Net Zero, Energy and Transport Committee

Meeting date: Tuesday, March 28, 2023

Official Report 791KB pdf

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Electricity Infrastructure Inquiry

Our next item of business is an evidence session as part of our inquiry into Scotland’s electricity infrastructure and whether it is an inhibitor or an enabler of our energy ambitions.

The aim of the inquiry is to scrutinise what electricity infrastructure will be needed to realise the ambitions that are set out in the Scottish Government’s recently released “Draft Energy Strategy and Just Transition Plan”, and to understand what will be needed to deliver that infrastructure. This is a short inquiry that will lead to a report to the Scottish Government as it finalises its strategy.

Last week, during the first evidence session of our inquiry, we heard from two panels of key energy industry stakeholders and experts. Today, we will hear from the Office of Gas and Electricity Markets, which is the Government regulator for the electricity markets in Great Britain. We will discuss the evidence that we have heard so far and hear Ofgem’s views on the delivery of the aims that are set out in the draft energy strategy and on the decarbonisation—there are a lot of long words in this brief—of our electricity infrastructure.

I am pleased to welcome Steven McMahon, deputy director for networks and head of Scotland at Ofgem, and Jack Presley Abbott, deputy director for energy systems management and security at Ofgem. Thank you for accepting our invitation; we are delighted to have you here.

Before we start our questions, I believe that Steven would like to make an opening statement.

Good morning, and thank you for inviting us to give evidence.

As the convener said in his introduction, I am the head of Ofgem’s office in Scotland. I am also the deputy director who leads much of our work on electricity network regulation. I am joined by my colleague Jack Presley Abbott, who is also a deputy director based in our Glasgow office. Jack oversees much of our work on connections policy and market design.

Taking a step back, the Intergovernmental Panel on Climate Change report that was published last week concluded that

“only swift and drastic action can avert irrevocable damage to world”.

As members will be aware, the report runs to thousands of pages, but the message is crystal clear: either we act now or it will be too late. The evidence has never been as clear as it is at present: we need truly transformational and accelerated action across every sector, including energy.

Given what has unfolded across the energy sector over the past few years in particular, not least following events in Ukraine, alongside ambitious Government targets for renewables and other forms of generation, we already knew that we needed to accelerate the shift away from fossil fuels to clean energy. That will help to reduce costs to customers by breaking the link between electricity bills and gas prices. As well as protecting our security of supply and providing secure and reliable home-grown energy, it will help to protect customers from the dangers of unmitigated climate change.

Basically, we are on the cusp of a transformational shift in the energy system, which will probably involve the biggest changes that anyone involved in the sector has ever seen. As the economic regulator of that energy sector, with a responsibility to protect consumers and represent their long-term interests, that represents a big change in the environment in which we operate.

We need to act at pace to enable cost-effective infrastructure investment, to transition away from a high dependence on fossil fuels and to deliver a home-grown, cheaper and more secure net zero energy system. Over the next 10 to 20 years, in particular, that will require an immense amount of investment in new network infrastructure, which needs to be built in a co-ordinated way, across generation and demand, not only at pace but at a reasonable cost. That is the defining challenge that we face. We need to ensure that our regulation helps that infrastructure to be built as rapidly and efficiently as possible, so that when everything—from the wind farms down to electric vehicles—is ready to connect on to the system, the grid capacity is already in place. That is possible through accelerated planning, environmental consents and network companies being incentivised to deliver on time.

The committee’s call for evidence specifically poses the question whether our electricity infrastructure is an inhibitor or an enabler of Scotland’s energy ambitions. Our response is that it must be an enabler, and everything that we are doing is geared towards ensuring that our economic regulation can help to build the system that we need, at pace, but in a way that protects energy consumers, both now and in the future.

Thank you. Before we move to questions, I would like to remind members and those people who are listening that, as a farmer and a landowner, I have electricity transmission lines across the farm in the form of 11kV lines—the small ones—33kV ring main lines, which are the bigger ones, and I am in negotiation for a 132kV power line to go through the farm. At some stage, all of those will generate some income for the farm, so I want there to be no doubt that I have some interests here. I will continue to make that declaration as and when I think it appropriate to do so. I do not think that it inhibits me from doing my job as convener, but I want committee members to know about that.

The first questions will come from Mark Ruskell.

Good morning, and thank you for joining us.

The draft energy strategy discusses a range of targets for onshore wind. There is also the potential for a target or targets for solar to emerge from the energy strategy, perhaps at different scales, including embedded agricultural-scale solar. There is potential for marine energy targets as well. How do such targets influence your approach to market design and regulation? It would be useful to start with solar.

