Welcome to this morning’s session of the Energy Security and Net Zero Select Committee and our session on reviewing the electricity market. Welcome to panel one. Please introduce yourselves, starting with Rachel Fletcher.

Good morning, everyone. I am Rachel Fletcher. I am the Regulation Director for Octopus Energy.

Good morning. I am Lawrence Slade. I am Chief Executive of the Energy Networks Association.

Good morning. I am Steve Smith. I am Chief Strategy and UK External Affairs Officer for National Grid.

I am Scott Somerville, Director of External Affairs at E.ON.

Thank you all very much for joining us. We look forward to your evidence. I will start with some questions on assessing constraint costs, their causes, consumer impacts, and mitigation measures. Lawrence, what is the right balance between a system without constraints, but which is inefficient, and the system we have now, where the number of constraints is too high? While you are telling us the answer to the perfect solution, can you also say who the Government should make responsible for delivering it?

The first point I would make there is that even the most efficient system anywhere will still have constraint costs. Constraint costs provide various signals, whether it be for investment in terms of expanding the grid or, just as importantly frankly, pricing signals for the need for flexibility in terms of how we manage the grid. That is the first important point that we make, that constraints need to be there. At the moment, the scale of constraint costs that we see going forward are too high, and that is providing the investment signals and the need for expanding the grid out, particularly bringing more power from north to south, as I am sure we will discuss during the course of the session. So, I think constraints need to be there. At the moment we need to concentrate a lot of investment into expanding the grid to bring power down. The need for flexibility is there, particularly at a local level in terms of how we are managing distribution networks, and we can explore that further in the session. The scale of flexibility is very positive, but there is a lot more that can be done at that local level to arrive there. Overall, though, it is a case of everyone working together to understand the best and most economical way that we can run the grid to provide an efficient and reliable service for our customers. That will particularly involve working with NESO and the local DSO service providers and, indeed, retailers and other flexibility providers to make sure we understand what is available.

Who should the Government make responsible?

I think, overall, you are looking at the system operator at that national level, and at local distribution operators, for how they are running the network in the most efficient manner.

A combination of NESO and the DNOs?

Yes.

Thank you. Scott, tell us about the evidence that is presented to us sometimes that it is these terrible renewables that are responsible for all the increases in bills, not least from constraint payments with the need to turn on gas generation. Is that right or is there another reason?

For us as a retailer, with nearly 6 million customers across the UK, we are always looking at it from that perspective. Too often the conversation is focused the other way around and may reflect the system that was built 50 or 60 years ago, which was starting at generation and working back to us as individuals or as businesses. To your question, Chair, it is not a piece around renewables, good or bad. It is around whether we are pulling every lever we possibly can. The opportunity we have is around energy flexibility, and that should be a test that is applied across the board. We started off with Lawrence’s answer around constraints and payments. There is an opportunity there for us to transfer value from a system level into those of consumers. I am sure we will get on to that later, but from some of the trials we have had, working with some network companies, some stuff on our own, working with charities and local authorities, if you can get, for example, batteries into people’s homes, you can use that to manage local constraints. If we can get more regionalised flex markets up and running, there is a possibility and an opportunity here. It is right that we look at constraint payments as a problem. They are, to an extent, an inevitability but what is not an inevitability is that it has to be a cost. It can create opportunity. We can reduce that demand when it is needed, batteries, algorithms, almost without sacrifice for people. I think the flipside as well is: let’s look at the opportunities for business and industry. At periods where there is an abundance of supply, can we encourage those facilities to make more use of that energy? Forgive me, Chair, I totally accept the premise of the question, but I think the opportunity is a bit more detailed in that, which is that customer flexibility is a real opportunity for us here and we do not give enough priority to that.

Yes. Say a bit more because you used the phrase that it is not renewables, good or bad. What does the cost breakdown show?

What we can certainly see is there are lots of forecasts around in terms of constraint payments and what that will mean to a household. What I would rather focus on in that respect and highlight is the opportunity. We had multiple trials, but one I will immediately dive into, for example, was with Northern Powergrid, where we worked on a firm flexibility model. Therefore, from a DNO perspective, it was good because it knew it could rely on those batteries. The batteries were there to be called upon for local constraints, but for people in low-income brackets and fuel poverty, what they received was a battery free of charge. They received a bill credit, so a regular payment, and then the opportunity to profit from that battery being there when it was not being used for DNO. Those people were seeing savings and bill credits between £280 and £500. What we see there is a benefit to homeowners, but we also see a benefit in terms of the ability to minimise—you need investment at an infrastructure level, we need to strengthen the network, but there is an opportunity to use these levers to minimise that bigger price tag, if you will. That was a partnership with Northern Powergrid that worked well. We reckon that if you scale that across the country, there is around £3 billion to £4 billion in savings that you could deliver against some of the upgrade costs. Again, it is not the answer. There is not a silver bullet to all this, but we have opportunities and we are not using them all at the moment. We are still approaching—

The savings to the consumer?

That is a total model. I will follow up in writing with the detail of the modelling, but there is a benefit across the piece if you use this Battery Boost pilot that we talked about to about £4 billion.

Who pays for the capital cost of the batteries?

