for energy,because we were not producing everything we needourselves and we might suffer for that.Dr Harrison: If the regulatory environment is as itshould be, that remains an issue even if you haveplenty of generation in the UK because it works theother way round. You need to be able to manage thattype of situation with adequate peaking plant,wherever it is in Europe, to provide the backup forsituations where you are short of maybe wind and sunat the same time or something. That whole problemwould need to be solved. The dimension we have not

mentioned at all is the evolution in parallel acrossEurope of smartgrids and the ability to managedemand, which is a very key part of the same storyand we should not underestimate that.Dan Byles: I think we will probably be asking a fewquestions on that shortly.

Q8 Sir Robert Smith: You mentioned earlierBetamax and VHS. Is the technology there now for asupergrid and is it a question of installing it, or arethere missing technologies that still need to becreated?Dr Harrison: I think in general, yes—but sorry,Matthew, please, you are the technologist.Matthew Knight: On behalf of my own company andalso our competitors, who build the technology for thesupergrid, the answer is an emphatic yes, thetechnology is available now. To build the first stagesof the supergrid, as is described in the Friends of theSupergrid paper, we can use the concept of thesupernode. Everything that we need to be able to dothat is available now or certainly within the lifetimeof a project.Going forward, if we get to future wholly DCnetworks we need some new technology. My owncompany—and I am sure our competitors have thepatents in place—knows how to build something likea DC circuit breaker. What we need is thestandardisation agreement across Europe of whatvoltage does it need to operate and what current doesit need to interrupt. That is being worked on at themoment. There is a pan-European group calledCENELEC and there is a working group that willreport in November this year. All of the manufacturersare involved in that and some of the transmissionsystem operators as well. I would commend, as aquick win for something like the North Sea’s gridinitiative, to adopt the output of that standards body’swork as its first template for interoperability andharmonisation of the future.Chair: Any other views?John Scott: I don’t know whether you are aware ofthe way this industry works, but of course we havehighly competitive major players. It is wellestablished that there is a sense of co-ordination andco-operation at the beginning of creating a newmarket to get standards in place. People worktogether. So you do end up with a market that isenormously helpful for the purchasers of thisequipment in the future, because you have so-calledinteroperability, open systems, by complying withstandards and developing standards and then you letthe market compete from there on. The importantthing is to try and accelerate through thestandardisation process at the beginning of a newtechnology.Dr Harrison: Overall, the IET believes thattechnically this isn’t all that hard, it is just a very largeproject. So there are a few new technologies that needto come along but they are in development. Theproject is on a very massive scale indeed, and thereneeds to be a step up the game in terms of supplychain capacity to deliver all this within the time. Thatis going to need confidence among manufacturers, andso on, which needs to come from the right regulatory



environment creating the right incentives for peopleto go out and do this so that people will invest inmanufacturing capacity, and the like.

Q9 Sir Robert Smith: The standardising oftechnologies: who is producing those standards and isit in place to happen?Matthew Knight: Yes. This CENELEC group is aninternational standard-making body. We wentknocking on the door just over a year ago and said,“As the manufacturers of this kit, we need to come upwith some standards”, but obviously manufacturers ontheir own getting together is not what is wanted; thatlooks too much like a cartel. We knocked on the doorof CENELEC and other standards-making bodies andsaid, “Would you like to invite us all in?” They invitedin ENTSO-E and one or two other transmissionsystem operators—I think National Grid isrepresented for the UK—and that work is welladvanced. It has defined the areas that needstandardising and by November it will have come upwith the outlines of the standards. Technology is notgoing to be the issue for this; it is all about regulationand markets.Eddie O'Connor: I would just like to point out this ishappening because the Friends of the Supergrid gottogether a couple of years ago and said, “The mostimportant thing we have to lay down here is notcartel-driven, not a recipe for charging high prices tocustomers, but bringing together the various elementsof the industry”. The industry is not just aboutmanufacture. It is about development of things. It isabout the operation of these issues. It is about theownership of these assets. All these people have beenbrought together to consider engineering a set ofstandards, and now they are all working together.There was a meeting two weeks ago in Germany,which lasted for two days. They sat down for two fulldays and, as Matthew says, we are having a reportin November.

Q10 Sir Robert Smith: Are there any examples inthe world of interconnection between very differentelectrical transmission systems at scale?Dr Harrison: There are plenty of examples of verylarge point-to-point connections using high voltageDC technology, which provide that type ofinterconnection. What we don’t have at the momentare large meshed DC systems, so that is somethingnew. I think the control technology is there, inprinciple; it just has not had deployment. This wouldbe an early example of such deployment, but I thinkwe see this as a solvable problem. It is just we needto go out and do it.John Scott: May I add that this is a movingmarketplace, from the engineering perspective, and Ithink I am right in saying the largest DC link at themoment is being built in China? We say that the linkacross to France at the moment is two by onegigawatts. There is a six gigawatt link being built inChina at the moment, an overhead line.Matthew Knight: China is an interesting example.Albeit, that China is building its equivalent tosupergrid onshore, it is building over 100 gigawatts ofnew transmission lines by 2019, I think is their target

date. In the decade that we are talking aboutdiscussions in Europe and setting up the first leg ofthe supergrid, China is actually building somethingequivalent in size and scale.Dr Harrison: China has a habit of beating the targetdates that it sets as well, so I think the experiencegained there will be very valuable in Europe.

Q11 Sir Robert Smith: Is there any added problemwith fault detection on a supergrid and themanagement of faults?Eddie O'Connor: That is an interesting questionbecause, classically, the answer would have been, yes,that if you get a breakdown you can’t fly off in yourhelicopter and see where the overhead line has fallendown. This is a radically new idea, this supergrid, andthe new cable will be festooned with fibre optics. It isa profound trading tool; the supergrid is a profoundtrading tool. To return to the question about whetherBritain will run out of supply because the power willflow elsewhere, what will happen is that the price willadjust according to the need and the power will flowin the direction of where it is going to get the bestprice. The new cables will be different from all thecables up to now, in that they will contain a lot ofinformation within them. So I don’t think it is outsidethe bounds of technical possibility to be able to put ina cable with a number of fibre optics as part of itsstructure, where you bounce a light signal down andit tells you how many miles out the thing has broken.It is one of these technical issues that we will dealwith and solve.Matthew Knight: It is something we are alreadydoing. On offshore wind farm connections we alreadyhave distributed temperature sensing, which allows usto run the cable to the maximum capability, and faultdetection. The technology is available.Dr Harrison: Historically, HVDC systems have beenextremely reliable even when installed offshore,provided it is done properly. I think one area that willneed some further thought is when you get into verylarge transfer capabilities, possibly using singleelements, then one needs to think at the receiving endof what happens if you lose that particular circuit. Atthe moment, there are limits on size of in-feed to theUK system—I think it is 1,200 megawatts, isn’t it?—that can all be lost in one go. Potentially, that couldget pushed here to something rather larger and thesystem would need to have appropriate strategies toallow it to respond. We do not see that as being anunsolvable technical problem; it is simply somethingthat is going to have to be thought through and doneas we make the journey.Matthew Knight: In fact, again National Grid isalready doing work on that. The single in-feed loss atthe moment is 1,320 megawatts, which is based onthe Sizewell Power Station being the biggest singlefeed used on the system. They are intending to changethat to a higher number to allow for new nuclear build,and they are already discussing changing it to aslightly higher number, of around about twogigawatts, to suit the size of DC grid connection in-feeds that they are expecting by the latter part of thisdecade for Round 3 offshore wind projects.



John Scott: Could I just say that this is a goodexample of needing to regard this as a system, not asa series of elements. Perhaps a rather loose parallel is:if you had a road network with no motorways, whenyou build the first kilometre what do you do with it,because you will have a bottleneck at each end and itis only when you put all the links together into asystem do you start to move the traffic round? Now,we have an issue here because if you built a sixgigawatt link across to France—move China’stechnology, put it here—we couldn’t use itstraightaway because we can’t accept the risk of a sixgigawatt loss, but if you had a number of six gigawattlinks and they were connected up at each end and itwas part of a network, then, of course, losing one doesnot have the same effect.This is the need to think ahead, to have an architectureand have an investment confidence, because to startwith you might put in assets that are only partlyloaded. Then you would have everybody raising theirhands, saying, “This is stranded assets” or, “It is badinvestment”, but it just needs the confidence of anoverall strategic goal that would last for a number ofyears.

Q12 Dr Lee: Firstly, I think our inability to progresswith these things is the price we pay for democracy.Matthew Knight: I wasn’t suggesting that China—Dr Lee: It is a small technical point. How muchenergy is expended transmitting all of this electricityaround? My point being: I totally follow the logic ofwhen we are generating it we can push it into thesystem, someone else can use it, and the intermittencyof wind, but it takes energy to transmit electricity. Soif it is being generated on Dogger Bank and it is goingdown to Munich, how much of it arrives in Munich?Matthew Knight: The reason for using direct current,DC technology, is to reduce the losses. There is aconversion loss at each end. When you take ACelectricity, which is what we have running around ourmain system at the moment, you convert it to DC.Using a modern voltage sourced, multilevel convertertechnology, you are looking at a conversion loss ofabout 1% and you lose that at each end. Once youhave converted to DC, you do not have the—what arecalled—reactive losses of a conventional AC cable. Itmeans you can send power over a much greaterdistance and also, as that power is transmitted, it hasmuch, much lower losses, order of magnitude lowerlosses so it makes long distance transmissioneconomic. The break point for that is somewherebetween about 70 and 100 kilometres at the moment.If you want to push power more than that distanceyou either have to have lots of substations along theway, which is what we have with the onshore network,or alternatively if you just want to send it longdistance on one cable, you have to use DC.

Q13 Dr Lee: What percentage is lost? Is there like aper kilometre loss of energy?Dr Harrison: It is a per kilometre figure, but if youwere talking about a long distance, large capacityHVDC link of that type, including the losses at eachend, I think it is about 4%.

John Scott: The long link in China, which is 2,000kilometres, is forecast at 5% losses, I believe.

Q14 Dr Lee: Does the consumer pay at the point ofarrival or at the point of generation?Matthew Knight: That is one of the disconnectsbetween the different regulatory arrangements indifferent European countries. Even in the UK at themoment under the OFTO regime we have onetreatment of losses, whereas with an interconnectorthe losses are paid for in a different way. We alreadyhave different kinds of asset on the British electricitynetwork whose losses are treated in different ways. Ifyou are going to interconnect countries, you need tohave some rules about who pays for what. Generallyspeaking, the point of the DC network is it is lowerloss than the alternative of doing it AC. The benefitsof connecting a wider group of systems are that,somewhere in Europe, you don’t need the next mostexpensive power station to be built. The cost of powerstations is usually—again, orders of magnitude—different from the cost of the transmission network.Dr Harrison: Also, when you are building powerstations to cover peaks, the economic choice of powerstation is usually one that is relatively inefficientthermally, so you need to look at the losses that willbe incurred there when balancing against the totalpicture.

Q15 Chair: The supernode you referred to, is thatalready commercial?Matthew Knight: The concept has not needed to bebuilt anywhere yet, but the bits of technology that gointo the supernode are available and proven. Imentioned this multi-level converter technology. Wehave a link in California, in San Francisco, which hasbeen running for about a year now. That was newtechnology but it was built and financed as a projectfinanced operation, so the banks are sufficientlyconfident of the technology to put money into it.

Q16 Chair: I am trying to get what the function ofthe supernode is.Eddie O'Connor: Having thought up this concept—Iam an engineer by background and I have been in theelectricity business all my life—the idea came to mefrom a router in IT, because a router takes informationand it directs it in various directions. What we neededto do with this offshore grid was find a methodologyof being able to take wind power, wave power, anyother power out at sea, and to be able to route that ina trading manner to wherever the price was thehighest. So we came up with this concept of a node,like a router. It collects all the power from the localwind farm—and some of these wind farms offshoreare going to be very big; we could be talking about2,000 megawatts each—and it takes that power,collects it, transforms it into DC, and then routes itinto the direction where it is most needed, and that“most need” is expressed in terms of price.Once you have that supernode concept in mind, nowit is a question of the design philosophy: whatreliability do you want to build in? This systemoffshore, this supergrid system, is going to have tomirror, in its customer friendliness, in its customer



reliability, what we supply to the customer already inonshore grids. So there is an N minus one system. Iam not an electrical engineer, I am a chemicalengineer, but an N minus one system of reliabilitymeans that you can have a failure on one leg and stillthe customer gets the benefit. In fact, it seems to melikely that that is what we are going to come up withoffshore, that you will design in enough redundancy—that is spare capacity—into your supergrid system, sothat should one leg come down because of badinstallation or because a submarine lands on thebottom and drags it, or puts out an anchor orsomething and drags a cable, that can be identified andrepaired before it manifests itself as a lack of supply tothe customer.So that is where the supernode concept came from. Itis absolutely integral to the whole idea of thesupergrid—imagine a series of supernodes that arelinked together in this meshed grid and which link upwith the onshore grids. We are not going to make theonshore grids obsolete. We have to work in absoluteharmony with them. There will be some minorupgrades to the onshore grid to work the supergrid,but look at the alternative. I have seen figures comingfrom ENTSO-E suggesting that something like 40,000kilometres of onshore upgrades are going to have tobe done if we don’t do the supergrid. So we arelooking at a huge upgrade to our existing onshoresystems.Dr Harrison: I think if I may add a couple of thingson the concept: firstly, there are clearly also going tobe resilience issues and dealing with terrorism threats,and all that kind of thing, that will have to beengineered in so that one could lose a supernode oralternatively that supernode is detected or otherwisedivided so that it can’t be lost entirely. That is onearea that would need to be thought about really quitecarefully.Another area that is very interesting when you arelooking at bringing a lot of power onshore is that thereally scarce resource is landing sites for cables.Finding landing sites for cables that areenvironmentally and socially acceptable isincreasingly difficult. If you are seeking to bring verylarge amounts of point-to-point connected offshorewind power ashore, those sites are going to become avery difficult and scarce resource. One thing that thesupernode concept does do is help ease that problem.

Q17 Chair: What about the relationship with thesmartgrid that we want to develop here? Is there anyimplication on that?John Scott: Could I pick up on that? I have beenwondering when to try and raise that one because youseem to have quite a big agenda already with just asupergrid. I think you are absolutely right that there isa bigger picture here, which is the smartgrid forEurope. That is beginning to be developed in differentways: smartgrids within Member States, smartgridsacross Europe. I think the difference or the addeddimension is to think around the behaviour ofcustomers. For example, the ability to send a signal totwo million electric vehicles and reduce their chargingfrom boost charge to half charge would be like givingthe system operator a huge control lever to vary the

demand on the grid. That becomes very attractive ifyou are harnessing a variable energy source, likewind. You begin to think about balancing the grid byvarying the demand, not just by varying generation,which is what we do at the moment.If you begin to think this through, of course, it takesyou into the world of the end customer, to smartmeters, which we know are very much on otheragendas and projects. Smart meters take you intoenergy displays, awareness of price. We were talkingjust now about selling the energy where the marketneeds it. Are we going to just do that at a bigsupranational level or are we going to be in a positionin a few years’ time where, as end customers, we varyour behaviour; we run our domestic appliances or wecharge our electric vehicles at different times of theday depending on the price? There is a lot of workgoing on separately looking at that in differentcountries around the world, but I think if we aretalking about the supergrid being a big system, thericher agenda is one that looks at it as a smartgrid forEurope as well.Dr Harrison: The smartgrid problem is at least as bigas the supergrid problem. The smart meteringprogramme that is being started in the UK at themoment is a very small step along the way tosmartgrids and will not provide that functionality byitself. I think it only goes to emphasise the scale oftransformation that is going to be needed fordecarbonisation, not just in generation but in networksas well.

Q18 Dr Lee: In view of all the complexity and thenegotiations between countries and everything else,might it not be better just to have one relationshipwith Norway?Eddie O'Connor: With Norway?Dr Lee: I mean in view of the fact—Eddie O'Connor: No, not really because Norway hasfive million people and Britain has 63 million people.Dr Lee: Of course.Eddie O'Connor: They will never have enough plantto be able to deal with—

Q19 Dr Lee: Well, first of all, they are already self-sufficient. It is totally carbon neutral. It is a battery:you press a button, it comes on; you press a button, itgoes off. There is no storage needed. They haven’tover-developed their hydroelectricity. There are somelocal political issues with regards to putting it in, butthey have much more capacity. They are close by, sotransmission becomes more straightforward. Yes, itwould push upon us a need to become more energyefficient and generate our own energy, but I wonderwhether that would be a cheaper way of doing thingsin a more secure and geopolitical sense, not tappinginto North Africa, and so on. Is that not a simplerconcept or is it totally unviable?Eddie O'Connor: With the greatest of respect, I thinkit is totally unviable. If you are thinking of thevariability in wind and you have 25,000 megawattsout there, it may go flat calm, and that can happenover 500 miles.



Q20 Dr Lee: Yes, but they would not open theirdams, would they?Eddie O'Connor: I visited there recently and I sawthey are importing electricity from Holland. Therewill be times when they will be able to supply a verylarge balancing amount of power, but there will beother times when they will have to import power. Ifone of their times coincides with a time when there isnot an awful lot of wind blowing, then you don’t haveenough oomph in Norway; you don’t have enoughmegawatts. On the other hand, if you link withGermany—80,000 installed megawatts of capacity—then a mixture of generation, all kinds: you havenuclear; you have brown coal; you have coal; youhave gas; you have oil even, and you have the samein Britain. So in the period to 2020, which is thecritical rollout period for the first phase of thesupergrid, the sound bit is to link with Germany. Ifyou had only one nation you could link with, then theimportant one would be Germany.

Q21 Sir Robert Smith: May I ask one technicalthing: is your vision of the supergrid connecting theexisting grid or will it run through it? Will you run aDC cable all the way from our shores to the Alps orwill you run a connecting cable and then use their gridas part of the supergrid?Matthew Knight: The first leg that is proposed byFriends of the Supergrid goes not just to the northGerman coast but right down to southern Germany. Itwould be a new cable. The reason for that is that, atthe moment, the north/south links in Germany arefairly congested but also, as Eddie said earlier, it givesyou this greater scale.One of the things that maybe we have a mismatch onis the first step and the big eventual picture. Norwayis a great place to trade power with. If we build acouple of gigawatt link to Norway, that will be veryuseful and that is a couple of gigawatts, but if we arelooking to the future that was in the offshoreevaluation last year, where the UK is a net exporterof as much offshore wind, wave and tidal energy asthe equivalent of North Sea oil, by that stage we needto be interconnected with everywhere. Britain hasalways been a strong supporter of free trade and freemarkets. The beauty of the supernode idea is that thepower will go wherever the market price is the bestfor it to go. That means overall and over time, acrossthe bigger geographic area the better, which bringsbenefits to everybody because the cost of powercomes down through that market-based approachrather than through being highly regulated. We are notlooking at a centralised super-European regulator/operator here. We are looking at enabling a market inelectricity that is trans-continental; a much largerscale.

Q22 Dr Lee: I follow that the reality is that there isan industry in the infrastructure.Matthew Knight: Yes.Dr Lee: The Germans have done a very good job oftaking a huge share in that. They have invested hugelyin solar, which is why they want the North Africathing. They have invested hugely in offshore wind,along with the Danes. I am a bit anxious that, yes,

okay, we might end up with cheaper power but it isactually not cheaper, is it, because we don’t have aneconomy, we don’t have an industry. We have had tosubsidise up front. I am wondering whether the wholepackage is the right package for us, for UK plc?Matthew Knight: For the UK, the first thing to say isthat of the three large manufacturers of high voltageDC systems, two of them are centring their northernEurope operations in the UK. My own company isbased in Manchester and because of our success in theUK’s offshore wind programme to date, that is wherewe have built the competence in these sorts of systemsand that is where we are going to do projects not justfor Great Britain but also in the Netherlands, Polandeven. Just down the road in Stafford, is where Alstomhave their headquarters. There is a tremendousopportunity here. For lots of reasons, Britain needs tobe the active starter of this process, and Germany isanother key country but Britain stands to gain most,if we get going nice and early, in terms of the jobsand the skills because of our current position.What we have seen from offshore wind is that the jobsgo where the industry gets going in a sustained wayfirst. The UK is already benefiting from that and if wecan get over the existing hiatus that we have inoffshore wind, we will benefit more from that. This isa really tremendous opportunity for UK plc to exportthis technology.John Scott: I think perhaps the key issue is that wedo have good wind resource in this corner of Europeand we do find ourselves with a shallow sea, so wecan build offshore. There are not many countries thathave that opportunity, but we also have a very heavilyloaded grid. Our neighbours in Europe have veryheavily loaded grids and the evolutionary step, whichyou always see when you look back over grids, is thatyou then have to build an overlay. You build a newlevel on top. The big step this time is to move it toDC rather than another AC grid, which is what wehave been doing since the 1930s. We have built layersof AC grid. We now have a 400,000 volt AC gridfully loaded. The next step is a DC grid.Dr Harrison: Historically, the decision aboutcommitting to the next voltage up is always a big anddifficult one. It is much easier to do incrementalextensions of what you have already and it takessomebody brave and with some vision to go to thenext level. For this, the problem gets compounded bythe fact it is multi-jurisdictional and that is an especialchallenge that has to be dealt with.

Q23 Christopher Pincher: You say it requiressomeone with bravery and with vision, butpresumably it also requires deep pockets. I justwonder how much a supergrid is going to cost,particularly if you are going to build the architecture,Mr Scott, that you talked about to make it truly viableand if you are going to build in the resilience that yousay is necessary to deal with security or redundancy.Those costs, it seems to me, vary wildly fromsomething like €30 billion to €210 billion dependingon what you are building. What do you quantify thecost to be?Matthew Knight: In the Friends of the Supergridpaper there are some numbers on this. There are two



elements—what does it cost and who pays for it?What it costs is pretty low. The calculation in thepaper comes out with an increase of a fraction of apenny per unit on electricity bills for the first phase ofthe supergrid. As for who pays for it, if you can createthe right market so that somebody entrepreneurial canbuild something and get paid for doing it, it does notneed to cost the public purse anything. It ends up onthe electricity bills. If you can’t create the rightmarket, then it needs to be driven by a decision tobuild it because of the benefits to the public. That isthe issue we need to grapple with. It is not that it isnot affordable, but at the moment nobody could put aproject forward and find a mechanism to get paid fordoing that.

Q24 Christopher Pincher: So it is not unaffordablebut the question is whether there is the desire to investin it?Dr Harrison: I think the key cost question is: what isthe cost compared to the cost of alternatives? We aregoing into a world—I think it is probably generallyagreed—of rather more expensive electricitywhichever way we go. What I think probably needsbetter quantification through fairly urgent furtherstudy is what this looks like compared withalternatives. The wide variability is to do with scope:€30 billion is I think roughly your North Seasupergrid—Eddie O'Connor: First leg.Dr Harrison:—first leg; €200 billion is somethingmore like an eventual end-game price, but it is allabout justifying that against the cost of other options.Eddie O'Connor: I anticipated that this was going tobe a nub of the issue. If we don’t have offshore windand we don’t have the supergrid, what are we facinginto? Well, by 2020 the only amount of plant that wecan deploy at scale is gas. Therefore it is either oneor the other. If you were to, let’s say, allow that it isgoing to cost roughly €100 billion to build 25,000megawatts of offshore wind and it is, let’s say, €30billion for the supergrid; that is €130 billion. That isan enormous figure, except when you start workingout how much you would pay for gas in the meantime.A figure to build out that amount of gas plant wouldbe a hell of a lot less, but when you take that numberand you start to work out how much gas you wouldhave to buy to supply the same electricity, you willfind you pay for the €130 billion in eight years. Youpay for it in eight years, and from then on the pricecomes down because you have a free source of power.I can quantify this and send the Committee a paper onthis, because it is actually quite dramatic. When yourecast your future electricity supply, when you havean enormous amount of it coming free and novariability about it and it is entirely in Britain’scontrol, that leaves you dealing with, in fact, thevariability issue, which is what the supergrid wasinitially envisioned to do. We would like to submit apaper to you on that, showing the alternative and howquick a payback period you get from not having tobuy any fuel.Dr Harrison: I think there would be value going onfrom that, then, in looking at the range of variabilityof future gas price. There are a lot of scenarios out

there for where gas price might go in the future.Potentially, there is a glut of gas on the worldmarket—

Q25 Christopher Pincher: If there is a clear cost toan alternative and the payback that you havedemonstrated in your paper is what you say it is, thenpresumably the City is falling over itself to invest inthis supergrid idea, isn’t it?Eddie O'Connor: It can't as yet because we do nothave the standards; we have not decided who is theowner.

Q26 Christopher Pincher: It must be pushing forthese things because it can see an opportunity?Eddie O'Connor: The City is the City, it will do itsown thing in its own time, but people need to see avery secure regulatory framework before they will putmoney at risk. As I mentioned at the start, what wehave to address and what the Friends of the Supergridwas set up to do was to address the soft issues—whoregulates it, how is the plant established, who owns it,to what standards will it be built and how is the costcharged to the customer? If we get those issuesaddressed within the next two years, then I believethat it will flow from then on in. That will lead to thecreation of a regulatory environment, so that peoplecan see the cash flows coming from this biginvestment. Then the City will come into it. It ispremature to say to the City, “Will you invest rightnow?” because the question is, invest in what?Matthew Knight: May I add that the infrastructurefinance community in the City tends to have arelatively short time horizon. If there is a deal to bedone in about six or nine months, then they will put100 people on it and do something, but if there is nodeal for five years, they will let somebody else workit up to a point where it is ready to go ahead. That isexactly why a group like the Friends of the Supergridexists, to try and create the situation.When the project is ready to be done, I am sure thereis appetite to invest in it. What we have seen withoffshore wind and recently with the OFTO process, isthat offshore infrastructure assets are very easy to sellonce you have created a structure to sell them in. Thefirst round of OFTO was something like four or fivetimes over-subscribed and there is every expectationthat that appetite will continue. So the funds will beavailable but at the moment there is not theopportunity to make that investment.

Q27 Christopher Pincher: If we get the regulatoryframework right, what you are saying is you think thatthere will be sufficient appetite out there for not justthe benefits in terms of jobs to fall to Britain, but thecost would not fall on the Government or thetaxpayer? There would be significant investment outthere to build the supergrid without that cost to thetaxpayer.Matthew Knight: Yes. There are a range of ways inwhich you might decide to finance these things. If youwant someone to take a big risk, they will expect abig reward. Given the scale of this kind ofinfrastructure, it may be in the interests of UK plc toreduce the risk by giving a certain degree of political



direction and support to things but, fundamentally, ifthere is a good business case for doing it, somebodywill invest in it. The world has enough money.John Scott: Could I just pick up on this because thisis the topic area of the real core issues. As we haveheard, the technology, the big architecture, can bedealt with, but here we are saying, “What is thesignal? What is going to make people apply somepriority to this?” Because there are technical issueslike standards, there are regulatory issues and thereare commercial frameworks. We have not talked aboutthat, but there are commercial trading arrangementsand back office systems needed. To be honest, all ofthose are complicated not only because they arecomplex systems but they span jurisdictionalboundaries.To understand the trading across various parts ofEurope or to understand how the trading systems willoperate, and so on, it needs an icepack on the headand some very clear thinking. Who is going to makethat a number one issue when they already have abusy home agenda on shorter term issues? Where arethese really good people going to be found from inthe companies if this is just a conceptual matter? Ithink we will see some studies and some reports andthis will just go on, unless some kind of signal isproduced or incentive is produced that says, “No, thisis really important. We know it is a big challenge. Itwill go on forever if we do not make a start now”.

Q28 Christopher Pincher: Where do you think thatsignal needs to come from?John Scott: I think one has to think about what willfocus the attention of the management of theorganisations who have the knowledge? That requiresregulators to apply themselves, as well asmanufacturers and grid companies, for example.Eddie O'Connor: They have already committed tojoin the Friends of the Supergrid in great numbers,and we will soon be getting to the stage where wewill have to turn people down.John Scott: Stakeholder groups are absolutely core,as is the detailed work of the standards bodies. I amvery pleased to hear that that is progressing. All theinter-jurisdictional issues are solvable but they are onan agenda in terms of many other issues.Eddie O'Connor: What could get this thing going isif the Chancellor of Germany and the Prime Ministerwere to say to themselves, “We think this is a verygood idea. We think this is a joint Anglo-Germanproject and we will have some other European nationsinvolved as well. We expect to see all the soft issuesdealt with within the timeframe of three years and wewill commit some of our civil servants to assist andwork with other stakeholder groups, such as theFriends of the Supergrid”. That big signal would makethis whole thing happen.So if your Select Committee were to reinforce whatthe Prime Minister has already said in public—heissued a statement saying he was in favour of thesupergrid—I think you could amplify the importanceof that piece of internal infrastructure, so that he couldsay, “If it becomes a priority project for Germany andBritain, we will see huge movement here”. We alreadyhave a huge number of companies with a quarter of a

trillion capitalisation working on this issue. If itbecomes a big political issue for two countries, wewill see it happen.

Q29 Dan Byles: Are you basically saying that wecan’t leave this up to industry and the market? Areyou saying that it is not going to happen if theGovernment takes a hands-off approach and says,“This is a business decision”?Matthew Knight: The issue is that we have to leaveit up to about 27 markets. We need several of thosemarkets to come close enough together so that thereis a business opportunity to trade between them. Thatis why we need the political leadership.John Scott: Could I add to that? I think it is generallytrue that markets are very good at moving at theedges, at optimising, at finding a new way forward.They never respond to a step change on their own,which is why Governments have such an importantrole to incentivise step change. This is true of smartmetering and smartgrids, electric vehicles. The marketin itself is not capable. Once the market getsestablished, then the Government can step back andyou get the benefits of competition.

Q30 Dan Byles: Do you think this is something thatwould be better dealt with at a European Union level,or do you think that would be the worst thing wecould possibly do if we want this to move forward ina dynamic and flexible way?Eddie O'Connor: I think it must be dealt with at anumber of levels—company level and stakeholderlevel. Primarily to me it seems that if two of thelargest and most dynamic countries in Europe, Britainand Germany, decide they are going to do this, Europewill just say, “How can we help?” They already wantto create a free market and it is funny that the fastestmoving good or product in Europe is the only onethat does not have a free open market at the moment,namely electricity.To me, it is a multi-tiered affair, but it is in Britain’sprofound interest to get this thing given what youyourselves have mentioned: security of supply, price,export potential, jobs. I would not like to put a figureon jobs, but if Britain can actually help to create thismarket, imagine Siemens multiplied by 20; thenArriva—they are both represented here at themoment—new ports being developed; six newdifferent types of ships being built; and new cablemanufacturing. I myself am on this apprenticeambassador’s thing and we are looking very hard,with our chairman here, Sir Roy Gardner, on how weare going to amplify this into a series of jobs forBritain. This is really in Britain’s interests. I thinkBritain has to take the lead on this. If you look atGermany’s window on to the North Sea, it is quitesmall. Britain’s window on to the North Sea and theNorth Atlantic is not limited at all.

Q31 Dan Byles: Apart from the Prime Ministermaking another speech, what should we be doingtomorrow? What should the UK be doing to makethis happen; actual people physically doing things, notjust talking?Eddie O'Connor: A phone call to the Chancellor.



Q32 Dan Byles: So you think the key here is thebilateral relationship between Britain and Germany?Eddie O'Connor: Yes.Dan Byles: It has to be driven forward by those twonations?Eddie O'Connor: Honestly, I think that.Dan Byles: In fact, this is initially a diplomatic issue?We have to align ourselves with Germany—Eddie O'Connor: It is fair to say that we can handlethe technology issues. If we get the regulatoryframework in place, the financial issues will get dealtwith. The wind is out there already and we knowabout it and Britain has a more aggressive programmethan anybody else in Europe. There are blockages allalong the way, but the most profound one, the one thatthat bilateral relationship—

Q33 Dan Byles: The thing that is stopping usactually going forward and making this thing happenis more of a political will?Eddie O'Connor: Yes.John Scott: It is the signal that says that we are allup for this.

Q34 Dan Byles: Then, presumably, the next step isthe practical nature of DECC sitting around with theircounterparts and coming up with the actualregulatory regime.Dr Harrison: Definitely, there is a whole heap offollow-up activity needed in terms of moving theregulatory environment forward at a European level.

Q35 Dan Byles: How much discussion have you hadwith DECC? What signals and feedback are yougetting from the Ministers, if anything? Are theygung-ho for it?Eddie O'Connor: Chris Huhne is profoundly infavour of an integrated European market given hisbackground, but I would have to say that Charles


Witnesses: Alex Murley, Head of Technical Affairs, RenewableUK, Andrew Nind, Director, Pöyry, and JamesCox, Consultant, Pöyry, gave evidence.

Q38 Chair: Thank you very much for coming in andyou have heard what has already been said. As I say,we have quite a tight deadline. Could I start off byasking you how you think the development of asupergrid might affect the deployment of renewablegeneration in the UK?Alex Murley: I think, to start with, there were somevery useful discussions in the last session about thewider economic benefits of greater interconnectionacross Europe. There has been growinginterconnection, purely because of the economicrewards that interconnection affords in terms ofincreased market liquidity, increased competition, andthe driving down of wholesale electricity prices. So,even without renewable energy, there are sufficienteconomic drivers for interconnection in theappropriate sites.

Hendry has shown huge interest in offshore wind andhe has facilitated a meeting between me and the PrimeMinister to explain it to the Prime Minister. There isreal big interest at that political level because they cansee Britain being the huge big winner in thiseventually.

Q36 Dan Byles: It seems to me this is the nextlogical step, given what we are already doing withwind. You cannot do wind and not do this; otherwiseyou are doing half of the job.John Scott: To put it in context, this is a strategic planfor something bigger because otherwise we could justbe build a DC link between here and Germany or outto a wind farm. That is just a merchant development,this is the bigger.

Q37 Dan Byles: So there is an argument againstevolution. Basically that means saying, “We can’tallow this to evolve”?John Scott: Yes, it is a step change.Dan Byles: We need to step in and somebody needsto grip it from the top of the fence.Dr Harrison: It is a step change, but you need toconsider that DECC is also charged with delivering aUK energy policy outcome over a period of time, andthe trouble about fitting the supergrid into that is theuncertainty of end timing. DECC may struggle withthat. It has to run parallel paths to do this and it hasto deliver the policy outcome, while at the same timepushing this proposal forward, as fast as possible, toget it to the point where it is certain enough that youcan then start patching into policy decisions in a morepragmatic way.Chair: I think on that note I am going to have to windup. We are out of time. Thank you very much indeedfor coming in. It was extremely interesting and thatprovides a good start for our inquiry. Send us thefigures that you mentioned about the cost comparisonswith gas because we are interested in those as well.

In terms of renewables, there are enabling benefits thatinterconnection provides. I suppose you could alsoturn it around and suggest that renewable energy canhelp the economics of interconnection in the firstplace. At a high level there are opportunities to accessnew markets, access new capacity, share peakingcapacity, flexible capacity and to reduce transmissioncosts, both offshore and onshore.

Q39 Chair: I think you suggested that there might besome tension between the plans for a supergrid andthe plans of the national system operators.Alex Murley: Yes, we did. I think the example thatwas given in the last session of how offshoreinterconnection lines can be arrive at onshore grids,further inshore than actually at the coast to avoidrestructuring onshore networks, is one of where the


10 May 2011 Alex Murley, Andrew Nind and James Cox

investment portfolio or the investment intentions ofthe national TSO could be affected.Obviously, in that example, the alternative toproviding greater offshore interconnection is toreinforce the entire onshore infrastructure. At anational level, the TSOs will have a natural interest inthe investment of their own network. There are similarexamples in the US, where significant amounts ofstate interconnection has been provided as analternative to reinforcing the state level infrastructure,and I think where the ownership and development ofthe interconnection is separate from the TSO therewill naturally be a tension between the vested interestsof those parties.