More broadly, the Scottish Government sets targets and the UK Government sets targets, and we see those policy ambitions growing every year.

How do we treat the targets? The targets are an important part of our responsibility. We interpret our remit to deliver the policy ambitions and the decarbonisation targets that are set by Government. The key thing is how that then plays into the system planning. In your evidence session last week, you heard that we are moving towards more co-ordinated, holistic network planning. It is important that the policy aspirations and the targets for any source of generation are included in that planning process.

We also have to work with Government to understand what those targets are, as does the industry. We believe that we can help to inform those targets, including how they are set and the policies that will sit behind them. Sometimes that might make a difference in how we look at the challenge. We might ask, “Is this deliverable?” Especially when very specific targets are being set in specific locations, we need to ask whether we can deliver on those and whether we can do that in a way that avoids unnecessary costs. For any source, we see the information coming through in terms of the network planning. That feeds into the system and the system architecture that would need to be in place to deliver against those targets.

09:45  

I will add that it is clear with all the targets that we are going to have increasingly renewable, and therefore variable, generation on the system. In order to do that, we have to consider—in market design terms—how to ensure that the signals are there for those assets to operate when they are able to generate and that the flexible technologies, such as battery storage, exist to respond to deal with variability in the system.

I do not think that any of the markets will be radically removed or that new markets will be created. It is more a case of a transformation of current markets to ensure that they work for highly renewable, and therefore variable, generation.

Therefore, with regard to the network operator’s business plan, how would, say, targets for onshore wind generation of 12GW and targets for solar generation impact on that? What will change on the ground, in practical terms?

Let us take the example of offshore and onshore wind at the transmission level. The electricity system operator’s first iteration of the holistic network design was published last year, and it told us, “Here is the network infrastructure that we need to get to 50GW of offshore wind generation by 2030.” That is the first step in that process—it is basically your low-regrets investment. Further iterations of that will follow. I think that the existing electricity system operator will publish HND 2 this summer. That will look at 25GW from ScotWind and floating offshore wind generation in Wales. It will also look at what additional network infrastructure requirements we need.

We have tasked the system operator with producing what we call the centralised strategic network plan, which will be published in 2025. It will look holistically at onshore and offshore targets across the whole of GB and ask what infrastructure we need to deliver those, including any aspirations and targets that the Scottish Government sets out. Therefore, that is the situation at transmission level, to use industry speak.

When it comes to solar generation, for example, that might connect into the transmission system, but a lot of it is likely to come through in the distribution network. We see that coming through the distribution future energy scenarios, which, in turn, inform the business planning process for the distribution network operators in Scotland—Scottish Power Energy Networks and Scottish and Southern Electricity Networks—which factor that into their investment planning over the regulatory periods.

I will bring you back in later, Mark, but the next questions come from Jackie Dunbar.

Good morning. What role does Ofgem play in developing and regulating hydrogen markets? What work has been done on that to date?

I can pick that up. With regard to hydrogen, we are still awaiting many of the business models from the UK Government to deploy hydrogen production and hydrogen storage. Ofgem’s role is to ensure that the markets and market design will work. We have a market for natural gas. Do we need to transition to a system where we are able to buy and sell that hydrogen? At present, it will be a mechanism through which we have facilities that can produce hydrogen and we have end users, such as industry, which require that hydrogen to decarbonise their processes.

With regard to Ofgem’s role to date, there has not been a specific requirement to develop the market because it is an industry that has been stimulated through UK Government mechanisms. However, over time, we will have to be ready for whatever form that hydrogen market takes, whether it is specifically between buyers and sellers or is a bigger traded market that is dealt with in the same way as natural gas.

Whose responsibility is it to develop the regulatory regime for hydrogen storage, either onshore or geologically, and what role would you have in that?

In general, it is our responsibility to ensure that we have the right regulatory regime in place and the right regulatory environment across all the technologies for which we are responsible. Some of them are established and some of them are new and emerging, but we see that as our responsibility.

When new technologies emerge, as Jack Presley Abbott set out, we have to work closely with Government just to understand the market arrangements that are in place around some of the commercial drivers that will determine whether those technologies will be successful. We can then ensure that we can build them, like our regulation, into the system planning. That will ultimately allow us, irrespective of where those technologies materialise, to make sure that we have the infrastructure in place to support them.

I will push on that a wee bit. We heard in last week’s evidence session that the storage of hydrogen will become critical to ensuring the supply in future. It is not a just-in-time situation; hydrogen is something that we will have to store. Will Ofgem have to develop future resources to make sure that that storage becomes available? Without that, hydrogen will not be a fuel that will be of huge use to us.