There are lots of different models, where sometimes we will take the cost; there are others in battery trials we have had on products where we will work with people in fuel poverty and again we take the cost. There are lots of models. In this case, the Battery Boost project with Northern Powergrid, that was using its existing flexibility budgets because it was an answer to local grid constraint. By working across, essentially putting batteries in multiple people’s homes, you could create local control that avoided a bottleneck in the grid. That was working with Northern Powergrid. It was used from existing capital projects. The point here is there are lots of pots of funding around, but if we apply a flexibility first test to a lot of these pieces—and I would add that to the connections queue, which I know we will get on to—there is an opportunity to put flexibility first. We can start to transfer the value from the top of the energy system into customers and businesses. That is, I think, the revolution that we could see here through the transition. If we can make new energy work for everyone through that route, those savings and that benefit comes.

This is very interesting. Just so I have understood it, if lots of people are saving £3 billion to £4 billion, then presumably somebody else is losing £3 billion to £4 billion.

It is avoided cost. Again, I will come back to the Committee in writing with the detailed modelling behind this. Essentially, if you expanded this Battery Boost project that we ran in Crowle and Starbeck across the piece, what the modelling shows is that by avoiding unnecessary strengthening and upgrades, you can create a collective saving across the piece. This is money that is in the system. Can we transfer that value from the upper ends of the system into the hands of customers? It does not get away from investment you need to make higher up the chain. We need to change the transmission network. We need to upgrade networks. I will speak selfishly as a retailer. Speaking to our customers every day, your constituents seeing the bills, the challenge that businesses have with energy being unaffordable—and it is for too many—there are tools we can use, and I think the flexibility piece is where this will work.

Your suggestion is that this happens without affecting investment elsewhere in the system?

It is about whether we can change the perspective we are looking at. Yes, it is not additional. There are different ways to look at this challenge. In the same way that the Government have placed a priority on data centres and AI investment as a national priority, we would very much argue that flexibility needs to be a national strategic priority as well. At the end of the day, it is about transferring value from the “upper end” of the system and starting with customers. There are benefits to be had here, and we have to be careful. We sometimes talk about net zero; we talk about the energy transition as a concept, as an optional piece. This is a social policy tool that we can use to bring benefits. There are lots of projects. I will be quiet and let others speak, but the most powerful and exciting thing for me—I have been in energy for 15 years now—is being able to come to places like this and sit and talk about the difference we are making to people in poverty in Glasgow through putting batteries in their home, through giving them time of use tariffs. If we unleash that, not only does it bring benefit there, but it can also mean benefits throughout the rest of the system as well.

Before I move on to Polly, I will just ask Rachel to follow on from Scott. Do you think that the public’s understanding of the system, and in particular the constraints within the system, is good enough? If not, what should we be doing to improve understanding?

I don’t think the public should really have a deep or even a surface level understanding of something so technical. I think it is our responsibility, as industry participants and policymakers, to get a system that is efficient and delivers customers the cheapest electricity bills they can have. I am sorry to say that we are failing on that right now. Going back to your original question to Scott, last year constraint costs were £1.5 billion. Depending upon whose estimate and what scenario they are looking at, by 2030 that cost could be between £6 billion or £10 billion. Our own forecasts are that the impact on the customer bill, which for a typical customer is currently about £40 to £50, is likely to double just from constraint costs alone by the end of this decade. That is in the context where other costs are putting bills up as well. We are still very worried that consumers, like for like, are facing potentially a £100 increase in their electricity bill. That is what we need to be focusing on as we work through this complicated technical conversation about market reform. The cost of constraints effectively has two parts to it. One is paying wind farms not to run that had made commitments in the market, but whose volumes cannot reach demand because there is not sufficient network. The other part is paying to turn up other forms of power generation to fill that gap in the market. Typically, the turn-up is gas. Constraint costs—that £1.5 billion that I am talking about—around two thirds and maybe more of that was actually paying gas to fill the gap with a residual, the minority, being to pay wind typically not to run.

Yes. I suppose that goes to the question I asked you, which is about public understanding. If I am seeing £50 on my bill and I hear that this is to turn on gas, what conclusion do I draw as a customer who is, quite understandably, not technically advanced in my understanding?

We are promising customers a cheaper, more resilient system that is less exposed to geopolitical risk, on the back of a renewable investment strategy, but we are failing to put the market arrangements in place that deliver that to customers. We have not focused enough on how we resolve constraints without cementing our reliance on gas. That is not getting the focus that it needs in all this very complicated conversation about market reform. We need to be using gas less. As Scott has eloquently said, we are sitting with hundreds of thousands of assets that could be turning down instead of turning up gas. We have big batteries on the system. We have a system operator that is not making good use of those assets. The impact of this is not just about carbon and cost of resolving constraints. When the system operator uses gas to manage constraints, it has a knock-on effect in the wholesale price and the wholesale market, pushing up the wholesale market and continuing the interrelationship between gas and power prices that, rightly, this Government are so keen to break. So, a real laser-like focus on where we do have constraints can we please not use gas and let’s use all this clean flexibility that we have on the system instead.

Great. That is a very helpful scene set by the three of you. Polly, then Mike.

I want to follow up on that, to make sure that we have it on the record and quite clear from the whole panel that flexibility first would help us make electricity cheaper.

Definitely.

Can I have that from the other two?

