Strategic Issues Vision

is no clear direction for the future development of their industry (Annex Four). As detailed in this thesis, many commentators and analysts expect an increased contribution from small scale, decentralised, low carbon generating technologies and an expansion of some larger scale renewables such as offshore wind and biomass. If this long-term vision is to be realised, there is a need to supplement the current perspective of five to seven years, and to allow longer time horizons for strategic planning.

Over the next few decades, certain technology trends may bring geographical generation and demand patterns into balance. For instance, as detailed in Chapter 5, embedded generation tends to be more or less evenly distributed across the country. Thus, a high market penetration for fuel cells, micro-CHP and CHP district-heating systems would bring electricity generation adjacent to where it is consumed in all areas of the country through the transmission of their fuel source by the existing natural gas pipeline infrastructure. However, other technologies may maintain or even increase the need for bulk electricity transfers. Renewable energy resources, such as wind and wave power, are most abundant in the north and west of the country while demand is highest in the south and east. Rural agricultural or forestry fuel sources are required for biomass power stations. Proposed interconnection expansion may allow access to new hydro, wind and geothermal resources (ETSU, 2001).

Electricity network issues could be made more explicit in Government energy policy

considerations, e.g. security of supply concerns. There are real issues that need addressing and the ESI stakeholders need to recognise the reality of obstacles, challenges, problems and each others positions. Sharing and pooling resources across the industry to address key issues is an essential response to the demands and issues evident in the liberalised ESI.

There remains a tension between free market principles and the desire for long term planning and co-ordination. Market based governance systems are emerging in a variety of forms, but all require that individuals play a greater role, and that governments relinquish actions to markets where feasible (Weinberg, 2001). Any long-term vision must take account of dichotomy between central planning and liberalised markets.

Government and policy makers need to develop a vision of the long term (2050), define desired outcomes and to construct the regulatory and financial incentives required to achieve them. The management of transmission and distribution networks involves 30-40 year investment and infrastructure decisions, set against short-term transitional electricity

generation markets. The difficulty in aligning the two is apparent. The current Energy Review, due to report by the end of 2001, provides the opportunity to develop a vision of what electricity networks will do and be like in the future and how users may be charged for access to them. The development of a coherent structure and forum across industry and government to facilitate such a transition is therefore important (EGWG, 2001). Regulation and Charging

Long term transmission and distribution network planning and investments run counter to the shorter term generation investments. Certainty of the regulatory regime is another critical factor influencing investor decisions. Reviewing industry price controls every five years provide a short-term outlook for long-term asset and investment decisions. The Group Review agreed that a five-year regulatory framework is not appropriate for 30-40 year assets (Annex Four). That said, one of the projected characteristics of decentralised, small-scale generation technologies electricity is that they do not require such long term planning nor involve large capital investments. The question remains, however, how to regulate without knowing what your end goal is?

One approach to delivering joined-up policy goals and addressing uncertainty as to future policy and regulatory changes is to move to ‘Performance Based Regulation’ (PBR). Beyond simply setting performance standards (see Section 4.3) and penalising for non- compliance, this would provide a positive incentive for DNOs by linking revenues to performance measures - customer value through fewer interruptions, stable voltages, speedy response to queries or requests for work or connection, low accident rates etc - rather than the size of the capital asset base.

Many have observed, including EGWG, that the regulatory regime based on asset value is inappropriate for meeting environmental and social objectives (EGWG, 2001). “The

primary drive within the restructured England and Wales electricity system has been for economic efficiency (through competition); with much less concern being placed on the social obligations of equity and security of supply” (Amin, 2000). PBR would remove the

DNO guarantee of a return on capital investments, and provide incentives for them to reach high levels of performance at lowest cost. This may therefore encourage novel forms of system support, including embedded generation, provided such alternatives were cheaper than infrastructure investments.

Presently, 2% of DNO’s income is based on performance criteria. It is thought that a move beyond 20% is needed to ensure that the incentives for embedded generation are in place (Fabian Society, 2001). PBR could be introduced at the next Distribution Price Control

Review in 2005. EGWG and others have suggested that there appears sufficient

justification to start the ball rolling and to consider introducing appropriate measures as soon as is possible prior to the full review in 2005 (EGWG, 2001).

While networks need to develop to allow flexibility, present distribution networks are on the whole, simple and passive. The need for clearer price structures and signals to drive change is evident. One of the key regulatory issues identified by EGWG is how embedded generators are charged for access and use of the distribution and transmission networks is a very complex area. Although discussed in more detail later in this chapter, at this point it is important to note that consistent and long term charging structures need to be

established. Issues must be prioritised, focussing initially on how DNOs charge for services. Incentives and profits of DNOs must also be considered.

Skills and Innovation

Skill shortages were highlighted in the ‘Group Review’ (Annex Four) as being of great concern with only four British universities offering power engineering courses. The decentralised electricity system would increasingly demand such skills and the

Government, industry and academia must develop appropriate incentives and information provision to bridge this potential skills shortage

Research and Development (R & D) has been noted as another area for concern (Group Review, 2001 and RCEP, 2000). DNOs are the major group who must define R & D requirements yet appear reluctant to pursue embedded generation as an option. ETSU concluded that the requirements for R & D have been clouded by the commercial and regulatory frameworks. Companies in the UK have technology under development that could enable embedded generation to play a more significant role in helping the DNOs operate a safe and cost effective network. However, without clear indications of interest from DNOs these technology providers are reluctant to invest in developing potential solutions (ETSU, 2001). Some government funded R & D is available through the Engineering and Physical Science Research Council ‘New and Renewable Energy Programme’ which includes elements related to electricity networks.

6.2 Commercial and Market Issues