Absolutely. That applies across the board—we have to put our resources where they are needed. The Climate Change Committee report that was published earlier this month gave us a good feel for putting more flesh on the bones of what the mix of generation will look like in 2030 and 2035. The dominant factor there is onshore and offshore wind, but hydrogen is a big part of that as well. The CCC has set out how we expect those to complement one another, particularly in Scotland, given the natural resources that we have. We will definitely make sure that we are resourced to have the right regulatory arrangements in place for hydrogen over time, because it is emerging.

Good morning. I will touch on Ofgem and energy markets. I know that the UK Energy Bill is going through the House of Lords, and there is a provision in it that we establish a future systems operator. What impact does Ofgem believe that the establishment of a future systems operator will have on whole-energy-system planning? What skills, experience and authority will the FSO have that existing agencies and system operators do not?

We are very involved with the FSO work at the moment, and we and the UK Government are incredibly supportive of it.

We have talked about adapting our regulation. You will see a big shift in the landscape in terms of the institutional and governance arrangements. The single biggest issue for us is that, if there is an FSO that is responsible for whole-system planning, it will be charged with looking at the GB energy system as a whole and asking, “What is the right mix of generation? Where will we see production over time? What impact will that have on how we orchestrate the system?” A lot of responsibility will sit with the FSO.

We have consulted recently on what our future model of economic regulation of the network should look like. We have had a very successful model since privatisation, but that, like everything else, needs to adapt and evolve. The emergence of whole-system planning gives us a big opportunity; it can become the bedrock for network planning. If the FSO acts as a co-ordinating body across the networks that says what we need to build, where we need it and by when, that will give us a lot more certainty on the decisions that we need to take. Our role might reduce slightly. That is not guaranteed—there are different models over time—but the FSO will certainly have a prominent role.

The same will potentially happen at distribution level. A lot of the decisions that we have to take on net zero will be taken at a regional and local level, particularly around the electrification of heat and transport. Can we do the same thing at a regional level? That is further back in our thinking, but we are consulting on that at the moment, particularly around the emergence of new regional system planners. Can the FSO create a whole-system plan at a particular geographic level that reflects those network needs, the associated demand and the available opportunities? There are two parts to that.

The fact that the gas and electricity systems are being brought together under one independent entity will give the FSO assurance and the ability to give proper strategic advice to regulators and the Government.

How will the electricity networks commissioner interact with and add value to the work of Ofgem and the FSO, and vice versa? Is there a risk that regulation and forward planning will become crowded and a bit fussy?

On your second question, I think that the idea is that we try to simplify the landscape as much as possible. I know that that is an objective for the UK Government. We have the work that is on-going; I cannot remember the chap’s name—

It is Nick Winser.

Yes. The work that Nick Winser is doing is expected to report in the not-too-distant future, and I think that it is likely to set out a series of recommendations on what Ofgem should do over time and how our model of regulation needs to adapt. He is looking at some of the big strategic challenges that we are facing with network congestion and the time that it takes to get a connection into the grid. We are working closely with the UK Government on that piece of work, and we look forward to seeing what the implications are.

Generally speaking, I think that there is an opportunity to simplify the landscape as much as possible. Everybody is laser focused on getting to a net zero energy system as quickly and efficiently as we can.

Do you want to comment on that, Jack?

No.

Okay. I have finished my questions, convener.

Okay. Thank you. We will go back to Mark Ruskell.

There has been a lot of focus on trying to decouple the gas price from the renewable electricity price. What are your thoughts on the review of electricity market arrangements, or REMA—the market access review? Are the proposals workable? Do the current market access arrangements have particular pros and cons? It will be helpful if you can explore that a bit.

The review of electricity market arrangements is very welcome. As I alluded to earlier, the scale of the challenge and the fact that we are going to have a largely decarbonised power system with huge amounts of renewables on the system mean that we need to take a good look at the market arrangements to ensure that they are fit for purpose for that energy mix.

The review, which is UK Government led, is looking at different elements, and I think that they are the right ones. How do we deploy mass low carbon at the lowest cost, but in a way that does not impact on the system from an operational perspective? How do we ensure security of supply when the assets are low carbon? At present, much of our security of supply is delivered by fossil fuels. How do we deliver the flexibility that we need when there are lulls in renewable generation? Finally—this is where we have been putting our focus—are the arrangements appropriate in the wholesale market where we buy and sell wholesale electricity? Will they work in a largely decarbonised system?