Yes, I agree. Looking at our distribution networks, we all went back to the regulator and said we need to push harder on flexibility. The scenarios they were asking to plan for we felt were a bit too aggressive, so we would be in agreement—

A bit too aggressive meaning what?

The balance between using flexibility and investing in the network to meet the growing demand.

They said they wanted you to do more investment rather than do flexibility?

No, I think it is just about the balance of the two. We need to do both, but we said we think we can do more on flexibility and therefore that allows us to just push some of the investment out in time.

What was too aggressive about its approach?

The National Energy System Operator has four scenarios about how things might pan out. They were at the more aggressive end of the scenarios. We said we think we could push flex harder.

More aggressive meaning what?

More aggressive meaning the amount of investment we need to do in the next five years.

They were basically saying you need to do more grid strengthening than use flexibility? I am just wanting it for clarity and simplicity.

Yes.

Right. Lawrence?

I think we have shown over the last few years, particularly with the Open Networks programme since 2017, that flexibility has to be a fundamental part of what we do, but as Steve correctly says, it has to work—

That is not quite the same as what I am asking. Again and again, we have had witnesses come here and say that, if there is one thing we need to do to make the transition effective, it is to make electricity cheaper. I am trying to make sure that I understand what the role of flexibility is in making electricity cheaper.

It is a fundamental role, absolutely critical.

Okay. That is fine. Sorry if I am pushing you for simplicity. It helps with communications.

Not at all.

We also have the constraints management action plan. That is supposed to reduce costs over the next five to 10 years. Lawrence, do you think it will do?

I think if all the relevant parts can work together, it definitely should be delivering savings. However, as I have just said, we need all the measures outlined in that to be working together, particularly from the viewpoint of those that are in the constraints management action plan if it is actually going to deliver those savings.

If you had to prioritise them, what would be your priority?

From my point of view, and this plays to the last conversation, I think the flexible demand is certainly part of that and has to be right at or near the top of the list. While we will spend a lot of time talking about the importance of flexibility, given where we see things are going at transmission level and at distribution level, that has to work alongside the fast and effective buildout of new grid so we can carry power to where it is needed most effectively.

So it is flexible demand followed by buildout?

Yes.

Okay. Rachel, DESNZ is trialling cheaper or free electricity in constrained areas when there is surplus generation. Is that a sustainable way to reduce constraint costs?

I think it could be part of the solution. I understand that what DESNZ is talking about is a trial to take the levy costs off demand turn-up. Where consumers increase their demand to soak up excess wind and thereby reduce the amount of constraints, we agree that those turn-up actions should not attract a tax, because they are turning up in order to support the system. We are a little worried that this is a trial rather than the first stage towards making this happen. To us, removing levies from demand turn-up is a no-brainer. It should be happening. If we want to avoid this escalation of £1.5 billion to £8 billion through encouraging people to use electricity, we need to be taking those taxes off. On the question you asked Lawrence about the action plan, we think there are two fundamental problems. One is whether we can stop constraints in the first place, and we do that by making sure that flexible assets—and that is grid-scale batteries as well as consumer flex—all over the country have a clear understanding of what the physical reality and market conditions are in their area so that they can help out. The current arrangements and current proposals that we have seen do not go to that fundamental problem. What they are focusing on is, if we have constraints, what the most efficient way is of managing those constraints by the system operator after the event.

Rather than what?

Rather than preventing them from happening in the first place by appropriate use of flexible demand and batteries across the country.

Colleagues will be aware of my profound irritation at the idea that people should have to choose when they put their washing machines on in order to be able to get free electricity. I do not want to spend my time worrying about that, and I have money to spare. People who do not have money to spare already are probably the most engaged people in the energy market, and I want them to not have to worry about it. When we talk about giving people free electricity, surely we are talking about how the institutions that are most profoundly impacted by our energy costs are the ones that are not involved in having the energy cap, for example, which is businesses. What engagement is being done with businesses to ensure that they can help us to manage constraint costs rather than us having—forgive me—adverts with Tom Daley putting his pants in the washer on a Sunday evening, which I am just not interested in?

I have a lot of sympathy, by the way, for what you say. There are some customers who will—

Yes, fine, but they are a very small number, and they are not going to change the market.

Businesses have a business to run, right?

Yes.

This is where automation comes in, where companies like ours and others are able to do the heavy lifting for the customer, automate it for them, set it and forget it. They can override if they do not like how they set things up in the first place. For that to work, we need signals about where the system needs customers to turn up and where the system needs customers to turn down, which might be happening at the same time in different parts of the country. Dare I say it, zonal pricing would have provided that price signal, which is why we advocated for it so strongly. It would have optimised all this flexibility that we are increasing on the system.

You get a black mark every time you mention zonal pricing.

It was the title of the inquiry, with respect, Chair. If we are not going to go for that reform, we need to find second best ways of approximating for these signals, which is why we are saying that a lot of these constraint management proposals are playing around at the edges and not going to make a massive improvement in things. Instead, we need to move fast to get some regional clean flex markets up and running so that your businesses can have an automated service that allows them to capture the value from turning up or turning down that power.

The constraint management action plan will not do that?

Currently, it does not include that. There seem to be some new ideas that the system operator is considering since it published its last document, which we do not know the full details of. That might be a question to ask the system operator. As things stand, we think we could have regional markets that allow entities like ourselves to automate the provision of demand flex and bring the cost of the system down for everyone.