Q40 Chair: You also suggested that if it was arequirement to fit into a supergrid scheme, someinvestment in new renewables might be delayed.Alex Murley: Yes, without taking away from theoverall benefits of interconnection, not just for widereconomy but for those renewable energy projects thatwill be enhanced by them, there are a number ofprojects currently under development and at veryadvanced stages of their development in the UK. Partof the issue in the interaction between taking a verystrategic approach to co-ordinating networkdevelopment is with planning and consent. Althoughthere are many benefits there, projects that are at avery late stage of their development at the moment,which are already a long way towards achievingplanning and consent, may be asked, “Well, hang ona second, how do you fit in with the wider strategicvision?” and that is a fair question. The ability ofindividual projects to fit in with this wider strategicvision is very much on a case-specific basis. Thedanger is that, if the regulation is not put in place ina timely and appropriate fashion, then it could posedelays to those projects that are ready to push thebutton on development now. Given the importance ofoffshore development, both industrially,environmentally and in terms of security of supply, itwould be unfortunate if those projects that are readyto go now were to be delayed.

Q41 Chair: We already have quite a substantialprogramme of investment proposed on renewables. Avery expensive supergrid would obviously add greatlyto the amount of investment needed. Is it the mostcost-efficient way of trying to develop this?Alex Murley: I don’t know whether my partners onthe panel want to contribute to this as well.James Cox: I guess a supergrid, at least a North Seagrid, is potentially quite an effective way of balancingthe system, balancing the intermittency of the wind.But the reality is that across the north-west Europeanregions—so if you look across the UK, up to Norway,down to Germany and France—there is a lot ofcorrelation between wind patterns and weatherpatterns. So fundamentally, if you get a high-pressurearea covering the area, it is likely, if it is covering theUK system, that there will also be low generation inGermany, in Denmark and in the Netherlands at thesame time. So although interconnection will help, andhelp quite a bit with balancing the intermittency of thewind, it is not a panacea. You cannot guarantee that

at the time when you need power in the UK, becausethe wind has dropped off, the wind has not alsodropped in Germany, in Denmark, in the Netherlandsand in France at the same time.Alex Murley: I think your question was on whether itis a cost-effective driver to increase renewables. Thereare already a number of primary drivers encouragingrenewable energy development outsideinterconnection completely. There have beendiscussions on security of supply and on theenvironmental impacts of taking us away from coaland gas. Let’s not forget that we have targets for 2020but, by 2030, we need to reduce the carbon intensityof our electricity supplies to below 50 grams per unit,and gas is upwards of 300.So, offshore wind, because of its resource location inthe UK, has a great ability to contribute not just toenergy security and economically, but also to theenvironmental agenda. So there are significantprimary drivers already there. The interconnection andthe supergrid concept can help renewables along andprovide additional benefits. Equally, renewables canprovide additional benefits to the economic case ofinterconnection as well as in terms of the widereconomic benefits they provide.

Q42 Chair: Has any assessment been made of theenvironmental impact of laying lots of subsea cables?Alex Murley: I think it is important to start with theinterconnection across Europe. The supergrid is at anearly stage of its conceptual development but,certainly, in terms of the offshore wind farmdevelopments in Round 1, Round 2 and Round 3, veryrobust environmental assessments are required of allaspects of deploying offshore wind. That very muchincludes the cable laying and the way in which theyare brought ashore. So there are robust processes inplace to assess the associated environmental impacts.

Q43 Sir Robert Smith: Mr Cox, you mentionedalready that even connecting Germany and certainweather climates may not be enough. If you scale itup to the solar power of the southern part of Europe,does that start to help?James Cox: I guess one observation is that wind andsolar are pretty much uncorrelated, so any time it issunny it can be either windy or still. The fundamentalproblem with solar is any time a system peak occursit is always at night, pretty much by definition. So theonly way that DESERTEC can help with the winterpeak, the peak time for generation in the UK, is witha lot of storage. There is a lot of solar in Spain and agreat many of investigations suggest that you canheavily connect Spain with 30 gigawattsinterconnection with the rest of Europe. The way thatbecomes useful is then to have a lot of storage inSpain, based on solar thermal systems, which takesthe heat from 4pm or 5pm and bring that forward tobetween 7pm and 9pm, when the peak in generationis occurring.Andrew Nind: In a study that we did recently for theCommittee on Climate Change, we looked at theimpact of linking in the supergrid, among other things,on wind curtailment in Britain; at times when it isvery windy how much would wind be curtailed?



Broadly what we found in the study was that, althougha supergrid would reduce the amount of windcurtailment, it would by no means get rid of it. Sothere was still a lot of wind curtailment occurring inthe analysis. That is essentially because there wouldbe times when it was windy in Britain but, equally, itwas sunny in Spain, so effectively you have too muchgeneration in the sum of the two.Alex Murley: I think that report was publishedyesterday and I found a small amount of time to flickthrough it, and it is a very welcome contribution tothe debate. I think it is important, in terms of thebalancing side of things, to remember the differentaspects to it, which are often confused. On theflexibility side of things, the intra-hour managementof variation of output from wind, say 30 gigawatts,would be no more than about 3 megawatts a secondat peak change, which is broadly similar to whatdemand does every morning, but you do need to haveflexible plant that can ramp up and down with thatvariation.The second aspect of balancing is the peaking plant—that means plant that does not necessarily have to berapidly responding to those changes but a plant thatcan provide service at times when there are low windperiods, maybe not just in the UK but across theregion, like the Pöyry report has demonstrated.Going back to the report that Pöyry put forward, thereare benefits of increasing the scope of marketintegration. I note that the report that the Committeeon Climate Change have released does not include theSpanish inclusion of markets, nor going down to, forexample, Greece. So I suppose the further you gogeographically, the more smoothing you are going toget in terms of the variation that wind will provide. Inthat, you also guard against the one single weatherevent affecting the whole region as well. Asmentioned, you tap into diversification of resource,such that the rhythms of output coalesce to the extentthat the absolute minimum is reduced, so the amountof peaking plant you would need in those areas of lowoutput from variable renewables is reduced.It is important to separate those two sides of thingsand also to remember that, in the context of how muchpeaking plant you need to tap into, it should becompared to what you need in an alternative system.So if you had a very inflexible baseload-focusedsystem, you would still need the peaking plant to takeyou in the amplitude of minimum to maximumdemand. In terms of the peaking plant that you requireto handle high penetrations of renewables, if a peakingis reasonably low, the cost of managing that aspectand the variable aspect is very low as well. The Pöyrystudy has shown, I think, that moving up to 65% ofrenewable penetration in 2030, and 80% renewableelectricity penetration in 2050, adds no more than apenny per unit on to the bills.I think there is a lot of mischief out there and I thinkin our submission we said that the pundits do runaway with some of the facts. It is important to put thatprice addition, which comes with the systemmanagement as a whole, in the context of what riskexists outside renewables, in terms of fuel risk. Youknow the Japanese increase in demand for gassupplies, to offset their domestic problems at the

moment, has certainly had an impact in pushing upthe gas prices to a greater extent than that 1pproportion of the bills. So there are aspects ofinterconnection that can help with this but theyshouldn’t be overstated.Andrew Nind: In terms of the Pöyry conclusion—the1p on the bill—we were essentially looking atwholesale prices and assuming that there was asubsidy for low-carbon generation, so we were notlooking at retail prices in the analysis. Our view isoffshore wind, in particular, is expensive thus far andhow much it reduces in cost in the future remains tobe seen. We certainly expect it will come down butcurrently our view would be that it is expensive, andso if it is—Sir Robert Smith: Whether or not you have thesupergrid?Andrew Nind: Whether or not you have the supergrid,yes. There is still quite—

Q44 Sir Robert Smith: Presumably, once you havereached a certain point in the supergrid you start toget a standard price across Europe?James Cox: The interesting question is what is theimplication of a supergrid? In a recent study, you havea copy of the public report from it, we looked atsomething akin to supergrids. We looked at anadditional 41 gigawatts of interconnection, which isa 50% increase in interconnection across north-westEurope, so around the North Sea area.What we found from that is the 41 gigawatts ofinterconnection offset about 14 gigawatts of plant, soyou got about 30% back-up capacity from theinterconnection. So you still have to build quite a lotof back-up capacity when you put all this wind in.There is a lot of plant sitting idle for long periods oftime. The interesting thing then, taking it a stagefurther, was the effect on prices and generation costs.So when you interconnect countries together, thesimple thing is you reduce the cost in generation. Itmakes things more efficient; that is the fundamentalthing. Provided interconnection is used efficiently—we will take that as read—the generation costs willreduce; so you don’t use expensive oil plant in somecountries; you run gas ahead of coal, and so on.What was interesting, though, is you that cannotguarantee who will benefit from those reducedgeneration costs. It is very unclear. There is a bigasymmetry in the benefits. A case in point is that ifyou have a North Sea grid interconnecting GB andNorway, which is the main beneficiary from that, ourlatest work suggests that UK prices would barelymove but Norwegian prices could rise verysubstantially. So generation costs are lower but pricesin the Norwegian market are much higher. As a result,the beneficiaries are all the people who have hydro-generation in Norway. That could then lead to a lotof political resistance as a result, but the impact of asupergrid across Europe is higher prices in a numberof countries, which are going to be opposed to thesupergrid as a result.Andrew Nind: On a related note to that, the volatilityof prices in markets will not necessarily come downwith the supergrid in place. It might depend on theparticular market in question. For example, in



Germany there have been in the last year or two a lotof zero prices, a lot of congestion in northernGermany in particular. Tapping into that wouldprobably—or could—import some of those zeroprices into GB, clearly a benefit to consumers but thatcould increase rather than decrease price volatility. Ithink the impacts on prices are quite complex. Thereis no guarantee either that prices will necessarily comedown for consumers or that price volatility will bereduced, as a result of having the supergrid.Touching also on the point that Alex made, we wouldcertainly agree that the further the geographical scopecould be, the more benefits you are going to get. Ourratio of 41 gigawatts of interconnection saving 14gigawatts of thermal capacity would have beensomewhat better if we had looked at a widergeographic scope. Essentially, what we are finding isthat weather patterns are large relative to the size ofcountries in north-western Europe, so ideally youwant the grid to be extensive in its geographicalscope.

Q45 Dr Lee: To be clear, for us to get a better returnon this heavy investment in offshore wind, we needthe supergrid?Andrew Nind: I think it would give the better returnon investment in offshore wind. Of course, offsetagainst that, is the cost of the supergrid itself andwhether one justifies the other.Dr Lee: So if we take a 50-year snapshot, yes is theanswer? A long enough snapshot, because obviouslyif you structure allowing for a bit of repair—Andrew Nind: Absolutely, yes.

Q46 Dr Lee: Following on from that, is the sensehere that we have thrown all our money into offshorewind because we are blessed with shallow water, andso on, but now we have to throw a bit more moneyin to make the figures add up a bit better. Is that afair assessment?Alex Murley: As I said earlier, I think the economiccase for interconnection will stand on its own two legswithout renewables but there will be enabling benefitsgiven to renewables. Your earlier discussion about theindustrial benefits of offshore wind prompts thequestion: why are we doing this? Why did we not dothis with onshore wind in the 1990s? We failed todevelop manufacturing and export opportunities, andtherefore the jobs, because we did not support ourindigenous market at the very outset of thattechnology. All the jobs now exist in Denmark,Germany and Spain.With offshore wind, it is starting now, but it is onlyjust starting. We have a good market to which tosupply the energy. As you say, we have shallowwaters; we have significant engineering capacity; wehave the ability to have half of the global market forthe next 10 years in our country. If we can developthe level of annual deployment that encouragesmanufacturing to take place, and companies likeSiemens and GE to come and put their factories here,for the short term it will grow to provide exportopportunities across Europe and the world.

I think the Carbon Trust have recently been doing apiece of work for BIS, for DECC, for the TechnologyStrategy Board, in terms of where to focus strategicR&D investment, and they are positive that, by 2050,the global market for offshore wind is going to beworth £170 billion annually. If we can just get 10%,20% of that, that is creating 250,000 UK jobs by 2050.We suggest that by 2020, with the levels ofdeployment that we foresee in offshore wind, with 24gigawatts generation by 2020, that jobs could beupwards of 50,000.So there is a point at which you go with offshore windwhere you need to rely on other industries to take thelead and if you do not have enough ambition todevelop an indigenous market early on in thetechnology development, other people will do it. Theconsequence of not going far enough early enough isthat we will be importing technology from abroad inthe future and we will not gain the cost benefits ofthat technology through the supply chain. Admittedlythe technology costs are high in the short term, butthey are coming down as the technology starts to bedin and deploy more widely commercially.

Q47 Dr Lee: One final question, a small one: if weare ploughing this money into this particular area—you talk about R&D—we are surrounded by wind,but we are also surrounded by water; it seems marinetechnology is getting squeezed out. Is there a dangerhere that in our attempts to try and make this workthat we are missing an opportunity to be at theforefront of renewable technology within marine?Alex Murley: Yes. The R&D pot across the board isgoing to be limited, especially at times like these, andthere needs to be a strategic vision, not just in termsof energy policy but in industrial policy as well. Sothere will be an inevitable competition betweenvarious different technologies. These two just sohappen to share a lot of the attributes that arenecessary for successful long-term industrial vision,and when the coalition talks about long-term visionin manufacturing, in rebalancing the economy and inexports, these are two very good examples of wherethat long-term vision can be embedded, and we willreap the benefits. There is a natural competition, butif the manufacturing vision of the broader economy isthere, then these two should stand quite healthily incompetition outside the energy sector, just on anindustrial economic basis.

Q48 Dan Byles: I want to tie you down a little bitmore on the potential impact of the supergrid on theneed for back-up generation, because we do seem tobe getting slightly different messages. WWF havesuggested that the supergrid would substantiallyreduce the need for back-up generation. The EuropeanClimate Foundation have said that increasedinterconnection at EU level would reduce total reserverequirements by 35% to 40%, and I think you give afigure of about 30% or so. In the Pöyry report yousaid, “This heavy reinforcement of interconnectiondoesn’t appear to offset the need for very much back-up plant”.James Cox: I guess it comes to the definition of the“very much”. The ECF and the WWF work have



considered heavy interconnection all the way to thesouth part of Europe and what are very ambitiouslevels of interconnection—I think 30 gigawattsinterconnection from Spain to France is on the outerscopes of anyone’s possible vision—and then a lot ofthermal storage in the Spanish markets, Italianmarkets, North African markets, and so on. When youput all these assumptions together, you start pullingall the levers together so you can substantially reducethe need for back-up capacity. The sad fact is thatback-up capacity, relatively speaking, is quite cheapand it is in your country, it works, it is reliable andit is always there when you call upon it; aside fromoccasional technical failures, it is there.When you call upon an interconnector, there is noguarantee it will supply you any power at your timeof need. A very good example of that of course isthe gas interconnection between Netherlands, GB andBelgium, where quite often at times when our systemneeds—it gets very cold in the UK; it is also very coldon the continent—the gas isn’t there. Exactly the samewould apply in the case of electricity interconnection.It is still in Germany; it is still in the Netherlandsand the stable Norwegian battery, which has a hugecapacity in terms of its ability to send power, whenwe are trying to send power to Denmark, to Germany,to the Netherlands, to North France, to the UK at thesame time.

Q49 Dan Byles: You have effectively anticipated mynext question, which was: is there a danger that, if weover-egg this, we take the lazy option and do not buildthe peaking plant here, on the assumption it willalways be at the end of the tap if we need it, whathappens when we will need it when everyone elseneeds it?Alex Murley: I think the more extreme danger is notthat we build the peaking plant here or not, it iswhether you build inflexible plant within the outerreaches of the European network. For example, if youhave a single line, a cable line feeding into a networkthat only has the capacity of two gigawatts, if you puta baseload inflexible plant that is operating 80% ofthe time there, potentially, you can only have enoughspace for very small additional flexible, potentiallyvariable renewables to be added on.If you widen that analogy to say, “That line is theUK” or, “that line is Ireland to the UK or UK toEurope”, by putting inflexible plant in the extremitiesof the European network, you would increase thecongestion at high-wind periods of getting that windout of the UK into Europe. It would potentiallyencourage the uneconomic build-out ofinterconnection in order to make use of the fantasticresources that we have in Ireland and the UK.Dan Byles: That is interesting. So it is not aboutpeaking plant, it is about how we do our baseload?Alex Murley: It is about the system as a whole,absolutely. If a large inflexible plant needs to operate80% of the time in order to be economic, then thereis going to be a tension within any network with otherforms of renewables that need to run when the fuel isvery low in marginal cost, and available.

Q50 Dan Byles: How do you see all this interactingwith the proposal for a capacity mechanism in theelectricity reform in the EMR process, because itseems there might be a bit of a tension here. TheGovernment are looking very domestically at saying,“We need a certain amount of peaking plant. We needa certain amount of capacity. We are going tointroduce capacity mechanism to produce that, but atthe same time we are linking ourselves throughsupergrids to everybody else and we can’t just look atourselves as a bubble”?Andrew Nind: Your point is a good one thatultimately security of supply depends on havinggeneration assets, it depends on having enoughgeneration and enough flexible generation, andinterconnection is none of the above. It is just a meansof transporting the electricity from one place toanother. So someone has to have the flexiblegeneration, the peaking generation. I think it is notparticularly a problem that encouraging peakingcapacity in Britain is somehow suboptimal, somehowcontradicting or going against interconnection withEurope. I would have thought it is probably moreimportant that Britain still has peaking capacity forsecurity of supply reasons.Alex Murley: I think the point about the peaking plantis well exampled in Spain, where they have very highlevels of wind and the load factor of the combinedtotal gas plants are slowly ebbing down, as the windtakes a larger share of the fuel on an annual averagebasis. The gas plants in those situations will bequestioning, “Well, how low does my load factor haveto go before I can remain on the grid and provide aservice, even if I am only needed at a once in a yeartime when there is low wind?” In Spain they haveused every single one of their CCGT plants, althoughthe load factor has been squeezed down. It shows that,in some circumstances, for the plant that is onlyneeded once a year, it is still very important to havethat plant and there may need to be an availabilitycapacity payment that is made available to that plantto make sure it is there.To go back to my point, you have a peaking point andthen you have a flexible point as well in managing inthe intra-hour opportunities. In Ireland, where theyhave a wind penetration of about 10%, over doublewhat we have—they had 52% wind penetration inOctober last year—the instant operational reserve thatthey have is still being completely driven by the lossof the largest unit on the system. So it is not beingdriven by wind at all.I think it is important to note that in Ireland they dohave a capacity payment system, and now they arealmost moving towards a targeted capacity payment,where they don’t just bring in peaking plant but theybring in peaking plant that is flexible because flexibleplant can do both jobs. Non-flexible peaking plant canonly do one of those things.James Cox: To pick up that point: Ireland is lookingto institute a maximum instantaneous penetration ofrenewables. It says the maximum amount ofrenewables at any time on the system is around75%—that is the current proposal—and it will curtailit if it ever gets above that. That is the current proposalfrom EirGrid and that is for system stability reasons.



So EirGrid say, “50% is okay. If we hit 75%, we’llcurtail any wind above that level” and that is theexisting proposal.Ireland and Spain are very good examples. Both havevery high wind penetration, both are quite smallmarkets and both of them have capacity paymentmechanisms in place, which means that theyencourage either old plants down the system to addpeaking capacity or new build of peaking capacity.The existing GB market, which encourages CCGTs tobe built at a relatively low cost and has relatively lowflexibility compared with Ireland, is starkly differentfrom that of Ireland where roughly half of the newplant that are proposed to come on-stream are peakinggeneration. That is pretty stark. In GB not a singleOCGT has ever been built under a market mechanismwhereas in Ireland about half are likely to come on asa result.Andrew Nind: I think you can get interestingunforeseen consequences when one country has acapacity mechanism, say, which other countries do nothave. When we did our first intermittency study, whatwe found—looking at Britain and Ireland—was thatone of the big effects was Ireland importing pricespikes, which they would not have had otherwise, asa result of interconnection with Britain. In the studyyou have a capacity payment mechanism in Irelandthat caps how high prices can go, in a highlyintermittent world you could have a situation inBritain where, if you do not have any suchmechanism—it is just the BETTA market—the pricescould spike up very high and at peak times Irelandwould be exporting to Britain, pushing up the price inIreland. So as a result of the interconnection you couldget very high prices in Ireland. It is an example of thenotion that if you do have different mechanisms indifferent countries, you can get unforeseen results.Dan Byles: You become exposed to your neighbour’smechanism in addition to your own?Andrew Nind: Indeed.

Q51 Dr Lee: DECC have suggested that if we hadan interconnection with Norway that UK consumerswould have cheaper bills. Do you agree with that?James Cox: That is not necessarily clear. There wouldcertainly be lower generation costs, so there would beefficiency as a result. It is simply not clear that theUK consumer would benefit as a result. We certainlywould expect Norwegian prices to rise; so Norwayproduces the benefit, Norwegian consumers lose out.Quite often in a lot of the work we do, we see theprices in the UK rising when we interconnect toNorway. This is one of the curious sides about theasymmetry—the uncertainty of interconnection—youget all these unexpected effects. So, in that particularexample, Norwegian prices rise because they are lowand there is a lot of hydro but UK prices rise because,if you assume there is a lot of wind in the UK, youstart to get a lot of low-price periods where the priceis zero or negative. By removing those low-priceperiods, prices in the UK rise as a result. So it ispossible to interconnect the UK and Norway togetherand prices in both countries to rise simultaneously.

Q52 Dr Lee: The more the interconnection, theworse the asymmetry?James Cox: The more the interconnection, the morethe two markets will balance together. As a result,effectively, the more market coupling you get betweenthe two markets, the more similarity of prices.

Q53 Dr Lee: What is in it for the Norwegians then?James Cox: Fundamentally, the Norwegianproducers—particularly those that have hydrogeneration—potentially make an awful lot of money.Then it is about swings and roundabouts as to wherethat money goes. You could see all the recoverymechanisms that could happen across interconnectors,so you could see a situation where there are taxes andwindfall taxes on the producers that are benefitingfrom unexpected high prices, and so on.Andrew Nind: It depends on what happens to hydro;hydro conditions in Norway and also the fossil fuelprices. Before 2003 there was quite a lot of interestby Statnett in developing this cable and theassumption was that Britain would export to Norwayovernight and Norway would export to Britain duringthe day, and the effect would be that it would beequitably distributed. The Norwegian Governmentstepped in 2003 and stopped it, because I think therewas concern that Norwegian consumers would sufferas a result of the link. More recently, fossil fuel priceshave been a lot higher and so there has been thisassumption that the direction of flow would primarilybe from Norway to Britain, helping British consumers,arguably at the expense of Norwegian consumers, butit all depends on one’s view of fossil fuel prices andalso hydro conditions in Norway.

Q54 Dr Lee: And also to what extent you are reliantupon fossil fuels. If we go down the path of nuclearand offshore wind and energy efficiency, our demandfor fossil fuels may reduce, in which case we wouldbe less likely to be importing those fossil fuels fromNorway, which would then perhaps change theequation. I suppose they could sell the power and thenlevy a tax, put it in a sovereign wealth fund and thengive it back to the Norwegians in kind so that theywill buy into it with a longer-term perspective, but Iwonder about their direct benefits. Do you think webenefit from the interconnectors or, generallyspeaking, do you think if we are connected withBelgium, Germany, everywhere, this country benefits?James Cox: My personal view is we are likely to havebenefits but they are certainly not guaranteed. So weare probably likely to have less price volatility. Thereis a likelihood of having lower prices. That canhappen but there is no guarantee of that. Particularlyas we head down a course of having more and morewind, the wind lobby might say, “Well, put a lot ofwind on the system. That reduces wholesale prices.That has to be a good thing”, but if you interconnectthe UK to other countries that will raise the price toUK consumers.The caveat to that, of course, is that higher wholesaleprices means you have to subsidise wind less. So youend up with these complex interlocking circles, whichis why we say you can’t tell where the benefits will



lie because it is very uncertain. You can’t guaranteethey will come to the UK, though.

Q55 Dr Lee: One final question: do you see us beingimporters or exporters of energy onto the supergrid inthe future?James Cox: I would have thought exporters, broadly,but it depends on the level of wind deployment. If youhave a significant roll-out of wind deployment, we arelikely to be exporters, but the flows are likely to beheavily bidirectional because of the intermittency andthe variability associated with wind.

Alex Murley: If the UK has an industrial interest andan interest in developing and manufacturing, then wehave to be an exporter in order to maximise the supplychain benefits of that. If the Europeans successfullymanage to bring forward an integrated single market,the wealth of resource across the region will beidentified as being rich in the North Sea and thesupergrid concept can only help the exploitation ofthat resource.Chair: Thank you very much indeed. That is veryhelpful and interesting. Thank you for your time.



Members present:

Mr Tim Yeo (Chair)

Barry GardinerChristopher Pincher

________________


Witnesses: Stuart Cook, Senior Partner, Transmission and Governance, Ofgem, Martin Crouch, Partner,European Strategy and Environment, Ofgem, and Alison Kay, Commercial Director for Transmission, NationalGrid, gave evidence.

Q56 Chair: Good morning. Welcome to this meetingof the Committee and thank you very much formaking time to come and talk to us. We are in themiddle of this particular inquiry, as you probably areaware. Could I start off with a general question abouthow big you think the potential for UK offshorerenewable energy is and why we need a supergrid ifwe are going to take full advantage of it?Alison Kay: I think in our scenarios we see a very bigpotential for offshore wind. We see 16 GW of offshorewind by 2020, rising to some 37 or 38 GW by 2030.So we see, particularly for the 2020 renewable targets,offshore wind has a very big part to play. We see thatthe benefits that a wider supergrid can bring, otherthan provide things like backup support forintermittency, will enable us to enact more of the EULiberalisation Directive, enabling cross-border trade.So I think we see very much offshore wind as a steptowards a supergrid; a very important step towardssomething that ultimately we feel could be veryvaluable to the UK.Stuart Cook: Perhaps if I could say a few words;Stuart Cook from Ofgem. My responsibilities are tolead on regulatory framework for distribution andtransmission businesses. I think the Crown Estatehave put into the public domain estimates of 40 GWof offshore generation as the potential that we mightroll out to and clearly, in the context of the scale ofgeneration that we rely upon to meet needs here, thatis a massive opportunity. It is absolutely essential thatthat generation can connect into the onshore system,but it is a step further then to go to say that we needto have a supergrid and I think there are a lot ofquestions about what a supergrid would look like; howit would operate; whether it is technically feasible inthe short-term. So I think it is absolutely clear that weneed interconnection to the onshore grid network. It isalso very important we have increased interconnectionwith other countries, for reasons which I am happy toelaborate on. I think there is a lot of work to be doneyet to work out whether the supergrid is the right wayof delivering all of the resources, but we are very opento doing that work.

Q57 Chair: If we had a supergrid, could that makeus a net exporter of electricity?Alison Kay: It certainly has the potential to do so, yes.At times when we have surplus energy here in theUK, there is definitely an increased ability for us tobe able to export that spare capacity.

Sir Robert Smith

Stuart Cook: I would add to that, even with theexisting interconnectors—Northern Ireland, theinterconnector with France and the interconnector thathas just come online called BritNed, which links uswith the Netherlands—the Northern Irelandinterconnector is currently in export mode at themoment for physical reasons. The BritNedinterconnector and the interconnector with Francealternate between import and export. So we arealready net exporters on occasions.

Q58 Sir Robert Smith: So is export leaving Britainto Northern Ireland or from Northern Ireland toBritain?Stuart Cook: It is export from Scotland to NorthernIreland.

Q59 Chair: Why is a meshed grid better than point-to-point connections?Alison Kay: We believe that an integrated offshoregrid brings a number of very substantial benefits; oneis cost. Our estimates have shown that we could knocksome 25% off the cost by having an integrated grid.It enables us to scale up the size of the asset sosomebody is planning ahead, making sure that theassets are not just sized for a particular generatorappearing at the end of a radial link but are sized forall generators that may come at the end of that link. Avery important benefit as well is that it does decrease,probably by around half, the number of onshoreconnection points that you want and, as we all know,planning and availability of land within the UK is abig issue.These converter stations are twice the size of afootball pitch and, therefore, the space they require asthey go onshore is very great indeed. Another obviousbenefit is co-ordination of the supply chain: makingsure that we are giving clear signals as to what isgoing to be needed going forwards; giving thesuppliers the necessary certainty to go out and dosome R&D and to make sure these things aretechnically feasible and thus are able to size and plantheir workbook accordingly for this very limitedresource. The Western HVDC cable that we arecurrently looking at from Scotland to England will tieup manufacturing capability of cable for two years.So there is a very great need to signal to suppliers thescale of this challenge coming forwards.

Q60 Chair: Your written evidence suggests that theintegration of offshore energy is critical to meeting


14 June 2011 Stuart Cook, Martin Crouch and Alison Kay

EU environmental targets. Does that mean thatwithout a supergrid we won’t be able to generateenough renewables?Alison Kay: We think that an integrated offshore grid,which we see as an important step to the supergrid, isvery, very important for meeting our renewablestargets. I would agree with Stuart that the evolving ofthe supergrid is something that we need to take stepby step. It is the integrated offshore grid that we seeas absolutely key to being able to meet ourrenewables targets.

Q61 Chair: Can that be done by 2020?Alison Kay: The integrated offshore grid can be doneby 2020 with the necessary caveats on supply chain,on onshore planning, on environment constraints. AsI said, we are planning 16 GW of offshore by 2020.

Q62 Sir Robert Smith: The difference between anintegrated grid and a supergrid?Stuart Cook: If I may answer. I think sometimes thesedebates can be cast in quite black-and-white terms.The reality is there is a range of options for the wayin which the offshore grid could evolve and whichoption makes sense, I think, will depend upon factorslike the extent and the location of generation; whetheror not you get planning consents for particular cablesand connections onshore; the way in whichtechnology evolves as well and the way in which theregulatory framework assists. The range of optionsthat the transmission companies in Europe havelooked at span from, at one end, something thatsimply is point-to-point, which is more or less the waythat the system has evolved so far; to a system thatinvolves optimisation of the onshore connection; to asystem that involves the optimisation of the onshoreconnections and the interconnections across countries;to something that, at the extreme, is a meshed systemlooking like a grid on the sea.Where we end up in that spectrum very much dependsupon the factors that I was explaining at the start. Itdepends on how quickly generation comes on offshoreand what level and extent and location of it. I thinkmost studies point to the 2020s as the determinantdecade. So it will be the generation that connects inthe 2020s that will really place a shape around theway in which that grid evolves and determine it. Upuntil the 2020s, it is more in the realm of avoidingduplication of resources and optimising in a morelimited way, rather than pushing out to the fullsupergrid potential.

Q63 Christopher Pincher: Can we talk a little bitabout how the supergrid will reinforce the existinggrid? You have touched a few of these points already,but in terms of congestion the flow of electricity inthe UK is north to south and in terms of the currentuse of wind, as I understand it, the majority ofoffshore projects rely on a single connection to theonshore grid. So I wonder how you think an integratedoffshore grid will help to ease the bottlenecks thatwe face.Alison Kay: An integrated offshore grid will help easesome of those bottlenecks. If you size the connectionsto allow for all generation to share those assets, firstly,

you are making sure that there is no risk of stranding.I think that you will able to ensure that the points atwhich those offshore connections come onshore are atparts of the system where the system is currently veryconstrained onshore, thus helping to ease congestionas we build out our offshore networks. So it iscertainly a help in easing that congestion goingforward. It is not a panacea. It still relies on theonshore network that we have in train, and things likethe bootlaces that we see coming down the east andwest coast of Scotland are still very necessary. Webelieve that with an integrated network, largelybecause of where you can be very much more co-ordinated in where those points come onshore, we canhelp to relieve some of those constraints goingforward.Martin Crouch: From an Ofgem perspective, wewould certainly agree that an integrated networkoffshore can help. It is not going to solve the problemsof intermittency on its own, but it is a contributingfactor, along with the work on market coupling andintegration with other markets, which will ensure thatwhen GB prices are high we are importing and whenour prices are low we are exporting, based on theflows across the interconnectors. When we have a lotof wind generation, we are more likely to beexporting. When we have less wind generation, weare more likely to be importing. So it will help balancethe system there as well.

Q64 Christopher Pincher: You said that a supergridwould reduce costs by something like 25%. Is thatlargely soaked up by the curtailment that currentlyexists, by the bottlenecks that exist in the system? Byremoving those bottlenecks, are you saving 25% ofcosts or are there other ways of saving costs?Alison Kay: No, if I can clarify. The 25% savings wason the integrated offshore grid. It is very importantthat I clarify it was on the integrated offshore, ratherthan the supergrid where work done through ENTSO-E—who you are going to hear from next—has shownthat if we get some more co-ordination we should seesavings of around 10%. That 25% saving was verymuch on capital costs, simply because you are sizingthe assets slightly bigger than you would do withradial point-to-point connections. So it was very much25% savings on capital costs, rather than on theongoing constraint costs that we are likely to see. Itwas very much the capital costs point.Stuart Cook: If I may, I think it is worth saying thata number of estimates are being produced aboutsavings for co-ordination offshore, and indeed savingsfor the North Sea supergrid itself. We are, ourselves,at quite an early stage in the assessment of those. Wehave two steams of work under way at the moment:one through Europe and one through a Great Britaininitiative, which is trying to understand assumptionsand implications of costs and benefits. As far asOfgem is concerned, we note the analysis that hasbeen done to date, but we are not yet in a position tovalidate it as something that we would support.

Q65 Christopher Pincher: You said that you will beable to reduce the connector points by something likehalf. In terms of other transmission asset savings, are



there others as a result of a meshed grid or is it justthe connector points that we are reducing?Alison Kay: For the integrated offshore comingonshore, it is just the connection points comingonshore. Our work has shown that, in order to meetthe 2020 targets, we need the onshore reinforcementsthat were identified through the Electricity NetworksStrategy Group and which we are currently takingforward.

Q66 Sir Robert Smith: Yes, continuing on the sortof spectrum of what might happen and over-sizing.To get a supergrid, do we need a lot of anticipatoryinvestment by networks, assuming more futuredemand rather than waiting for that demand toappear?Alison Kay: That is a very good question. I think,certainly in terms of our view of an evolvement to asupergrid, in some of the integrated offshore, wewould see some need for anticipatory investment.Sizing assets back to shore slightly bigger than wascurrently signalled might be appropriate in somecases, but in other cases it will still be appropriate totake into account user signals. I think you may also,depending on how the supergrid evolves—and I amvery much with Stuart on this; we do need to take thisstep by step—there may well be some cause for somedegree of anticipatory investment, but one of thethings that we should absolutely make sure of is thatwe are really taking account of the way thingsdevelop, where the generation is coming on and theappetite for cross-border trade, before we look and seewhether some form of anticipatory investment mightbe necessary.

Q67 Sir Robert Smith: For the layman, if you arelaying a cable for 50 miles, if you put in a cable thatis a bit bigger, is the cost in the cable worth the risk,because of all the other associated work doing it, oris better to come back and lay a second cable?Alison Kay: After the event, I could clarify the exactcost, but it is certainly cheaper to lay a bigger cablein the first instance than to come back and lay asecond cable. You wouldn’t do that without beingfairly certain that you were going to see that furthergeneration coming off as well. You wouldn’t takethese decisions lightly. It would be a question oflooking to see what was happening, where were thesignals from the generators. Then it is very muchcheaper to size a bigger cable than to go back and laya second or indeed a third one.