Ofgem has seen real value in assessing whether there is a need for more locational signals in the wholesale market to indicate to parties that they can site in the optimal location for the system, taking into account the network and demand, and then be used on the system in the most efficient way. We have been undertaking a lot of analysis of that. We need to consider the cost benefit case and the trade-offs that will apply if we introduce what is a very significant change to the market arrangements. We have been working through that. The work is on-going, but we intend to feed it into the REMA process and publish it more broadly.

It is a question of focusing on the right areas. We believe that there is a case for making sure that there are better and more granular signals, to ensure that parties use the system as efficiently as possible and that they can deploy in the right places and at the right times.

We move on to questions from Liam Kerr.

Good morning, panel. It has been suggested that Ofgem has an ambiguous relationship with net zero. There are proposals in a recent UK Government white paper to amend your statutory duties to include a specific reference to net zero. Do you have a view on that, Steven? What would expressly changing Ofgem’s statutory duty to include achieving net zero mean in relation to the regulation and design of markets and networks?

10:00  

That is a good question, and it is something that is often talked about. We work under a statutory remit that is set by the UK Government, which is to protect existing and future customers. We interpret that responsibility towards future customers as including achieving the net zero targets that are set by the Government.

I do not think that having a net zero objective would make a practical difference to us, because, ultimately, we are already doing the things that we think we need to do to deliver net zero. There is a chance that, through the consultation on the upcoming strategy and policy statement, we may be given an explicit duty around net zero or there will be other clarifications of our role. However, in practice, I do not think that our role will change that much, because we are already doing the sort of stuff that is implied by such an obligation.

You can keep going, Liam. I will bring in Fiona Hyslop to ask some questions at the end.

Thank you, convener.

The Climate Change Committee has said that we need to ramp up transmission infrastructure massively. As I understand it, Ofgem sets price controls for SPEN and SSEN, which regulate how much can be spent on investment and infrastructure. Your submission says that, on at least one metric, those two companies asked for 17 per cent more for EDT2 than they were actually given. Given all of that, how will Ofgem ensure that the next transmission and distribution network price control periods—those post-2026 and post-2028—will deliver the investment and redesign of the network that we need?

We are currently consulting. As you say, we have set the last of the RIIO-2 generation of price controls—the new one for electricity distribution starts on Saturday 1 April. You alluded to some of those figures. I think that that represents the overall challenge against the submitted costs by the distribution network operators and the individual SP energy networks, or SSE for the Scottish licensed areas. That is us making sure that they are delivering efficiently and in the best interests of their customers.

If you take a step back, the RIIO model of regulation that we have had in place since 2013 has really evolved over time. They are very agile and adaptive price controls. Yes, it is right to have an ex ante set funding settlement for the companies, so that we can say, “Here is the amount of money that we are confident that we can set up front and that you can charge your customers in return, and here is the level of network service quality that has to go alongside that. Here are the challenges that we are setting for your cost efficiency.” However, increasingly, we now have in-period uncertainty mechanisms. There may have been some discussion of that in the evidence session that you had last week. Those mechanisms allow us to adapt investment over time so as to track the changes in the economy because there may be new requirements for the transmission network or the distribution network.

That is good for the companies, because it gives them a route to funding in-period, and it is good for customers, because it avoids mis-targeted, inefficient or unnecessary investment up front. That adaptability and knowledge that we can evolve over time gives us comfort, here and now, that we can address the net zero targets. On the transmission side, the accelerated strategic transmission investment programme is a great example: last year, there was an additional £20 billion of network investment on the transmission grids, to give us what we need to deliver the 50GW of offshore wind by 2030.

We are constantly evolving the price controls over time. There is quite a big discussion at the moment of what happens beyond 2026 and 2028. Do we need to do things differently? Quite possibly, yes. To go back to the previous question about the system architecture and what it looks like, institutions and governance are evolving, so our price controller regulation of the networks should evolve over time, too. We do not have a set solution for that—it is subject to consultation. However, one thing that we can say is that it will be adaptable, to allow us to meet the net zero targets.

Thank you.

My colleague Liam Kerr mentioned the CCC report—witnesses did, too—and I want to come back to that report on delivering a reliable, decarbonised power system. The report suggests that a step change in the delivery of transmission infrastructure is necessary in order to meet both UK and Scottish Government targets for renewable generation. I want to explore in more detail what you see as the main practical constraints that Ofgem faces. You have mentioned a few examples already, but what are the main challenges? Can you give us more clarity about what needs to be put in place to support such an increase in deployment, which everyone wants to see?

I am happy to start off. For us, there are a number of big challenges. At the moment, there is quite a lot of coverage of network congestion, so we face system balancing costs in GB. There is a related problem with connection queues, which is queues to get connection into the grid. We can influence that through our regulation—we have the ability to accelerate the network expansion. Alongside that, we can look at what can be done to reform the connections policy. Those approaches are more within our gift, working with the network companies and with Government.