I want to ask Steve about the locational marginal pricing. DESNZ obviously rejected that. Does the constraints management action plan achieve the objectives that locational pricing was supposed to or was arguing for?

I think Rachel has already said much of what I would have said, so I am not going to get a black mark. That decision has been taken. Fundamentally, we need to have that laser focus on constraints. We have talked about flexibility and the role that can play. Rachel has talked about the urgency and focus we need on the market reforms to make sure that flexibility really is having its maximum impact. The thing we have not talked about, because we have talked about investment in the networks as well, is deployment of technology on the network. One of the other things we can do, which we are doing aggressively, is there are emerging technologies that simply allow us to squeeze more capacity out of the network we have. An example of that would be dynamic line rating. We have just agreed with Ofgem that after successful trials we will roll that out across our network. That on a good day enables us to push about 10% to 15% more power along our existing lines. There is no single solution. It is flexibility. It is the application of technology to our networks and then fundamentally it is building more capacity. We have been working with Government on being able to build capacity faster. Historically, big new transmission lines have taken upwards of nine years from conception to energisation. We set ourselves the task of halving that. With the planning reforms and other things that have gone through, we hope we can get those new lines in faster. As I said, it is investment, it is use of technology to get much more out of the network we have, and then it is flexibility.

I want to come back to what was discussed and then I will come on to my questions. NESO tells us that increased network build will have the single largest impact on affordability. You have just told us the reverse, that flexibility is the key. Does that mean NESO is wrong? Do we have an operator that has the wrong position on how we address costs?

I think it goes back to what I said. It is an order in time. Between us and the Scottish companies on the transmission side, it is the largest investment programme. It is the largest buildout of the grid since the 1950s, when it was first constructed. We are investing £40 billion over the next five years, but that is going to take time. If you ask me, “Is that going to have an impact in 2027, 2028?”, it is limited, because those lines start coming in 2028, 2029, 2030, 2031. I think NESO is right if you look over the next 10 years, but what we are all saying is there is huge opportunity in the next three or four years through technology on the grids and through flexibility to manage while we are waiting for that.

Does the operator perhaps have the wrong horizon it is looking to? It is looking to how we solve energy bills long term, 10, 15, 20 years ahead. We are concerned with how we sort people’s bills out in the next two years.

I think there is perhaps something there in the horizon, but I would also say that we have as an industry over the last 15 years undervalued the role that flexibility should play in creating an efficient system and lower bills for customers. Network costs are increasing above the rate of inflation. The cost of a battery, the cost of an electric vehicle, is falling like a stone and we have got ourselves locked into a way of thinking that thinks about big assets first and then on the margin plays around with flexibility in trials.

Investment flexibility, and batteries and EV are the prime example, increases our exposure to Chinese technologies and Chinese influence on our energy market. In terms of energy security, which is what our Committee looks at as well as the drive to net zero, is the drive on flexibility, more batteries, this flooding of Chinese EVs—we will see the flooding of Chinese HEVs into the market very soon—increasing our exposure to what is potentially a threat to UK security?

That is being properly managed, and we have appropriate controls in place to ensure that when we get hardware in, as we are with electric vehicles, that it is not creating a systemic risk for the country. There are other controls. We could be increasing our own battery technology development, for example. That issue aside, I think we have completely over-indexed on building big assets to get ourselves out of this situation and it is customers who are paying the price for this right now. Customer lack of support for net zero is being created as a result of these high prices.

So an incoming Prime Minister with a focus on reindustrialisation could be looking at the industrial sector of batteries and clean technology as a growth sector for security and cost reduction.

Absolutely.

Scott, you are nodding.

Yes, nodding in agreement. Picking up on the point of resilience, I think you are right and, as Rachel said, it is important that the right controls are in place around the hardware and the software that is used, but also that the distributed system has benefits in terms of security of supply as well. To your question, yes, I think there is a huge opportunity. One of the approaches we have very much taken in recent years through partnerships with Coventry, with Glasgow and work we do in Sheffield, just as three examples, is how you work with local authorities. How can you put more control in the hands of communities? This is where those grid constraints and the opportunity come together because you can drive growth through targeting areas. As I touched on earlier, I think there is an opportunity for flexibility to be a strategic priority. I think it is looking at how you transfer value into the hands of communities and businesses as an asset. We have talked about turning down demand and turning up demand. How can we incentivise that? There is money in the system through that constraints payment. Should that go to generators, or should that go to businesses and residents? That is the opportunity here. To an earlier but very much related point, if we were sat here three, four or five years ago, we would be talking about people changing their habits. There are people who want to do it. We have lots of customers, and we are very grateful for them, who want to work in that way, but it is a portion of our customer base, a portion of the country. The brilliant thing is what has changed—and you can see evidence of this from partners we have in Australia, you see it happening in the Netherlands where we have operations, but you see it today through a product we have called E.ON Next Optimise. It runs in the background. It is not that a few years down the line flexibility will be, to use the language, fit and forget. It is active, it is running, it is generating for people today. We have thousands of customers benefiting now. As you are asleep, your battery is working. That is important, I think, to resilience and these opportunities.