Q68 Sir Robert Smith: Does over-sizing need to beled by Government or regulation or does the marketsignal deliver?Stuart Cook: I will answer that question and, withyour permission, I will also ask my colleague toexpand on some of the other regulatory issues as well,which I think are quite important. On the onshoreregime, we are already in a place where we fundcertain anticipatory investments. That reflects the factthat nobody can know with certainty the way in whichthe system is going to evolve and we have to makedecisions in the interests of future customers as wellas current customers. That pushes us in the direction

of doing our best to understand how the system isgoing to evolve. Onshore, we rely on the companiesto come to us with evidence to make a case as to whythey feel that that necessary investment is required. Iwould expect that sort of model to be appropriateoffshore as well, because the companies are muchcloser to the coalface and understand—if I can usethat analogy—exactly what is required, but I thinkanticipatory investment is not the only challenge.Martin Crouch: No. Certainly the biggest cost issueand the biggest technical challenge is not the size ofthe cable so much as when you start to link the cablestogether, because we don’t have an example anywhereof a meshed DC grid to follow. So I think it isprobably not realistic to imagine us leaping towards ameshed supergrid or a meshed integrated grid in onestep; it is more likely to be an incremental approach.We have lots of interest at the moment fromdevelopers in point-to-point interconnectors betweenus and different countries. Over the last year, we haveseen levels of interest expand enormously in that, andthat can be a component.If we were to do that and then come back and say,“Should we have laid a bigger cable?” I think that isunlikely to be the question. The question is more,“Can we link into that cable and create multiplehubs?” which is a real technical challenge. What weare focusing on in the North Sea Group, and in someof the other work, is identifying the building blocksand the hurdles that we need to address to enable someof these developments if, as things progress, it lookslike that is a good way to go. So it is identifying thetechnical challenges; identifying the regulatoryframeworks that are different around differentcountries around the North Sea and how do thoseenable anticipatory investment, where that is sensible;how do we get the right signals as to what will berequired in future.

Q69 Chair: We had quite contradictory views abouthow the supergrid would balance out intermittency;Friends of the Supergrid, not surprisingly, on one sideand the report from Pöyry on the other side. What isyour view about that?Stuart Cook: Can I give a view first and then I willlet my colleagues come in with their own opinions? Ithink intermittency itself is a problem that lots ofsolutions can play a part in the evolution of the smartgrid onshore, the development of storage solutionsand the development of flexible response and smartmeetings. All those things will play into this space. Ithink interconnection plays an important part in thatoverall mix of tools and opportunities, and there willbe occasions when the ability to export and import isexactly what you need in order to plug a gap betweengeneration and demand.It does not solve the full intermittency problemthough. There will be occasions, as we know fromweather studies, when quite large geographical areasof Europe, in the north-west, will be without wind,collectively, and that is a problem that isn’t addressedby interconnection. The other issue that greaterinterconnection, supergrids and so on, does not readilyaddress is what you might call in-feed loss; so theevent when a single event trips off a circuit, for



example, as a result of an accident or malicious actionor whatever. In those circumstances, the system has tobe resilient to cope with that loss of supply. Again,that is not something that is resolved byinterconnection, in a sense it is a problem that isexacerbated by it.Alison Kay: By and large, I am absolutely with Stuarton the answer to that. On paper at least, it must helpwith intermittency, having access to a greater range ofpower across Europe. Stuart is absolutely right aboutthe wind. You can see a very high pressure and nowind right the across Europe, as we saw this winter.So it is not a panacea. It is not the same as having aCCGT that you can call upon to back up thisintermittency. I guess with the supergrid you can see,as the supergrid may evolve—and certainly as somecommentators are seeing the supergrid evolve—intogoing right down into southern Europe, and evenperhaps further, and then up into the north, you get agreater range of generation available in mass solar andhydro and, again, it can all help with the intermittency,but it is very much an evolving step.Martin Crouch: A technical point to add is, I think, abig opportunity is access to the hydro generation inNorway and Sweden. They have close to 50,000 MWof hydro power that can be used to even out windfluctuations if we have sufficient interconnection,although we are not the only country that might beseeking to use those reserves.

Q70 Chair: It does need to be pretty big if it is goingto be able to take advantage of all this, which certainlyhas an impact on the costs.Martin Crouch: Yes. In the short-term we are talkingabout 2 GW connections to Norway, which is goingmake an important contribution but a smallcontribution. It needs to be a lot bigger. Then thetrade-off is avoiding anticipatory investment, sinkinga lot of cost into it that customers will have to payfor, unless we are fairly confident that is going to bewell used. So that is always going to be the trade-offin these decisions.

Q71 Chair: Can we safely reduce our backupcapacity here if we think we are going to have thechance to trade between European electricity markets?Stuart Cook: I think it comes back to my commentabout the fact that you have to be ready for the eventwhen interconnection fails. In those circumstances, ifa circuit trips out because of a fault, you still need thebackup generation in order to provide the supply. Soit is not clear that it would make a big impact uponthe need for backup.Alison Kay: You can see it reducing the need in somecircumstances for backup generation. It would neverget rid of the need entirely because, as Stuart says,conditions are likely to be the same right the wayacross Europe and you can never rely on the fact thatthere won’t be a fault at some point in time.

Q72 Chair: One of your National Grid colleaguestold us that substantial electricity storage could beintegrated into an offshore national grid. Do you thinkthat storage is going to be a big part of the systemin future?

Alison Kay: I think it is vitally important that we lookat storage and look at storage on a mass scale andinvest the R&D to ensure that that can come forward.I think it is a very important part of the mix goingforward, yes.Chair: I have just noticed that I should declare aninterest as a director of Eurotunnel, which may havean effect.

Q73 Sir Robert Smith: You already touched onsome of the supply chain constraints. What are thetechnical challenges that need to be overcome todevelop an integrated offshore grid?Alison Kay: If I go first on that. The suppliers arevery much a part of a number of the groups that Stuartand Martin have already referred to; the North SeaGroup and Friends of the Supergrid. So we are verymuch talking to them all the time. I think from wherewe sit we don’t see huge technical problems and hugetechnical challenges. What we do see is assets on thescale that we are looking at haven’t really beenutilised on the systems, but what we are being told bythe suppliers is that they believe an up-step in thetechnology is very easy. What they need is thecertainty to enable them to do that R&D and that iswhat is so very critical. So, technically, not hugechallenges.Stuart Cook: I think I might have a slightly differenttake on it. If I can, I will just say a couple of wordsby way of context. Most of the offshore generationthat has been connected to the grid has been inrelatively shallow waters, relatively close to the coast.I think colleagues in the oil and gas industry joke thatwe haven’t really got to where it is wet yet, offshore.To put that into context, if we go out to 2020s andbeyond, we are talking about connecting generationwhich is probably more than double the distance wehave connected so far. It is probably at more thandouble the depth and it is probably more than 10 timesthe capacity.Now, when you are dealing with high voltage directcurrent systems, which is what is envisaged for thesupergrid, you need to have a large physical separationbetween equipment otherwise it shorts out betweenitself. I think that is stretching the boundaries oftechnical capabilities. If I can paint a picture: the firstof its kind high voltage direct current platform isconnected to a wind farm called BorWin1, and it isconnected to the German system. As a critical part ofits infrastructure, it has a platform on which sits theconverter station, which converts one type of currentand voltage to another one. That converter station hasthe footprint of a supermarket and is four storeys high.It is a very large building and that is on a platformbuilt into the sea. That is operating at 400 MW.When people talk about supergrid, they are talkingabout 2,000 MW platforms. Remember what I saidabout the physical separation being important; we aregoing to end up with a much bigger structuresupported on legs in the North Sea. That is not to sayit can’t be done, but BorWin 1 is first of a kind. It isnot fully commissioned yet. It is energised, but it isnot fully commissioned. We haven’t had theopportunity to learn from the experiences of operatingthat or working out how we design and build a bigger



converter station. You couple that with the fact thatthere are only a very few companies out there whoare active in this space in terms of the supply chain—there are not many organisations who have expertisein this area—you are fishing in a relatively small poolof expertise.The final thing I would say around the technicalchallenges is that we don’t yet have a viable circuitbreaker for direct current—that is the capability toswitch off a direct current circuit. I think the jury isout on whether we need one in order to get tosupergrid, but there are some people out there whoare saying at the moment that this is a critical gap inthe infrastructure.

Q74 Sir Robert Smith: Why can’t you switch—Stuart Cook: An alternating current goes up and downin voltage levels. At some point it is at zero and whenit is at zero you can easily separate circuits. A highvoltage direct current always creates a gap and wedon’t yet have viable technology for solving that. Icame here to try and paint a picture of an analogy. Ithink a good analogy of where we are at the momentis the Channel Tunnel, in the sense that when theChannel Tunnel was built it relied upon existingtechnology. In fact, many people talked about theChannel Tunnel being constructed 100 years ago; Ithink the first Channel Tunnel company was in the1800s.What the Channel Tunnel did was it pushed out theboundaries in a way that technology hadn’t previouslybeen pushed out before. I think that is where we arewith some of the technology on the supergrid and thatthe manufacturers are absolutely right—a supergrid istechnically possible. This is not a quantum shift intechnology, but what it is is designing new things,bigger things, in an environment that we haven’toperated in before, and what my technical advisorssay to me is that the thing that we mustn’t do is rushinto this because that is when we are going to startmaking mistakes.

Q75 Sir Robert Smith: On the other hand, whatkinds of signals are required by the supply chain toramp up if we do want to end up down this route?Stuart Cook: I think that is a very important point.There is potentially a role here for policymakers tohelp encourage innovation. It is very interesting to methat the Department for Business, Innovation andSkills, in their recent announcement on the GreenInvestment Bank, highlighted offshore grids as an areawhere they felt that, because of the R&D challengesand because of the novelty of what was needed, itmight be in need of financial support to help that. Ithink that is an interesting observation.

Q76 Sir Robert Smith: Is it a global supply chainchallenge? I mean, is the UK better placed or—Stuart Cook: No, globally there are not many peoplewho can do it.Alison Kay: Absolutely.

Q77 Christopher Pincher: You mentioned that anintegrated offshore grid could reduce cost, but wedon’t know what the costs of construction are, I

suspect. So I just wonder, have you made anassessment of what the impact of construction of anoffshore integrated grid would be on consumerenergy bills?Alison Kay: We have and it was negligible. I willcome back to the Committee with a number. We havemade an estimate of what we believe the integratedoffshore grid would cost consumers and it isnegligible, but I would like to come back with afigure. It was something like £1 on each consumer’sbill for each year of construction, but I would like toclarify that if I may.

Q78 Christopher Pincher: So it would increaseconsumer bills, not decrease them?Alison Kay: They increase consumer bills becauseyou are going out and building more networks. Sothere is an increase. What we are saying is that anintegrated grid will lower the costs that a consumerwould face by around 25%; depending on what thatintegrated offshore grid looks like, somewherebetween £4 billion to £8 billion less than it would dothan if you had gone for radial point-to-pointconnections. That was the point of it. Yes, there willbe an increase because you are building out moretransmission network, which ultimately falls to theuser, but we are saying we can minimise that increasein cost to the end consumer.

Q79 Christopher Pincher: How do electricity pricesin the North Sea countries, the areas that the NorthSeas Group operates in, compare with UK electricityprices?Alison Kay: Does Martin want to have a go at thosefirst?Martin Crouch: In the last few years, we have tendedto import from France. Our wholesale prices havebeen higher than the French prices, so we have beenimporting power. The French had strikes affectingtheir nuclear power plants recently and we wereexporting to France because our prices were lower. Inthe context of Norway and Sweden, it dependswhether it is a wet year or a dry year. Last year wasdry; their prices were higher than ours. So it doesswing about. We have tended to be importing fromFrance to the UK through the interconnector we havebecause our wholesale prices have been higher thanFrench wholesale prices.Stuart Cook: I think it is important to understand theway they operate. Effectively, it is about having moreinterconnection. If you have two markets at differentprices, it brings the prices close together. Bydefinition, the market that had the lower price willprobably see price rises and the one that had thehigher prices will probably see prices fall. So greaterinterconnection may at times lead to increase in thewholesale prices in Great Britain; at other times it maylead to a decrease. To answer the question about whatis likely to happen is a big exercise, because you needto look at not only price projections in Great Britainbut also understand what prices will be in France andGermany and Denmark. That is part of the work thatwe are doing at the moment.



Q80 Christopher Pincher: In the areas in the UKwhere there is currently high demand and potentiallyhigh prices, those prices could fall and consumerscould benefit from that, but in those areas where thereis perhaps lower demand then prices could go up?Stuart Cook: Probably not, because we have auniform electricity price across Great Britain. It ismore between hour and hour. So on occasions whenUK prices are high and it attracts power in from thecontinent the prices will fall, but on occasions whenUK prices are low and we are exporting, it will raiseprices.Martin Crouch: Once we have a lot more windgeneration that is very much going to be a driver ofwholesale prices. So, when it is very windy, our priceswill be low and we will be exporting, so they will beslightly higher than they would otherwise be. Whenthe wind stops blowing, our prices will be high, wewill be importing and that will help bring thoseprices down.

Q81 Christopher Pincher: I am trying to get to thebottom of what the benefit of this will be to the UKconsumers who are already seeing increases in theirbills.Martin Crouch: Part of it should be reducing thevolatility in wholesale prices, providing other sourcesof supply and more competition into the wholesalemarket. There are big costs from the infrastructure, asAlison was saying. If you spread those over enoughcustomers, it does amount to only a few pounds ayear, but we are still talking billions of pounds, sothose are not investments that anyone would enterinto lightly.

Q82 Christopher Pincher: How is it going toencourage new entrants into the wholesale market?Notwithstanding what might happen in the future tochange that cartel, but you have a big six with astranglehold on that market. How will this help toincrease entrants into the market?Stuart Cook: A separate team is working on ourproposals in liquidity as part of the retail marketreform programme. One of the things that we haveobserved in that context is that more interconnectionincreases liquidity of the wholesale market, because itprovides a means by which new entrant generators cansell their power and by which new entrant suppliersare able to purchase power. We expect to see anincrease in liquidity with the advent of BritNed, andso on, as a new interconnector quite recently.

Q83 Sir Robert Smith: In theory, if it is a goodthing, it should narrow the sort of swings andperturbations in the price. Is there a risk that, becauseit is a much bigger system, you could get moreaberrant behaviour and real spikes suddenly?Martin Crouch: There is always a risk of unintendedconsequences. I think with the moves that arehappening on a European scale to have moreintegrated wholesale markets between countries andto have that working in a much more clearly organisedway, in effect we are then moving to a larger marketthat should be more stable, but as to exactly what

things will pan out in unintended events, there are noguarantees.Alison Kay: I think it is very dependent on the amountof wind that does eventually connect right the wayacross Europe, and it is very dependent on the appetitefor cross-border trade. Those two things will have abig effect on what will happen to price differentials.It is very difficult to see, and we are working veryhard through the various groups to try to get somemore certainty around that.

Q84 Barry Gardiner: Can I just ask you what isthe potential for planned arbitrage? For example, youtalked about a dry or a wet winter in northern Europereducing storage capacity. That is then a known factorthat perhaps a baseload supplier elsewhere can buildinto their forward projections, perhaps to artificiallyraise the price per unit by constricting their supply. Isthere scope here for real wholesale manipulation ofthe market because, as Robert is saying, it is so large?Martin Crouch: From a competitiveness point ofview, the real risk would be if people could restrict theavailability of interconnector flows. There is a clearframework in the European legislation and in the rulesthat are being rolled out, which say all the capacity ofinterconnectors has to be sold. That has to beidentified by the TSOs and very transparently madeavailable. A large proportion of that is sold a yearahead, but then there is this market coupling modelthat ensures optimal flows at the day-ahead stage. Itdoesn’t prevent there being market power inindividual markets. So there is still a risk thatgenerators in the individual markets will bid up pricesin that market at times of system stress but it shouldensure that the flows across the interconnectors areoptimal to reduce the way in which that market powercan be transferred from one market to another.

Q85 Chair: Regulatory challenges in all this arequite complicated if we are going to go down thisroute. Where do you see the main difficulties?Stuart Cook: I think there is a list of things that areuppermost in our minds at the moment. We talkedabout the anticipatory investments, investing ahead ofneed. We need a framework that allows us to regulatethat in a suitable way. Where you have infrastructurethat spans more than one jurisdiction you need a basisfor allocating the costs between the two jurisdictionsthat it spans. That is relatively simple if you aredealing with just two countries, but as soon as youbroaden it out to multiple countries, the way in whichyou allocate costs becomes trickier.The more integration you have, the more important itis that people understand the way in which renewablesupport mechanisms in different countries might affectthe way in which things operate. At a higher policylevel than Ofgem operates at, there is a need forrenewable support to be consistent across countries.There is a need for consistent standards, technicalstandards, and we need to make certain that theplanning and authorisation processes that operatebetween one country and another are consistent. So Ithink those are the five key changes. I think those areall being taken forward in one guise or another by theNorth Seas initiative.



Martin Crouch: We saw the 10 Member StateGovernments coming together to set up the NorthSeas Countries Offshore Grid Initiative. As Ofgem,we took the lead in getting the regulators of thoseMember States together. We set up a group, which weare chairing, that has been going through andcomparing and contrasting the regulatory regimes inthe different Member States to try and understand howthey can work together or where the barriers mightcome. Separately, on all the interconnector projectswe have, we are talking to the regulator, the otherside of the interconnector, to try and get a consistentframework that enables us to work together andsupport the investments.

Q86 Chair: Are we going to be able to find an easyway of showing the costs of all this—an easy andfair way?Martin Crouch: Because it is a range as to what thesupergrid might entail or what an integrated meshedgrid might entail, it is expandable. I don’t think thereis one easy number or even a range that—Alison Kay: I think it is terribly difficult to sit heretoday and say what the cost will be. As both Grid andOfgem have said today, we see it very much as anevolving piece. You do build out the offshorenetworks and the interconnectors. The cost of thosewill be very apparent, and then we have to look andsee how much of wind connects across Europe beforewe can decide whether the cost justifies a greaterexpansion.Stuart Cook: A couple of observations on thatquestion from me. As I am sure you have done, if youlook through all the evidence that has been presentedto you you will see that from the people who providethem there is a very wide range of costs, from tensof billions to many hundreds of billions of euro ininvestment. We are doing a lot of work at the momentunder the North Seas initiative and under the offshoregrid co-ordination initiatives to try and understandwhat the shape of the grid might look like. The interimreport from the North Seas is the end of the year andit will go into next year for a final report, but I thinkwhen we finish that we will be in a clearer position toanswer your question.

Q87 Chair: Are the companies going to be able toagree standards, so that interoperability becomes thenorm?Alison Kay: I think that goes back to the very heartof the question about giving suppliers the certainty asto what is likely to be coming forward across Europe.It is that certainty that is so very key for them. It isvery, very important that there is a degree ofstandardisation. As we are each going out at themoment and building our offshore networks, it isvitally important that the degree forinterconnectability is taken forward in those designs.As I say, the companies are sitting round the tablewith us in a number of the groups that Stuart andMartin have alluded to. They are very keen to helpthis vision and, therefore, they are keen at looking atstandardisation. They want that signal of certainty.

Q88 Sir Robert Smith: On that signal of certaintyand standardisation then, what are the challenges ofthe fact that our offshore transmission lines are notpart of the transmission system operator’sresponsibility yet? When you get into the otherterritorial water, it is the transmission system operator.Do you see any challenges there?Alison Kay: Shall I go first? Joking aside, we do seeit as an issue. As you know, throughout most of therest of Europe, the TSOs have been mandated to buildtheir onshore network offshore. We believe, for all thereasons that I have been through on the integratedoffshore, that there are some real benefits in allowingpeople to get on and do that. It then comes down towho is going to take the decisions on what the size ofthe link should be, and the TSO is very well placedto do that.One of the other problems that we do foresee is, whenwe are trying to co-ordinate around our transmissionsystem operator colleagues around Europe, there willbe 11 or 12 of them around the table, and with thecurrent regime that we have, we could have 11 or 12transmission system operators from the UK sittingaround that table too, because we could have manytransmission system operators offshore in the UK. SoI think we see that the radial connections have workedfine for what we have so far, but as you get furtherout into the deeper water it is much more sensible forthat to be an integrated design and the TSO is clearlyvery well placed to take that forward.Stuart Cook: I think the other countries wrestle withsimilar issues. It is clear that the regulatory frameworkhas a profound implication on the way in which thesesystems evolve, but it is not true to say that the TSOsare responsible for offshore generation universallyacross Europe. In France, the Netherlands andSweden, the generator is responsible for building theconnection to the onshore grid. So there are multipleparties out there at the moment. Alison is right—andI think we would agree with this—that at the momentwe do not see evidence from where we are at thispoint in time that the offshore regime is causingdifficulty, but we are not complacent about the factthat the regulatory framework can pose challenges,which we need to address. That is part of the workthat Martin’s teams are working on at the moment, isto try and understand whether, as you go forward intothe 2020s and up to the 2020s, the regulatoryframework will act as an impediment. If we find thatit is, then clearly we will have to do something to fixit, but at the moment we haven’t seen the evidence tosupport that.

Q89 Sir Robert Smith: Is there anything at themoment though, with so many different offshoreowners, in trying to co-ordinate that sort ofanticipatory ability of a future network? Are wemissing an opportunity?Stuart Cook: I think it is right that National Gridprovides connection agreements that combinemultiple interests at the moment, and I think it is alsotrue that National Grid, in its role as system operator,has a role of ensuring that the design of offshore isunderstood in a co-ordinated way. I do emphasise—I



am not being complacent about this—that we do needto understand whether that goes far enough.Alison Kay: To Stuart’s point, we publish the OffshoreDevelopment Information Statement on a annual basis,which gives developers a view of how we see theoffshore system developing and where are the mostoptimal points. It is an information statement, as itsname implies, and no one is obliged to build to thatspecification. We are currently, as National Grid,where we can integrate those offers, planning forintegrated network. We are sending out connectionoffers on the basis of an integrated system, so takinginto account more—but we are absolutely ensuringthat in doing so we have the ability to move away ifthat is not how the regime plays out in the future.

Q90 Sir Robert Smith: Just one last thing. On themerchant model for interconnection, does that haveenough incentive to ensure maximum interconnectionor does that need looking at as well?Martin Crouch: We have been looking at that overthe last couple of years. We found that, because of theprocess for getting an exemption to be a merchant,we would take our decision and then the Commissionwould effectively have a veto at the end of theprocess. That was exposing developers to a lot of riskthat the Commission would say somethingunexpected, which happened effectively with BritNed.So we have been devising a regulated regime, whichwould be available as an option alongside themerchant regime. Since we started doing this work, asI said, we have moved from having one project thatwas interested in building a new interconnector tonow we are up to about a dozen. So the interest isvery definitely there. I think there is a lot of supportwithin those developers for the regime that we aredeveloping with the Belgian regulator as a test for aninterconnector to be built by National Grid and Eliaas a first case.

Q91 Sir Robert Smith: You are saying you couldhave parallel; as an investor you could choose?Martin Crouch: Yes, you have the two options. Theproject that recently announced itself using theChannel Tunnel has implied to us that they areinterested in exploring the merchant route. We havelots of other projects that are interested in exploringthe regulated route. We are trying to devise a regimethat allows both, so that the most investment can beencouraged.Alison Kay: I think that National Grid, as a builder ofinterconnectors, has really welcomed the great workthat we have done together to look at moving thatregime. I have real concerns that merchantinterconnectors, with all the uncertainty throughoutEurope at the moment, are going to prevent a lot offurther interconnections coming forward, but we havebeen doing some great work using the Belgianinterconnector as a test case as to what that newregime could look like.

Q92 Sir Robert Smith: When you say merchantswould be a barrier, having the availability of themerchant option still would not be a barrier, butmerchant-only would be?

Alison Kay: Absolutely, yes.

Q93 Christopher Pincher: Although there may beappetite for a regulatory regime, someone has tofinance the investment to build the first stage of thegrid, and I think the Offshore Valuation Groupsuggested that to build a first stage of interconnectionby 2020 would be somewhere around £8 billion. Iwonder if you can tell us something about thefinancial challenges of getting the infrastructure built.Stuart Cook: I am not familiar with that number, butI have certainly seen figures of £15 billion for theoffshore investments up until 2020. We have, ofcourse, run one tender round under the offshoreregime so far, and I think it is very welcome that for£1.1 billion of investment we attracted £4 billionworth of interest. So the number of bids, when youtotal the sums of money that people were willing tocommit was almost four times the volume of theinitial investment. So far we have seen a lot ofenthusiasm from new parties and existing parties toraise funds for the offshore environment and theoffshore regime. Part of the reason we think that isthe case is because we are resting on the fact that wehave a very stable and understood regulatoryframework in Great Britain, which, of itself, attractsfunds from international investors and makes this arelatively attractive place for people to invest. I thinkas long as that continues there is no reason to believethat that type of investment won’t come forward,certainly on the basis of the evidence we have seenso far.Christopher Pincher: £4 billion has come forwardso—Stuart Cook: We had £4 billion worth of bids, ofwhich the winning people contributed £1.1 billion. Soit was £3 billion worth of funds, which we didn’t needin the initial round because there were unsuccessfulbidders.

Q94 Christopher Pincher: You said you have seenfigures that suggest that £15 billion was required forthat initial spend?Stuart Cook: Yes.Christopher Pincher: Let’s assume that you need atleast £11 billion; where is that going to come from?Stuart Cook: There is an appetite for investments,even in today’s climate, where people can see anunderstood and stable regime and an opportunity tomake a return in that context. I don’t think we areconcerned, based on the evidence we have seen, thatpeople won’t come forward with money.

Q95 Christopher Pincher: Do you think there willneed to be a substantial public investment?Stuart Cook: There hasn’t been so far.Christopher Pincher: Do you think there might be?Stuart Cook: The only area that I think is worthy ofmention is the point I made earlier about the GreenInvestment Bank and the way in which theDepartment of Business had looked at using some ofthat money for the speculative, quite uncertain andrisky research and development aspects of theoffshore regime, where I think it is rather moredifficult to get investors to stump up money where



their gains are less certain. In the stable end of theregime, where we are implementing technology thatis already understood, we have not seen any evidencethat there is a problem in raising finance.Martin Crouch: We also know that the EuropeanCommission, through their infrastructure package, islooking at establishing funding potentially for whatthey see as priority projects and the North Seas is highup their list among priority projects from a Europeaninterest. So it may not just be UK taxpayers fundingsome of this. There may be sources of funding froma European level available.

Q96 Christopher Pincher: So beyond the Europeanfunding, which obviously incorporates a significantdegree of UK taxpayer funding, what otherexperiences do you have in putting in place a regimethat will share the costs? If there are lots of potentialbeneficiaries across the North Sea, have youexperience of getting other players to invest, so thatsome of that cost is shared, as opposed to publicfunding?Martin Crouch: Doing it on a multilateral basis isdefinitely a new challenge. For the existinginterconnectors, the interconnector with France wasshared cost between the UK and France and BritNedis a 50:50 joint venture between the Dutchtransmission company and National Grid. So there areexamples of sharing of costs between the two Member


Witnesses: Daniel Dobbeni, President, European Network of Transmission System Operators (ENTSO-E), andAlberto Pototschnig, Director, Agency for the Cooperation of Energy Regulators (ACER), gave evidence.

Q97 Chair: Good morning. Thank you for coming into see us. I think you have both travelled to do so, andwe appreciate that, and welcome. I think it is the firsttime, certainly under my chairmanship, you havegiven evidence to this Committee; so we are very gladto have you. Could I ask, first of all: the StrategicEnergy Review said that a North Sea offshore gridwas an energy security priority? How much work hasbeen done in Europe to assess the costs and thebenefits of developing an integrated offshore grid?Daniel Dobbeni: If you allow me, I wouldn’t say thatwe have a clear definition in Europe about the ultimatecost of the energy and climate change policies,because basically it starts with the decision taken bythe 27 Heads of State to move towards renewableenergy sources. Because of that decision, you need totackle measures in terms of how to ensure that thepower system will work with the same reliability withthis new energy mix. In that sense, the cost issue is tobe linked to the political decision to move towardsrenewable energy sources. So the figures you can readin the documents coming from either the EuropeanCommission or the ENTSO-E associations are bestguesses based on the known technology we havetoday. So these figures are estimates and the bestestimates we could deliver but not more than that.Alberto Pototschnig: If I can add: as it was madeevident in the previous panel, we still need tounderstand exactly what kind of technological and

States involved. Extending that to potentially 10countries around the North Seas is definitely aregulatory challenge. That is high on the list of—Stuart Cook: A political one as well.Alison Kay: Yes. Once again, it comes back tocertainty. If, around the North Sea, you have 10countries all working together towards a commonregulatory regime that can accommodate all parties,you start to give that certainty to investors to want toput their money into it. So I think some of theregulatory challenges, which Martin and Stuart havetalked through, are absolutely key to ensuring thatinvestors come forward and do wish to invest in thisnetwork. That will come back to a lot of things thatwe have talked about; how does the supergrid evolve?It is getting that certainty out there.I would agree with Stuart that so far we have not seenthe need for public funding. I think as you move outfurther into the sea and get towards what we wouldcall an integrated offshore grid, if you want to buildbigger assets it is going to be much more difficult toget investors to invest in assets that are not only sizedfor their own projects but maybe taking some degreeof optionality for the future. There are lots ofchallenges to overcome.Chair: We have another set of witnesses we have togive time to as well, so thank you very much indeedfor coming in. It has been very helpful.

system solutions we are talking about. It is clear thata greater penetration of offshore wind is needed. Itmay not be essential by 2020, even though it willmake a significant contribution. It will be moreessential beyond that, but I think we are still at thestage where we are trying to figure out exactly whatthis would mean, in terms of grid and in terms of theelectricity system more generally. The Commissioncommunication last November identified an area, theconnection in the North Seas, as a priority area, butfrom there to say that we know exactly what shapethis priority area will take in terms of developing theinfrastructure, I think it is still work ongoing.

Q98 Chair: There is a slight sense that we have thisconcept that we think sounds good, so we are pressingahead with it before we really know how much it isgoing to cost and what benefits it is going to bring.Daniel Dobbeni: If you allow me, this is a little bit ofa chicken-and-egg issue. If I only take the targets thathave been set out by the European Commission andthe European Union, and I try to have a reasonablelook at what it means in terms of the number of windfarms in the North Sea—and at this stage the NorthSea is the only case; we have also the Baltic Sea butlet us take the North Sea—we may imagine by having,let us say, a standout wind farm of 300 MW, which isreasonably what we have today, if I take the figuresthat have been put together by different kinds of


14 June 2011 Daniel Dobbeni and Alberto Pototschnig

organisations, I come up with between 2020 and 2030,with 80 to 280 wind farms in the North Sea. Ofcourse, if I have wind farms of 500 MW, it will reducesomewhat these figures. These numbers give a goodindication of the need for “grids in the sea”, becauseI cannot honestly imagine having 280 individualconnections to the shore only for the North Sea. Therationale behind the number of wind farms leads to arationale at the basis of grids in the sea.

Q99 Chair: Yes. Will this supergrid help to meet theEU’s strategic objectives: security of supply,decarbonisation and market coupling?Daniel Dobbeni: It all depends what the definitionof supergrid is, because you have different definitionswhen you talk to different people. I would say thatthere are different needs in order to tackle the 2050target. I take 2050, because it is even more ambitiousthan the one we have with 2020. We all know, in thisaudience, that this target implies more complex gridoperation leading to the need for smarter grids. Wealso need grids in the sea and at least in the continent,we need electricity highways or overlaid grids,basically grids that allow to transfer more power overa longer distance. We need the three of them as wellas storage and so on.A supergrid in itself is a concept, as you said. Weneed to clarify what we talk about. If I take all thegrids in the sea, the electricity highways, my answerto your question would be definitely yes, becausehonestly I do not see how we could make it happenare differently.Alberto Pototschnig: If I could just reinforce thatmessage: interconnection between Member States,including interconnection that is able at the same timeto connect offshore wind, is clearly part of the strategyto try to support the achievement of the threestrategic objectives.For the North Sea’s countries, I think the currentinstalled off-shore wind capacity is around 3,600 MW.We are looking in 2020 at 36,000 MW. As Imentioned beforehand, that is a sizeable contribution,but it is not probably, strictly speaking, essential. Anoffshore grid will become an essential componentbeyond 2020. The new developments will be furtheraway from the shore, so some form of offshore gridis probably inevitable. That would also allow thecomplementary generation technologies to be usedtogether: hydro in Norway, or if we look further southin Europe, in the Alps, to be used to balance off windand other intermittent technologies. Clearly, this doesnot prevent or does not allow us not to have localbackup because of the potential inevitability of theinterconnection, which is still obviously an issue. Ithink it is a component, both offshore and inshore. Areinforcement of the interconnection is still anessential component of meeting or pursuing thetargets. Then obviously greater integration of marketsis essential for competitiveness and for marketcoupling, so probably it is going to be very useful.

Q100 Chair: What about the rules for networkdevelopment? Are they changing across Europe theway the electricity networks develop at the moment?

Daniel Dobbeni: Yes, of course. I can give you anexample of what is happening in my home country,Belgium: today, when there is more or less wind innorthern Germany, we see the difference in theBelgian network and, as operator, we have to act inorder to facilitate the power flows or avoid constraintsin surrounding countries. Such effect is also felt inPoland and Hungary. The power system in continentalEurope, because of its interconnection, is alreadybehaving as a single power system, which isultimately the objective of the single electricitymarket.Alberto Pototschnig: I think you also mentionedplanning. With the Third Package, there are newinstruments for ensuring that planning of the networksat a European level is made with a greater Europeanfocus. ENTSO-E is responsible for developing an EU-wide Network Development Plan every two years. Itis non-binding, so it will still allow some flexibility atthe level of Member States, but it will clearlyrepresent a reference for developing the grid at aEuropean level and taking a more unified approach,and this will also help with the integration of markets.

Q101 Christopher Pincher: You heard, because Ithink you were here during the previous panel, theimportance that was stressed of getting a regulatoryframework in the North Sea. Can you explain whatthe role is of your two respective organisations inhelping to develop that regulatory framework?Daniel Dobbeni: The task of ENTSO-E is not to, letus say, design the regulation framework. We helpregulators as much as we can to understand what thehurdles are and what can be improved, especiallylooking forward, given the challenges we have on thetable, among which is the supergrid. I think, when youtalk about grids in the sea, the major issue is to ensurethat we have—I am not saying “harmonised”—compatible regulatory framework among the differentMember States. Once you build the grid that willinterconnect the networks of those Member Statesmore than is the case today and especially becausethey will be linked to intermittent generation sourceslike wind, it will become absolutely essential thatcompatible frameworks are available in the differentMember States that are interconnected. Of course, itis not up to TSOs to do that. We are there to helpregulators when it touches to regulation frameworksconcerned with the design or operation of the network,implicitly or explicitly. As was said during theprevious panel, this is more of a challenge to me thanbuilding the supergrids of the future, even though allthe elements of the supergrids are not yet available,and Governments as well as regulators will have toensure that this compatibility is made available indue course.I would like to clarify one point, because I didn’tcompletely answer the previous question when I saidit is a chicken-and-egg issue. When TSOs do theseoffshore investments, we usually anticipate a lifetime,we anticipate of 25 to 35 or 40 years. Onshore, thelifetime is closer to 30 to 50 years. It is a majorchallenge to all of us—TSOs, you, regulators—to takethe right decisions now because, if we don’t send theright signals to manufacturers, we may expect that we



are not going to deliver the optimum power system in2030, 2040 or 2050. This is what I mean by a chicken-and-egg issue, because investors’ will only start toinvest in the needed research and development whenthey have a clear view of the long term expectationscoming from the political side, the Government.While for the time being, Governments are asking ushow much it is going to cost and whether it is addedvalue for the consumer meaning that the long termexpectations are not yet established. Therefore it is achicken-and-egg issue while we should notunderestimate the change we are inducing in theenergy mix all over Europe. It is a tremendous changemoving to 30%, 40% and, even further, 80%renewables, and I don’t think anyone today has a clearview on the complete set of consequences this changeis going to create. At a certain point in time, we haveto believe in a given solution, and I am afraid thatnobody today can answer your question about whatthe regulatory consequences are. We will have to learnby walking.Alberto Pototschnig: If you will allow us to brieflydescribe the function of the Agency for theCooperation of Energy Regulation. It was establishedas part of the new institutional framework of the ThirdPackage, and its mission is to assist nationalregulatory authorities to exercise their regulatoryfunctions at a community level and to co-ordinatetheir action whenever necessary. We have a supportrole with respect to NRAs and also a co-ordinationrole. The issues that we are discussing today haveregulatory implications, both at national and cross-border levels. I will take three examples. When itcomes to cost recovery—the allowed revenues in eachMember State—that is clearly within, and will remainwithin, the sole jurisdiction and sole responsibility ofnational regulators in each Member State. Obviously,there you can try to either harmonise or have acommon framework, but that is as far as you can go.Then when you have access to the regime, to a cross-border infrastructure, clearly there you need to makesure that the access regime on the many sides of theinfrastructure is consistent. That is where the agencycan more directly support the co-ordination betweenthe national regulators involved. In fact, it may evenhave stronger powers, when the national regulatorsinvolved are not able to agree on a common accessregime or when they decide to pass the decision to theagency, so there we can have a more relevant role.Then, for example, there is the cost allocation issue.When an infrastructure provides benefit or connectstwo or more jurisdictions, then clearly there is an issueof how you allocate the cost. The simple rule is 50:50,but if you go into more complicated schemes, if youhave an integrated grid in the North Sea, for example,that may affect all the coastal countries then clearlythe issue of cost allocation among the differentjurisdictions becomes relevant. That again is wherethe agency is part of the process by which this isresolved at European level. That is our role. Our roleis much more relevant when it comes to cross-borderor multi-lateral issues and less relevant and moresupportive, maybe sharing best practices or trying toharmonise, to the extent that it makes sense when itcomes to mainly national issues.