Aside from that, we probably need to see two big things happening over time. One is around planning and consenting, which I think the committee heard some evidence on in its earlier session. We need Government to be getting on with planning and consenting, so that that issue is not holding us back from delivering the infrastructure. The other thing is around the network companies getting on top of their procurement and management of the supply chains.

We need the right regulations in place, the right market arrangements—as Jack Presley Abbott described earlier—and an enabling environment in terms of planning and consents and companies managing supply chain issues. If all those things come together in concert, we can meet the sorts of challenges that are set out in the CCC’s report.

You mentioned a couple of things—planning and consents and the network companies themselves and procurement—as being the issues. I am trying to understand those so-called blockers and how we can unblock these systems. What is the issue? Is it a lack of people? Is it a personnel issue? Is it a skills issue? Has Ofgem done any work to look at the skills mix across the sector? I am just trying to understand it when people say that these are the things that are slowing things down. Are you looking for less regulation, or is there something in there about the number of people and the skills that they have?

It is probably a mix of everything. When you think about it, they sound like very simple problems to overcome. For example, from the outside, you might think, “Well, all planning is devolved in Scotland, so it must be a matter for the Scottish Government,” but there are some subtleties in how it works in practice. The interaction with the Electricity Act 1989 makes it more complicated, although we know that the Scottish and UK Governments are working quickly to resolve that.

When you need the amount of infrastructure that we need, putting it in place will have an impact on communities across the country, and we need to be able to bring them with us. We know that there is probably no alternative to low-carbon infrastructure. We need more wires and cables, and putting them in can have a disruptive impact. It is probably incumbent on all of us who are involved to work with the regional and local authorities to bring communities through, listening to their concerns and responding to them, and to ensure that there truly are community benefits and lasting benefits from the work.

Do you have a view on whether national planning framework 4 will help with any of this, or do you feel that planning needs to be a higher priority for Government nationally?

Generally speaking, I think that NPF4 is seen as pretty world leading—it is certainly leading in a European context—and the Scottish Government has to be applauded for the work that it has done on that. On whether it is enough, I am not sure that we, as a regulator, are best placed to advise on that. However, as the committee heard from a panel last week, further improvements can be made around it.

On the procurement and supply chain issues, the challenge is that a number of countries, including the United States and countries in mainland Europe, are also moving at pace, so there can sometimes be physical constraints on the market’s ability to respond. There is long-term procurement in countries such as Germany and the Netherlands. For us, the issue is also what the networks can do to make investment in them attractive. Should they take forward long-term, bundled procurement strategies to make sure that they are getting supply chain involvement?

There is the issue of people and skills, as well. Depending on which number you believe, between 250,000 and 500,000 additional skilled workers might be needed in the industry across GB, so there is huge potential. I think that the Scottish Government has agencies in Scotland, and there are the universities and the colleges. A mobilisation needs to happen to make sure that we have the right people coming through with the skills that we need to deliver all of this.

Does Jack want to add anything?

I can speak about the connections queue, which is a challenge. We build a network to connect the parties that are in the queue. We have allowed people to connect prior to the entire network having been built, which has been a success. As a result of that, as well as the sheer investment that is proposed because of net zero, there are plans for a huge amount of assets to connect to the grid. That means that we have to ask, “We have those parties in the queue; which of them will realistically deliver?” If we identify parties that are not progressing at the speed that we want them to or projects that are not viable, those need to be removed from the queue as quickly as possible, because they are blocking others’ progress.

We operate on a first come, first served basis, which means that, if you put in your connection application and get an offer, you must be connected before the project that is next in the queue. If a party is not progressing, it is blocking others that are in the queue, so we look at whether we can speed up the removal of non-viable projects. We also try to ensure that the network companies and the system operator are considering appropriate assumptions. If they assume that everything that is in front of a particular project in the queue has been built, they will be quoted a date that is uninvestable, because they must assume that all those parties are connected. If we use more realistic assumptions, we can bring those dates forward, assuming that we can remove any unviable projects from the queue.

I would like to move on. However, your point about viability is important. You mentioned the queue a couple of times. How long is that queue? I have read that some projects have been quoted a connection date of 2035. Does that sound about right?

It does sound about right for certain areas. The queue is not nationwide, but there are areas where some parties have been quoted that date. That is also the case for parties at a local level, because, if they trigger reinforcement work—

Our work is about removing non-viable projects in order to bring those dates forward.

Is 2035 the date that is furthest away, or are there any dates beyond that?