As I have a time limit and have not yet asked the questions on my page, I will move on to them now, as I have some on grid investment.

You have three more minutes.

What should be prioritised, transmission or distribution networks? I will start with you, Scott.

Flexibility. It is the first lever we should pull.

So, investment in transmission versus distribution network, Steve, as a DNO.

It is both, but it is heavily weighted towards transmission. That is what is in the plan for the next five years.

Is that the right thing?

Yes it is. What you need to remember is that our transmission network was built for a world of fossil fuel generation, so either the coal or gas plants, and the renewable resources are in fundamentally different parts of the country. There is some level of build required because flexibility has a huge role to play, but we cannot use flexibility where we have no assets. There is a need to increase the capacity of the system to move power crudely from Scotland through England into the midlands and the south.

I have 1,200 homes in Northampton ready to be built. National Grid cannot give a connection for three years. Is that because we have not invested in the transmission network?

No. Again, this is a common misconception. If you look at the next five years and our plan, our plan is to connect 35 GW of generation; it is to connect another 19 GW of demand. We are as focused on demand, and that is demand from everything from housing to new industrial load like batteries to data centres. It is focused as much on demand as it is on connecting up that generation.

Lawrence, a witness has argued that no further wind generation should be built in Scotland until transmission constraints to England are addressed. Do you agree?

I think the way that question had come through to me first was the other way around. The case here is to ensure, as Steve has said, that we halve the time that we can build transmission systems. The faster we can build the new lines from Scotland to get the power down to the south where it is needed, the better it will be. That is where the planning reforms, the Planning and Infrastructure Act, are starting to make a difference in the speed that we can do that. That is the critical factor in managing those constraint costs.

I just want to ask Rachel a follow-up from Mike’s question. Do you think DESNZ gets it about flexibility?

I think parts of DESNZ do, but it is a very—

Which bits?

It is a very complicated machine.

Which bits?

The team working on flexibility.

Okay. Bear in mind I have had engagement with DESNZ before and I feel your pain. Bearing in mind that everyone who is in a team fights for their bit, where does there need to be greater understanding about the importance of flexibility?

In the way that Government are thinking about markets and market reform—we are not focusing on getting gas off and flexibility on to the system—and in the way that we think about network investment, picking up on Mike’s question, yes, we need more transmission. Certainly, if we have a new wind farm in Shetland and no transmission network, we need a new transmission line. However, I am still sceptical about whether all the investment that we are, and NESO is, planning for the next decade or so would really be needed if we were properly using grid-scale batteries, for example, on the system. At distribution level, our distribution network average utilisation is around 15% in Britain. Yes, of course, where there is a big housing development we will need a new connection and that may very well mean that we need new upgrades on the distribution network. By and large, we should be expecting that a better use of flexible demand and batteries, including those behind the meter, can help to resolve load growth over the next few years at distribution level.

What do you guys experience with your relationship with DESNZ when it comes to flexibility?

There have been some positive steps across the whole system, not just on DESNZ but right across. We need to be careful we do not look for the simple solution every time. Flexibility is the right solution, but just as an example—and this is not denigrating them—a grid-scale battery is a very easy proposition in terms of capital. Where you have domestic batteries, it would come back to we must not rule those out because on paper it can look more complex but there are the right solutions, as we have talked about with our firm-flex Battery Boost trial. What we have to look at is where the maximum value is then being transferred to, and I think that is the piece. There are a lot of good conversations and a lot of progress, and I would echo some of Rachel’s comments, but I think that is the piece we need to make sure we are always looking at, where maximum value is going to be taken from this, and maybe not just looking for the easy answer first.

We are talking about DESNZ here, but it is also Ofgem, isn’t it? Is Ofgem as the regulator understanding the nature of the way that the market needs to change?

I think both of them do. If you go back to the original objectives of the reform programme, it was to deliver more affordable energy and remove the exposure to international gas prices. What we are telling you is that flexibility is one of the fastest ways you could have impact on that. All the right elements are in place. Maybe there just is not, as Rachel said, quite the laser focus on it to say this is something we should really be prioritising.

If we had a Secretary of State and a head of Ofgem who were just saying, “Make electricity cheaper and flexibility is the number one priority in order to be able to do that”, would that help?

I think it would.

Yes. Again, to be fair to the Government, they have clean flex targets in the Clean Power 2030 plan. They have appointed, I would say, a very effective commissioner for flexibility. We have a very detailed—I don’t know how many lines on a Gantt chart—road map, a lot of activity, not a lot to show for it just yet. I think the message is beginning to hit home and the Clean Power mission team, for example, is increasingly talking about the importance of flexibility in this transition programme. Just to give you a sense of how far away we are from using this valuable asset, our estimate is that there is about 13 GW of flexibility from domestic consumers alone. That is people with EVs typically. You could easily double that or more if you brought businesses into the equation. By 2030, if our adoption of EVs grows the way we are seeing it, that could be a 32 GW prize. Yet at the moment in the balancing market, which is where the system operator resolves constraints, they are using 30 MW of consumer flex. Half of that, by the way, comes from industrial consumers. They are using 15 MW out of a 13 GW potential. The potential here is massive and a number of us are saying it is just not getting the attention that it deserves.