Q102 Christopher Pincher: How far have yourdeliberations taken you? I see that when the initiativewas launched last December, three working partieswere set up for integration, regulatory and marketissues, which I guess is one way of dealing with itwhen planning an authorisation. A number ofinitiatives were set to be delivered, deliverables set forthis month. What progress has been made againstthose?Alberto Pototschnig: At the moment, working groupnumber 2, which is the one on regulatory issues, hasbeen surveying the regulatory regime in differentcountries, and basically what has emerged is that thereis a significant difference at the moment in theregulatory regime applicable to connection of windgeneration. The report will be released by the end ofthe month. The next issue is: what is the best way ofaddressing these different approaches? If you want todevelop an integrated grid in the North Sea, you wantto have consistent regulatory frameworks on all sides:firstly, because that will make the development easier;secondly, because you don’t want to give spuriousincentives for locating the capacity not where it iseconomically optimal but where there is a morefavourable regulatory regime, for example, when itcomes to access charges and connection charges. Sothat is the effort. As I said, we are still very much inthe early stages at the moment; it was just a survey ofwhat was happening, and I think the more interestingstage will be the next one.

Q103 Christopher Pincher: I am sure it will be. Ithas taken six months to survey what the differencesare between the different regulatory groups in thecountries. You now need to work out how toharmonise those. How long is that going to take?Alberto Pototschnig: The next deliverable is at theend of the year and the work will be completed by theend of next year, so basically there are still 18 monthsto go. That is the timeframe over which theseexercises are planned.

Q104 Christopher Pincher: Then you will report towhom?Alberto Pototschnig: That is to be reported to the 10Ministers of the 10 countries.

Q105 Christopher Pincher: Is that a reasonabletimeframe or do you think the process could beexpedited?Alberto Pototschnig: That is the timeframe that wasenvisaged in the agreement. It is quite challenging. Ithink we have probably been through—I wouldn’t saythe easier part, because part of this time has also beenused to establish the working groups and so on, so Idon’t know whether we will be able to cut the time,because seeing what scope there is for approximatingthe different regimes is not an easy task, but I thinkthere is goodwill on all sides. We are there asobservers because, at the end of the day, this issomething that the national regulators involved, theGovernments, the Member States and Norway wouldhave to agree, but I would say it is a reasonable if notchallenging timeframe.



Daniel Dobbeni: I think it was a very good initiativethat was taken because of the experience achieved inbringing market coupling to continental Europe,where basically it started between three countries andhas now moved to Germany, Luxembourg and theNordic countries. Experience has shown that theearlier you start involving the Ministers, theadministrations, the regulators, the TSOs of course,but also the market parties, the higher the chance thatyou can achieve a common understanding of what isneeded and how to achieve it. Afterwards, changingthe law or regulations, if necessary, is a question offollowing the established procedures in each MemberState. It is therefore fundamentally important that allconcerned parties understand what needs to be built.For this to happen, you need a common vision for thepolitical side, regulatory side, TSO side and marketparties.This is the reason why this initiative—and there are alot of initiatives in Europe—made me prettyoptimistic for the future of grids in the North Sea.Given a very short timeframe, since December lastyear, there was not enough time to go into the detailof the design, but there was at least sufficient time tobe sure that all concerned parties understand what weneed to build. When ENTSO-E talks about €70billion—this is one of the figures often mentioned—we had better be sure what we are contemplatingbuilding in the North Sea. I don’t think we could doit faster. To give you an example, before goingforward in terms of the necessary grid infrastructure,we needed to take into account the national allocationplans for renewables. This was only in June last year.So, everything is moving pretty fast. What isimportant is that all concerned parties are ready andwant to open the debate and agree on a common view.That is fundamental.Alberto Pototschnig: If I can just add one othercomment: this is quite an ambitious project because Ithink it is probably the first time that so manycountries with such different legacies andbackgrounds in electricity are trying to work together,from Norway to Ireland. They have different marketstructures; they come into different trajectories. TheNordic countries have been running an integratedmarket now for 10 years in the current configuration;17 years from the very beginning. In continentalEurope, we have more recent, very encouraging andvery fast-moving market developments. It is quiteambitious. I think we should be ambitious in theresults but not over-ambitious on the timing.Daniel Dobbeni: A last point. This initiative isfantastic, but at the same time we should not forgetthat the interconnected power systems concern 34countries. In other words the grid that will be builtbetween the Member States having a shore with theNorth Sea needs also to take included in the largerview about the power system. This is where ENTSO-E enters into the game. The same TSOs concernedwith grids in the sea are working on the technicalaspect in ENTSO-E so as to ensure that all EuropeanTSOs understand what is happening. If I go back tomy example about more or less wind in Germanyimpacting the Belgian network, imagine what thepower flows will become in 2020, 2030 or 2040.

Therefore, those 34 countries need to be very closelyinvolved in what will happen in the North Sea, in theBaltic Sea, and maybe tomorrow with energyproduced by the sun in North Africa, because everyelement of a power system is interacting with all theother parts in real-time.

Q106 Christopher Pincher: Given that, at the endof the day, this infrastructure has to be built and thenoperated, how closely are you working with theinvestor community and with energy providers, so thatyou don’t just create a regulatory framework that isnicely harmonised between countries but also worksfor the investors so they can build it, and then theenergy companies so they get to operate within it?Daniel Dobbeni: There are a lot of contacts eitherdirectly or indirectly between with those who aredelivering or will be delivering those grid componentsto the TSOs in the future, also through theirassociations, also towards the generator associations,because they will also play a major role in the wholestory. The major advantage of having a single TSOassociation for the last two years is that ENTSO-E isnow in a position to give the same message and thesame perception of the consequences on theirnetworks what is going to happen in the next 20 or 30years, so that manufacturers can adapt their researchand development program.I think a major concern is that when contemplatingthe recent evolution in Germany, Switzerland andItaly, for example, it is important that, given the factseveral Member State will evolve even faster towardsa new energy mix—influencing by definition allEurope—there is sufficient manufacturing capacityamong the companies who will have to deliver thosenew grid products. I am sure that there is not enoughmanufacturing capacity today to answer all the needs,because we should not expect China or other countriesin this planet, to stop investing in their networks.There again, the right signals should be given as soonas possible of what we want to achieve in 2020, 2030,2040 and 2050, knowing, of course, that we arechasing a moving target and that we will have tocorrect the way we are aiming at this target throughthe years. In summary: we are in discussion with themanufacturers, of course, but they will not investunless they have more stable vision of the needs forthe future.

Q107 Christopher Pincher: Lastly, quickly, whatabout governance? As a result of the work you willbe doing—you are going to produce a regulatoryframework—do you believe that there is a politicalwill to actually deal with the deadlock whilst theregulatory framework is in place?Daniel Dobbeni: From what I have understood, yes,and I hope it will remain like that, because if it wasn’tthe case then the Member State policy towards a highshare of renewable in the energy mix would have tobe reconsidered. Either Member States go forwardtowards the contemplated new energy mix and thenwe need to build the adequate transmission anddistribution capacity. If not, Member States will notachieve their target. You cannot have one, the new



energy mix, without the other, more transmissioncapacity.Alberto Pototschnig: At the European level, thereseems to be a strong political commitment in tryingto pursue the infrastructure agenda, to the extent thatthe Commission has now proposed that probably theremay be some financial support or some initiatives;something that is quite new to the regulatory practicein most Member States where, in the past, mostdevelopments were done through the tariff system. Soclearly, at the European level, the Commission—andI would say the other institutions also—are very muchon this piece.

Q108 Sir Robert Smith: When looking around theNorth Sea at the regulation, are you just looking at thespecific regulation of the electricity networks, or areyou also imputing into, say, the decisions ofGovernments? For example, if we have a floor pricefor carbon, the incentive may be to build lots ofinterconnectors and invest in power stations on theother side of the Channel supplying through thosepower stations where there is a different regime forthe price of carbon.Daniel Dobbeni: It is an excellent question. I wassupposing the European Union was there to solvethese kinds of discussions or issues. The fact is thatbecause we cannot easily store a huge amount ofelectricity, the power system is one of the fewdomains where the Member States have to rely oneach other and therefore agree on a common view andthen walk the talk. If that is not the case then we willhave to face reliability problems.

Q109 Sir Robert Smith: You have touched a lot onthe roles of both organisations. Do you have thepowers to make it happen, or in your situation do younot have the power so much as to provide theinformation and the sense of direction?Daniel Dobbeni: In an association like ENTSO-E, itis our ambition is to contribute to the three pillars ofthe European Commission’s energy and climatechange policies. So of course we are looking at howour association can help making it happen. But at theend of the day, the network development goes back tothe individual TSO and its Member States with theirlocal regulation and legislation. And, I am not sayingthat the hurdles are solved at Member State level.Again, the closer we get to the 2020 and the targetsthe Commission and the European Union have fixedfor themselves, the more I hope there will be sufficientpolitical will to move ahead in order to achieve thegoal. As an association, we have the power to deliverthe 10-Year Network Development Plan, like we dida year ago, and the next one is now in the making, toshow you policymakers the size of the challenge andidentify what TSOs believe are the things that need tobe fixed in order to go forward. We will implementthis plan once we have a clear indication of what isneeded and the regulation and legislation are in place.As engineers we will find the technical solutions,provided of course regulation and legislationsolutions exist.Alberto Pototschnig: As I mentioned before, the maintask for the agency is to support the regulators. I also

mentioned areas where we might have direct powers.We are also part of the process of developing thecriteria and principles for the ENTSO-E to developthe rules, and then these rules could be adoptedthrough comitology, rules that will govern in futurethe operation of networks and markets throughoutEurope, so we are part of this process. We are onlyone part. I wouldn’t say we have powers, but we canbe quite influential, and we bring together withinACER all the national regulators. The nationalregulators are our clients but they are also ourconstituencies, so in that respect we can be quiteinfluential in shaping the way in which the market willwork in the future, so at least one of the pillars: theintegration of markets.When it comes to security of supply, we also have arole here. It is mainly for national regulation ofMember States, and when it comes to sustainability,that is mainly Member States. We don’t have muchinput in that.

Q110 Sir Robert Smith: The costs and benefits forthe consumer is that at the heart of the agency’s—Alberto Pototschnig: Together with nationalregulators, we promote the idea that any developmentshould be assessed for costs and benefits, not justmonetary costs and benefits but also to try to includeexternalities because there are still aspects that are notpriced through markets. We are getting better there,especially as some of the environmental aspects arenow priced through a market. We are not sure thatthe prices that emerge from those markets are fullyreflective of the implicit cost, but, yes, this is basicallywhat we are trying to promote.When it comes to political decisions on targets—especially, for example, the 2020 targets—we take itas a given that there are some objectives to beachieved at the European level. I don’t think it is forregulators and definitely not for ACER to questionthem. The issue is more about how you achieve thetarget and the measures you put in place.

Q111 Sir Robert Smith: I suppose you should makesure that those who make those targets know theconsequences. I mean, you can inform them of that.Alberto Pototschnig: Maybe it is for nationalregulators. As an agency that is looking at cross-border issues, to be honest, we are not seeing that atthe moment as our main objective. Also, given thefact that we were only established a few months ago,at the moment we have to stick to the main priorities,and these do not include informing on the costs andbenefits of policies that have been agreed at aEuropean and political level. Where we may look intoit, as I said, are the costs and benefits of alternativeapproaches to achieve them. In this we clearly workvery closely with the national regulators becauseobviously this is something that the national regulatorshave to do in a harmonised and co-operative way.Daniel Dobbeni: To add one thing about that subject,when we think about the new grids in the sea or theelectricity highways, one way to have the cost as lowas possible, taking into account, of course, the lifetimeof those assets, is to go forward as much as we cantowards a standardised approach. Today, in Europe we



have 27—and sometimes even more—different kindsof power system transmission and distributionnetworkds, because all of us used different standardsthat are not totally different, but a little bit different.TSOs now have the unique opportunity, when we areworking towards these grids in the sea and electricityhighways, to define commons standards. ENTSO-Ehas the responsibility to deliver network codes,through open communication with stakeholders. Oncethese codes have received positive advice from ACERand have been approved by comitology, they willbecome law. I think this is exactly what I was tryingto say in the beginning. Given the challenge we haveand the cost involved, TSOs now have a window ofopportunity to establish these common standards.ENTSO-E is working on these codes, but of coursewe cannot do it alone; we need manufacturers; weneed the other market parties; and we need the supportof the comitology process.

Q112 Barry Gardiner: Mr Pototschnig, could I justask you to think with me? We are in England here. Iam a Scotsman, so I find it difficult as well. In theUK, we look at European monetary union, and youknow the background in the UK of not being part ofthat, believing that a common currency might requirea common Government. In a sense, do you see aparallel between your body of regulators and the sortof European Bank position, where you can set a setof rules, you can have your regulatory framework, butyou can’t ensure adequately, because you don’t havethe statutory powers of the Government, that it isgoing to be observed in the different sovereign states?How do you propose to prevent the equivalent of aGreece or a Portugal happening in this area?Alberto Pototschnig: That is an excellent question,because I am often asked, “Are you the new Europeanregulator?” and I have to say no, because we are not.A lot of people would like us to be, but I don’t thinkEurope is ready for that. On the other hand, we don’thave direct powers, but I think there is a system inplace where eventually Member States or nationalregulatory authorities who are not behaving in linewith the new European rules would be brought toaccount.Let us take one example; I could give you more. Thenew network codes: we develop the frameworkguidelines, which includes principles and criteria.ENTSO-E develops the network codes, they comeback to us, we see whether they are in compliancewith the framework guidelines and we recommendtheir adoption by the Commission. The Commissiongoes through comitology; they become law—that is,they are mandatory in the 27 Member States. Now, letus assume that one national regulator in one countrytakes a decision that is in contrast with these codes.We can be asked by another regulator to look into it,and if we find that this is the case we can issue arecommendation. The national regulator has a periodof time—I think it is six months: three months, plusthree months—in order to bring the decision into line.If they don’t do it we make a recommendation to theEuropean Commission, and the EuropeanCommission can launch an infringement procedure.You can say this is a very long process—

Q113 Barry Gardiner: We are talking years, arewe not?Alberto Pototschnig: I am talking about months here.Barry Gardiner: For the launching of theinfringement procedure, but then you know how longinfringement procedures take. This is the EuropeanUnion.Alberto Pototschnig: At the moment, the Europeangovernance is based on infringement procedures.Unless you get to having, as you mention, a EuropeanCentral Bank and European energy regulators, that iswhat we have. Again, in the case of disagreementbetween national regulators on terms and conditionsfor access to cross-border infrastructure, as Imentioned beforehand, after six or 12 months,depending on the circumstances, this decision maycome to us and we will decide. Again, we will not beable to enforce the decision, but we will have to relyon either national regulators or the Commission. Theyhave the powers. The Third Package increased thepower and the independence of national regulators. Soeither we rely on national regulators in thejurisdictions or we have to rely on the Commission. Itis already quite a step forward with respect to whatwe had until 2 March.

Q114 Barry Gardiner: I don’t doubt that, but youcan see the scepticism that one can have here of,particularly, national Governments under domesticpolitical pressure to back up their own TSO and toback up their own regulator in protecting certainaspects of their own economy, being out of step withthe regulations that you are trying to ensure getcommon adherence. You have quite openly said thatyou don’t have powers to enforce compliance.Ultimately, you will rely on the national Governmentsbringing themselves into line, or the European Union,in a process of Kafkaesque complexity andtendentiousness going on perhaps for years with acountry not in compliance.Alberto Pototschnig: I can agree with you that thisprobably is not the most expeditious process. Keep inmind, however, that this is also the process throughwhich the European Union institutions can enforceproper implementation of the Third Package to startwith. The deadline for implementing the ThirdPackage, which is basically the framework withinwhich all we are talking about today is set against,was supposed to be implemented by all the MemberStates by 3 March. No Member State implemented itor transposed it into national legislation by 3 March.The Commission indicated that they would give a six-month grace period but now, I think, in September theissue will come as to whether the Commission willtake it seriously. I am sure that there will be a longlist of countries receiving the communication ofinfringement procedures. That is the way in which thewhole game is set at the moment. I may be able toshare your scepticism, but that is what we have atthe moment.Barry Gardiner: At the start, people tend to start offwith the best of intentions and, as you say, it is not anauspicious start.Daniel Dobbeni: Maybe it is worthwhile to rememberagain that electricity, because of the nature of the



product and the service, implies a very high level ofco-operation between Member States to make itwork reliably.Barry Gardiner: Just like money.Daniel Dobbeni: The interconnection of severalMember States in Europe happened before theEuropean Union was invented, and I am convincedthat, given the targets we have for 2020—and wedon’t yet know the targets for 2050—the pressure willbe pretty high on all bodies, TSOs included of course,to make it happen. When I contemplate for the UK,Ireland and Scotland the ambition in terms of windenergy and imagine what is needed to balance thisintermittent generation being an electricity island, itappears to me even more of a challenge, especially ina cheap way. So there is a need to interconnect UKwith the continent to benefit from a larger powersystem, and I hope this will be the driving force toaccelerate the development of the network, withouthaving to go towards an infringement procedure. Ihope this will be the way we go forward.

Q115 Sir Robert Smith: I suppose there werelessons learned, because we built gas connections andwe thought that meant that, if we had problems, gaswould flow into the country but in reality, because ofthe different regimes in different countries in Europeabout the obligation for security of supply, the gasflowed against the market out of our country.Daniel Dobbeni: If you go back to what happened inthe case of Ukraine, the needed investments have beenachieved, in the meantime, to allow gas moving intwo directions, which was not always the case incontinental Europe previously. This is an example thatwhen a major problem happens, Europe is able toreact very quickly, much faster than any regulationchange or legislation, because there was a real need.That is what I was trying to say for electricity. Forelectricity, it is even stronger due to the fact thatelectricity cannot be easily stored.Alberto Pototschnig: If I may just add on a morepositive note, there have been a number of initiativesin Europe that have seen regulators, TSOs,Governments and Member States very muchsupporting the integration of markets. In fact, thosethat were involving Member States were the oneswhere progress has been achieved more speedily, andprobably better progress. The integration of themarket in central continental Europe between France,Germany and the Benelux countries, between Spainand Portugal, then integration in the Nordic area, areall examples where Governments were key inpromoting development. I have to admit there areother areas of Europe where probably the situation isslightly different. We are looking into it, because italso has to do with the independence of nationalregulators, but if the UK Parliament wanted topropose greater power for the agency, personally Iwouldn’t complain.Daniel Dobbeni: I am not so sure I would notcomplain.

Q116 Chair: If this is going to work, is it principallygoing to be a top-down process, though, or can it bea bottom-up process?

Daniel Dobbeni: You need both. The worst would be,in a complex power system like ours, just to think thatyou can reinvent everything only from a top-downapproach, and the same would be true if you wouldonly think about doing it bottom-up. We are in theposition today where the power system is redefinedall over Europe. A good example is to image having27 different kinds of airplanes leaving from 27Member States. At the end of the journey, it isexpected to land with the same airplane, with adifferent kind of motor and different kind of fuel,while the passengers didn’t notice anything. That isthe challenge, because TSOs cannot shut down thesystem for the weekend for an upgrade. The publicexpectation is to continue to benefit from the fullreliability TSOs have delivered successfully nearly allover Europe for the last 10, 15 or so years. To thisaim, TSOs need to carefully take into account theinfrastructure they operate today and how they canimprove it, whether with electricity highways, smartgrids or grids in the sea. You cannot decouple one ofthese new developments from the existent networks,so you need both approaches.

Q117 Chair: It is inevitable, is it not, that if we havea more integrated electricity network, that meansnational sovereignty in relation to energy andelectricity issues has to be pooled?Alberto Pototschnig: I guess this just goes back to thefact that we will have common rules that would bebinding on all 27 Member States, rather than having27 sets of rules that are more or less harmonised, aswas the case up until the Second Package. The Firstand Second Packages were mainly about harmonisingnational rules. Now we are going, at least for whatconcerns cross-border issues, towards a common setof rules that would be binding throughout. So yes, inthat respect you can read it that way.

Q118 Chair: If we have a common set of rules thatrelate to the harmonisation of an offshore grid, canthat happen without a common set of rules that mightrelate to electricity generation?Daniel Dobbeni: That is, to me, decoupled to someextent. I am used to saying that it is not a problem fora country to be highly dependent on imports as longas someone is ready to export. Yes, we will have toevolve towards more, let us say, common points ofview in terms of energy mix. It doesn’t mean that anEuropean energy mix will be imposed to the MemberStates because that doesn’t make sense either. Youhave more wind on the coasts of Scotland and Irelandthan there is to be found in other places in Europe. Sogeography in itself is already a good reason why wewill have—and we will keep—different energy mixamong the Member States, but we need moreunderstanding of the impact of these energy mix oneach other power systems.

Q119 Sir Robert Smith: Of the barriers to thisambition of a North Sea grid, which are the mostpressing: the technical, the economic or the socio-political?Daniel Dobbeni: All of them, because you need all ofthem. Don’t forget that it is not because you build the



grid in the sea that you do not need to reinforce gridsonshore. Grids in the sea may help to optimiseonshore grids by having the highest usage of theonshore connection and offshore connection, andreducing their number, but it will not solve the factthat we still need permits to build moreinfrastructure onshore.Alberto Pototschnig: Perhaps because I have thegreatest esteem for engineers, I would say probablythe non-technical aspects are the most challenging. Atthe moment, in Europe, permitting, not only foroffshore—in fact, mostly for onshore—is clearly thesingle most relevant obstacle to developing gridinfrastructure. I think that is clearly a challenge. Herewe are looking at possibly 10 different systemscurrently, and if you look at an infrastructure that linksa number of them, clearly you don’t want thedifficulties in each of these systems just to add up,one on top of the other, and then, as we mentionedbefore, also, a good regulatory regime that wouldfacilitate this development when it comes to accesscosts and location, and so on.

Q120 Sir Robert Smith: You are saying there willbe onshore developments that still need to be acceptedby the community if we are going to have our energy?Daniel Dobbeni: Yes. The danger with words like“supergrid”, “smart grid”, “super-smart grid”, and“electricity highway” is that these are concepts, andyou can find different definitions to them. It mayhappen that people believe, “We just have to waitsome time and we will not have to deliver permits tobuild new onshore infrastructure”. That is not true.New onshore infrastructure help the whole process ofachieving the 2020 target. It does not cancel theneeded reinforcement all over Europe. You saidduring the previous session that there was animportant flow from North to South. You cannot solveit only with grids in the sea. You still need to doreinforcement all over Europe. ENTSO-E identified500 projects only to handle the three pillars of theEuropean Union policy, and I am not talking about theday-to-day investments that each TSO has to do. Inthis 500, you don’t find the grids in the sea and theelectricity highways.One of the points that regulators will have to tackle,and also how to explain that to consumers, is that thiswill definitely have an impact on the price ofelectricity, not that much on transmission.Transmission represents in the electricity bill of aconsumer something around 4% to 6% or 7%,something like that, so before the price of grids inthe sea or the electricity highway makes a tremendousdifference in the electricity bill at home, we wouldneed to invest much more than in grids in the sea.Nevertheless, we need to attract investors. For manyTSOs, this means more than nearly doubling theinvestment requirements for the next 20 years, soTSOs need to be attractive for the investmentcommunity, and there we come back to the point: theright political and regulatory signals.

Q121 Sir Robert Smith: And certainty. Howconfident can the investors be that the wind farms willactually be producing the electricity?

Daniel Dobbeni: Of course. You are hitting aninteresting topic. When in some Member Statesexisting contracts for renewables are put into question,this increases tremendously the perception of risk byinvestors and investors usually translate that into ahigher risk premium, so nobody is advantaged byincreasing the risk perception of the financial markets,but it is happening now.

Q122 Sir Robert Smith: Your 10-year plan is €23billion to €28 billion?Daniel Dobbeni: The first five years.Sir Robert Smith: The first five years. How muchmore do you think we would need to create a viablesupergrid?Daniel Dobbeni: How much? If I knew the answers,I would quit my job and start as a consultant. As Isaid at the beginning, we at ENTSO-E have givenrough ideas and we came out with something around€70 billion for the grids in the sea, only for the NorthSea. Don’t attack me in 10 or 20 years if it is €80billion or €60 billion. It is too early to give accuratefigures. What is important is to have an idea of whatthis means with respect to all other investments TSOsare doing anyhow. This relative figure is important forpolicymakers because, at the end of the day, thesemajor developments will have an impact on theconsumers, the poorest family among us, as well asthe industry. This is where the issue is. As long as itremains, let us say, acceptable and that we do it thecheapest way through standardisation, then I think weare on the right road.

Q123 Christopher Pincher: At the risk of boringeveryone to death by talking even more aboutregulation, the current rather simple system ofcompensating for the cost of infrastructure into quitea more complex supergrid because it tends to benefitthe exporter of energy rather than the importer ofenergy. It seems to be rather unfair, so it needs to bechanged. Do you think it is going to be possible tocreate a mechanism for fairly sharing the costs of thesupergrid structure?Daniel Dobbeni: I can’t answer you, because this isclearly a Member States’ and a regulatory issue. AsTSOs we are open to any allocation keys whatever.What is important—and again, that is the added valueof the initiative of 10 Member States in the NorthSea—is that we need clarity there as soon as possible.Ultimately, a decision will have to be taken, and thereis no perfect allocation key, because even if we wereto design a fantastic computer to calculate theallocation keys nobody knows what will be the energymix in 20 years, or even in within five years. So whowill import? Who will export? Who will benefit fromthe wind in the seas of the UK, and who will benefitfrom the sun? You don’t know, so we will have tobuild a network that is reasonably correct for allconsumers in Europe and all Member States, knowingthat we have no clear view of the next 40 to 50 years.So allocation keys will have to be decided politically.I don’t think there is an engineering formula able tobring that out.Alberto Pototschnig: There is in operation in Europe,an interim inter-TSO compensation schemes since



March 2002. That scheme has been modified slightlybut basically is still running more or less on the sameprinciples. I think now the challenge is to see whetherit is still fit for the new situation in which morecomplex and probably larger infrastructure wouldhave to be built. That scheme was mainly devised totry to compensate for the use of existing infrastructurefor transits. Personally, I think it will require somerethinking before it can be used for supporting newinvestment. It is not easy. This has been looked intoby several academics and other institutions over theyears. I agree with Daniel; I don’t think we will havethe magic formula, so it is a matter of finding areasonable formula. It is also true that energy flowswill not necessarily be the main driver or the onlydrivers for the allocation, because there are somebenefits that are not necessarily reflected in energyflows. There are wider benefits of integration, ofsustainability and security of supply, typically. I thinkit is a challenge, but it is one of the challenges thatwe will need to address in the next few years.It is not particularly relevant for TSOs’ decisions toinvest, because at the end of the day what is relevantis whether they would be allowed revenues sufficientto cover the costs, and here we are talking about howthe different jurisdictions would share the cost. Whereit is relevant is on building consensus for newinfrastructure, because that would be how the newinfrastructure is seen from the national perspective ofthe different jurisdictions.

Q124 Christopher Pincher: That is going to bepartly political, isn’t it, which is going to mean energyspirals, and therefore knowing how that cost is goingto be spread out will be important to that decision?Alberto Pototschnig: It is a zero-sum game, whichmakes any agreement very complicated.Unfortunately, we have a regulatory system in place,so any time you propose an amendment ormodification of the system there are some countriesthat are going to win, according to likely scenarios,and some other countries are going to lose. I havebeen involved in this for a few years, and myexperience is that the first question you get is, “Whatdoes this mean for country X?” Then all the nicetechnical details behind the quality of the algorithmare not particularly of interest.

Q125 Barry Gardiner: You said that sooner or later,politicians are going to have to take a decision. On ascale of one to 10, 10 being top of the priority list andone being in the category of “just too difficult todecide upon,” where would you say European EnergyMinisters are at the moment on taking that decisionyou talked about?Daniel Dobbeni: I can’t answer you. I have no ideawhatsoever whether it would be one or 10. Being anoptimist by nature but not necessarily a believer, Iwould not say 10, but hopefully we will get there. Ifyou allow me, you said, “sooner or later”. I wouldlike to qualify it, “Sooner the better.”

Q126 Barry Gardiner: I am going to push you,because it seems to me that you must have a clearview of how focused different energy departments

around the European Union are on this issue, howmuch their officials have brought it to the attention oftheir Ministers and how engaged those Ministers arewith this particular matter as opposed to all the otherproblems that they are dealing with. Surely, you havesome sense of whether this is something that mostEnergy Ministers are absolutely seized of theimportance of and what to get on with, or whether itis just a law and order issue that on the whole is noton their political priority list.Alberto Pototschnig: Sorry, are you referring to thecost of location or more generally the integration ofthe market in the North Sea?Barry Gardiner: I am specifically going to the pointthat Mr Dobbeni said when he said, and I think I amquoting you almost exactly, “Sooner or later, adecision is going to have to be made here, and that isgoing to have to be made by politicians”.Daniel Dobbeni: The only element I have to give youis the summary of the meeting of the Heads of Statein February, where for the first time clearly some ofthe points we have discussed today were addressed inwriting by saying that they have discussed it at thehighest level. I hope that if the Heads of State arediscussing this at the highest level, it is the same forthe Energy Ministers.Barry Gardiner: So do I.Alberto Pototschnig: If I can add another dimension,Ministers at the technical level would have to be partof the comitology process, so that we will have a clearsign. I think the first comitology process will belaunched probably next year, so we will have animmediate sign of how engaged the various ministriesare and the various administrations are. There is acommitment at the highest level. Then, when you lookat the involvement at the technical level, I think youhave a more varied picture and you have somecountries that are really following and pushing, andothers that are at the moment still looking from theoutside.Barry Gardiner: I will not ask you to name names.Thank you very much.

Q127 Christopher Pincher: I have one morequestion about decisions that have to be made in thiscase about the various low-carbon schemes we haveoperating across Europe. Here we are going to have acarbon price support scheme. That presumably meansthat electricity prices here go up. If you have asupergrid that presumably means that cheaperelectricity could be imported from abroad, where theremay be no carbon price support or a less advantageouscarbon price support system in place, so what sort ofalignment do you think might need to take place toensure that those low-carbon schemes work acrossEurope, and do you think it is an important issue?Alberto Pototschnig: I think there are twodimensions, if I understand your question correctly.There is now a European carbon market, which willhopefully operate in an unbiased way throughoutEurope, and then there are other promotion schemesthat may have an impact on the way in which theelectricity market works. The Commission tried acouple of years ago, with the initial proposal on the



renewables directive, to create a more integratedmarket; for example, for renewables support. It didn’tget its way. It is still very much national. There was astrong resistance to any form of European market inthat respect. I think what worries me the most is thatsome of these schemes would keep a large share ofgeneration out of the market or not respond to pricesignals, so this would have an impact on the liquidityof markets. That is where I think the problem is. It isnot the fact that you still have national schemes; it isthe fact that some of the national schemes maydeprive the market of some important liquidity,especially if we look in the future at havingrenewables at 30%, 40% and, in some countries, 50%of generation. You take that out of the marketsomehow and you prevent that generation respondingto price signals. That might be a problem.

Q128 Chair: We have been looking mostly at a gridaround the North Sea. How are the prospects fornorth-south, to Europe, to Africa, or east-west toRussia? Are those projects coming along?Daniel Dobbeni: There are, for the time being, trialsof grid synchronisation with Turkey. They are goingforward. In the next few weeks, the first marketexchange will take place. We are contemplating a stepby step approach, because the bigger the system, themore we have to ensure that we keep the stability anda well-functioning power system. When you talkabout Russia, there are also discussions. We did astudy before—a former association now—UCTE withthe Russians, whether it was feasible or not tosynchronously interconnect Continental Europe withRussia. It appeared that it would not be feasible at thattime and that a DC-DC connection would be better.I think there also you have to put time in perspective.When we go forward in relying more and more on

generation with an intermittent character, the biggerthe system the better, of course, providing it is stable,because at some moment in time very high quantityof energy will be produced in some places with a lowdemand and we will be happy to find someone thatneeds this energy. That is also another reason why itis difficult to identify which country is going to winand which country is going to lose, because the moreEurope relies on intermittent generation, everyonecould lose or win, not every five years, but every hour,every day, every night or whatever moment. There,again, interconnection is a natural benefit. How tocalculate this benefit is another story.

Q129 Sir Robert Smith: They used to argue whetherScotland supported England because it provided mostof the power, but then the people operating the gridsaid, “Well, really, England supports Scotland byproviding all the phasing.”Daniel Dobbeni: A huge power system such as theEuropean power system today, knowing of course thatChina will be bigger someday, deliver energy of avery high reliability to some 530 million people. Ofcourse, if I drill down and I go to a given village,maybe this given village will benefit from anothervillage because, at a given moment, the residentreduced electricity consumption when there is a peak.I think we have to look in terms of added value, prosand cons at the European level. If you drill down tospecific cases, you will always find good reasons toconnect or not to connect Member States, but globallythe advantage of higher interconnection capacity isclear.Chair: Thank you very much indeed. It has been avery interesting session, and we do appreciate yourtime and trouble in coming to give evidence. Thankyou.


Thursday 30 June 2011

Members present:

Mr Tim Yeo (Chair)

Dan BylesDr Phillip LeeAlbert OwenChristopher Pincher

________________


Witnesses: Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and SueHarrison, Head of European Energy Markets, gave evidence.

Q130 Chair: Good morning. Thank you for comingagain. I am afraid we are seeing a lot of you, but weare grateful for your time. I should draw theCommittee’s attention to my entry in the Register ofMembers’ Interests and in particular that I am a paiddirector of Eurotunnel, which is planning aninterconnector.Could I start with a question about what plans youhave in DECC for developing an integrated offshoregrid and what benefits do you think that is going todeliver?Charles Hendry: There are a number of benefits thatwe think it delivers. We think it is a critical part ofbeing able to develop the offshore wind sector. Ifpeople are going to be investing billions of pounds innew offshore wind farms, they need to have comfortthat they can get the power they generate to marketon day one and the more integrated that is then thebetter that will be. Secondly, we think that in terms ofdelivering it at a lower cost it has benefits because ifevery individual offshore wind farm seeks to have itsown point-to-point connection from where it happensto be out at sea to the coast then obviously it can bemore expensive and it also requires a huge amount ofupgrading of the onshore grid, which we discussedlast time, which is difficult in its own right. It alsoenhances our security of supply so that, for example,if one sees a wind pattern moving from the west coastof Ireland through the Irish Sea, through the NorthSea into the Baltic then one can pick that wind up andarrange a different location if one has an integratednetwork to make it happen. So that is where we seereal benefits. It is helping to deliver low carbonelectricity, it is helping to deliver security of supplyand reduce costs.In terms of the workstreams, we are involved in anumber of different ones. There is the European onefor the 10 Member States in the North Sea that areinvolved, including some others. We have a separateinitiative, the Nordic-Baltic, which came out of thesummit last year, and we are also looking morespecifically at the British Isles and how we connectwith Ireland and the Channel Islands.