That is the furthest-away date that I have heard about, although there may be other cases.

Good luck in getting a quote for 2035. I suspect that that may prove difficult for connection to the grid.

The deputy convener, Fiona Hyslop, will now come in with some questions.

I think that we are getting to the nub of the issue and the concerns about it. Clearly, when there are queues, there is the potential for delays, for a number of reasons. Currently, because you have to create the conditions for a market investment, all the risk for grid delays lies with the developer and the generators. Is there anything that you can do to rebalance that? You imply that you would want to investigate the viability of some of the proposals. That is a shift from being an enabler to being—dare I say it?—a market interrogator. Is that what you are suggesting would lead to greater flexibility, adaptability and investment?

Does your question relate to those in the queue and the management of that queue?

Yes.

There are a few things that we can do, including introducing milestones for parties that are progressing their projects, so that, if they do not hit those milestones, they will be removed from the queue. We can do that sooner, although we are yet to approve that. That will keep the projects that are in the queue progressing towards delivery. Does that answer your question?

Yes, it does. On a market condition basis, that state involvement in the operation is interesting.

It is not the regulator. The regulator approves the milestones. The idea is that, for each milestone, you have to build the network to facilitate those assets getting access to the system. The regulator makes sure that, when the network companies need to start investing in a new substation, for example, they are increasingly confident that those projects will be developed. If they do not have confidence in that yet build the network and those projects do not go ahead, they will have spent money on a network that is not being utilised.

10:15  

Concerns have been raised with us that Ofgem is not as adaptable or as flexible as it needs to be. You have said that you have plans for the future, but why are you being so slow in mobilising the immense amount of investment that you have said is needed? Is it because you have not, in the past, allowed investment in anticipation of need? You have said that you are improving ASTI and so on, but what sort of trajectory are we talking about? After all, this will all have to accelerate at a rapid pace. How can people—and, indeed, investors—have confidence that Ofgem will be fit for purpose with regard to what we need for that expansion of renewable energy?

This is an important question, because the suggestion that our regulation prevents—or has prevented—investment ahead of need is just not true. Nothing in our rules or regulations prevents such investment.

Any network company under the licence is required to be economic, efficient and co-ordinated in how it delivers and discharges its responsibilities. It is entirely reasonable that, when someone installs assets with a 45-year lifespan, they should expect the obligation to cover the demand that is likely to materialise over time, so that they can size their intervention in response. It is for the companies to make that case—there is nothing in our regulation that prevents it.

If you were to push a company, it might well say that it is a behavioural thing and that Ofgem, as the regulator, has, in the past 10 to 15 years, been preoccupied with cost efficiency. In some ways, we have, and we will probably not apologise for that. Ultimately, all of these costs go into consumers’ bills, so we want to make sure that companies are efficient. However, we would certainly not stand in the way of a good case for making investment ahead of need.

Your reference to ASTI is a good one, because it represents investment ahead of need. Even before that, there was the green recovery programme that we announced in 2021, which amounted to £300 million across Great Britain and, I think, about £50 million in Scotland. Again, that was anticipatory investment at the distribution level, with support for more EVs, heat pumps and low-carbon generation. We have shown that that can be done.

Indeed, I would say unequivocally that the mindset of the regulators is that there is no option but to invest ahead of need. We are encouraging the networks to do so, but to do so efficiently.

However, with regard to your existing responsibilities, particularly to customers, the issue is the location of demand, and we have seen charging costs, especially transmission costs, increasing rapidly in Scotland. That sort of thing leads to uncertainty, which we know business does not like when it comes to making the immense amounts of investment that you have referred to. Can something be done to send out clear, positive signals for investment? Is the dichotomy that has existed to date going to change in the future?

Jack Presley Abbott is probably more of an expert on charging reforms, but, generally speaking, I would say yes. As a matter of principle, we have to look across the full range of our regulation. Do the network regulation, the charging arrangements and the other things that might have held true in the past still hold true for the future? After all, we are likely to have a very different energy system.

Traditionally, more rural projects involve two big costs: the actual cost of the investment itself and the costs of connecting it into the grid. The further you are from demand, the higher the cost to the network of transporting that electricity. There is a trade-off in that respect. As has been said in past debates on charging arrangements, if you want generators to pay less, consumers have to pay more. It is a zero-sum game, and there is a trade-off that has to be assessed.

In short, the issue is under review, but I do not know whether Jack Presley Abbott wants to pick up on the detail.

I should start by saying that the transmission charges are for recovering the cost of the transmission network.