Okay, I get that. I’m sorry, I’m going to have to move on because I have been far too nosy about that. On connections delays, Lawrence, you said that in January there were no concerns about connections being delivered in the reform queue. That is not quite how it worked out, was it?

No, and I am quite happy with the comment I made then. The issue that we have seen since then is that with any huge reform, and I think we would all agree it is massive reform that we are doing, once you actually start going through the details and, in this case, once you start looking at the engineering issues related to some of the projects coming through, the readiness of different projects within the queue, which is going to lead to the issues that we had. I think what we have seen over the past few months particularly is—to use the phrase of the day—a laser-like focus from NESO, from the transmission operators, from Ofgem and from DESNZ in solving that problem and getting the offers out there. I think the latest figures are something like 700 new offers have gone out now. Responses are coming back in for, I think, 28 GW of new connections.

Where do you think it went wrong?

It didn’t go wrong. It just took more time because it took longer to go through each of the areas, each of the—

Is it a lack of enthusiasm? Is it a lack of competence? Is it a lack of capacity? Is it a lack of capability?

We were trying to do an awful lot in a very short space of time and, quite sensibly, the pause button was pressed to make sure that when the offers go out, the system, the electricity engineering that sits behind it, have been checked and confirmed so that when the offers arrive, they are the correct offers and we can get those developments on to the system as quickly as possible.

It was mostly about engineering know-how capacity?

I think it is mostly about what we were trying to do in a very short space of time, and we did it in the most effective way we possibly could.

Yes, but all projects are time versus resources, aren’t they?

Yes.

We did not have enough resources in the time that we had available?

It was certainly a challenging situation, which the companies have moved heaven and earth to get on top of now.

Is it just an engineering issue? We have had conversations about other issues to do with connections, particularly around community and local energy, where the financial stipulations make it much harder for us to get local energy connections on to the grid and that reduces the opportunities for flexibility and demand.

Obviously, from this point of view, we are talking about the transmission level and the top level of projects in the queues at the moment.

Thank you. Scott, do you think the transmission owners are being held sufficiently accountable for delivering connection works on time?

We would always welcome scrutiny. All of us, and anyone involved in the system, should be held accountable for what they are delivering. I think we can see, as we have touched on, that as a retailer, at the end of the day we are sending the bills out and collecting the money. There was an earlier question about whether customers understand. I do not think they need to. What we need to be tackling is unaffordability of energy and making sure that that is being passed through. It is for others to decide whether there is the right amount of scrutiny. What we will always do is champion that and push that as far as we can on behalf of our customers, whether that is residential or business. It comes to the question around connections as well. Mr Reader talked earlier about a housing estate waiting to be connected with new homes. Again, that should be an asset to the local grid. If you have flexible assets in there, can you add to that benefit? We see it through our Eco2Solar business, trying to work those opportunities. That flexibility test should be there and that openness to progress. Returning to the question around scrutiny, this is also where it comes back to whether we are making sure we are tackling and using every lever at our disposal today, because otherwise this conversation will still be happening in 2030, 2035, and we will not have the permission from our customers, your constituents, to continue talking about a transition. It is their money. To finish the point very briefly, I think we must make sure we are framing this entire conversation. Carbon is important and it is right, but it is a by-product now of getting more cash into our customers’ pockets. If we get these assets live, we get them connected, we can tackle energy unaffordability. Start with those most in need in terms of social impact, and then work to the able-to-pay market that we talk about. Focus on the economic benefit. Focus on pounds in pockets. That is how we get a motor and an engine behind all this.

Do you think there should be a grid delay compensation framework?

I think we need to ensure that we are using every single lever around it.

That is not a no.

Rather than focusing on penalties, I think we need to make sure that people’s feet are being held to the fire. The best way to do that—others will judge, but certainly what we see here and get every single day, whether on the phones, emails, direct messages, is frustration from customers. I mean that in terms of developers that we work with all the way through to my parents complaining.

We feel your pain.

We can tackle it. Those tools are there. We have 50-plus million customers across Europe. This is not a theoretical piece. I might have sat here 10 years ago and said the future is coming, postcards from here, blah-blah-blah. It is happening today. Look at the Netherlands, where distributed generation has taken hold. Look at the way that that value is transferred. Australia is often cited; I always try to come back to the Netherlands. It feels more like our climate. In terms of penalties and all the rest of it—maybe I am delusional and too optimistic, but I want to try to find the positives in this—I think that encouraging people to do the right thing is always better than a penalty.

We have just been talking about constraint payments, which increases costs for businesses and for customers, so it just seems a bit odd that we think that they are okay, but a grid delay compensation framework might not be. Anyway, you did not say no.

All right. Thank you very much. We will move on to Lizzi, who has questions on grid-scale flexibility and demand.

There is a clear message from the panel that we should be using flexibility more than potentials already in the system, and that it should be higher on the Government’s agenda. That is what I have taken from the panel so far. I am going to start with grid-scale flexibility. I might come to you, Rachel, because we have already had evidence from Octopus that tells us that flexible assets are incentivised to support the system less than a third of the time. Why is that and how would Octopus suggest we change that?

Well, at risk of getting another black mark, the reason is because we have one—

It is all right, Polly said it as well.

Only because it was in the question, Chair.