Q131 Chair: Would you go so far as to say that wewon’t be able to meet our renewable energy targetsunless we get on and develop an integrated offshoregrid?Charles Hendry: I think it is helpful. It doesn’t stopus doing it, but it would make it potentially more

John RobertsonLaura SandysSir Robert SmithDr Alan Whitehead

expensive as a way of doing it, but I don’t think wehave to develop at the outset the full grid. I think wecould sit down for years and map it and think of everysingle potential connection that could be a part of thatprocess, and what I think we absolutely should betaking forward is bilateral negotiations on somestrategic interconnectors to begin with: to Norway,potentially to Iceland, to Denmark, additionally toFrance. So a range of additional interconnectors,which create the spine, perhaps, of an offshore gridfrom which it can evolve over time, but we don’t haveto have a perfect blueprint from day one.

Q132 Chair: That may anticipate what I was goingto say, because some of the witnesses we have heardfrom suggested securing, creating an integratedoffshore grid simply won’t happen by 2020. It is notphysically achievable.Charles Hendry: It can’t be in place in its totality by2020, but its evolution could be well under way.

Q133 Chair: Do you think that there are someregulatory issues, as well as the political ones, thatwill need to be solved very quickly, the next coupleof years, if we are to avoid locking ourselves into atransmission infrastructure that is less than optimal?Charles Hendry: They will be essential as part ofdeveloping an offshore grid, so one needs to have aregulatory regime. We have different regulatoryregimes with different countries and therefore thereneeds to be some agreement between those. Thereneeds to be agreement on transmission currents andissues in that respect. So there are technical issues thatneed to be resolved as well. If you look at, forexample, the approaches we set out on the All IslandsApproach at the British-Irish Council last week, thoseare exactly the workstreams that we are prioritising.

Q134 Chair: To what extent do you see the offshoregrid as a means of relieving the pressure for moreoverhead transmission lines onshore, which is, as youknow, extremely controversial in some parts of thecountry, including my own constituency?Charles Hendry: As indeed we discussed last timeround, Chairman. I totally understand why developersare so concerned that on the day when they are readyto generate they can get their power to market andthey need to be comfortable about the costs of thatand the certainty of it. What we then have to do is tolook at our strategic overview and say what is the


30 June 2011 Charles Hendry MP and Sue Harrison

case for Government, National Grid, others, CrownEstates, being involved in saying, “These are the mostimportant parts of that network. How do we get thoseconstructed? How do we get those financed?” Thedifficulty sometimes is going to be that if you have anoffshore wind farm relatively close to the shore theywill not be particularly concerned about putting in anoversized interconnection link in the anticipation thatat some point in the future a new offshore wind farmwill be built further out that could share it, becausethey would potentially have to carry that extra costwithout getting any benefit for it. We have askedNational Grid to help on this; Ofgem are helping onthis; DECC is doing its work on this; so it is actuallygetting the building blocks in place in the right order.We all recognise where we need to get to. The workthat we are doing at the moment is working out whotakes the lead and how we bring it together.

Q135 Sir Robert Smith: You mentioned how itcould evolve with maybe Norway, Ireland, Iceland. Ifit is going down that evolutionary road, how importantis it before those early ones start to physically appearthat there is some kind of standard setting and long-term idea of what the integrated system would looklike?Charles Hendry: We will need to have a bilateralarrangement in any case for each of those. The morethat can be harmonised then the better that is going tobe, and I think the EU can play a very significant rolebecause quite a lot of the countries that might be partof this process are EU members but obviously notexclusively so. I think that we can’t hold everythingback waiting for all of that detailed work to be done.We have had active discussions with the Norwegians;we have had some preliminary discussions withIceland; significant discussions about aninterconnector from France and Flamanville comingvia the Channel Islands into the United Kingdom. Sothere is a range of different discussions that havehappened already and I think it would be veryfrustrating, where there is a real prospect of progress,if that was to be held up because of the lack of acomplete overall agreement on some of thoseregulatory matters.Sue Harrison: Perhaps I can come in at that point. Ithink you are quite right that if we don’t do anythingnow we will end up with point-to-point connectionsand direct connections between offshore wind farmsto shore, so you won’t get a more co-ordinatedoffshore grid. The work that we are doing with nineother countries around the North Sea and the Irish Seais to look at whether a more co-ordinated developmentin offshore grids would be to our mutual benefit andlooking at the kind of configurations that that mighttake. A supergrid can be many different things. Wedon’t want to stop any investment that is happeningat the moment. We certainly don’t want to stop thepoint-to-point connections, because we will alwaysneed those, but I think before you get a more co-ordinated grid development Governments collectivelyare going to have to give some kind of signal, somekind of vision, and do something with the regulatoryarrangements to make it happen. But we do not want

to stop investment that is actually taking place. Thatis the last thing we want to do.

Q136 Dr Whitehead: You mentioned the North SeasCountries’ Offshore Grid Initiative. What hashappened so far with that? What are the results toshow? There was a timetable adopted after theagreement was reached, aiming for this summer, Ithink, for some initial results about feasibility andprotocols.Sue Harrison: There are three workstreams in theinitiative, one looking at regulatory and market issues,one looking at the technical issues and one looking atthe physical planning issues, and they all haddeliverables, outputs by a specific time. A couple ofthose deliverables were in June this year, but for thethird workstream the first deliverable is not until theend of the year. Our commitment was to give a reportto Ministers at the end of this year, but we are goingto do an interim report in the next couple of weeksthat will set out the progress that has been made inall three workstreams and looking forward to the firstofficial report to Ministers at the end of the year, sowhat we are going to achieve over the next sixmonths. That should come out in the next couple ofweeks. There has been quite a lot of preparatory work,preparatory analysis, that we have carried out already,which we hope we will be able to tell people about ina couple of weeks’ time.

Q137 Dr Whitehead: Are you able to reflect todayon whether that interim report when it comes out willprove to be a positive series of steps as far asfeasibility and protocols are concerned?Sue Harrison: We won’t be coming to anyconclusions. We have done a lot of evidencegathering. We have been looking at the regulatoryregimes in the countries around the North Sea and theIrish Sea. We now have a very good digest of whatthe regulatory regimes are. We will then have to do ananalytical piece of work to see whether those differentregulatory regimes present barriers, because you don’thave to have the same regulatory regime but they haveto be consistent. We have done a lot of data gatheringon plans that the countries have to develop offshoregeneration, because before you look at what kind ofgrid you will need you will need to know whatgeneration is planned, and getting that kind offorecasting data and getting it consistent andcompatible has taken time. The problem there is thatmost countries do not have any plans beyond 2020 forgeneration because everyone is working to the 2020targets. So between 2020 and 2030 we are having tomake assumptions and give some sort of ballparkfigures, but it gets more uncertain the further out yougo.

Q138 Dr Whitehead: This is a question to theMinister particularly. That initiative, as we hear, looksat technical options and appraises various ways ofworking better together but doesn’t make any politicalcommitment to build or to progress. What politicalefforts are there under way to develop that particularside of the whole process?



Charles Hendry: These are issues that are addressedat the European Energy Ministers meetings, so thereis a continuing focus on them. I think one of thereasons why we have a range of different workstreamsgoing on is to increase the prospects of workhappening at an early stage. That is why we have theseparate programme for the British Isles as a whole;why we then looked separately at the Nordic andBaltic aspects as well and the particular connectionopportunities that are there, as well as this widerEuropean one, which it should be remembered thatwork is also going to have a separate group lookingat it at a southern European grid and connecting intoNorth Africa. So I think by trying to keep the differentavenues open, the very clear commitment that comesfrom the Prime Minister personally in terms of theconclusions of the Nordic-Baltic British summit lastyear, shows this is an area where we believe that thereis particular scope for co-operation.

Q139 Dr Whitehead: On the question of political co-operation, we have heard and we know that onprevious occasions some individual countries haveblocked or looked like they might blockinterconnector plans on the grounds that they mayhave had, say, low consumer prices and that the neteffect of an interconnector, while it may beoverwhelmingly beneficial all round, would have aneffect on their consumer prices. I believe Norwayintervened in this respect, I think in 2003, on an earlierproposal for an interconnector. What sort of effortsmay be undertaken to ensure that that sort of response,politically, is not made by those involved in theprocess?Charles Hendry: I think if we are looking where thereis a bilateral arrangement then both countries have tobe persuaded that it is in their interest to do so, and wehave, with the Norwegian Government for example,to persuade Norwegian consumers that this is a goodprospect for them. So, for example, when there issurplus offshore wind available, which we couldn’tuse in our own system, that can be put into theNorwegian grid or into pumped storage and then theycould sell back to us hydroelectricity when we haveextra demand in the United Kingdom. The Norwegianconsumers need to be persuaded that that is not goingto push up their prices and it is not going to be takingelectricity out of their system at a time when they mayneed it themselves. They have to be persuaded thatthis is a good deal for them as well and so this has tobe on a voluntarist approach and carrying consumerswith us is part of that process.

Q140 Dr Whitehead: We heard from EddieO’Connor, the CEO of Mainstream, who suggestedthat the best way to advance politically a Europeansupergrid would be a phone call to the GermanChancellor. I was just wondering how good yourGerman is.Charles Hendry: Ja ganz gut, ich könnte auf Deutschsprechen wenn das einfacher ist.

Q141 Dr Whitehead: Unfortunately, mine is notvery good. Does that mean, “I am about to ring theChancellor up and—”

Charles Hendry: No, that said, “It is all right, I canspeak German if you would like me to”, and I amnot sure whether that is permissible in Hansard, sohopefully the translation will help. If necessary, wewill pick up a phone call wherever appropriate andthe Prime Minister is happy to do that where it isappropriate for Britain’s economic interests. On aregular basis, we are talking to our fellow ministerialcounterparts. With the Norwegians, for example, wehave had regular ministerial discussions on this;Iceland has been at a ministerial level. There is arecognition that all of us can have a mutual benefitfrom this, and certainly at a ministerial level I havediscussed it with my German counterparts as well.There is no doubting the Government is keen,politically, to push this forward.

Q142 John Robertson: Minister, you havementioned offshore grids being developed, I think youdid anyway, around the British Isles. Do you expectthat to be linking into similar projects in Europe?Charles Hendry: I guess ideally. This is somethingthat can evolve to cover a range of projects in manydifferent jurisdictions.

Q143 John Robertson: Are there any preparationsbeing made for that interoperability between theBritish projects and future European projects?Charles Hendry: On a specific project basis or—John Robertson: Or on projects, plural. I imaginethere is more than one on the go.Sue Harrison: When you say interoperability, are youtalking about technical standards or—John Robertson: And being able to connect up,discussions about how it would be done—planning forthe future, in other words.Sue Harrison: We are looking at that in the two foraat the moment. We will be looking at it under theBritish-Irish Council workstream that was agreed lastweek, the All Islands Approach, and that is looking athow we can co-ordinate grid development and alsoshare renewables resources possibly, developing themin a mutually beneficial way. That is a sort of subset,if you like, of the wider North Seas Initiative whereyou have 10 countries, where we are trying to do asimilar thing on a slightly larger scale.

Q144 John Robertson: In the Irish Sea itself, howmuch will the UK spend on that and are we getting acontribution from Ireland as well?Charles Hendry: In terms of how much will theBritish Government spend?John Robertson: Yes.Charles Hendry: This is not a Government-ledprogramme. This is an area where the investmentwould come from the individual companies involvedor from specialist operators and this would not involvepublic funds going into the project.

Q145 John Robertson: Do we not help to subsidisethese offshore wind farms and research anddevelopment and also the grid itself?Charles Hendry: Yes. The ROC system, theRenewables Obligation, is there at the level of twoROCs to support the development of offshore wind.



That is supposed to be a reflection of the costsinvolved and so the costs of interconnection areincorporated in that process.

Q146 John Robertson: It always amazes me we usethe word ROC. How much is a ROC?Charles Hendry: Two ROCs is the equivalent of £8per megawatt hour, I think it is, but we will need tocome back precisely on that. We have the ROCBanding Review, which is going on at the moment. Iknow the idea of banding ROCs becomes even moretautological. We are publishing that shortly. Ourrecommended—John Robertson: When we talk about these things itwould be helpful, I think, if we could actually put afigure on a ROC. I have this vision of somebodythrowing a stone into the sea and wondering howmuch that is costing us. Anyway, that is me, perhaps.I am not quite as sharp as the rest.

Q147 Chair: On the ROCs review, that is going tobe concluded by the end of the year; is that right?Charles Hendry: What we have said is that we willpublish the recommendations before the summer witha three months’ consultation, with the intention ofproviding the final decisions at the end of the year.

Q148 John Robertson: Being Scottish you wouldexpect me to ask you a Scottish question. Do youagree with the Scottish Government’s proposal toidentify priority energy corridors in home waters?Charles Hendry: We work very closely with theScottish Government on many of the renewablesissues. What we also recognise is that for Scottishrenewable energy to achieve its potential in theScottish Government’s stated ambition of self-sufficiency then that needs to have additionalconnectors for getting it to an English market wherethey wish to be exporting it. There are very significantgrid constraints on land and therefore it is absolutelyright to be looking at whether there are offshoreconnectors that can get the electricity from where it isbeing generated into the key English markets.

Q149 John Robertson: There are two problems as Isee it. The first one would be on who pays for thesethings, energy being obviously reserved but planningbeing devolved, and the problems that we have had inmany devolved areas, particularly with the Scottishdevolved Administration, in getting things done andthe hold-up there, which obviously always adds to thecost. Would that be built into any—shall we say—agreement that was made? Plus, with 2014 being thedate of the referendum on independence in Scotland,has that been taken into consideration and would it bea consideration that the Government would have totake some cognisance of in the future?Charles Hendry: The system is more complicated asa result of the funding mechanism. So, for example,the Renewables Obligation regime, there is a separatesystem applied in Scotland that is more supportive ofsome of the emerging technologies—for example,tidal technologies, which they support with five ROCscompared to two in England. So that complicates thestructure. We have had active discussions with them

as part of the market review process to see if we cantry to move to a more standardised approach, and wewill be publishing our final position on that shortly,but on all of these issues, companies looking to investin the United Kingdom want as much clarity and assimple a jurisdiction as possible, rather than if theyare operating on a cross-boundary, cross-border basis.

Q150 John Robertson: I want to push you more onthis because it is important, particularly for the peoplein Scotland: does the referendum possibility and thepossibility of a yes vote for independence curtailyour negotiations?Charles Hendry: I don’t see it does. I think that wehave the respect agenda with the Scottish Governmentat the moment. We totally understand where they canmake their own decisions, particularly on planning,and how that brings forward different energytechnologies and their very understandable interest tomake the best of Scotland’s resources. We want to dothat in as harmonious a way as possible but there iscertainly nothing in our discussions with them at themoment that is affected by the potential referendumor any conclusions from that.

Q151 Sir Robert Smith: How does the interactionbetween the two regimes impact on a connection seadown the coast? They would go out to the territoriallimit and then the regulation would become UK?Charles Hendry: Yes. So they would control the firstfew miles of foreshore and the seabed and then afterthat it is a UK-wide policy.

Q152 Sir Robert Smith: But in terms of drivingforward those bootstraps of connection, how much ofit would be policy driven by the UK Government andhow much would require a Scottish Governmentpolicy drive?Charles Hendry: We have the primacy on the energypolicy side of issues but, as I say, we are trying todevelop a very consensual approach, because we bothsee the benefits to Scotland and the wider UKinterests.

Q153 Sir Robert Smith: Just one other thing. TheNorth Sea discussions are taking place but the fullvision for a supergrid involves deeper connectionsinto the east. Is there a wider European discussion ofthose countries that could be involved?Charles Hendry: Do you mean across in the Baltic,or do you mean further?Sir Robert Smith: Also into the south and the long-term vision of connecting to North Africa and so on.Charles Hendry: It is a priority for the EuropeanUnion now to look at how one enhances theinfrastructure network and therefore looking at whereare the strategic links that are necessary, north-southlinks; this is both for electricity and for gas. So theenhancement to that and security of supply that itwould bring is a very significant area. It has beengreatly strengthened further by the Hungarianpresidency and the Polish presidency where these areclearly issues of particular concern to them. Thepotential for an offshore grid is looked at in a differentway than the need to upgrade and enhance the onshore



existing grid structure and so what has beenhappening is looking at where the potentialweaknesses and the potential challenges are in thatonshore structure to see where they need to bereinforced, but separately exploring how it can bedone, both offshore in the north and also into a NorthAfrica grid.Sue Harrison: Perhaps I can add something to that.Later on in the year, there will be a new piece oflegislation coming out from the Commission oninfrastructure that will identify priority corridors andit will look at the various regional groups that youhave mentioned. Our North Seas will be one of thosepriorities and then there will links with the south,which are solar in the south, and then there will belinks with east-west, with biomass in the east. I thinkthey are looking at a regional basis at the moment.The North Seas region is, I think, the one where mostwork is being done, but I think the long-term visionis to join up all those regions, and they talk aboutelectricity superhighways by 2040, which is a longway in the future.

Q154 John Robertson: I missed out one of thequestions I meant to ask you, moving towards Irelandagain. How many gigawatts of renewable electricitygeneration would you expect to connect in the IrishSea?Charles Hendry: It is a matter for the IrishGovernment. It is not for us to set any targets orambitions for them. The thinking behind the approachwe have taken is that at the moment there are strandedpotential assets, assets that won’t be built in the IrishSea or in the west of Ireland because the Irish gridand the Irish demand market could not accommodateit, but these are good resources; they are accessible;they are more affordable than some of the deeperwater ones. So there is a benefit to us if we look intotality at the British Isles from harnessing thoseresources: by providing an interconnection into theUnited Kingdom market does that enable differentdevelopments to come forward? At the moment, thereaction from the Irish Government has beenextremely positive, and from the Irish press and othershas been very good. We are therefore keen, havingestablished the principle, that we want to talk aboutthis further to see how much it could bring.

Q155 John Robertson: Is there a minimum figurewhere if it drops below that it is not worthwhile doing,or a maximum figure? Somebody somewhere musthave an idea of what kind of size we are talkingabout?Sue Harrison: As the Minister said, the Irish certainlyhave their long-term forecasts. I am afraid I don’t havethem at the moment; we can let you have them. Theydo have enormous potential in Ireland, both onshoreand offshore, both west and east coast, and that is whythey see it as such a valuable resource, which theywant to maximise.Charles Hendry: The minimum would be linked tothe cost of installing an interconnector. That is goingto be a few hundred million, so the cost of that has tobe covered as part of that process. As Sue was saying,we don’t see a maximum in that respect, but that

would be absolutely a matter for the IrishGovernment.

Q156 John Robertson: Is that off the NorthernIreland coast we are talking about?Sue Harrison: No, we are talking about Ireland, theRepublic of Ireland. There are renewable resources offthe Northern Irish coast as well, but recently we haddiscussions with the Irish Government.

Q157 Chair: Given that Britain is already a leader inoffshore wind and has the potential to become a verysubstantial leader in this, are we doing enough andquickly enough to exploit this advantage in terms ofoffshore industries generally and sort of exportpotential?Charles Hendry: In terms of where we are, we arenow the world’s largest deployer of offshore wind.Seven of the world’s 10 largest offshore wind projectsare in UK territorial waters, so we have a verysubstantial position. We want to drive that through toget the supply chain investment and the ports projects,which is looking at actual manufacturing projects onport sites worth £60 million. That has stimulated a lotof interest with companies like Siemens indicatingthey are looking to go to Hull, Gamesa looking tocome in, Mitsubishi looking to come in, Olsenpotentially looking to come in, and a few others aswell who will berate me for leaving their names offthe list, but nevertheless the world’s key players in thesector are now all looking at Britain. What they needis to know what the market is going to be and theirfinal investment decisions will be based on decisionsby potential wind farm operators to go ahead with aninvestment. So that needs the clarity that the marketreform process will give and the approach we havetaken there on contracts for difference, so they can seethe likely return they will be getting. We are settingout a renewables roadmap in the course of the nextfew weeks that talks about the level of ambition thatwe have in these areas and what needs to be done todeliver that and so people can try and see what weare doing.The other thing, which we have made very clear, isthe scale of that ambition is linked as well to bringingdown costs. The industry tell us that they can bringdown the costs to around £100 per megawatt hour. Ifthey can do that then the scale of the ambition can bevery much greater than if it is £150 or £200. This iswhere we are working very closely with them to tryto see what can be done to bring down costs, wherethe area of looking at strategic interconnection issuescan be part of that process and to facilitate thathappening. So we do have a strong leadership positionat the moment. The policy drivers are in place, I think,or evolving, in order to give the clarity to investors,but we certainly aren’t there yet.

Q158 Chair: One of the other things, of course,investors would need is a skilled labour force in theplaces that you have referred to, or capable of movingto those places anyway. Are we doing much to try anddevelop those kinds of skills to make sure that if bigplayers in the supply chain chose to locate here theywould recruit the right sort of people?



Charles Hendry: Yes, without doubt there is a lothappening in that respect. I think the change to theLocal Enterprise Partnerships has been very helpful inthis respect, because they are more likely to focus onwhat is going to be a real growth potential for theircommunities and to tie that in with their FE colleges.I was in Hartlepool on Monday looking at some ofthe facilities in the ports there for the renewablessector, the way in which that is tying into the local FEcollege and looking at how one brings forward therelevant skills. These are often communities that havea very long history of heavy manufacturing and wherethey have been in long-term decline. So there arepeople with historic skills that can be readily updated,along with an individual approach from people whowant to see this investment coming forward. So Ithink this offers very, very good opportunities for wellpaid, well skilled, long-term jobs.

Q159 Chair: Do you have a figure in mind for thesort of total potential for offshore renewable energyresources that we might be able to develop?Charles Hendry: In terms of jobs or in terms ofcapacity?Chair: Capacity really I was thinking of now.Charles Hendry: The Crown Estates have identifiedsites offshore that would allow 25 GW to be built ontop of the eight that was already planned at the time.That is essentially an allocation of areas rather than atarget. We will be setting out a renewables roadmap,our thinking for what we believe is achievable on ahigh growth or a low growth scenario out to 2020, butwe also need to move our mindset beyond 2020,because 2020 is now too close to get the supply chaininvestment and people need to believe that there is a20 and 30-year market for their products rather thanone for just a few years.

Q160 Chair: If we manage to do all that, do youthink that a supergrid could then enable us to becomea net exporter of electricity?Charles Hendry: I think if you look at the challengeswe face we are looking more towards self-sufficiencyissues rather than exporters, but if we can then weshould certainly do so. The nature of these things, ofcourse, is at times we will be exporters and at timeswe will be importers, so there will be cross-borderflows we would expect in that process.

Q161 Chair: Yes. Those might even out over aperiod of time.Charles Hendry: Yes.

Q162 Sir Robert Smith: I should remind theCommittee of my entry in the Register of Members’Interests as a shareholder in Shell. The Minister wasat the reception for Subsea UK yesterday and Iwondered how much he thought that what we hadalready learnt about working offshore and subseaengineering in all those years with the oil and gasindustry had put us into a stronger position of beingable to provide leadership with subsea engineeringrequired for the renewables.Charles Hendry: I think it has put us in a very strongposition for much of that work. I think, for example,

the jackets that have been built for the offshore oiland gas sector, that technology is very appropriate forthe jackets for many of the designs of the offshorewind turbines. The skill set involved in underwatercabling, which has been developed for the oil and gassector, again is absolutely directly transferable in deepunderwater working understanding. So there are a lotof skills that can read across. There is also, I think, avery strong commitment for the companies involvedin this sector to make sure they make the most of itand we should absolutely recognise the globalachievement of the UK subsea sector where anextraordinarily high proportion of global contracts forsubsea work comes back to companies that are basedin Britain. This has been an amazing success story forcompanies in this country and we think this offersthem a very important new income stream in thefuture.

Q163 Sir Robert Smith: Turning to the costs, anintegrated offshore grid will cost many billions ofpounds. Have you made any thoughts as to how muchconsumers are going to find their bills going up tomake it possible?Charles Hendry: Again, the cost directly relates tohow integrated and how broad it is. What we aredoing as part of the reviews we have been carryingout, the market review, the ROC banding review, evenon the feed-in tariffs review, is saying that we need tobe very clear that at the end of the day there is a coston people’s bills for supporting these technologies andwe have an obligation to try and therefore focus onthe ones that are most attractive and most beneficial.That is why so much focus is being put on how onedrives down the overall costs and that the greater thecosts that can be brought down the greater thecontribution they can make. There is a fundingenvelope for the Renewables Obligation and thesupport that goes into these technologies will have tostay within that envelope.

Q164 Sir Robert Smith: Is National Grid beingoptimistic or in the ballpark when it thinks theconstruction costs going on to a consumer’s bill willbe £1 on each consumer’s bill for each year ofconstruction for the grids?Charles Hendry: I have no reason to questionNational Grid’s figures. They have probably the besttechnical understanding of these issues. We shouldalso recognise that National Grid is not the onlycompany that can be investing in these areas, and forsome of the existing offshore grid connections, manyof the projects for those have been won by othercompanies who are keen to invest in this area. Indeed,when Ofgem and I jointly launched the second roundof OFTO, the offshore transmission operators regime,there are 100 different companies from around theworld who are looking to invest in the UK offshoretransmission sector, which I think would have beenunimaginable three years ago, and it just shows theextent to which companies from around the worldwith appropriate expertise are seeing this as a marketin which they want to be involved.



Q165 Sir Robert Smith: What we have seen,though, from past interconnectors in a different field,with the gas field, is that people thought they werebuilding an interconnector to achieve one goal andthen suddenly found—surprise, surprise—they hadlinked two separate markets and our gas prices wentup to meet the levels of European gas prices. Howmuch do you think there is a concern that while themarkets are not that connected at the moment—youtold the Committee, I think, we are in the bottom fourfor the EU 15 for electricity prices at the moment—what is the downside risk that by becoming moreintegrated we actually put up consumer prices in thiscountry?Charles Hendry: I think it will help to reducevolatility, which I think is beneficial because it is oftenthe spikes that cause the greatest anxiety and so themore one can spread that over an area the better. Thefact that where you have excess supply coming thatcan’t be brought into a market therefore that becomesvery cheap electricity and being able to bring that intoother European markets could be a downwardpressure. So there will be some elements that areupward pressures and there will be some that aredownward pressures, but we believe what it brings interms of reducing the cost of developing some of theseprojects, what it brings in terms of a security of supplyis a very worthwhile prize for the country as a whole.

Q166 Sir Robert Smith: Do you think we need tohave a clear cost-benefit analysis before we finallymake the commitment?Charles Hendry: That is the starting point. So, forexample, on the All Islands Approach the startingpoint is: is this worth doing? Is the cost involvedjustified by the gain we would make from it? Thereare three other workstreams that follow on from that,but if the conclusion of that first one is that there isnot a business case for this then it is a nice idea butone that would not be able to be taken forward.Sue Harrison: That is one of the key outputs of theNorth Seas Offshore Grid Initiative—the sameexercise we are doing there as we are in the Islandsproject—and that is to look at likely gridconfigurations in future and then do a cost-benefitassessment of those likely configurations. The resultsof all this work over the next two years will bepresented to Ministers and the Ministers will thenhave data on which they can make some decisions, soit is a political initiative.

Q167 Sir Robert Smith: How free are Ministers tomake a completely unfettered decision on the cost-benefit if the EU has designated the development ofthe North Sea as an energy priority? If the EU set thatdesignation, does that leave Ministers still free to sayit is not cost effective; it shouldn’t go ahead?Charles Hendry: We are not required to put fundinginto it, but at the same time our funding regimethrough the Renewables Obligation or the marketreform proposals would be set at a certain cost. Thatcost will either need to take account of and stimulatethe investment in a wider grid infrastructure or itwouldn’t. Those are domestic policy drivers. We makethe final decisions at the level at which those support

mechanisms are set. We start off with an ambition totry and make this happen and so we are looking athow one drives down the cost. We are talking topeople who could manufacture more high voltage DCcabling and to see how we can stimulate thatinvestment and create additional jobs in Britain,because if one looks at the scale of the ambition, justin the North Sea, that could take most of the globaloutput of high voltage DC cabling over the rest of thisdecade. So there is a very, very strong business casefor additional investment in the supply chain. We startoff with a desire to see how do we remove theobstacles, how do we bring down the costs, rather thanone of saying we don’t think this is possible.

Q168 John Robertson: Before we move on, I haveanother question. You were saying how we areprobably the best at attracting people in offshore. Howmuch do we fund it compared to other countries? Arewe better, or worse?Charles Hendry: How much do we fund theoffshore sector?John Robertson: Yes. Are there incentives to comehere?Charles Hendry: No. It is because of theattractiveness of the market; it is because of the skillset of those companies that have grown up in theNorth Sea and therefore started off by working insome of the most inhospitable waters in the world andthe skill set that they learnt there has been very easilysellable internationally. So this is an absolute successstory for industry.

Q169 John Robertson: I ask the question simplybecause a similar question was asked, must have beennearly 10 years ago now, to Scottish Power about theirinvestment in onshore wind and the question was, “Ifyou didn’t receive the subsidies you get fromGovernment would you build these wind turbines?”and the answer was no. I just wonder if the same thingapplies to the North Sea and other areas.Charles Hendry: The North Sea in its early years ofexploration did receive big tax allowances. I thinkevery emerging technology requires support in orderto get to a point where it breaks even, and withoutdoubt the market can make a judgment betweensecurity of supply and affordability. It can’t factor ina price for low carbon unless Government gives anindication of what it thinks that should be, and that isthe main reason why we need to reform the electricitymarket to respond to that. What we are doing thewhole time is looking at the actual costs ofdeployment to make sure that when we review thebanding levels of the Renewables Obligation they areset at the right level to take account of cost increasesor cost reductions.

Q170 John Robertson: For the UK, how much doesthe business case for the integrated offshore grid relyon the need to efficiently harness our offshore windresource?Charles Hendry: There are certainly economies ofscale or benefits that will be derived from doing thisin a more strategic way. As we were saying earlier,what we have to balance is the interests of the



developers to be absolutely certain that they can gettheir power to market on day one with the strategicoverview. That is involving industry, Ofgem, theNational Grid, other operators and ourselves to try andsee how one moves forward on a more integratedapproach.

Q171 John Robertson: We have seen it in a lot ofareas to do with energy. We have seen it with CCS;we have seen it with nuclear; and the great worry isthat we will not get a return for our money quicklyenough. It will be 2025 before we could possibly havea viable CCS power station built. Where are we withoffshore? Are we ahead of what we would plantimescale-wise or are we in the same boat as we havebeen? The other thing that I wanted to ask is theefficiency of the offshore, has it been calculated? Theone thing we learned with onshore was you are luckyif you get a 30% efficiency rating from the turbines.What is the equivalent in offshore?Charles Hendry: It is about 40% offshore. Thatdoesn’t mean it is only working 40% of the time. Theyare working, typically, about 90% of the time but at alower factor, so the load factor is about 40%. If onecompares that with coal, a traditional old coal-firedpower station, you only get 30% of the energyresource out of the coal. So in all areas there arelosses, but the advantage of offshore wind is you canput out bigger installations, the wind resource isstronger and therefore, although the projects arebigger, are more expensive, one does get a betterelectricity output from them.

Q172 John Robertson: On reliability to feed into thegrid itself and give us that bit extra that might beneeded, are things still where we expect to get areasonable output from them?Charles Hendry: With wind it is always going to bevariable. It is much more predictable now thanhistorically used to be the case, so very rarely onewould see an unexpected drop off in wind. Part of thecase for a more integrated grid network is that it doesmean you can pick up the wind as it travels acrossfrom the west of Ireland through to the Baltic and soone can pick it up at different stages in that process,but there will still need to be backup technologies.The interconnectors could be part of that;hydrocarbons or biomass plants can be part of that;storage mechanisms can be part of that; but there doesneed to be backup in order to make sure the electricityis available when consumers need it.

Q173 John Robertson: My fear is that we will spenda fortune in offshore technology for us to receive verylittle, which in all honesty would appear to be whathas happened with onshore.Charles Hendry: I think it is a contributor. We havenever said this is the whole solution, but it is acontributor to our energy security and to low carbonenergies. We have, around the British Isles, thestrongest wind resource in Europe; 40% of Europe’swind, I am told, is around these islands. I think whenwe are trying to harness a range of differenttechnologies then we ought to be taking advantage ofthat potential that is there. The nature of the turbines

is improving all the time in terms of the efficiencyand what they can deliver, but inevitably there will belulls in that time. But in most cases the wind is stillblowing somewhere in these islands.

Q174 John Robertson: Will you take the ClimateChange Committee’s recommendation and revise the2020 figure?Charles Hendry: We are going to respond in duecourse to their figure. I think that part of the answerto that is as well about looking beyond 2020, to talkabout where the ambition is going afterwards, becauseif you are a supply chain investor then you need thatlonger term vision.

Q175 John Robertson: I know what you are saying,and I agree with most of what you are saying, but weare not getting anything that is concrete enough thatwe can turn round and say that we expect to have thisby such and such and we expect to have so much bysuch and such a time, and therefore it makes it verydifficult to plan ahead. As we know, after 2015,towards 2020, we are going to have an area of wherewe might be in danger of not having enough power. Iam sure we won’t, but given a hard winter orwhatever, we could have a really sticky spell andtherefore if the money here is being ploughed intothese projects then we need to know when we expectto get a return for our money.Charles Hendry: You will get much greater clarityin the renewables roadmap. I have always been quitecritical of targets for the sake of targets. I think targetsare important for raising ambition and that is a job forGovernment to do but unless you know what you areaiming for, unless you know whose job it is to deliverit—so the renewables roadmap will identify those corerenewable technologies that will deliver theoverwhelming majority of what we need to do to getto our 2020 targets and what Government needs to doto realise that ambition, and that will be happening inthe course of the next few weeks.

Q176 Sir Robert Smith: On the offshore wind, howmuch does the Department feel that there is stillpotential for more efficiency in the offshore wind? Myunderstanding is that basically this sort of generationof offshore wind has taken the onshore technology,marinised it and put it offshore, but because of thingslike sand not being the same issue offshore there couldbe more efficient designs. Does the Department haveany assessment of benefits coming down the line aswe become more dedicated to an offshore specificproduct?Charles Hendry: We have seen significant evolution,if one looks at, for example, the earlier projects, theball bearings and how they were affected by sea waterhave needed to be replaced and some the drive chainshave needed to be replaced. In the newer technologycoming forward that has been factored in and we aregetting wind turbines that are specifically designed forseawater conditions. In addition, the scale is obviouslyvery much greater. Onshore, 3.5 MW would be a largewind turbine. We are now seeing people trialling windturbines of 6 MW, 7 MW and upwards and so thepotential for a very much larger output is much



greater. So we are now seeing this emerging as anindustry in its own right rather than just a simpledevelopment of what had been an onshore technology.I think we are making good progress with some of thecompanies that are leading in that development workand looking at the United Kingdom for places to trialthose different technologies.

Q177 Dr Whitehead: What is your view of therelative salients of the different cases that have beenmade for a European supergrid or similar between,say, the question of making sure that there is the mostefficient supply of renewables various or,alternatively, the extent to which such a system mightitself provide some of the flexible generation to backup intermittency elsewhere in national systems? Whatwould be your view of the most important element ofsuch a system?Charles Hendry: There certainly is a case that can bemade for the more interconnected it is then wind itselfcan be a backup resource for wind elsewhere by beingable to pick up a resource that is blowing in one partof the Irish Sea but not in the North Sea, for example,so there is a case for that. I think, on the benefits ofinterconnections, it is primarily to do with security ofsupply and affordability because if it helps to bringdown the costs of offshore deployment we can gofurther in that respect and the more it is interconnectedthen the greater the benefits are in terms of being ableto balance out some of the peaks and troughs.