We are looking at the transmission charging issue from two angles. First, we are, in the interim, looking at whether the assumptions that we are using are based on the system as it is today rather than the transmission charging regime as it was when it was set up. As a result, we are working through the transmission network use of system—or TNUOS—task force to ensure that the assumptions that we are using to calculate the charges not only are accurate and provide cost-reflective signals, but give a level of stability that will allow parties to invest.

Secondly, as we have already mentioned, the review of electricity market arrangements considers the purpose of transmission charging in a changed electricity market. That is a separate piece of work, although the two are co-ordinated. We are thinking further about whether we want transmission charging to be sending a signal when we have a different market arrangement.

There is clearly a mismatch, bearing in mind that, as far as we are aware, Scotland has the most expensive transmission costs in Europe, and that—thinking about your responsibility for customer pricing, too—we also have some of the most severe fuel poverty among our energy customers. We are able to generate so much renewable energy precisely because of the rural nature of our geography and the offshore and coastal lines that harness the wind. I think that the mismatch is caused by the speed at which decisions are made. When will the pieces of work that you have mentioned emerge so as to change that policy and give more certainty for investment?

I will then ask a final question, if that is okay, convener.

Over the winter, we had to reprioritise our work. The transmission network use of system task force is restarting next month. It had already started—it is not a new project—and by working at pace we have resourced it appropriately to ensure that we can put changes in place to improve the current framework, with incremental improvements in cost effectiveness and stability over 2024 and 2025.

The longer-term design of those aspects is linked to the review of electricity market arrangements, which is due in 2030. Because of the importance of those charges, there are two co-ordinated but separate pieces of work. The first is to ensure that we give the near-term signals that parties can still keep investing. The second is to ensure that, in the longer term, those signals are appropriate, so that we are not giving conflicting signals when we potentially have a changed and reformed electricity market. I clarify that we are doing those two pieces of work. They are co-ordinated, but we need to have the two because of the near-term importance of that charging and the importance of coherence in the long term.

Finally, how does Ofgem plan to ensure that the electricity distribution network is ready for the anticipated increases in demand, particularly for heat and for transport and electrification? How are you planning for the potential reduction in demand for the gas distribution network?

If I may, I will address the previous issue about the TNUOS charges. It is a fact that Scottish consumers pay the lowest transmission charges anywhere in Great Britain. It is perhaps when we look at the generator side that the picture looks different.

On the distribution network, we have just settled the new regulatory price control for electricity distribution: as I said, that starts on Saturday. At the start, its big strategic objective will be to ensure that the distribution networks are ready to deliver net zero. That is where many of the anticipatory investments come in for EV charging and heat pumps. We have done a couple of things there. One is basically to double the annual investment that is made in network upgrades and the distribution sector—that is a really sizeable increase across all the DNOs, including the two Scottish licensees.

To go back to a point that was made earlier, we have agile funding mechanisms in place so that, if demand materialises faster than we expect, the investment can track that. Most of the big challenges that we might have at lower voltage levels have automatic uncertainty mechanisms in place, so there will not be an administrative role for Ofgem up front. We have a unit cost and then, if more work is needed, the funding can match that. Those mechanisms ensure that the networks will be prepared to deliver net zero.

One of the big questions is what the role of the gas networks will be. We do not yet have all the answers to that. We still await some of the Government’s policies on the future of heat. At the moment, we have an asset that has to be managed, but there are big safety issues. We have to operate, renew and replace the infrastructure. The existing gas price controls run until 2026. As I said, we are currently consulting on the regulatory arrangements beyond that, and will take a longer-term view on what the requirements of that gas network might be.

Mark Ruskell wanted to come back with a brief question.

On the TNUOS review, is it accepted that the locational signals need to change? As far as I can see, the aim with locational signalling at the moment is to build as much generation as possible as close as possible to the theoretical centre of the GB energy market, which I think is Warwick. Last time I looked, building renewable energy close to Warwick was not going to produce as big an efficiency and load factor as building renewables in Scotland. We get more energy out of wind farms in Scotland than we would in the midlands of England. Is it recognised that locational signals need to change now through TNUOS, and that we need to be accessing and developing the resource where it is?

As you have said, having a central point is one of the underpinning assumptions that we want to be accurate in order to calculate the transmission charges. We want to ensure that the charges are cost effective for today’s system, rather than for a presumed historical centre. We need to balance the need to have a cost-reflective, really accurate signal with the ability for parties to know what the signal is and the stability of that signal. That is why we are convening industry experts to find that balance between stability and cost reflectivity.