We have one wholesale market, which assumes that we have a perfectly available grid with infinite capacity in it. When you go into the market to trade, you get a price that assumes that there is infinite capacity. Then reality hits and you realise that you have an area of the country—let’s call it Scotland—where we have way too much wind, not very much demand and not enough network capacity to take that wind to where it belongs. The battery operator has worked according to the national price. If it is located in Scotland, it cannot do what you might want a battery operator to do, which would be to buy up lots and lots of cheap power and store it for a non-windy day. It does not have any price signal to do the right thing.

There is no price mechanism by which it could buy cheap and sell high?

This is not malicious activity. This is a commercially rational response to the fact that we have one single wholesale price. This is why, when we talk about resolving constraints, you need to start by thinking about how you can get flexible assets and how you can encourage them. We would like a locational price. We would like a locational market. If we are not going to have a locational market, let’s find another way of getting that battery to act in a way that supports the grid, rather than waiting for it to do the wrong thing because it is responding commercially to a single wholesale market, and then customers have to pay for the system operator to unwind that action and get wind to turn off and gas to turn on.

If that pricing mechanism were in place, would it be possible to completely automate that?

Absolutely. Battery operators will be automated. I am sure that grid-scale batteries are all automated in any case. It is just a question of what you automate against. We are automating about 4,000 electric vehicle batteries right now, and our algorithm is ingesting multiple types of price information in order to get the best deal for each customer. However, the best deal for the customer might not be the best deal for the system because we are optimising them against a single wholesale price.

Thank you. I am going to come back to customers in a moment. I just want to stay on the grid-scale level. Steve, you mentioned earlier technologies like dynamic line rating and flexibility trials. What is the potential for that to reduce constraint costs? We heard earlier that there is a potential 13 GW in domestic markets waiting to be exploited. How does the grid-scale technology compare?

There are two ways of thinking about it. I have talked about dynamic line rating. Rolled out across the network, then on average you could see uplifts of 10% in capacity. I think that when NESO has modelled that, it has seen the potential for savings of several hundreds of millions of pounds a year, simply because you can put 10% more power down the existing lines and therefore constraint costs go down. The other way of thinking about it is we have invested in a company called GridCARE. That speaks to some of the other things Committee members have been talking about. That helps us model our network in a much more sophisticated way and say, “If we had flexibility on these loads, could we push the system harder?” We have recently done a trial in our New York business and that said that if some of these big industrial loads provided us with flexibility—it sounds like it is the same number; it is accident, not design—you can push your system 10% harder. On our New York system, they said you can put another 700 MW of capacity on. That is something we are bringing over to the UK to say, “With this flexibility, could we drive the system harder?” Those two things work in unison. Ten per cent plus 10% are big, meaningful numbers, but you are still going to have to build out. It is trying to chip away at the problem and help us understand what flexibility unlocks at transmission scale.

Thank you. On to the demand flexibility, people talk about incentives for using electricity at the right time, but I am with Polly and think people should not have to think about when they put their washing machine on, when they use their power. Why are we not using that 13 GW of spare capacity? What can be done to make that automatically easier and make electricity cheaper for the consumer, which we all agree is a good thing?

I just want to come in quickly, because if we are not careful, you will walk away with the view that there is no flexibility on the system at the moment. As of last year, at the DSO level, 9 GW of flexibility was contracted. More was put out to the market in tenders, but 9 GW was contracted. That was 280% more than the previous year, and it is projected that there will be £3 billion-worth of savings going forward from that. You are hearing from Elexon later, which has been appointed as the market maker for flexibility markets. I fully agree with Rachel that this needs to happen faster. We would concur.

How does it happen faster?

I think it is by making sure that we are all working together, by making sure that we have these conversations, and by ensuring that transparency across the sector is in place; that the signals for market participation are clear; and that the right products are being generated and created for that. We have to work with Elexon, with NESO, with Ofgem, to ensure that the circumstances are there, that the market has been proven at all levels, and that there is an appetite to do this. Is it perfect? Absolutely not. I am not going to debate that, but it is important that we take the message away that the market has grown. There is a willingness to do so. As Steve said earlier, we are working with build and flex. It is not just a case of building out the grid; it is using the grid in the most efficient and effective way that provides value to consumers. Everyone is signed up for that, as we said earlier.

I can see Rachel wants to come in.

Yes. Thank you. I think we need to make a distinction between what is happening at distribution level and what is happening at the high voltage system level. Lawrence is correct. The DNOs have made good progress in procuring flex. Not all of that is clean flexibility, I would say—

Eighty per cent.

There is now access to the market that was not there five or six years ago. That could be so much better—back to your point about automation—if each DNO provided companies like ours and aggregators with a day ahead warning of where they have constrained areas so that we can take the action without having to be effectively dispatched by the distribution operator. We would like to see improvements at the distribution level, which we think will help reduce the need for investment and put money into people’s pockets.

Essentially, an energy forecast?

Yes, we could say—if it is near your new housing development—“We have a constraint here tomorrow that we can see, and it would be really helpful if your EVs did not consume power at this time,” for example. Then we can just go ahead and do it and respond to a dynamic price signal. That is what we are missing at the moment. At system level—and remember it is system level that is driving the constraint costs; distribution level is not—we see a real paucity in the use of flexible assets. That is why we are saying that, if you are not going to adopt locational pricing, which would be the simplest answer, then the system operator needs to give flexible providers an understanding of the physics in their part of the system so that they can turn up or turn down and be paid for supporting the system. That is what we need.