Q178 Dr Whitehead: If you were to consider that asupergrid could have a substantial role in balancingintermittency, how large and how connected would ithave to be before it played a very significant role interms of UK balancing, in your view?Charles Hendry: I think the larger it is the greater itspotential benefit, but then I think it is going to be anevolutionary approach and it is not going to be ablueprint for where we want to get to, and it wouldn’tbe that initially. I think this is an area that is absolutelyperfectly suited for being developed over time andseeing how one enhances that as it develops, so thatfunding doesn’t need to be found upfront but it wouldhappen gradually over time. It also means it helps tobecome self-funding because the operators can sellinto whichever market has the greatest demand at anyparticular time, so I think that helps withconstruction costs.

Q179 Dr Whitehead: National Grid produced anupdate report just recently on the extent to which theemergence of a substantial penetration of renewablesin the UK energy supply market could be balanced bya number of measures. They concluded that with arelatively modest increase in interconnection a muchlower level of installed capacity for the future couldbe planned and the system could be balanced than isenvisaged, for example, in the national policystatements at the moment. They have suggested, Ithink, something like by the early 2020s 101 GW ofinstalled capacity as opposed to 113, which is the

target, as it were, in the NPS documents. What wouldbe your view of that sort of argument relating toflexible backup generation in future that might changeas a result of such installations? Would you go alongwith National Grid? I guess you would probably saywhat is in the national planning statement is prettyaccurate, but do you envisage that possibly beingreviewed and changed as a result of these sort ofdevelopments?Charles Hendry: I completely agree with the principleand I have no reason to question the expertise ofNational Grid’s work, because they clearly havegreater ability to understand the full costs and thebenefits than most other organisations. This shouldn’tjust be looked at in terms of national policystatements, but if you look at the capacity mechanism,which will be there as part of the market reformprocess, that is not just about having a new gas powerstation available for a cold day in February when thewind is not blowing. It is also looking at ways ofmanaging demand more effectively and so what is thelowest cost way of delivering the certainty thatconsumers should rightly be able to expect and therole that interconnectors can play as part of thatprocess, alongside other technologies of storage, ofcompressed air, of hydrogen, of battery technology,looking at the relative costs of each of those to deliverthe security that we need. I think for the wind industrythe biggest challenge this decade is how they movefrom being a power source that is available when thewind blows to being a power source that is availablewhen the consumer needs it, and that requires theinvestment in the backup technologies, of whichinterconnectors, I think, is a very important part but itis one of a number of different potential solutions.

Q180 Dr Whitehead: Again going back to thehistory of gas, we built a gas pipeline thinking thatnow we have security and then when we needed thegas nothing came through the pipeline because themarket decided not to deliver it. How much is theelectricity market in Europe different in terms of itstransparency to make sure that if you do haveinterconnectors they behave in a rational way andfollow the market?Charles Hendry: On the gas interconnector side, theUnited Kingdom essentially now is a transit country—we are not just a destination in our own right—andfor much of the time, if one looks at the flows goingthrough them, the gas is coming in through oneinterconnector and going out through another. If thereis a shortage in the United Kingdom, there is aparticular pressure point and the gas price goes upthen they have a much greater vested interest inkeeping it in a domestic UK market rather thanshipping it out. The market has so far, touch wood,delivered the security that we need. It has been tightat times, but with the development of the LNGfacilities and additional pipeline infrastructure thenthat security has been enhanced more. With electricityinevitably one will see, through development of moreinterconnectors, more international trading in thatrespect and one will avoid some of the peaks, as I was



saying earlier, and it will smooth out that processmore. I think what it does for consumers overall is itenables us to have a more predictable outlook; itenables us to deliver the security of supply we wantat a more affordable price, because we happen to haveso much of our own backup capacity of hundreds ofmillions of pounds of plant that may only be used fora few days of the year. So it is a better way ofdelivering that security.

Q181 Dr Whitehead: We saw in Denmark howbeing connected to Norway they could have a lot ofwind, because when the wind blew the Norwegiansdidn’t need to let the water run and when the windstopped the Norwegians—so there is a lot of positivesto interconnection, but if every country that is signingup to interconnection says to itself, “This is greatbecause it gets rid of my peak problems and dealswith my intermittency and I don’t therefore need tohave so much capacity on the system,” is there anyoverarching regulation to say that Europe as a wholecould be at risk in certain situations because everycountry has decided to take the benefits ofinterconnection and therefore there is not enoughcapacity around the system in a serious situation todeliver across Europe?Charles Hendry: At the end of the day, the networkoperator, National Grid in our case, has a legalresponsibility to look at those issues, to becomfortable about it, and so it would be their primaryresponsibility. I think they would exercise aprecautionary approach to how much it is safe to relyon trading. The Irish situation is quite beneficialbecause Ireland will not have that many additionalmarkets it can export directly into, so we do have agreater security of supply on the western side. Yes,this can bring benefits, but clearly we have to becomfortable that this doesn’t get taken to anassumption that everybody is taking account of all ofthe North Sea’s potential wind output as if it is theirown domestic consumption, because that wouldcertainly end in tears.

Q182 Dr Whitehead: Back on the domesticsituation, do you see any way of achieving enoughcapacity north-south without a subsea cable at somepoint for the UK?Charles Hendry: It can be done, but it would requirevery significant onshore grid upgrading and, as theChairman has made clear, these are not alwayspopular developments. Putting that through some ofthe most beautiful countryside in southern Scotlandand northern England would bring its own tensionsand so if it can be done in a way that is cost effective,which has very few transmission losses because of thenature of our HVDC cabling, then that is somethingthat we think is absolutely right it should be looked at.

Q183 Chair: When we are looking at the costs ofintermittent forms of generation, do we factor in theextra transmission capacity that is needed? It seems tome that there is a growing feeling that hugeinvestment in offshore wind is neither giving us any

base load nor particularly good value for money. Theproblems about value for money aren’t just concernedwith the actual costs of the turbines and their life andso on, but it also relates to transmission demands.Charles Hendry: The funding mechanism in theRenewables Obligation takes account of the levelisedcost of building different technologies. It doesn’t takeaccount of a specific grid rebuilding in a particularpart of the country, so it is averaged out across thesector. We do need to upgrade that grid in any case forthe development, potentially, of new nuclear powerstations, so in Suffolk and Essex you are seeing partof the pressure as a result of potential for a new powerstation at Sizewell but also seeing that as an areawhere a lot of the offshore could connect naturallyinto the National Grid. I think one thing that we arevery acutely aware of is that the more that you havepoint-to-point connections in the offshore farms thenthe greater the onshore pressure will be for puttingvery visually intrusive pylon infrastructure in coastalareas, in low lying areas very often, and therefore ashort-term gain for a particular operator results in avery significant additional onshore cost to the NationalGrid and significant community concerns about it aswell. So the case for bringing it onshore at the mostappropriate locations and to have as few of those ascan rationally be achieved is an entirely properobjective.

Q184 Chair: Reverting to the supergrid, one of thedifficulties suggested to us is the equitable allocationof costs between different countries. It is not an areawhere the European Union has been particularlysuccessful at reaching agreement, where there arepotential disagreements. Do you think that a costsharing mechanism can be devised that will beacceptable?Charles Hendry: In my expectation, these will becommercial operations, so these will be individualcompanies that invest in the infrastructure and theywould be involved in trading, so there should be nocosts for the development of an offshore grid thatwould come from the British Government or fromother Governments, or indeed from the EuropeanUnion.

Q185 Chair: If that trading is going to be profitablein order to justify the investment, does that depend onthere being significant price differentials at certaintimes of the day and the year and so on between onemarket and another?Charles Hendry: I think one of the issues that has tobe resolved is, at a time when there is a reasonablygood wind resource but a very high demand in a rangeof different countries, how will it be sold. Will therebe development of long-term contracts so that we canhave a comfort that offshore wind from the UnitedKingdom will be available to British consumers whenit is needed? Otherwise I think that it becomes morefraught, if there is a sense that when we need it herethat because a different European country is prepared



to pay more on the spot market at that particularmoment that resource could be potentially all takenoff somewhere else. So those contractual issues haveto be resolved.

Q186 Chair: Does it go beyond the contractualissues in terms of the incentives? We have ROCs; weare going to have Carbon Price Support, CapacityMechanism payments and so on—quite a complexarray of different types of support. Those inthemselves could affect the flow through theinterconnectors, but the relationship between thosevarious incentive payments and incentives that arepaid in other countries will also presumably have animpact on what actually goes which way and when.Charles Hendry: Yes. One of the reasons why we arelooking at the system we are is that it still keeps therelationship to the wholesale price so that we continueto have a market structure that is within that. You areright; in most other European countries they have afeed-in tariff mechanism as opposed to a renewablesobligation mechanism. What we are looking to do isto run the Renewables Obligation alongside our newmechanism until 2017 and giving people a choice ofwhich system they wish to work with. We think thatis good for giving comfort to investors about theregime that they will be working under, but I wouldn’texpect to see harmonisation of those supportmechanisms across different European jurisdictions.

Q187 Chair: If we don’t have harmonisation, youdon’t see that as impeding the development of asupergrid? In fact in some ways you might even sayit is going to provide a further incentive for it?Charles Hendry: I think if you are a potentialdeveloper of that grid infrastructure then you will alsobe operating a trading business and therefore you dowant different prices in different parts of that marketin order to trade, and so I think that is an importantpart of the principle that will drive the investment.

Q188 Dr Whitehead: Presumably though, in termsof the question of harmonisation, there is a point atwhich, as bilateral early stage developments ofelements of the grid turn into a grid proper, issues ofsynchronisation of grid frequencies, for example, maycome into play and also the extent to which indeedone is not removing one’s own energy security on thebasis of possible market switching on the basis of whois getting the best price in whatever direction theoverall grid is going. Of course, it involves the extentto which anybody may decide they are not going toinvest in capacity, because they think that someoneelse will supply the capacity that they may be able tobenefit from. At what point would you envisageserious pooling of sovereignty on these issuesoccurring and is that something that is easy tocontemplate under these sorts of arrangements? Thatis the Bill Cash question, I think.Charles Hendry: This will often be done by aninternational agreement; it doesn’t need to be an EU-wide agreement. For example, if we were looking ata connector from northern France, which will come

via the Channel Islands to the United Kingdom andpick up some of the tidal resource in Alderney andGuernsey and elsewhere, then that would besomething where it is going through three differentjurisdictions. That would have to be resolved beforethat could be built and could go ahead and it wouldneed to deal with all of the technical issues that arethere as well, but that can be resolved for that oneparticular connection without having a European-wideagreement. So one would expect some degree ofharmonisation to happen over time, but it is not acritical element for individual elements of thatprocess.

Q189 Dr Whitehead: Can I press you? Do youenvisage or have you done any work on the point atwhich there would seriously have to be poolingagreements entered into, which would then involvealmost inevitably a certain pooling of sovereignty interms of market planning and market arrangementsand also protocols on development of capacity? Howserious an issue do you think that is and at what stageis that likely to become that sort of serious issue?Charles Hendry: It is one of the workstreams for theNorth Seas Offshore Grid Initiative; it is additionallyone of the workstreams for the All Islands Approach,which we have set out. In both of those cases, it isone of the key issues that is being identified andaddressed and the extent to which that needs to bemore comprehensive or it can be more narrowlyfocused will clearly be looked at as part of thatprocess.Sue Harrison: I think if I could add, it is not aquestion of sovereignty. It is a question of cost andbenefit here. We all have to comply with the EUlegislation in this area, which is comprehensive, so weare all using the same rulebook, but when you haveshared resources, if you have common joint projectsfor example, there will be a quite complicated cost-benefit analysis that will need to be done so that theparty that pays for a facility gets adequateremuneration from it. Sometimes the flows may notcoincide with who paid for the particular facility andthat is an issue. That is something, as the Ministersaid, that we are looking at in our 10-country initiativeto see how you would sort out those flows of moneyand benefit from co-operative projects.

Q190 Dr Whitehead: It is not just a question ofsorting out those flows in the cost and benefit though,is it? For example, one can envisage circumstancesunder which you would see the development of a sortof European central Wokingham in terms of balancingsupplies across Europe and therefore, among otherthings, a substantial change in control overdespatching and things such as that. Is that somethingthat is perhaps at the far end of the spectrum or is itsomething that perhaps is coming up faster?Sue Harrison: No, we see no need for that in the nearfuture and I am not sure how far out we can see. Butat the moment you have an integrated grid in mainlandEurope where you have 34 system operators who



collaborate together and they keep that grid runningand it has been working perfectly adequately for 50-odd years. I don’t see why we can’t carry on that sameco-operative arrangement with collaboration on anoffshore grid. You don’t need to have one systemoperator; you don’t need one regulator. The regulatorshave been working together very well for a number of

years now. It just needs a lot of co-operation and a lotof common working, but you don’t need one body tocontrol or regulate the system.Chair: Thank you. I think we have covered theground we wanted to this afternoon. Thank you verymuch for coming in. We look forward to seeing youagain soon.


Written evidence

Memorandum submitted by the Department of Energy and Climate Change

Executive Summary

1. The development of offshore renewables in the North and Irish Seas could play a key role in meeting theUK’s 2020 EU renewables target and, in the longer term, in decarbonising our electricity supply. Moreinterconnection with continental Europe and subsequently an offshore grid, potentially incorporating offshoregeneration, should also improve UK security of supply and resilience; and reduce the cost of integratingrenewables into the UK and EU markets. More coordinated offshore grid development raises complex issueswhich must be explored in close collaboration with neighbouring countries. These are being pursued throughthree parallel and complementary international work streams: the North Seas Offshore Grid Initiative; theBritish Irish Council; and UK-Nordic-Baltic cooperation.

Introductory Remarks

2. The Department of Energy and Climate Change (DECC) welcomes the opportunity to submit evidence tothis very timely and important inquiry. When the Committee launched the inquiry it referred to theMemorandum of Understanding signed by the UK in December 2010 on the North Seas Offshore Grid Initiativein the context of the potential for building a “supergrid”. It noted the UK’s relatively low level ofinterconnectivity and asked how the balance of costs and benefits of a “supergrid” would affect the UK.

3. The term “supergrid” is used in a variety of different contexts, ranging from a more integrated offshoregrid in the North and Irish Seas, with the possibility of linking offshore renewables developments to it, (thesubject of the afore-mentioned Initiative) to a network of “super highways” across the EU, as mentioned in theCommission’s Infrastructure Communication of 19 November 2010 (16302/10). The Commission’s long-termvision sees these super highways carrying renewable energy from the Northern and Baltic Seas, the East andSouth of Europe and also North Africa to the major consumption centres in Northern and Central Europe.DECC’s submission concentrates on the former. We have set out below summary information on the NorthSeas Offshore Grid Initiative and related government activity as this may be helpful to the Committee. Wethen address each of the Committee’s questions in turn.

Background on North Seas Offshore Grid Initiative

4. The UK Government recognises that the development of offshore renewables in the North and Irish Seascould play a key role in meeting our 2020 EU renewables target and, in the longer term, in decarbonising ourelectricity supply. We have one of the best wind profiles in the world, already have more offshore winddeployed than any other country in the world and current development agreements allow for up to 50GW.Significant investment in grid infrastructure will be needed in the future to bring offshore generation to shore.

5. Other European countries face similar challenges so it makes sense to collaborate with them, and moreparticularly with those bordering the North and Irish Seas. More interconnection with continental Europe andsubsequently an offshore grid, potentially incorporating offshore generation, should also improve UK securityof supply and resilience; and reduce the cost of integrating renewables into the UK and EU markets. Theyshould also offer more trading opportunities.

6. This is why the UK, together with nine other countries (Germany, France, Belgium, Netherlands, Sweden,Ireland, Luxembourg, Denmark and Norway), signed a Memorandum of Understanding in December 2010launching the North Seas Offshore Grid Initiative. The aim is for governments to work together over the nexttwo years, with energy regulators, the Commission and industry, to identify the cost and benefits of, and tacklethe technical, regulatory, market and planning barriers to, different approaches to co-ordinated development ofoffshore grids in the North and Irish Seas. This is against the background of an expected sharp growth inoffshore renewable generation. Detailed work will be carried out in three particular areas: grid configurationand integration; market and regulatory issues; and planning and authorisation procedures.

7. This work will explore many of the issues which are to be investigated by the Committee. The workstreamon grid configuration and integration will develop plausible scenarios for offshore grid infrastructure out to atleast 2030, based on each country’s renewables plans and planned grid developments. It will consider, in closecollaboration with the relevant manufacturers, the technical implications of these scenarios and assess theircosts and benefits. The work on market and regulatory issues will identify and develop ways of addressing themarket and regulatory barriers to offshore grid development, including ways of sharing the costs and benefits,dealing with the anticipatory investment that may be needed, developing market mechanisms for combiningoffshore wind farms with interconnection, and the impact of national renewable support schemes. Theworkstream on planning and authorisation procedures will identify and address areas where the incompatibilityof national planning and authorisation regimes acts as a barrier to offshore and onshore grid development andidentify best practice for streamlining these procedures.


Related Government Activity

8. The British Irish Council (BIC), whose members include the UK Government, the Irish Government, thethree devolved administrations, the States of Guernsey, the States of Jersey and the Government of the Isle ofMan, has an energy workstream which covers grid issues and marine renewable energy. Its annual summit inJune 2011 (which will be chaired by the Deputy Prime Minister) will focus on the development of offshoregrids. DECC Ministers have proposed to BIC colleagues that we explore an All-Island Approach to assess thepotential to work more effectively together to exploit our energy resources. This could be through better co-ordinating development of the networks and interconnections between us and assessing the mutual benefits ofundertaking specific joint renewables projects. There are complex legal and regulatory issues which wouldneed to be resolved to achieve this. We see this work as an important contributor to the North Seas GridInitiative. DECC and Irish Ministers will ensure that the two streams of work are fully integrated.

9. Following the Prime Minister’s UK-Nordic-Baltic Summit in January 2011, DECC has proposed that weshould continue this fruitful cooperation in key areas of mutual interest, including identifying ways ofaccelerating the transition to a low-carbon economy. We are considering a high-level meeting in the next fewmonths to discuss concrete ways of progressing this shared agenda, building on the North Seas Initiative anda similar initiative in the Baltic region, the Baltic Energy Market Interconnection Plan (involving Denmark,Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden and Norway).

Answers to the Committee’s Questions

What are the technical challenges for the development of a European Supergrid?

10. There are some considerable technical challenges to be overcome in order to be able to build a supergrid,if by this is meant the combination of interconnection and offshore renewable generation. Large and flexiblecables would be needed to transport energy efficiently over long distances and link up offshore renewableresources to interconnectors. The technology for this either does not exist at present or is expensive. Currenttechnology for the high voltage direct current connection used is also limited to 1.8GW, which could preventfull realisation of some configurations. Manufacturers have told us that the appropriate technology could bedeveloped over the next few years were it to be required. This is a key issue which is being explored withmanufacturers as part of the grid configuration and integration workstream in the North Seas Offshore GridInitiative.

What risk and uncertainties would a supergrid entail?

11. Any decision to build a supergrid would require the countries concerned to take a view on the gridconfiguration and coordinate offshore developments to achieve this. The selection of a particular configurationover another—setting a strategic vision—would need assumptions to be made about the offshore (and onshore)generation that is likely to be built post-2020. However, no country has made firm commitments beyond 2020,so such assumptions would inevitably entail huge uncertainties. If the decision were nevertheless made toselect a particular model for grid configuration, there is a risk that inaccurate projection of future levels ofgeneration would lead to sub-optimal use of the infrastructure built. For example, there could be stranding ofassets if the grid configuration was based on high renewable projections which turned out to be incorrect. It islikely that the costs of these unused and potentially expensive assets would fall on consumers. This is clearlyan outcome that all countries involved would want to avoid. This, again, is an issue which is being investigatedby the grid workstream of the North Seas Offshore Grid Initiative.

12. There are risks in the shorter term too. Achieving the UK’s 2020 renewables target is dependent on thedevelopment of considerable offshore capacity between now and 2020. DECC has worked with Ofgem to putin place a regime that balances reducing costs to consumers through introducing competition against providingthe certainty developers need to make investments. Any move to significantly change the offshore transmissionregime between now and 2020 could provide unwelcome uncertainty.

How much would it cost to create a supergrid and who would pay for it?

13. There is no simple answer to this question as it depends on a range of factors, for example thegeographical coverage of the supergrid, its technical characteristics and design and the technology used. DECChas estimated that the cost of connecting our renewables resources in the North Sea could be in the region of£15bn-20bn over the next decade, but has not made any assessment of the costs of a more integrated gridincluding interconnection. The costs of interconnection alone vary depending on the technology used, size ofthe cable and distance covered but are substantial. Recent projects have estimated costs ranging from £1m-3.9m per km of 1GW cable.

14. The Commission refers in its Infrastructure Communication to the OffshoreGrid study which estimatesthat offshore grid development in the North and Baltic Seas would cost €32 billion by 2020 leading to a totalof €90 billion by 2030 with radial connection of offshore renewables, which could be reduced by €15 billion,ie to €75 billion, with clustering of wind farms. The European Association of Transmission System Operatorsestimates that, assuming that the investment in offshore wind connections and point-to-point interconnectors


which is currently planned is realised, the additional cost of integrating future generation in a coordinated gridin the North Sea could range from €63bn to €70.5bn depending on the design.

15. Although the actual cost is difficult to determine, it is clear that it will be substantial and ultimately thecost will fall to energy consumers in those countries using the infrastructure.

Will a supergrid help to balance intermittency of electricity supply?

16. Under the EU internal market legislation, flows across interconnectors should be determined bydifferences in price between the two markets. At present, the main factors affecting variation in price acrossEU markets are the level of demand and the marginal cost of plant running at any given point. Diversity indemand patterns across the EU and the associated price differences therefore allows interconnection betweenmarkets to play a role in cost effective balancing of supply and demand. This is analogous to the way anynational transmission system has the ability to manage supply and demand across its area.

17. As the level of intermittent renewable generation increases, it will begin to affect wholesale price moresignificantly. When this happens, flows across interconnectors are likely to be influenced by renewable outputacross different countries. Our current understanding is that there will be significant diversity in output ofrenewable generation across the EU. A well integrated grid able to react flexibly to changes in output couldtherefore play a vital role in balancing that supply. This would be less effective in cases where the sameweather pattern spanned a wide area, such as a five day wind lull, spanning most of North West Europe; butinitial evidence suggests that these will be relatively infrequent events.. In these circumstances output fromsolar and hydro, for example pumped storage in Norway topped up at times of excess wind generation, couldbe used.

18. National Grid have done some initial analysis on the cost-effectiveness of direct interconnection andradial offshore transmission versus a more integrated approach which would involve linking interconnectiondirectly with offshore renewables generation. This analysis showed that, with very high levels of offshore windpenetration in 2030, there are benefits in linking interconnection directly with offshore renewables generation.

Will a supergrid reduce energy prices for consumers and businesses?

19. On the assumption that a supergrid would increase interconnection with other countries, then this shouldresult in more efficient use of resources across the EU by allowing least cost generation in an interconnectedarea to provide electricity to a wider group of consumers. This should increase generation efficiency, equaliseprices across the area and, in aggregate, reduce costs to consumers.

20. Therefore, overall there should be benefits from joining up individual Member State markets. However,for markets where prices are consistently lower than those in neighbouring markets it is possible that pricescould rise with increased interconnection. On the other hand, markets with higher prices could see prices fall.In reality, it is rare for prices to be consistently lower or higher, but instead tend to fluctuate over years. Forexample, currently the UK has prices roughly in line with neighbouring countries but this varies significantlyfrom year to year depending on available capacity and its cost relative to demand, which itself fluctuates.

21. Independent research carried out for DECC suggests that, looking at European wholesale prices over thepast five years, UK consumers could have benefited from greater interconnection with Norway. However, thisposition has reversed since the start of 2010. Whilst future relative prices are uncertain and will continue tofluctuate, interconnection will assist in reducing short term peaks in price by allowing imports at a time ofscarcity. Conversely, exports at times when output exceeds domestic demand increases prices during troughs.This could prevent negative pricing when there is excessive wind in GB, thereby avoiding payments to windgenerators to curtail their output, which currently include lost renewable obligation payments.

22. A separate question is whether an approach based on interconnection combined with offshoretransmission would be more cost effective than a combination of simple point to point interconnection andradial offshore transmission. Apart from the capital costs of the different approaches, there are a range of costsand benefits to be considered, including security of supply, curtailment of wind generators’ output and tradebenefits. The balance of all these factors will be considered by the North Seas Offshore Grid Initiative, includingthe sensitivity of the benefits to different levels of offshore wind penetration. As well as establishing the mostcost effective option given uncertainties over renewable levels post-2020, relevant Member States will need toconsider how the benefits are shared between the different countries and how these will affect consumersand industry.

What are the implications for UK energy policy of greater interconnection with other power markets?

23. At present, the UK is relatively poorly interconnected with other countries. This is primarily becauseinterconnection is more expensive in the UK because it involves high voltage subsea cables rather than overlandelectricity lines on the continent. We have a link with France and one with Northern Ireland (which thereforelinks us indirectly with Ireland). There has been little interest in building interconnectors in recent years,although there appears to be a good business case for further interconnection. The main barrier has been themismatch between the regulatory regimes in the UK and other countries. To address this barrier, Ofgem is


revising our regulatory regime. The prospect of change has led to a significant upsurge in interest ininterconnection projects.

24. If all these projects were built, the UK’s interconnector capacity would increase from 2.5GW to over10GW by around 2020, some 10% of installed capacity. Whilst this would represent a fairly rapid expansionfrom current levels, this is still relatively low compared with other EU countries and the impacts are likely tobe relatively small.

25. The immediate implications of greater interconnection are the impacts on security of supply and how itinteracts with any capacity mechanism which could be introduced through the electricity market reform (EMR).There is potential for interconnection to reduce required capacity margins which would need to be taken intoaccount in any prediction of future capacity requirements. However, there is also the risk that an interconnectorcould be exporting at times of need, pushing up the price in the market. These issues need further considerationand the Government intends to report on its approach towards interconnection as part of the white paper onthe EMR.

26. At present there is no regulatory regime at national or EU level that would facilitate the association ofinterconnection with renewable projects. For this reason interconnections are considered to have limitedpotential to contribute directly to UK renewables targets in the short term. However, this is another issue beingconsidered in the North Seas Offshore Grid Initiative as there is a general assumption that such a regime maybe needed in the future if the combination of interconnection and renewable projects proves to be cost-effective.In this case, the potential for impact on the UK’s renewables targets would need to be further considered.

Which states are potential partners with the UK in a supergrid project?

27. The potential partners are likely to be those in the North Seas Offshore Grid Initiative, plus possibly theBaltic countries.

How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

28. A supergrid would meet many of the goals of the Third Package. The development and operation of asupergrid would promote regional cooperation between Member States, regulators and transmission systemoperators which is seen as a first step towards creating an internal energy market. It would require thedevelopment of a consistent legal, regulatory and technical framework to incentivise the grid investmentneeded. And by facilitating investment in more interconnection it would facilitate cross-border trade, therebypromoting competition and securing the supply of energy to our consumers at competitive prices.

Would new institutions be needed to operate and regulate a supergrid?

29. No new institutions would be needed. New legal and regulatory arrangements governing the operationand regulation of a supergrid would need to be developed, both to ensure consistent across the region coveredand, potentially, to enable offshore renewable generation to be associated with interconnection . However, therelevant transmission system operators and regulators could respectively operate and regulate the supergrid,working closely together as they do already on bilateral interconnectors.

March 2011

Memorandum submitted by National Grid

Executive Summary

1. Greater electricity interconnection represents a vital part of the UK’s low carbon economy. The optimallevel of interconnection must be debated and will depend on the generation mix and demand side factors inthe UK and mainland Europe. However it is likely that, for the UK, somewhere around 10–15GW ofinterconnection would enable the UK to transition to a low carbon energy mix in an affordable and securemanner.

2. The connection and integration of offshore wind in the UK and the North Sea will also play a significantrole in meeting the EU environmental targets. Whilst radial point to point connections have adequately provideda route to market for near shore wind so far, a more efficient way of connecting wind needs to be sought forthe increased volumes and distances of wind expected.

3. Integrating the offshore transmission network has many benefits. In the UK, this is achieved through thedeployment of larger connections shared between the more distant wind parks delivering:

— substantial capital cost savings of £4–8billion;

— a reduced environmental footprint with associated consenting issues;

— increased reliability of the connection for wind; and

— better utilisation of valuable resources.


4. Combining the principles of greater interconnection and integrated onshore-offshore grids leads us to theconcept of a “supergrid” which could drive further benefits. These include:

— increasing the reliability of the connection for the wind;

— increasing overall utilisation of the assets by sharing them for wind connection and cross-border trade;

— strengthening security of supply in a “windy world”, providing flexibility of operation for theSystem Operator;

— increasing the opportunity for cross border trade, further integrating the European marketconsistent with the EU ambition to create a single energy market; and

— providing a route for the UK to become a net electricity exporter; thus creating economicgrowth.

5. The development of a European supergrid however is not without its challenges and key to its successwill be the alignment of the various regulatory regimes and government support schemes. Whilst technologyitself is unlikely to present an issue, there is a real need to provide timely signals to commence the necessarystandardisation and R&D in this area.

6. The European Commission’s approach to the development of regional transmission infrastructurerepresents a solid starting point for the concept of a supergrid. The work already underway within the various,regional, cross-European and Industry groups such as the North Sea Countries’ Offshore Grid Initiative(NSCOGI), the Friends of Supergrid (FOSG) or the European Network of Transmission System Operators forelectricity (ENTSO-E) needs to continue to ensure that the opportunities are maximised through consideredanalysis, with the necessary enablers in place, in time.

Introduction to National Grid

7. National Grid owns and operates the high voltage electricity transmission system in England and Walesand, as National Electricity Transmission System Operator (NETSO), operates the Scottish high voltagetransmission system. National Grid also owns and operates the gas transmission system throughout GreatBritain and through the low pressure gas distribution business, distributes gas in the heart of England toapproximately eleven million offices, schools and homes. In addition, National Grid owns and operatessignificant electricity and gas assets in the US, operating in the states of New England and New York.

8. In the UK, National Grid’s primary duties under the Electricity and Gas Acts are to develop and maintainefficient networks and also to facilitate competition in the generation and supply of electricity and the supplyof gas. Activities include the residual balancing in close to real time of the electricity and gas markets.

9. Through its subsidiaries, National Grid also own and maintain around 18 million domestic and commercialmeters, the electricity Interconnector between England and France, and a Liquid Natural Gas importationterminal at the Isle of Grain. In addition, the wholly owned subsidiary National Grid Carbon Limited hasadvanced the transportation and storage elements of the Carbon Capture and Storage (CCS) supply chain.

A European Supergrid in Context

10. Greater electricity interconnection represents a vital part of the UK’s low carbon economy. The optimallevel of interconnection must be debated and will depend on the generation mix and demand side factors inthe UK and mainland Europe. However it is likely that, for the UK, somewhere around 10–15GW ofinterconnection would enable the UK to transition to a low carbon energy mix in an affordable and securemanner.

11. The connection and integration of offshore wind energy in both the UK and the North Sea is critical tomeeting EU environmental targets. Whilst any network should offer a solution that is consistent with the EU(and UK) policy goals of energy security, sustainability and affordability, it must also be practical. In recentmonths, National Grid has been exploring the concept of integrating offshore transmission within the UK, thusensuring an efficient and economic transmission network that is optimised both onshore and offshore. Thebenefits of this approach include lower capital costs (£4–8 billion), reduced consenting issues and better useof valuable resources.

12. National Grid’s 2030 accelerated growth scenario suggests a peak demand in the GB market of 56GW,with 134GW of installed generation (of which 50GW is intermittent wind generation). When the wind isblowing, greater European connection will be important from an operating perspective. On windy days, theUK will need a mechanism to export the surplus power to the continent. Conversely, non windy days are likelyto result in an energy shortfall, therefore requiring an import of electricity—eight out of ten of the peak demanddays this last winter were non wind days.

13. NSCOGI, led by the UK and National Grid, with the support of ENSTO-E, the Association forCooperation of Energy Regulators (ACER) and the European Commission, has already begun evaluating howthe volumes of wind expected can be efficiently and economically connected to provide reliable access tomarket. Discussion on how to maximise opportunities to provide cross-border trade opportunities, consistentwith the EU ambition for a single, integrated energy market, is integral to this work.


14. The 3rd package places an obligation on European Transmission System Operators (TSOs) to coordinatetransmission planning, and as such, ENTSO-E produces a bi-annual Ten Year Network Development Plan(TYNDP) and Regional Investment Plan (RiP). A pilot TYNDP was produced in 2010, and the first RiP willbe available in 2012. ENTSO-E’s Regional Group North Sea will have responsibility for producing this firstRiP, and will consider the need for infrastructure in the North Sea, consistent with the priority corridor identifiedin the Commission’s communication on the Energy Infrastructure Package.

What Should a European Supergrid Look Like: National Grid’s View

15. A European supergrid would entail the evolution of a high voltage, multi–user offshore electrical networkthat interfaces with a number of different European countries. Typically built as a “direct current”1 network,it is likely to evolve over time as the feasibility, ownership structure, financeability, operability and regulatoryand commercial backdrop becomes more fully developed. It is envisaged that a supergrid will include, at leastin part, the backbone of an integrated UK offshore network, interconnection (both existing and planned) aswell as the development of further DC links both on and offshore. It will provide reliable connections to shorefor offshore wind generation over long distances and allow for transfer of power between countries, providingconnection, cross border trade and flexibility of operation. It is expected that such a supergrid will be underdevelopment prior to 2020.

16. With many sources of renewable power available across Europe, hydro and wind generation in the North,to solar power in the South, it is our view that the initial focus should be on the efficient connection and secureintegration of the significant volumes of wind generation expected in the North Sea. ENTSO-E has recentlyundertaken a design study to consider how to efficiently connect the volumes of wind expected in the 2020–30timescale. Its purpose was to show the relative benefits of an integrated solution over one which is dominatedby a continuation of national, radial schemes, with point to point interconnectors providing the only opportunityfor cross-border trade.

17. Figure 1 shows just one concept of how such a network could evolve, and a lot more detailed workneeds to be carried out within the various groups (NSCOGI, ENTSO-E and FOSG) to gain more clarity on thebenefits and route map towards an integrated offshore grid. It provides, however, a useful representation ofwhat the development of a supergrid might entail and the benefits that such a coordinated, integrated grid couldbring to the countries it connects:

Figure 1

AN INTEGRATED OFFSHORE CONCEPT NETWORK IN THE NORTH SEA FOR 2030 (ENTSO-E)

Denmark4 GW

Norway Shore Line

Den

mar

k S

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e(3

.5 G

W)

Ger

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y Sh

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(20

GW

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Belgium Shore Line (3.5 GW)

Netherlands Shore Line(10 GW)

Sco

tland

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(5 G

W)

Eng

land

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(24

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BritNedNemo

CORBA

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Dogger Bank13 GW

Hornsea4 GWNorfolk 7 GW

Norway1 GW

Belgium4 GW

Scotland9 GW

England

1 & 2 (5.5GW)

(7 G

W In

terfa

ce C

apac

ity)

Germany (24 GW)

Netherlands(12 GW)

HVDC TransmissionAC Transmission‘In Flight’ or current

Rounds

SK1-3

Nor

Ned

Nor

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2

North S

ea

SK4

CORBA

1 Direct Current networks allow for greater levels of energy transfer to be achieved over long distances, thus reducing electricallosses.


Why Build a European Supergrid

18. The benefits of pursuing a European supergrid in the right geographic region, in this instance the NorthSea, are many. A coordinated, integrated North Sea grid will deliver significant benefits to the UK and itsenergy consumers, including:

— an overall reduction in costs to the UK consumer through:

(a) lower capital and maintenance costs associated with the establishment of an offshore supergriddue to the need for fewer, larger assets. For the North Sea, the ENTSO-E initial findingssuggest this to be in the region of 7 billion Euros (or 10%) if all the potential renewablegeneration proceeds to commissioning;

(b) increased capacity for cross border trade and access to other energy markets providing a routeto allow the UK to become a net electricity exporter;

(c) an ability to balance the intermittency of wind generation more effectively and efficiently byallowing the cross border transfer of power flows, thus offering the potential for shared plantmargin, and

(d) improved security and network resilience for export/import.