The role of the charges is to recover the costs of the transmission network. It is a zero-sum game: we have to recover those costs. As for whether locational signalling should change, we are considering more incremental improvements in the nearer term, for the 2024-25 changes. In the longer term, there is a question about whether those signals need to be completely different or whether no signal should be sent at all through transmission charging. However, the crux of the issue is that we still need to recover the cost of the network through the signals.

Does that answer your question?

Yes.

I wish to come back on some of the earlier questions—which I thought were interesting—on the timescales and processes. I recently visited a big company that has some really exciting plans on building renewables and infrastructure, but it is restricted or inhibited in doing that. Its representatives told me that the company needs to apply for the grid connection many years in advance—a grid connection that it will start paying for in advance of actually putting electricity into the grid.

Once the company has gone through that, it then needs to get planning; then it needs to get the kit; and then it will need to get the skills to fit it. Once that is all stacked up—that is, if we accept that the process, the timescale and the up-front investment will potentially restrict innovation and development, or at least limit that to very large companies that can go through all of that—the question becomes one of what precisely needs to change in Scotland and which agency or body in Scotland needs to lead that change to encourage the step change in renewables investment that we all want to see.

I do not think that the responsibility sits with any individual party. We need the whole system—Government, regulator and industry—all working in concert to achieve that. We all have our different bits of the system that we are responsible for, and everything needs to be properly lined up.

Regarding the connection challenges that we have at the moment, a big change came in 2010. Prior to 2010, if someone wanted to connect renewables, the grid capacity had to exist at that point. In 2010, that changed, and it was more about connect and manage. The focus was to make the connection in the short term, and then to deal with the network implications over time. That model had a lot of success, because there was significant growth in renewables generation. The challenge now lies in the scale of that as it comes through.

The network investment is effectively playing catch-up, and that goes back to the fundamental point that we need strategic investment, or rather a strategic expansion of the grid, so that, when the developer of a wind farm or whatever form of generation wants to connect in, there is something available. That probably goes alongside some of the reforms that Jack Presley Abbott has been talking about. Perhaps he would like to pick up on some of the detail.

On connections?

Yes.

10:30  

We still need to do all those steps—the planning, the grid connection and the procurement of the equipment. The question is just whether the process could be more streamlined.

I have spoken about grid connections recently. As I have said, if a party is looking to connect today, it is behind all the other parties in the queue that have already applied to connect. Again, it is about whether those parties further up the queue will deliver, and, if not, how we remove them as quickly as possible. If parties are ready, even though they are behind others in the queue, could we, in some way, expedite delivery of their connection without causing detriment to the others in the queue?

We just need to think a bit more agilely about how we manage those connections. At the moment, it is first come, first served—we just go through the process in an orderly way. The question is whether the networks and the system operator could manage that process more agilely, with support from us, to deliver those assets more quickly by parties that are ready today.

Thank you.

Thanks, Liam.

I have been quiet but I will now ask a question at the end.

We have seen the length of time that it took to build the Beauly to Denny power line, and I have watched the building of the substations at Beauly and Blackhillock—which are getting bigger and bigger—and seen the problems caused to, and the consternation of, local people who live near them or see them.

Would the correct signal be to transmit that energy as hydrogen in underground pipe networks, which seem to require less infrastructure and are less of a scar on the landscape? Should everyone put out that signal, or is that too simplistic?

That is a good question. It is not economically viable to have all electricity infrastructure running underground—the cost would be prohibitive. Also, we probably do not have the confidence at the moment to rely purely on hydrogen. However, hydrogen certainly has a role to play. It is about looking at things in totality. The question is what the system needs for reliable and proven operability to deliver that net zero system.

There could be opportunities, especially with regard to the future of gas networks, which could potentially be converted into hydrogen networks over time. A lot of innovation work is going on around that, in which we explore whether it can be done, and done safely and viably. We keep an open mind around those questions.

We have an electrified system that will increasingly become electrified. As Steven has said, there is a role for hydrogen—especially in hard-to-decarbonise sectors and, potentially, in other roles, such as managing the power system. However, we need to remember that an efficiency drop takes place when converting electricity to hydrogen. Every time you convert electricity to hydrogen and back to electricity, you lose some of that useful power. We should use hydrogen when we need it, but we need to balance that efficiency and those losses against the point that, if we just need the electricity, we want to get it from one point to the other.

You are right, Jack. There are transmission losses, too, as you generate and move electricity around the countryside on power lines. However, I understand the difficulties of putting a 400kV line underground—we discussed that point in relation to the Beauly to Denny line. It is possible, and things are moving forward, but just because you have what you have does not mean that it is right for the future.

On that note, I suspend the meeting for five minutes to allow a change-over of witnesses. Thank you very much for attending.

10:33 Meeting suspended.  

10:41 On resuming—