— an ability to reduce the onshore network reinforcements required through additional flexibilityto inject power into stronger parts of the onshore network under outage conditions;

— significant environmental benefits given the reduction in required corridor routes, landingpoints onshore and supporting onshore transmission reinforcements such as new overheadlines or substations;

— removal of some of the expected supply constraints, further enhanced through standardisation,thus improving deliverability of offshore wind. The delivery of the large HVDC cablecurrently in design between Hunterston in Scotland and the Wirral is expected to take up thesupply capacity for high capacity HVDC cables for at least three years; and

— a reduced risk of asset stranding since close to 100% utilisation of the asset can be achievedby complementing wind generation with cross border trade. At present, dedicated transmissionasset to wind generation would only be utilised approximately 40% of the time, resulting ineffective stranding of 60%.

Risks and Uncertainties

19. Many aspects regarding a European supergrid remain uncertain. One of the greatest uncertainties is therate of deployment of wind generation in the UK and the rest of North West Europe, and the point at whichthis necessitates further interconnection. If the rate of deployment continues as expected, it is our view that,alongside the backbone of an integrated UK offshore network, further interconnection beyond that identifiedin the TYNDP is not warranted ahead of 2020—at this point sufficient wind should be connected to start tomake further network extension viable. To do otherwise, increases the risk of asset stranding and under-utilisation. It is possible to mitigate the risk of stranding but the network will need to be designed and built ona modular basis such that its development aligns with user commitment.

20. A further significant risk is that the issues posed by the regulatory regimes may not be fully addressedand remain inconsistent. It is our belief that a network can be designed and physically delivered but until issuesof ownership, subsidy, who pays, who operates, amongst others, are addressed, it is unlikely that a Europeansupergrid will proceed in any meaningful integrated manner. This is further addressed in sections 26 to 31.

21. Greater interconnection between the GB power market and other systems is likely to increase securityof supply for GB consumers by providing access to a wider range of sources of power generation, transferringpower from the lower to higher value power market. This gives comfort that exports from GB acrossinterconnectors will only occur when there is capability to export power within the GB market. During anyperiod of stressed balance between demand and generation, we expect GB prices to rise relative to othermarkets and therefore act as a natural mechanism to reduce exports if power is scarce in GB.

The Implications of Greater Interconnection for UK Energy Policy and for Consumers

22. UK energy policy is aligned to that of Europe in its aim to deliver secure, sustainable, affordable energysupply. As our generation mix changes over the coming years, the implications for UK energy policy of greaterinterconnection with other power markets are positive.

23. Greater interconnection will improve energy security of supply and subsequently reduce the amount ofback up generation required to cover the expected level of intermittency when considering the range of potentialrenewable sources (Wind, Hydro, Solar etc). Similarly, for periods of high wind in GB but at times of lowdemand, greater interconnection will reduce the need to curtail wind generation, thus harnessing all the benefitof renewable generation. Finally, increased interconnector capability will allow for increased competition inthe electricity supply market, allowing for greater choice for UK consumers and ensuring affordability. Thismay result in lower prices for consumers but will depend on the price differential in the various energy markets.


The Technological Challenges

24. As part of the discussions under way within the UK regarding the best design to connect offshore windgeneration, we have been looking closely into the issue of technology and the challenges that this may pose.It is our belief that the technology itself is not the issue. Whilst it is true that cables at the required rating andother technologies such as voltage source convertors are not yet in service to the required level, this technologyis already in development, and we are aware that orders have been placed for 1GW cables and associatedconvertors. We therefore do not believe this development will be significantly challenging, a view which isfurther supported by all major European manufacturers.

25. The more important challenge will be ensuring that the necessary research and development occurs in atimely fashion. Timely signals will be required to ensure sufficient supply chain capacity is available and assetstandardisation is developed. Without standardisation, the incremental build of any such network is likely tobe more complex and reduce competition, hence exacerbating the risk of asset stranding.

Feasibility of the UK’s Contribution to a European Supergrid

26. The level of co-ordination to deliver a European supergrid is complex and is likely to require changesto a number of existing mechanisms where the current arrangements prove to be incompatible.

Inconsistent and incompatible regulatory and market regimes

27. The existing competitive UK regime for the provision of offshore transmission capacity is incompatiblewith the development of a wider European supergrid (see Appendix 1). All other European countries haveplaced the responsibility of designing and building offshore transmission with the TSO. The multiple partiesin the UK will mean that trying to drive consensus in decision making will be more difficult.

Ensuring co-operation

28. In order to make an integrated and internationally coordinated European supergrid a reality, cooperationof all international players is essential. If efforts to acknowledge compatible technical standards and harmoniseregulatory frameworks are not coordinated, the development of an integrated onshore-offshore network modelis unlikely.

The need for anticipatory investment

29. To ensure that the offshore transmission network does not become a barrier to the development of aEuropean supergrid and UK offshore wind generation, it is likely that some investment will be needed aheadof clear signals of user commitment. This anticipatory investment could take the form of installing slightlylarger cables at minimum cost, and/or establish “tee points” that can accommodate further connections at alater date and/or route of cables such that they are located conveniently for future developments. Questionsarise as to who decides when and how much European anticipatory investment is made to ensure overalldelivery and under what framework should this be delivered. We believe this could be carried forward throughexisting anticipatory investment frameworks in the UK supported by the ENSG.

Government support mechanisms

30. Numerous support mechanisms are in place across Europe to incentivise the development of offshorewind into the future. In the UK, this is primarily in the form of the Renewable Obligation Certificate (ROC).The current ROC scheme guarantees a payment to the offshore generator as long as the energy generatedcomes ashore in the UK. In the world of a European supergrid, it will not be possible to identify individualpower flows and therefore ensure that the power generated by a particular site lands on the UK shoreline. Inaddition, issues such as whether priority is given to wind over cross border trade across shared, integratedassets will also need to be reviewed.

Funding and Regulating a European Supergrid

31. It is unlikely that further institutions will be required to oversee the regulation of a European supergrid.The presence of ACER, coupled with the national regulators, should mean that sufficient regulatory oversightand mechanisms exist to manage such a network. The UK for example already has a number of regulatorytools, depending on ownership, that can facilitate the building of a wider offshore network including:

— anticipatory investment mechanisms;

— regulation of longer term outputs and the provision of incentives through the RIIO process(revenue = incentives, innovation and outputs) therefore protecting the consumer to anextent; and

— the ability to introduce competition into the process.

32. The more difficult decision will be deciding upon the ownership split of a European supergrid and howthe responsibility for operation is allocated. Such issues need to be addressed before it is possible to agree onthe funding arrangements.


The EU Third Energy Liberalisation Package

33. As well as seeking further unbundling of European energy markets, the EU Third Energy LiberalisationPackage looks to establish further regional integrated energy markets. The provision of greater interconnectionand thus ultimately, establishment of a supergrid, between the UK and mainland Europe will help to facilitatethis goal.

Recommendations

34. To ensure that the UK meets the binding EU environmental targets, the concept of a European supergridrepresents a crucial part of the infrastructure investment required. We therefore make the followingrecommendations.

— support the development of an EU wide strategic plan to ensure clarity of objectives andtimelines;

— continue to support the further development of a European supergrid through the variousindustry groups, NSCOGI and ENTSO-E in particular, to ensure that opportunities aremaximised through considered analysis and that the necessary enablers are in place on time;

— develop proposals for the enduring regime for offshore wind connections which is compatiblewith the ambitions of a European supergrid and is compatible with other European regimes;

— encourage the timely provision of signals to ensure sufficient research and development sothat technology does not become an unnecessary barrier; and

— understand and seek to address the various inconsistencies present in different Europeanmarkets in order that the goal of a regional energy market is achieved.

March 2011

APPENDIX 1

THE CURRENT APPROACH TO NEAR SHORE TRANSMISSION

1. The current national approach to connecting offshore wind generation encourages the installation of singleuser point-to-point (radial) sub sea connections to each individual wind farm. Equipment is designed andinstalled sufficient to allow access to the market for 100% of the potential output from the windfarm, butremains unused when there is no wind.

2. Given the typical load factor of an offshore wind generator is less than 40%, this underutilisation issignificant, with 60% of the asset effectively under utilised. This approach has worked acceptably for thesmaller, near shore installations seen to date, but larger, more distant from shore volumes of connection canand should be planned differently to maximise utilisation of these assets and facilitate the management ofwind intermittency.

3. With no substantive interconnection to mainland Europe at present other than some direct shore to shoreinterconnectors facilitating bulk energy transfer, increased interconnectivity between the UK and continentalEurope is important. Greater interconnectivity is seen as an important tool in managing the system withincreased volumes of wind attached to it allow for export when the wind is blowing and import when not,offering essential balancing services and the potential to share operating reserves thus reducing the potentialfor stranded assets.

TSO Roles and Responsibilities

4. In all other EU countries, the building of electrical connection and interconnectors is the responsibility ofthe national Transmission System Operator (TSO). Uniquely in Europe, the current UK regime, prevents theonshore TSO from building transmission assets offshore. Instead, the TSO is limited to building the necessaryonshore reinforcement associated with the offshore assets:

(a) For wind—the right to build and own offshore transmission assets is subject to a competitive tenderprocess run by Ofgem. In many instances, these owners have their basis in financial institutions andare not able or incentivised to ensure that onshore/offshore optimisation is carried out whenconsidering optimal network designs. This ignores the experience and expertise of the TSOs.

(b) For interconnectors—interconnector developers apply for a licence to construct, own and operatean interconnector. As interconnectors connect the national transmission systems in twoneighbouring countries, the framework at the “other end” is an important consideration. Usuallythe onshore TSO is the only entity able to build such infrastructure. The differences in the UKregime with that of the rest of Europe has therefore been a significant barrier to their developmentto date. This has been recognised by Ofgem, and is the subject of an ongoing consultation todevelop a more appropriate framework going forward.

It is therefore unlikely that an integrated, pan-European supergrid will evolve given such a framework.


Memorandum submitted by Ofgem

1. Context for Our Response

1.1 Ofgem welcomes the opportunity to respond to the Select Committee enquiry into a European supergrid.As the GB energy sector regulator, we are required to protect the interests of present and future gas andelectricity consumers through, among other things, our regulation of transmission networks and promotion ofcompetition in energy markets. This includes consumer interests in the reduction of greenhouse gases and insecurity of supply.

1.2 Over the last decade, the open access offered by the GB transmission regulatory regime has enabled theconnection of major new onshore conventional and renewable generation, as well as a new interconnector(Britned). In addition, Ofgem has approved several billion pounds of investment by the onshore transmissionowners. In order to ensure that GB offshore renewable generation is able to enjoy similar access to transmission,Ofgem and DECC have established an offshore transmission regulatory regime tailored to the needs of theoffshore users, and compatible with our onshore regime.

1.3 We consider the harmonisation of European markets, and the move towards the internal European energymarket as set out in the “Third Package”, to have significant benefits for GB consumers. These benefits areprimarily the enhancement of security of supply and more competitive pricing. Increased physicalinterconnection between Member States is important in facilitating this harmonisation as constraints on theamount of electricity that can be transferred between Member States can limit the extent to which markets canconverge. This is recognised in the European Energy Infrastructure Package2 which sets out the requirementfor a European strategy and funding for projects such as the North Seas Countries Offshore Grids Initiative(NSCOGI) and the European Electricity Highways that are expected to contribute towards the development ofa European supergrid.

1.4 In addition, we look to protect future consumers through the promotion of carbon reducing measuresincluding the increased integration of renewable capacity into our power generation mix. Given this, we fullysupport the principles of increased renewables integration and of interconnection between Member States. Weagree that the supergrid concept might contribute towards achieving this goal, but we also see that the conceptof a “supergrid”, can be realised in a number of ways. How a North Sea grid (or European supergrid) evolvesshould depend on an evaluation of the costs and benefits of alternative approaches. An assessment that wouldcompare e.g. incremental development of existing networks in response to demand from transmission usersversus a more centrally planned approach, that could lead to anticipatory investment coordinated amongst manypartners, but also face the risk of stranded assets.

1.5 We also note that there has thus far been limited detailed analysis of what the costs, benefits and risksof a European supergrid would be and stress that it is one of a number of options for delivery of integratedmarkets and integrated renewable generation.

1.6. The ECCC has asked for evidence on a range of specific questions. We have drawn on experience fromwork that we have been involved with to provide information which we consider useful in responding to thequestions set out where possible. However, as a result of the limited analysis conducted to date, we have notresponded to all questions set out in the Committee’s inquiry directly. For example, we do not believe that itis possible to provide even an indicative figure of what a supergrid would cost at this stage with a largeamount of uncertainty still surrounding technological feasibility and how a supergrid could be most cost-efficiently designed.

Offshore Development

1.8 To provide further context, we note that there are a number of transmission activities that might beundertaken in the north-European seas. These different activities can be characterised as follows:

1. Direct connection of renewable energy generation e.g. offshore wind farms to individual MemberStates.

2. Interconnectors between Member States.

3. Offshore networks which are used to relieve constraints in the onshore network of an individualmember state (e.g. the “bootstraps”).

4. Networks which include interconnection between Member States with renewable energygeneration attached.

1.9 We understand that discussion of a north-European offshore grid or a pan-European supergrid oftenmakes reference to item four on this list. However, it is important to be mindful of the full range of transmissionactivities that will be undertaken both now and in the future. At this stage, it should not be presumed that griddevelopment should take place through some form of meshed system before the costs and benefits of such anapproach have been fully explored and there is value in keeping all options available. In any case, and as notedabove, it may be more cost-efficient to allow a grid to evolve into a meshed system incrementally in response2 Find the Energy Infrastructure Package document: Energy infrastructure priorities for 2020 and beyond—A Blueprint for an

integrated European energy network here:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SPLIT_COM:2010:0677(01):FIN:EN:PDF


to demand from transmission users. In this respect, direct connection of both renewable generation andinterconnectors continue to play an important role.

Ofgem’s Work in this Area

1.10 In responding to the inquiry, we have mainly drawn upon our experience of jointly developing the GBoffshore transmission regime with DECC and on our work to integrate the GB electricity market with that ofother Member States.

1.11 NSCOGI in particular is providing direct experience of many of the associated issues. Ofgem chairsthe regulators group which supports this initiative. Our response therefore focuses on work that is beingundertaken to facilitate the development of an offshore transmission infrastructure in the north-European seas.

1.12 However, we note that the concept of a supergrid often goes beyond this to depict some form of pan-European network (of which NSCOGI will be an incremental step). This shared network would facilitate thebulk transfer of power from areas of (primarily renewable) generation surplus3 to demand4 and storagehubs5 thus optimising the provision of generation at a European (rather than national) level. We are engagedin preliminary work in this area through the Energy Infrastructure Package which sets out, for example, theidea of European Electricity Highways. We have also referred to this work in our response where relevant.

The Offshore Transmission Regime

The Offshore Regime

1.13 Jointly developed by Government and Ofgem, the GB offshore transmission regulatory regime waslaunched in 2009 to deliver offshore transmission connections for offshore renewable generation. Theregulatory approach that has been adopted is largely the same as onshore in that it extends the onshoreregulatory and connection regime to the generators offshore connection point, ensuring that a clear commercialand technical interface already exists for potential future development of an offshore meshed orinterconnected network.

1.14 Where the offshore regime differs significantly from the onshore regulation of electricity networks, isthat the licensed right to build, own and operate the offshore connections is awarded on the basis of acompetitive tender process, run by Ofgem. The competitive approach was adopted to attract new entrants andinvestment to the sector, encourage innovation, and drive down the costs of network assets for generatorsand consumers.

1.15 The first tender process for nine offshore transmission connections was run during 2010. These wereall already built or under construction by Generators. Strong competition has attracted almost £4 billion ofinvestment appetite for all nine transmission links which are in total worth around £1.1 billion. The first tenderround resulted in overall forecast savings of £350 million for offshore wind farms and ultimately consumers.Further rounds of tenders will be run over subsequent years, with an estimated total value in excess of £15billion. The second such round is currently underway.

Co-ordination project

1.16 Government and Ofgem recognise the importance of developing effective and efficient transmissioninfrastructure to connect offshore renewable generation to the onshore grid. It will be important to ensure thatthe regulatory regime can support the realisation of benefits from a co-ordinated, efficient and economicoffshore transmission network.

1.17 Ofgem and DECC are currently working together to consider whether any additional measures arerequired to ensure that the benefits of co-ordination are maximised through the offshore transmission regime.The work will include consideration of opportunities for offshore generator sites to be interconnected, or foranticipatory work to be undertaken. DECC and Ofgem will be publishing a conclusions report on this work inwinter 2011.

North Seas Countries Offshore Grid Initiative (NSCOGI)

1.18 NSCOGI is a framework for regional cooperation between ten countries6 to find common solutionsto challenges related to current and possible future grid infrastructure developments in the north-European seas.Through our involvement in the NSCOGI project, we are working alongside DECC, looking at the potentialfor UK contribution to an offshore cross-border transmission network in the north-European seas.

1.19 The workplan of the initiative includes activities to identify a range of plausible scenarios fordevelopment of an offshore grid and to identify and address the technical, market and regulatory challengesassociated with these scenarios.3 Examples of potential generation hubs include the north-European seas and the North African desert.4 Examples of demand hubs include central and northern Europe.5 Examples of storage hubs include the hydro generation and storage in Nordic countries and the Alps.6 The 10 Member States signed up to the NSCOGI project are Belgium, Denmark, France, Germany, Ireland, Luxembourg, the

Netherlands, Norway, Sweden and the United Kingdom.


1.20 NSCOGI plans to identify a set of plausible scenarios for onshore and offshore grid infrastructure for2030 and develop proposals to overcome barriers to the development of these potential grid configurations byDecember 2012. By this date, the project also aims to develop proposals for regulatory and market design fora coordinated offshore grid while also proposing methods for tackling issues such as cost allocation andanticipatory investment.

2. Responses to Inquiry

What are the technical challenges for the development of a European supergrid?

2.1 While Ofgem is not best placed to advise on the detailed technical challenges of a supergrid, we areinvolved in one of the fundamental technical issues of the development of its development. Through ourinvolvement in projects such as the Offshore Coordination Project and NSCOGI, we are developing anunderstanding of the considerations surrounding the physical layout of an offshore grid in the north-Europeanseas.

2.2 Wind farms around the coast of GB have so far been connected to the onshore grid by “point-to-point”7

connections. These wind farms have been located relatively close to the coast in relatively shallow waters.However, future wind farms are likely to be located further from the shoreline and may be of greater totalcapacity.

2.3 A number of different styles of connection solution have been proposed for the connection of futureoffshore generation. These designs can be roughly characterised by the level of shared assets that they providefor offshore transmission users. These would range from simple point-to-point connections (such as the existinginterconnectors and connections between offshore wind farms) up to complex, meshed offshore-grids includingconnections between several European Member States.

2.4 It is important to note that no single design will be the cost-effective choice for all projects. As foronshore networks, the current and expected future requirements of the generators influence these choices indifferent ways. The most cost-effective design will be dependent on e.g. the specific characteristics of theproject such as distance from the shore, available cable routes, environmental and planning consents, optimalnetwork redundancy requirements, size of the wind farm, operational characteristics, the transmissiontechnology available, and also the risks that transmission users and their finance providers are willing to bear.This is likely to lead to a hybrid mix of the designs for an offshore grid.

2.5 The figure below summarises the conceptual range of designs that have been proposed. We would stressthat the development of offshore connections to deliver any one of these designs could take place in a numberof ways. For example, rather than being centrally planned, a fully meshed grid may evolve incrementally in linewith demand through the development of point-to-point connections which are then connected to each other.

Radial: Pointto-point

connections

Tntegratedoffshore

hubsFully meshedoffshore grid

Radial +: Advancedtechnology and

multiple connectionsto each onshore point

Increased point-point interconnection Increasedinterconnection

with directconnection of

renewables to formmeshed grid

Less integrated More integrated

Interconnection

Offshore connections

7 Point-to-point connection is direct connection from a generation source to the onshore grid or from one onshore grid to another.


What risks and uncertainties would a supergrid entail?

2.6 Work to date on coordination of the offshore regime and on NSCOGI have presented a number ofchallenges for the development of an offshore grid in the north-European seas:

1. Level of investment: One important challenge with NSCOGI and to an even greater extent withthe pan-European supergrid will be encouraging the levels of investment required.

2. Anticipatory investment: In addition, a number of potential designs for a north-European seas gridand for a European supergrid would rely on anticipatory investment, ie a need for infrastructureto be built in anticipation of demand where this demand may not yet be in place and may not becompletely certain. There are advantages of anticipatory investment such as the potential to realiseeconomies of scale through sizing infrastructure to meet expected rather than current demand.However, this has to be weighed up against the risk that the demand will never be realised thusrendering part of the infrastructure as a sunk cost. It is likely that much of this risk will be passedonto consumers and so it is vitally important to consider the extent to which anticipatoryinvestment is desired and how the associated risks are dealt with.

3. Cost and benefit allocation: Future projects may be financed by a number of stakeholders from anumber of different Member States. This raises the question of how to allocate the costs andbenefits of the project to one Member State or the other.

4. Coordination of regulation: In addition to allocation of costs and benefits there is also the questionof how shared assets or assets that lie outside of the border of the country into which they areconnecting should be regulated by the National Regulatory Authorities.

5. Coordination of operation: In the same regard, there is the question of how the different nationaltransmission system operators involved will operate a shared asset.

6. Coordination of renewable generation support schemes: This includes issues around harmonisationof the different support schemes that are provided in each country. In addition, there is thechallenge of allocating support schemes and renewable generation contributions to a project thatis constructed in one country but exports power to another.

7. Conflicting European legislation: There a number of pieces of EU legislation that conveyconflicting messages in relation to some of the characteristics of a supergrid. For example, directconnection of renewable generation into an interconnector will present a conflict betweenlegislation that sets out the requirement of priority access onto the network for renewable formsof generation with legislation that requires access onto interconnectors to be non-discriminatory.

8. Capacity allocation: In addition to the above, there is the question of how to predict the level ofcapacity available for use across the interconnector due to the unpredictable nature of renewablegeneration.

9. Planning and consents: It is also important to consider the coordination and optimisation ofplanning and consenting procedures. It has been suggested that the coordination of an offshoregrid would reduce the amount of onshore and offshore substations that are required thus decreasingthe risk of planning and consenting delays. This risk is also proposed as an important barrier toinvestment in offshore and cross-border infrastructure. It is thus vital to consider how best tostreamline these procedures from a national and European perspective.

2.7 Some of these issues may be relatively straightforward while others are more involved, but they can alsobe interlinked. It is therefore sensible to subject them to focussed analysis in a structured way. This is whatthe NSCOGI is intended to achieve.


2.8 As highlighted earlier, the concept of a pan-European supergrid has not yet been clearly defined and assuch more analysis needs to be performed before even an indicative cost can be provided. As the work is likelyto be modular, spread over decades, and the boundary between a supergrid and the existing transmissionnetwork may be (arguably should be) blurred, a total cost figure may not be meaningful.

2.9 Even as a step towards a pan-European supergrid, work on NSCOGI has so far considered that anoffshore grid will be developed through a range of different types of connection. An important part of the workbeing carried out is to analyse the costs and benefits associated with this range in order to identify likely futurescenarios for an offshore grid development. As such, an indication of costs cannot be provided with anyaccuracy at this stage.

2.10 Development of a north-European seas grid and, in turn, a pan-European supergrid will involvecoordination of projects between a number of Member States. This raises the question of how to allocate thecosts and benefits of these projects. This question is being explored through NSCOGI and we expect that manyof the outcomes of this work will feed into cost allocation of a wider supergrid.



2.11 Increased interconnection between countries can balance intermittency by providing additional marketswhen there is excess generation and by providing additional capacity from other countries when renewableoutput is low.

2.12 The key driver for a supergrid is to connect areas of excess renewable generation to demand and storagehubs. This should act to balance intermittency. The same will apply to a north-European seas grid as a steppingstone towards a wider supergrid.

Will a supergrid reduce energy prices for consumer and businesses?

2.13 In order to meet renewable targets and gain the benefits of a more sustainable energy infrastructurewhilst maintaining security of supply, significant amounts will have to be spent on the development ofinfrastructure. This is likely to have an upwards effect on energy prices in the short term in whatever way thisis achieved.

2.14 Therefore, it is important to question not whether a supergrid would reduce energy prices per se butwhether a supergrid would be the most cost-efficient way to achieve these objectives, thus minimise the impactthat achieving these objectives will have on energy prices.

2.15 This question is being explored at a north-European seas level through NSCOGI which is consideringthe costs and benefits associated with a range of options for the connection of offshore renewable generation.

2.16 In the longer term, it is likely that the increase in competition associated with access to new marketsachieved through increased interconnection will place a downwards pressure on prices and this should beconsidered as one of the benefits of a European network with greater levels of interconnection.


2.17 Greater levels of interconnection and market coupling over interconnectors (as will be the case forBritned) will increase the impact of European energy policy and markets on the GB market. We believe it tobe important that these implications are considered when looking at the introduction of measures such ascapacity mechanisms and feed-in-tariffs as part of the Electricity Market Reform package.

Which States are potential partners with the UK for a supergrid project?

2.18 As a project which could act as a stepping stone towards a pan-European supergrid, NSCOGI is a jointframework between ten Member States with an interest in grid development in the north-European seas. TheMember States involved are Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands,Norway, Sweden and the United Kingdom.

2.19 Further into the future, work on a pan-European supergrid will involve input from all European MemberStates. In addition, the possibility for projects in other Member States to contribute to UK renewable targets ifthey are funded by the UK (even if the generation does not connect into the UK) provides an opportunity topartner with any Member State in theory on projects which could feed into a supergrid.

How would a supergrid contribute to the goals of the Third Energy Liberalisation Package?

2.20 On 4 February 2011, Heads of State of all Member States committed to the achievement of the internalEuropean energy market by 2014. While the harmonisation of market and regulatory regimes will go someway to improving the efficiency of cross border flows of electricity, the level of physical interconnection placesa limit on the extent to which this is possible. Therefore the development of increased interconnection betweenGB and European Member States associated with a supergrid would assist the achievement of this objective.


2.21 A north-European seas grid will require cooperation and harmonisation between both TSOs and NRAs.We note that ACER (the agency for the cooperation of energy regulators) has recently been formally launchedand may have an important role to play. Cooperation among NRAs currently takes place through regionalinitiatives which will be overseen by ACER and this may be a useful vehicle for coordination. This issue isbeing considered as part of NSCOGI and lessons learnt from this are likely to feed into policy towards a pan-European supergrid, but as yet we see no need to prepare new institutions.

March 2011


Memorandum submitted by the Institution of Engineering and Technology (IET)

Executive Summary

1. A European Supergrid is a fascinating concept that in the long term could provide some very interestingoptions for UK electricity, particularly in managing intermittent renewables.

2. The term “European Supergrid” is used rather loosely at the moment to describe a range of interconnectionconcepts, including:

— a North Sea supergrid, principally connecting countries with North Sea coasts and potentiallylarge amounts of offshore generation;

— a North-South supergrid bringing power from North Africa into Europe;

— an East-West supergrid crossing several time zones and thus allowing advantage to be takento different timings of demand peaks as well as uncorrelated renewables; and

— various combinations of the above.

3. Each of these would have rather difference costs and benefits, could be scaled at different levels and couldmake different levels of use of existing infrastructure.

4. Technically a super-grid would be challenging on account of its large size but would not particularlystretch the knowledge we have today. However its deployment in a complex multi-jurisdictional environment,with massive construction of transmission infrastructure in countries each with their own challenges inplanning, would be very challenging.8

5. We would suggest that it is currently not possible to predict by what date a useful supergrid could bemade sufficiently complete to provide large scale benefit to the UK, and the IET would therefore cautionagainst placing too much reliance on its being available when planning UK policy.

6. However, we do need to start somewhere and these uncertainties should not be a reason for holding backon preparatory work, which the UK should fully support. As we move forward to decarbonise the UK andwider Europe’s energy systems the challenge of greater interconnection will in time need to be addressed. Thepotential benefits may be substantial.

7. The IET would strongly support continuing scoping and other studies to allow functionality, costs andbenefits to be quantified. Alongside this, the institutional, legal and other barriers should be explored.Deployment would then need to be planned, financed and delivered. Once deployment was well underway, andgreater understanding of the challenges of delivery had been gained, the UK may be able to take a view onplanning for the use of a Supergrid as a part of future energy policy.

8. In providing this response, we have addressed the potential for very much greater interconnection acrossEurope. We have not included in this evidence the smaller (but still substantial and important) issue of providingthe best means to connect UK offshore wind generation to the UK power system. There are more integratedalternative possibilities than the point to point connections envisaged under the OFTO regime. Should theCommittee wish to explore this issue further, we would be pleased to provide further evidence.

9. Our detailed comments below are necessarily generic, and it may be that the various concepts haveradically different economics. Much more analysis of need, technical solutions, costs and risks is needed tounderstand these issues fully to inform decision making.

10. Our responses to questions 1, 2, 3, 4, 5, 6 and 9 follow.

Question 1: What are the technical challenges for the development of a European Supergrid?

11. We assume here that a European supergrid would be a multi GW meshed electrical network connectingthe power systems in numerous European countries. The technical challenges for such a European supergridare significant but are not at all insuperable.

12. In conceptualising the supergrid, key early decisions would need to be taken about its architecture andthe extent, if any, that conventional AC transmission would be used rather than high voltage direct current(HVDC). HVDC transmission would be needed for any links crossing significant bodies of water (such as theEnglish Channel or the North Sea), and may be desirable for economic or aesthetic reasons for large overlandpower transfers.

13. AC transmission is a highly mature technology, but HVDC networks (as distinct from point to pointconnections using HVDC) are as yet an immature technology. If the supergrid were to be substantially HVDCthen the principal technical challenges would be:

(a) At present HVDC networks would have to be designed without the use of DC circuit breakers athigh voltages as they are not yet available. If the international industry were to develop them therewould be significant cost savings and operational benefits.

8 Although it should be noted that large scale power transfers across mainland Europe using legacy networks are undertakenroutinely.


(b) To date, almost all successful HVDC schemes have been point to point connections, meaning thatcontrol practice for a meshed DC network is not yet established and would need to evolve.

(c) There are limited suppliers of HVDC technology who would be able to overcome these challenges,leaving limited choice in the equipment market place.

(d) Supply chains are not sized for this major expansion of HVDC technology and would take timeto catch up, meaning that deployment would take some time.

(e) Planning consent for converter stations, DC overhead lines and submarine cable landfalls wouldtake time to obtain.

14. These issues have been looked at in some detail as part of the ongoing discussions in the UK regardingthe best ways to connect offshore wind generation. We believe the “missing” technologies can be developedby the industry provided there is perceived demand for them.

15. If the supergrid were to be substantially AC, the principal technical challenges would be:

(a) The probable introduction of a higher voltage than the 500 kV maximum common across Europecurrently. This should not be a major issue as 765 kV is in use in various parts of the world, and1000 kV is under development in China. Higher voltages allow higher power transfers.

(b) Care would need to be taken to develop and manage the network to avoid stability risks andcascade failure risks across Europe. HVDC tends to avoid this issue by avoiding synchronousconnection of multiple power systems and thus effectively creating “firewalls” between nationalsystems. This issue should be manageable but will require careful attention to system operationand governance.

(c) AC overhead lines are generally more visually intrusive than DC overhead lines, which may createadditional planning consent issues. Other planning consent issues would be similar to DC, thoughfewer building structures at substation sites would be required.

16. The more important challenge in relation to technology is to ensure that the necessary research anddevelopment takes place in a timely fashion. This requires timely signals to manufacturers to ensure theycommence investment in technology and in the scaling up of the supply chain to be able to deliver at the righttime. There will also be a need to drive standardisation as an important contributor to timely and efficientdelivery.

Question 2: What risks and uncertainties would a supergrid entail?

17. The main risks and uncertainties are:

(a) during the creation of an EU Supergrid, uncertainty as to when it could be brought to full fruition,given the range of jurisdictions involved and the consequent complexities of consenting andfunding;

(b) resilience during operation;

(c) geo-political risks during operation; and

(d) uncertainty as to whether market rules and systems will be sufficient to allow a truly transparentprocess of sale across multiple boundaries at times of energy shortage in Europe.

During Creation of a EU Supergrid

18. The main risk in bringing a European supergrid to full fruition is ensuring timely completion given therange of jurisdictions involved and the consequent complexities of consenting and funding. Persuadingcountries with nothing much to gain from a grid to accept the infrastructure through their territory would bechallenging. It would therefore be unwise to rely on the supergrid to deliver significant amounts of energy toor from the UK until its deployment was quite well advanced. We would caution against it being used as aconvenient assumption in policy making when considering the long term requirements for generation, forexample.

19. The legal challenges involved in creating a cross-jurisdictional network should not be underestimated,particularly for those portions of it that might be developed offshore. There are significant differences in theways EU member states apply laws relating to electricity in their coastal waters, and their legal frameworksare at different stages of development.

20. Another legal/regulatory issue is that the EU is currently organised into various regional electricitymarkets already (for example the GB market and the All-Island market in Ireland), and the commercial drivers(and legal frameworks) for creating increased linkage between these markets are very specific to the localcontext. There is also an economic fact that, if interconnectors between markets are financed privately, a largeelement of their market value consists in being a trading path for generators in a market area with low pricesto sell electricity into a more expensive area. As more and more connection is built between markets theseprice differentials tend to zero, so the commercial incentive to build incremental capacity decreases. Thischallenges some of the market and financial models in place today, and might require different approaches toremuneration for owners of network assets.


21. The time taken to gain consents for new transmission lines is significant and projects can be subject tosignificant local opposition. The same is true however for potential alternatives, such as building moreconventional generation plant.

Resilience and Technical Risks

22. The design criteria for the supergrid would need to include adequate redundancy against maintenanceand breakdown downtime of individual components to ensure resilience was adequate.

23. Elements of the supergrid would be potential targets for terrorism, and appropriate measures would needto be taken to guard against this, which might include both redundancy in design and also physical protectionat key node points.

Geo-Political Risks

24. Once operational, a supergrid would carry a number of political risks to UK electricity supply, includingthe possibility of switching off supply from source countries, such as those in North Africa, for politicalreasons, and sharing power amongst European states in time of shortage.

Market Uncertainties and Risks

25. Once operational, the supergrid would need to be governed by clear trading rules such that there couldbe no question of transit countries acting in their national interests in circumstances where power was short.

26. Existing markets have a number of mismatches in their operating rules which act as a barrier to otherwiserational trades across borders. These are being addressed in part by legislative change at EU level but thereare various changes to market rules and systems required to allow a truly transparent process of sale acrossmultiple boundaries.

Question 3: How much would it cost to create a supergrid and who would pay for it?

27. This question can only be answered meaningfully after defining the extent, capacity and boundaries of asupergrid, which would then be the starting point for a cost study. To make a major long term difference tomoving renewable energy across Europe, power transfers might be greater than 100–200 GW—which is 50 to100 times the capacity of the current England-France link. However, other concepts for a European supergridare rather more modest, seeking instead the more limited objective of flexing output from offshore generationto countries best able to accept the output. The difference in costs between these two could be a factor of 10or more, illustrating the uncertainties involved.

28. Costs for individual transmission connections can be calculated but this does tend to depend very muchon individual circumstances. The cost varies greatly depending on whether links are sub-sea, over mountains,through densely populated areas etc. The costing of conventional AC transmission is well understood andvarious projects are underway to build better knowledge of capital costs for HVDC projects. We can point theCommittee to this work on request, but this only addresses the cost of individual connections that might formpart of a supergrid rather than a complete supergrid.

29. One option to reduce costs and increase the chances of gaining planning consents would be to convertexisting AC line routes across Europe to HVDC operation, which would substantially increase their transfercapacity. Extensive technical studies would be needed to determine the feasibility of such an option, whichcould of course also have an impact on the networks of which these lines are currently a part.

30. To deploy a supergrid of sufficient capacity across Europe to make a significant difference to managingthe intermittency of renewables is likely to cost in the tens of £billion at 2011 prices.

31. The question of who would pay for it will be highly influenced by the existing mechanisms forremuneration of transmission networks in different member states. There are significant differences in approach(for example, in the UK currently generators pay a charge for use of the transmission network; in some memberstates they do not).

32. In addition, most major renewable energy projects are financed by subsidies such as feed-in tariffs orRenewables Obligation Certificates. As subsidies are not generally transferable between member states, as allhave their own systems and targets, this means that a generator in one country will be subsidised by thecustomers of that country, regardless of where the energy is finally used. This has potential to unfairly penalisecustomers in small states with high amounts of renewable generation. Legal mechanisms exist at EU level formember states to trade surplus renewable energy but they are not fully defined beyond 2020. Further work isrequired in this area to come up with a workable approach to subsidies which recognise different countries’individual targets whilst creating capability to move subsidy funds transparently around the EU as a whole.

Question 4: Will a supergrid help to balance intermittency of electricity supply?

33. A supergrid has the potential to contribute significantly to balancing intermittency of renewable energyproduction, provided:


— it is connected to countries with uncorrelated renewable supply and/or demand;

— they are willing to trade; and

— the supergrid is of sufficient capacity.

34. It is noteworthy that the electricity system has to be balanced on an ongoing minute by minute basis, soany analysis of its benefits would need to take account of scenarios such as low UK wind and high localdemand for Scandinavian hydro, as well as the reverse, more favourable, cases, since investment in additionalback-up plant would be largely governed by worst case combinations.

35. If major benefits are to be achieved in smoothing intermittent renewable generation sources, this wouldimply the supergrid would need to cover a wide geographic area, possibly extending beyond Europe into NorthAfrica and Russia, and be of sufficient capacity to transport very large (100GW scale or larger) amounts ofpower. Staying within the relatively limited geographical confines of northern Europe will limit the amount ofuncorrelated renewables accessible, and also the opportunity to exploit time differences in times of maximumdemand, other than at the margins.

36. The extent to which using a supergrid to back up intermittency is cheaper than other options for copingwith intermittency (such as demand management, storage, low cost back-up generating capacity, etc) can onlybe determined by detailed study, at least in part using highly complex hourly models.

37. Extensive commercial modelling will also be required to understand the commercial incentives actingon generators and consumers to trade power across such long distances. Even if this is technically possible anddesirable it might not represent a credible market response.

38. The technical capability to balance intermittency will only be realised in practice if various countries’market rules are sufficiently aligned.

Question 5: Will a supergrid reduce energy prices for consumers and businesses?

39. Without the analysis referred to above, and a more detailed knowledge of the capacity and topology ofthe supergrid it is not possible to comment on its impact on UK domestic energy prices.

40. If capacity were sufficient it would tend to produce more uniform prices across Europe. Whether thesebenefits are sufficient to offset the price impacts of building the Supergrid is unclear at the moment.

41. We would caution that, in any case, energy and electricity prices are likely to rise substantially over thenext 10 years, and the debate about supergrid economics should be more in terms of whether it limits increasesmore or less than other options rather than whether it reduces prices.

42. Building a supergrid entails addressing a series of complex institutional issues which are only worthtackling if it is demonstrably cheaper than the alternative of building large amounts of backup generation ordemand-side measures to match demand to generation from intermittent renewables. The problem could bethat, for individual countries, the balance of costs and benefits might be significantly different: arguably therecould be net winners and net losers. For example, a small country could conceive of being a net exporter ofwind power into neighbouring states, but unless subsidies are apportioned fairly, the consumers in that countrycould end up paying more to subsidise exports of green electricity. For those states for whom offshore networkbuild is contemplated, the construction costs are significantly higher than onshore and have to be borne by themarket somehow, so the benefit derived in terms of access to cheaper generation would need to outweighthis cost.

Question 6: What are the implications for UK energy policy of greater interconnection with other powermarkets?

43. Assuming interconnection with Europe was of rather higher capacity than today, the UK market wouldbecome in effect a part of the wider European market. Electricity would be traded across Europe for the bestprice, and the UK would need to consider safeguards to ensure supplies needed domestically were not soldinto the rest of Europe in times of shortage.

44. Greater interconnection than at present should reduce to a degree the need for reserve generation capacityas, in principal, reserve plant could be shared. However the issues around backup plant for intermittentrenewables would need careful analysis, taking account of the correlations in renewable outputs and nationalelectricity demands in worst case hours.

45. The issues around subsidies for renewable energy mentioned above would need to be tackled, howeverfor UK, with a high population density and the corresponding challenges of planning and environmental barriersto building enough renewable projects to meet its own targets, greater interconnection could allow the countryto import green energy from any neighbouring countries with a surplus. The GB market is one of the largestand most open electricity markets in the EU and therefore potentially attractive in this respect.

46. In summary, more work is needed to evaluate the benefits. The supergrid could potentially leveragesignificant economic benefits as outlined above, but at the same time could leverage risks, both technical andin governance terms.


Questions 7 and 8

Not answered.

Question 9: Would new institutions be needed to operate and regulate a supergrid?

47. The option of letting a supergrid evolve through the gradual development of component links betweenpairs of countries is worthy of consideration. However certain countries are likely to fulfil more of a transitrole with less obvious benefits to themselves. At the very least, regulatory arrangements would seem to beneeded to incentivise the construction and to govern the operation of the supergrid. This whole area needsfurther investigation as part of the overall studies needed for the supergrid.

48. In areas where interconnection is not well developed already, such as around the North Sea, or betweenthe UK and mainland Europe, a supergrid is unlikely to evolve9 without groups of affected countries agreeingto coordinate network planning and also coordinating regulatory development to remove barriers toimplementation. Such coordination could occur at a working (zonal) level without a need for over-archinginstitutions. There are existing regulatory bodies at EU level already considering some of these issues and theycan also play a useful role. However there is still work to do to improve and coordinate overall governanceacross Europe.

49. The UK does not at present have to engage significantly with European Transmission System Operators(TSOs). With a supergrid this would change, and the UK would need to guard against governance decisionsthat were not in its favour.

About the IET

50. The Institution of Engineering and Technology (IET) is one of the world’s leading professional bodiesfor the engineering and technology community and, as a charity, is technically informed but independent ofnetwork company, equipment supplier or service provider interests.

51. This submission has been prepared on behalf of the Board of Trustees by the IET’s Energy Policy Paneland takes into account inputs from experts within the IET’s wider membership who responded to a requestfor input.

52. Evidence from the Institution of Engineering and Technology (IET) supported by The Royal Academyof Engineering (RAEng), The Institution of Mechanical Engineers, and the Institution of Chemical Engineers.

March 2011

Memorandum submitted by RenewableUK

Executive Summary

1. The response comprises three sections:

(a) Answers to the questions posed.

(b) Additional questions and answers.

(c) About RenewableUK.

2. Our key points are:

(a) Development of a supergrid or coordinated network must not be allowed to delay or adverselyimpact the connection of offshore wind projects which are currently underway.

(b) The key issues are consenting, finance and regulatory issues not technical matters.

(c) The development of a supergrid will require, and could help drive, a common framework of marketrules across Europe.

(d) The supergrid can be (and is being) started with point to point connections integrating offshorewind and interconnectors.

Questions Posed

What are the technical challenges for the development of a European Supergrid?

3. The technical challenges are not a significant issue compared to the regulatory, commercial, finance andconsenting issues.

4. Initial steps and projects are feasible using current technology, though for some of the more advancedconcepts (e.g. wide-area offshore meshed grids) will require demonstration projects and the first projects withthe new technology may not be cost effective until deployment ramps up and lowers costs.9 Individual interconnectors may be provided by the market, but not an integrated grid.


5. The issue of standardisation will arise and the benefits of standardisation (e.g. of HVDC voltages) willneed to be weighed against the risk of stifling innovation and the potential advantage to one manufacturerover another.

What risks and uncertainties would a supergrid entail?

6. The key uncertainties are in forecasting the future demand and generation locations, volumes and timingalongside the timescales for development and delivery of a supergrid given consenting issues for transmissionand the need for regulatory coordination.

7. National TSOs may see a supergrid as a threat if it means that their investment plans are “adversely”affected. E.g. if ownership of supergrid links/assets is awarded on a competitive bidding bases to third partyowners (e.g. as in the GB OFTO—offshore transmission owner—model) and a supergrid may reduce thedrivers for investment by national TSOs.

8. There is a real danger that the process of supergrid coordination results in delays to new generationprojects which are under development, if a regulator or authority were to decide that the project should be re-engineered to fit into a supergrid scheme. It is imperative that any supergrid developments do not delay oradversely impact on projects that are under development by changing their grid connection points, cable routes,connection voltages, or commercial terms etc. This may apply, for instance, to the initial phases of Round 3developments where design and environmental permitting work is already underway.

9. Financing the supergrid must be considered, including at the high risk stage of development andconsidering the consenting and land lease/easement/acquisition costs. European strategic financial support andthe Green Investment Bank could be important in this respect.


10. The costs of a supergrid are dependent on how much capacity is built, over what distances and in whichregions. The supergrid should be justified on a cost-benefit approach. The benefits for Europe being:

(a) Increased competition leading to lower energy prices.

(b) Increased security of supply.

(c) Access to a greater amount of renewable resources.

(d) More rapid decarbonisation.

(e) Ability to access lowest cost low carbon generation wherever it occurs within Europe.

11. Electricity customers would pay for the supergrid, either directly (through the transmission tariffs) orindirectly (through recharging of transmission tariffs levied on the generators from whom their energy issourced), but the cost-benefit approach referred to above would ensure that consumers received an overallbenefit through, for instance, reduced generation prices thanks to increased competition and efficiency ofoperations.

12. The allocation of development finance for projects, which is inevitably riskier (although much smallerscale) than construction & project finance, must be addressed.

13. All grids must charge users to cover their costs and all grids have rules of access and connection for theusers. For a supergrid to work fairly and effectively, charging, connection and access would need to beregularised or standardised across Europe, as is proposed to happen from 2014 under the Network Codes.

14. At the moment we have an iniquitous situation in GB where an interconnector can connect to the GBtransmission system and not face any transmission charges whereas a generator connected in the same locationwill be subject to charges, even if both have an identical impact on the GB transmission network. It is one ofthe issues which we have flagged under project TransmiT and which we expect TransmiT and European Codesto address.

15. The cost of any new grids are likely to be significantly higher that current transmission assets, whichwere built in a time where there was much greater public acceptance of the benefits of overhead high voltagelines. New lines may need total or significant undergrounding (with the associated extra expense) in order tobe accepted and approved.


16. Interconnection will help maximise the utilisation of variable renewable generation sources such as solar(PV and thermal), wind, wave and tidal and hydro. It will reduce the need for balancing or peaking plant whichcan be shared. Although the costs of balancing and peaking needed for large wind penetrations are very modestand tend to be exaggerated by pundits they could still be reduced through additional interconnection.

17. With a large increase in the penetration of wind generation on the UK grid system, variability has twoeffects: one is in relation to market prices and predicted increase in price volatility; the other is in terms ofsystem operation. A supergrid will help the GB to balance electricity supply from variable renewable generationsources. The use of interconnection between countries including integration with large offshore wind farms


will facilitate imports during times of low wind and high demand, and export surplus power to Europe in timesof high wind. Increasing the capacities of networks across Europe also provides a natural hedge and riskmitigation measure by ensuring that wind generation is spread across wind zones and weather systems (i.e.reduces the correlation between wind power generation at different sites.)10

Will a supergrid reduce energy prices for consumers and businesses?

18. Given the cost-benefit test set out previously, supergrid designs will only be approved (in place ofconventional grid designs e.g. that connect the same volume of offshore renewables to one country only), ifthey deliver the desired level of security of supply at lower prices. There is considerable evidence that for theconnection of far-offshore wind farms in the North Sea supergrid-type solutions will have a cost advantage, atleast until the amount of interconnection to Britain has been increased substantially from the current level.

19. In addition greater interconnection will provide greater market coupling and reduce GB prices when GBprices are relatively high, but raise GB prices when GB prices are low. This will provide more stable andcertain prices for customers. For generators it will provide increased market access and more certainty forinvestors and therefore assist in delivering the new renewable and low carbon generation that Europe needs.Overall these effects should deliver the low carbon electricity that it needed at the lowest possible cost.


20. Interconnection could enable UK to import more renewable energy—e.g. from Ireland in which casethere may be pressures to reduce renewable development in the UK. Interconnection would enable UK toexport more renewable energy in which case there are opportunities for the UK to capitalise on its resourcesand use the opportunity to sell renewable electricity and benefit from the associated supply chain in terms ofjob creation and business.

21. There will be a need to share the costs of system management which may be provided in one countryand used in another (e.g. peaking capacity, storage, flexibility, ancillary services) facilitated by interconnectionand the supergrid. This need not be complex, and has been undertaken successfully in continental Europe forover 50 years.

Which states are potential partners with the UK in a supergrid project?

22. The immediate opportunities are with Ireland and countries across the North Sea especially whereinterconnection assets can be shared with offshore windfarms' transmission connections to reduce the overallcosts.

How would a supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

23. The high level goals of secure, competitive and sustainable markets are all facilitated by a supergrid.Increased capacity between countries improves security by allowing mutual assistance in emergencies; it alsomakes it easier to integrate renewables and allows generators in different countries to compete more extensively.In addition the existence of an offshore network would help to accelerate the connection of offshore renewables.A supergrid would also force the pace of coordination in regulation, markets, grid charging, connection, accessand support mechanisms for decarbonisation.


24. Existing institutions could probably be developed to perform the necessary roles though there must bestrong stakeholder involvement and representation on governing bodies and codes. In developing the PilotNetwork Code for Connection over the last year or more, ENTSO-E has not demonstrated effective stakeholderengagement and industry representation compared to established practice in GB.

Additional Questions

25. We are suggesting and responding to the following additional questions

What do we mean by a supergrid?

26. A supergrid transcends national boundaries. It could provide:

(a) Connections to offshore wind farms which also reduce GB onshore reinforcements;

(b) Interconnectors which also help to connect offshore windfarms;

(c) Interconnections between synchronous systems (e.g. GB to Ireland);

(d) Reinforcements to weak connections within synchronous system (e.g. the West & East Coastbootstraps in GB); and

10 We note a recent study from Poyry http://www.povry.com/linked/services/pdf/142.pdf which indicates a low level of benefitfrom interconnection in Northern Europe. We welcome this work but would suggest that further work is required in this area,including expanding the limited geographic scope.


(e) High voltage transmission across Europe bypassing countries (e.g. a hypothetical link from GB'sNorth Sea to Austria).

27. It could comprise of:

(a) HVDC links using underground/subsea cables and/or overhead lines.

(b) Point to point HVDC links.

(c) Interconnected and meshed, multi-terminal HVDC systems.

28. It is likely to start by the use of offshore HVDC technology to simultaneously connect offshorerenewables and allow trading between national markets. This may involve smaller individual HVDC networksand subsequently HVDC meshed/interconnected network(s).

29. High capacity links can create a challenge when they trip or fail, therefore appropriate ancillary services,generation intertripping and demand management would be needed to ensure high utilisation of such links; ora number of links would be required and operated with some form of redundancy.

What are the planning, consenting and permitting challenges?

30. The challenges of consenting and permitting are similar to the connection of individual offshorerenewables projects to shore.

31. A challenge for the supergrid, especially when projects cross national and regional boundaries and haveto deal with different consenting regimes.

Would the supergrid have implications for siting and operation of generation on a European level?

32. The ECCC should consider if a highly developed supergrid will interact with the siting and operation ofgeneration plant within a European context.

33. For example, it might not make sense to locate new high load factor generation on the west coast ofIreland, as during high wind and low demand periods in the British Isles, energy would need to be exportedfrom the west of Ireland across, to and through GB and onto continental Europe. Such siting could lead toeither an uneconomic level of interconnection (i.e. with low utilisation) or to generation constraints.

34. As a further example, early 2010 was a wet period in Spain, so that wind, hydro and solar generationcombined with reduced demand (due to the recession) meant that CCGT generation in Spain had very lowaverage load factors, down to about 30%. If these plants had been connected to a stronger European networkthey may have been able to operate with a higher load factor, potentially displacing higher carbon coal firedplant elsewhere in Europe.

About RenewableUK

35. RenewableUK (formerly the British Wind Energy Association (BWEA)) is the trade and professionalbody for the UK wind and marine renewables industries. Formed in 1978, and with over 660 corporatemembers, RenewableUK is the leading renewable energy trade association in the UK, representing the largemajority of the UK's wind, wave, and tidal energy companies.

April 2011

Memorandum submitted by Friends of the Supergrid

1. Introduction

The Friends of the Supergrid (“FOSG”) is a group of companies and organisations which have a mutualinterest in promoting and influencing the policy and regulatory framework required to enable large-scaleinterconnection in Europe.11 With a special insight into the technology needed to create Supergrid the Friendswill be empowered to build the know-how to deliver it in practice.

FOSG combines companies in sectors that will deliver the HVDC infrastructure and related technology,together with companies that will develop, install, own and operate that infrastructure. The Friends will designthe physical equipment, and work alongside the companies that will build the structures at sea, so that both areempowered to compete and win. The risks of providing this new transmission service will be reduced by theearly knowledge gained during the policy formation and design stages.

FOSG is able to present “cradle to grave” interconnection solutions to policy makers and others looking todevelop energy policy across Europe through to 2050.

11 www.friendsofthesupergrid.eu


2. Executive Summary

2.1 A consensus exists among EU member states on the need to decarbonise their power sectors and developnew sources of low carbon energy. Supergrid is an essential element of this energy package.

2.2 Given the many benefits of Supergrid for the UK, the UK government and the regulator need to viewthe creation of Supergrid as vital for the national interest and as an integral part of national policy.

2.3 FOSG has made preliminary indicative calculations for the costs of Supergrid and finds that project costsare not excessive and would be recovered from an agreed and regulated tariff.

2.4 Supergrid will help balance intermittency of electricity supply: by interconnecting areas with differentpeak demand times and different renewable generation patterns, reserve capacity can be deployed on a moreeffective basis.

2.5 Supergrid will reduce energy prices for consumers and businesses as a result of increased competitionand better utilisation amongst existing plant and by enabling more renewables with low marginal cost toconnect to the system.

2.6 The technology is available today that can deliver Supergrid. Certain technological and supply chainrisks exists but all these can be mitigated should regulatory certainty exists.

3. Supergrid

3.1 FOSG shares a mutual interest in promoting the concept of open markets in electricity transmission,trans-national interconnection and exploiting the resulting business opportunities. This development ininterconnection has become known as “Supergrid”.

3.2 Our definition of Supergrid is the following: “an electricity transmission system, mainly based on directcurrent, designed to facilitate large-scale sustainable power generation in remote areas for transmission tocentres of consumption, one of whose fundamental attributes will be the enhancement of the market inelectricity.”

3.3 In late 2010 FOSG devised a “Phase 1” Supergrid linking the UK with four other European markets(“Phase 1”). With the recent arrival of new entrants to FOSG we are working on a revised Phase 1 proposalto take into account, amongst other things, work that National Grid is undertaking in the UK.

3.4 Work is also ongoing to take account of developments put forward by other associations also looking atSupergrids—in particular, the North Seas Countries Offshore Grids Initiative (NSCOGI) and the EuropeanNetwork of Transmission System Operators Electricity (ENTSO-E).12

12 As the European body of Transmission System Operators, ENTSO-E's mission is to promote important aspects of energy policyincluding security and adequacy of supply, market regulations and sustainability. The association has been given important newroles in the 3rd EU Energy Liberalisation package.


UK

GERMANY

NORWAY

Munich

3.5 As such, the “Supergrid” detailed in Phase 1 is recognised to be a concept that will evolve with time asthe feasibility, ownership structure, financeability, operability, regulatory and commercial backdrop becomesmore fully developed. Nevertheless, the “Supergrid” detailed in Phase 1 is taken as the starting point fordeveloping the answers to this Select Committee Inquiry.

3.6 It is envisaged that the Supergrid will include, at least in part, the backbone of an integrated UK offshorenetwork, interconnection (both existing and new) as well as the development of further DC links both onshoreand offshore in NW Europe. As such, it is envisaged that the Supergrid will be under development before 2020.

3.7 The illustration above provides an indicative overview of how Phase 1 could be developed. The finaldesign will, as outlined above, be subject to further detailed analysis, and be the responsibility of nationalTSOs and regulators.

3.8 The Phase 1 concept recognises that:

— The UK must connect further substantial amounts of offshore wind to its already congestednetworks by 2020. A number of possible solutions have been considered to facilitate thisincluding line up-ratings, offshore “bootstraps” and offshore clustering.

— Germany plans to build 25GW of offshore wind generation by 2025/2030 and the existinggrids in Northern Germany are already largely congested with on-shore wind generation.

— Norway wants to trade its hydro generation, and

— Belgium’s renewable energy plans include at least 2GW of offshore wind generation.

Phase 1 addresses these immediate issues while providing a staging post for the future.

4. What are the technical challenges for the development of a European Supergrid?

4.1 There are technologies available today that can deliver a Supergrid. These include Voltage Source HVDCConverters (VSC), undersea XLPE (cross-linked poly-ethylene) HV cables up to 320kV, oil impregnated cablesup to 500kV and 400/500kV HVAC technology. To start today the main challenges will be:

— Supply Chain—manufacturers (particularly cable HV suppliers) will struggle to satisfy thedemand associated with the rapid pace of global marine renewable development in additionto the European Supergrid.

— Development of the infrastructure to deliver the hardware and logistics/operation services forthe offshore grid.


— Control Systems—the control and operation of an HVDC based Supergrid requires newcontrol/protection/operation hardware and software—particularly software. This mayincorporate “Smart Grid” technology with decision support systems encompassing demandside management to match available supply.

— Standards—to allow interoperability between different manufacturers and to ensure thatdesigns are future proofed it is necessary to develop and agree technical standards.

4.2 For the future we expect technology development to continue to provide:

— More efficient converter technology.

— Higher Voltage DC XLPE Cables.

— HVDC Switchgear.

— Lower Cost platform design.

— Superconducting pipes to carry very large amounts of power onshore.

4.3 A key concept for Phase 1 is the SuperNode. From a technical perspective a SuperNode interconnects anumber of DC links together with wind parks via a small islanded AC network (the node). The term islandedmeans that the small AC network is not connected to other AC networks but only fed by the connected DClinks and the wind parks.

4.4 It is an important advantage of this concept that it is largely based on technology existing today. As oftoday there is much experience with DC links interconnecting two AC systems. There are quite a number ofHVDC links operating or under construction, which are based on VSC technology. The development neededto build SuperNodes is mainly in the field of control and protection including frequency control on the islandedAC network, power flow dispatch and fault detection/clearing strategies.

4.5 The preferred DC transmission technology for building SuperNodes is VSC. This is because a VSCtransmission system can generate and maintain the AC voltage at the node with respect to amplitude andfrequency, a feature also referred to as black start capability. The concept of VSC transmission controllingislanded AC networks will be demonstrated by the first HVDC connected wind parks in the North Sea whichare currently under construction.

400kV

SUPERNODE CONCEPTACDC

2.4GW

2.4GW

2.4GW

2.4GW

2 x 500MW2 x 500MW

2 x 500MW 2 x 500MW

Convertor Station±320kV

±320kV

4.6 The most important step needed to develop HVDC grids further is the aspect of interoperability ofdifferent individual projects and technologies of different manufacturers.

Interoperability requires standardization of the basic principles of design and operation of HVDC grids. Asa starting point for the standardization of HVDC grids some fundamental planning criteria needs to be defined,probably leading towards different types of HVDC grids (eg transmission and distribution HVDC networks,sometimes also referred to as "local" and "inter area" grids).

4.7 The technical aspects of future European HVDC grids are the subject of a European Study Group"Technical Guidelines for HVDC Grids" chaired by the German Electrotechnical Commission VDE/DKE. TheStudy Group includes European manufacturers of HVDC systems, European Transmission System Operators(TSO) and Universities. The standards bodies CENELEC TC 8X and Cigré B4 are also involved. Functionalspecifications for the components needed for the first multivendor HVDC systems in Europe will be preparedby late 2011.


5. What risks and uncertainties would a Supergrid entail?

5.1 A political consensus exists within the EU 27 countries to fully decarbonise their power sectors by 2050at the latest; open the European electricity market to greater competition; and, develop new renewable energy.A Supergrid is an essential element of this energy strategy.

5.2 Taken to its full extent, Supergrid could be the largest infrastructure project undertaken in Europe. Therewill be technological risk—VSC technology is relatively new, is undergoing continuous improvement and hasnever been deployed in this way before. The development of this technology, however, is being driven bycompanies based in the UK and elsewhere in Europe, giving us a competitive advantage in its deployment.

5.3 The Supply Chain risk is significant but not insurmountable. Progress has been made, even in the lastyear, driven by the UK’s actions to enable supply chain investment in support of offshore wind. Progress isneeded to develop the manufacturing facilities and infrastructure to deliver Phase 1 with certainty.

5.4 All these risks can be mitigated. Today, the rules for operation of a pan European Supergrid (or even aPhase 1 connecting more than two countries) do not exist. Finance will not be available if there is regulatoryuncertainty. Technology development will follow, when there is certainty.

6. How much would it cost to create a Supergrid and who would pay for it?

6.1 FOSG has made preliminary indicative calculations for the costs associated with the development ofPhase 1 and proposes two possible models or a combination of both to finance it. Project costs would berecovered from an agreed or regulated tariff. Two models are considered:

1. User Pays—where the Transmission Use of System (TUOS) Charge is paid by the direct users ofthe system, and

2. Socialised Cost model—where the costs are recovered through the electricity retail tariff in theconnected countries.

6.2 User Pays—Transmission Use of System—TUOS

Although the preliminary model that underpins Phase 1 for the use of system assumes 23 GW of wind aloneconnected at a 40% capacity factor (or capacity utilisation), the operator should be incentivised to increase thisfactor by allowing other users to trade on the network and by providing ancillary services such as spinningreserve and voltage support. This will reduce the required TUOS charge. For this reason both 40% and 90%capacity factors are used in the analysis.

6.3 The main assumptions in the TUOS calculation are:

Project Finance:

— Capex = £28,000 million (2010 values).

— 30% Return on Equity.

— 23 GW of Wind at 40% Capacity Factor must carry the cost.

— Six year build out with 40 years of operation.

Capacity Factor:

— 40%—if the wind alone trades on the system.

— 90%—when wind and other energy service providers use the network.

The calculated TUOS for different values of Debt/Equity and capacity factor are shown in Figure 1:

Figure 1

TRANSMISSION USE OF SYSTEM CHARGE

Capacity Factor Gearing TUOS (£/MWh)

40% 70/30 46.775/25 43.880/20 40.885/15 37.890/10 34.8

90% 70/30 20.875/25 19.580/20 18.185/15 16.890/10 15.5

6.4 In summary, the transmission charge for Phase 1 could vary from 4.67p to as low as 1.55p per kilowatt-hour (p/kWh), depending on gearing and utilisation. The challenge is to provide a regulatory environment thatleads to high gearing values while incentivising the grid operator to increase the capacity factor/utilisation.


6.5 Socialised Cost Model

In this variation the costs are recovered by adding a Supergrid component to the national retail tariffs in thePhase 1 connected countries of Germany, UK, Norway and Belgium. Figure 2 summarises the electric energyconsumption in these countries (IEA 2008):

Figure 2

ANNUAL CONSUMPTION(IEA 2008 STATISTICS)

IN CONNECTED COUNTRIES

ConsumptionCountry (GWh/annum)

Germany 617,132Belgium 95,527UK 400,388Norway 128,806Total Energy 1,241,853

Figure 3

SOCIALISED TARIFF CALCULATION

Income 2,820,720,000 £/annumTotal Energy 1,241,853 GWh/annumCost 2.27 £/MWhTariff 0.23 p/kWh

6.6 Figure 3 presents the calculation of the increased tariff in the countries connected to Phase 1 in order torecover the project costs over 40 years based on 2008 statistics published by IEA. The result is that in Germany,UK, Belgium and Norway an increase in the retail tariff of 0.23p per kWh would be required to pay for Phase1. These calculations have considered all consumers from these four countries benefitting equally. However, acost allocation mechanism might be necessary if that is not the case.

7. Will a Supergrid help to balance intermittency of electricity supply?

7.1 Yes: By interconnecting areas with different peak demand times, and different renewable generationpatterns, reserve capacity can be deployed on a more effective basis. However, there are number of caveats.

7.2 Reserve capacity cannot be totally eliminated by interconnection. The amount required is governed, interalia, by the security of supply standards in place, the geographic dispersion of the capacity [too far “apart”and it is less “secure”], the degree of interconnection and the size of interconnection links.

7.3 However, the future shape of the Europe’s electricity network will be determined not merely by issuesof increased variable supply, but also increasingly variable demand, requiring the greater deployment of storageand demand response—using a grid not only interconnected for power but also with multi-directionalcommunications; integrating ICT with the power grid; a so-called smart grid. Interconnection enables the UKnot only to have access to Scandinavian hydro resources, but also the capacity in continental markets wherethe peak in consumption occurs at a different time.

8. Will a Supergrid reduce energy prices for consumers and businesses?

8.1 Supergrid should enable increased competition and better utilisation amongst existing plant, thus bringingdown average prices. It will enable more renewables, including wind, with low marginal cost, to connect tothe system; reducing portfolio risk and thus putting downward pressure on prices.

9. What are the implications for UK energy policy of greater interconnection with other power markets?

9.1 The UK needs to lead the debate in the areas outlined above—markets, operation, regulation, andtechnical standards. Otherwise we risk the imposition of solutions designed elsewhere, which are inappropriateto our needs and costly, being imposed on us.

9.2 The evolving European regulatory framework means that the UK may have little choice but to implementdecisions which may not be totally aligned to our own wider domestic energy policies. This is likely to frustrategovernment objectives if allowed to continue unchecked.

9.3 The UK is likely to be a net exporter of electrical energy with the establishment of a Supergrid and,more generally, improve the conditions for the development of our offshore renewable resources.

9.4 UK Energy policy should recognise this fact and seek to lead the debate on the detailed framework ofintegration, in order to ensure that the evolving structures facilitate our objectives and maximises the economicbenefits to the UK.


Beyond a national energy policy

9.5 Given the geographic distribution of renewable resources, individual countries will struggle to deliversustainable and secure energy supplies if they base policy on national considerations alone. The EU hasencouraged the creation of a single energy market, while energy policy is retained at a national level.

9.6 There is a risk that this national focus will constrain thinking. Given the many benefits to the UK of aSupergrid as outlined above, the UK needs to ensure that government departments and the regulator have awider market focus when considering energy policy and that the creation of the Supergrid is seen as being inthe national interest, and an integral part of national policy.

10. Which states are potential partners with the UK in a Supergrid project?

10.1 In Phase 1 with its emphasis on fully developing the UK’s existing offshore wind resource, we advancethe case for linking the UK to Norway, Germany and Belgium. By doing so the Supergrid will interconnectmarkets with sufficient demand and supply to enable the most effective use of the grid for trading electricity.Further work is on-going to measure these benefits in our outline Phase 1.

10.2 Over the medium term—from 2020 to 2030 the Supergrid will most likely develop to supply theelectricity markets in other countries in the North Seas Grid Group, so that UK generators could take furtheradvantage of an open market in electricity supply to deliver low cost, low carbon generation to consumersacross Northern Europe.

10.3 Over the long term—from 2030 to 2050 it is envisaged that the Supergrid will grow to become a majorelement of an open, liberalised, zero carbon power market bringing electricity generated from marinerenewables in the north and solar in the south to consumers across the EU.

11. How would a Supergrid contribute to the goals of the EU Third Energy Liberalisation Package?

11.1 The objective of the 3rd package is to make the energy market fully effective and to create a single EUgas and electricity market. This will help to keep prices as low as possible and increase standards of serviceand security of supply. The earlier sections of this response explain how the Supergrid helps to achieve this.

11.2 In terms of meeting the co-operation and co-ordination aspects of the 3rd package, considering theformal powers recently given to ENTSO-E under the third package, FOSG believes that the planning aspectsof a Supergrid should fall to ENTSO-E but ensuring entrepreneurial insight. The mandate to ENTSO-E shouldcome from the EU Commission and ACER and should also focus on developing a 2050 Master Plan.13 ThisMaster Plan will identify the sources of future power and will design an integrated grid to connect them to thekey nodes of AC networks while optimising security, redundancy and the single market.

11.3 Such a plan, despite giving a general overview of the entire EU, should also be divided into steps orphases with a first phase focussed in more detail on the North Sea.

11.4 Moreover, TSOs through ENTSO-E should also define a single Grid Code for the Supergrid.Standardisation and interoperability are major steps forward to achieve the efficient and timely realisation ofthe Supergrid. Such a new Grid Code should be proposed by ENTSO-E with the agreement of the EUCommission and ACER and after consultation with all the interested stakeholders. The preliminary focus ofsuch a Code would be on offshore wind connection.

12. Would new institutions be needed to operate and regulate a Supergrid?

12.1 By its nature, Supergrid will span existing national and jurisdictional boundaries. There will need to bea mechanism for raising the capital to build it. There will need to be rules for recovering the cost and allocatingthe revenues accrued. These may not be simple, as the “notional allocation” of the costs and benefits involvedwill be complex. We consider that ACER, although not formally a European Regulator, could get the necessarypowers to develop these mechanisms. ENTSO-E could be mandated to set up an independent system operator(ISO) to operate the Supergrid.

April 2011

13 The Agency for the Cooperation of Energy Regulators (ACER) is a European Union body established in 2010. ACER's missionis to assist National Regulatory Authorities in exercising, at Community level, the regulatory tasks that they perform in theMember States and, where necessary, to coordinate their action.


Supplementary memorandum submitted by Pöyry

Many thanks for the opportunity to participate in the ECC select committee panel discussion yesterday. Ihope Pöyry’s contribution was helpful, though I am aware we perhaps failed to get our view across in a coupleof respects.

Firstly, we are a little sceptical of the “seven-year payback period” mentioned in the first session. Theeconomics of wind power and the supergrid are dependent on a number of uncertainties such as fossil fuel andcarbon prices, capital costs and wind patterns; but our expectation is that offshore wind will turn out to besignificantly more expensive than gas-fired generation. (Of course, it arguably has other benefits.) And theeconomic case for the supergrid may depend heavily on the extent of the avoided costs of AC network upgrades.The first panel had a bullish view on these avoided costs which should be challenged: this is an important areafor further investigation.

A second point is the uncertainty about who will benefit from interconnection. Although interconnectingcountries together should lead to lower overall costs of generation, it is not clear that GB plc, or GB consumersin particular, will necessarily benefit. It could be that interconnecting GB to other markets raises prices in GB,or it could lower prices.

Thirdly, although interconnection provides diversity and helps mitigate security of supply issues, it does notreplace back-up generation. Weather patterns are well correlated even across large areas, so the benefits fromheavy interconnection should not be overstated; when the system is tight in GB, there is a reasonable chancethat it is tight in other countries too, and that their backup generation is already being used.

In our view, given all the uncertainties, an incremental approach to the supergrid has a lot of merit, beginningwith bilateral country-to-country interconnection. It may also be the only realistic way of making significantprogress. The motorway example given by the first panel is a good analogy—when the M1 was built, a detailedplan of the next 50 years of motorway construction wasn’t needed—the M1 was of sufficient value on its ownto speed up north-south transport. The stepping stone it provided to a full UK-wide motorway network was asubsequent benefit, but not the rationale for building the first motorway.

Once again, many thanks and we enjoyed the occasion!

May 2011

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