If we sort that bit and we have some households that have capacity for battery and flexibility, but not the majority, how do we—from my constituents’ point of view—make sure that every household is able to benefit from cheaper prices as well as adding to the flexibility? What policies do the Government need to put in place to make that a reality across the whole system, from a resident and a domestic point of view?

We have talked a lot about this—and I won’t repeat it because of time—but it may come back to accountability and scrutiny. Of course, we need to invest in the different parts of the transmission distribution network, but are we making sure that that value is at a customer level? That is point one. We have talked a lot about constraint payments. How do we meet that challenge and turn it into an opportunity for businesses? I think this links to an earlier point you made around people changing their habits and having to do their washing at 3.00 in the morning. That is not the world that we are in now in terms of products. We will follow up properly in writing. We have E.ON Next Optimise, which is flexible and works in the background. Essentially, your battery is doing the thinking and the work. You are getting the benefit, and that can be in money because essentially it is being traded in the background, and then you are using it when you want to. There is no sacrifice from a homeowner’s perspective. Importantly, I would come to, for example, high streets and SMEs in relation to this. I think there is more we can do with landlords to put a responsibility on them to help their tenants more, small businesses, because that opportunity exists. Prices are cheap, so how do you use that and turn it into a commodity, for example? To your point about different models, there is not a one size fits all. There is not a case here where we sit and say every house should have product X and use tariff Y; absolutely not. We need multiple models, but again, those exist today. As an example, a school that we work with in London, St Luke’s, has a solar share arrangement. It is a company that first worked in Australia called Allume that we partner with here in the UK. The school has solar on the roof, and it shares the excess generation with local households to reduce its bills. The school can also then trade in the background from its system and the battery. Those sharing arrangements—the true spirit of community—work. That would work if a household were not suitable for a battery. You can pool those resources as well. The final piece I will end on—and again we will follow up in writing because I don’t want to steal the remaining time—is that we have a programme at the moment called Flex Fleet, investing millions of pounds with 1,000 batteries that are ready to go. It is essentially creating a virtual power plant. It is looking at it from the perspective of can you help solve grid challenges and constraints, but can you make sure the value is held by those homeowners? Can they benefit? It is a double win scenario. To your point of how we make sure customers, there is not a one size fits all, different houses, different locations, different tariffs.

You talked about different tariffs and different technologies, but how are consumers meant to choose a thing that is best for them, given that it is complex? Currently, there are not that many different tariffs on offer, particularly if you do not have a battery. How do we make it simple enough for consumers to make the right choice? Is there a role for energy companies to make recommendations and, if so, are they the right people to make recommendations to reduce costs?

To put it simply, as a commercial entity, that challenge is on us as a retailer—one of the biggest in the country—wanting to grow, and wanting to do well for our customers. We only prosper if we can manage those relationships. We have invested £1.5 billion over the last five years. A lot of that is in service to make sure we are doing better than if I had sat here five years ago. Our performance is there in those recommendations. It is on us to make it simple as a modern company for our consumers. We cannot do it alone. We do not think we can do it alone. Again, where I have talked to some of the battery projects—for example in Glasgow—they are working with third-sector organisations because those organisations have the trust of people living in poverty, not us. As an energy company, we cannot knock on the door and say, “Trust us”. That is not the relationship those people may have with us as an organisation, but we can work with those groups that do, such as Citizens Advice or Which? You have your own examples. Can we work collectively to make sure information is clear? I will make an altruistic argument. We do it because we think it is the right thing. If you do not believe me, there is a hard-edged element to this: as a company, we will only be sustainable and grow and look after our colleagues and customers if we do this in the right way. As you would expect, we should make it simple for our customers, and I think we do. There are tariffed products coming to market all the time, but it is a challenge that reinvents itself and that is the dynamic of the market. We cannot and will not do it alone, but we are very committed to working with place-based or third-sector advocacy organisations. Where this is trust we must work in that way.

Rachel, I will pick up on something you said. I think I misheard you that there is a position we could get to where we restrict people’s ability to charge their EV to support flexibility. That is not what you said. Polly and I both picked up—

No, not at all. Apologies if I gave that impression. What I am saying is that, right now, around 400,000 customers in Britain have chosen to give us control over the charging schedule of their electric vehicle so that we can get the cheapest deal for them in the market. They have the right at any time to override what we are doing, and they also set the parameters. They might say, “Well, I need my car charged—”.

That is fine. I wanted to make sure we got that on record. I was thinking about demand management and this talk about getting more businesses to focus on than individuals. If I take 25% of the manufacturing base is food and drink, high energy intensive users. What consideration is there of demand for businesses to play more of this role and take up demand, which would mean abnormal work—it could mean more nightshift working? What consideration do you place on the impact of workers in that call? Because if you are working at Carlsberg in Northampton and they decide this week they will brew in the middle of the night, what does that mean to the 300 people that work in Carlsberg? Will they end up on irregular shifts? Will we see more uncertain work? I am trying to understand this because it is fine in theory but in practice we are talking about people’s lives here.

To put it simply, individual businesses will make their own choice. However, the way to talk to it, the way we work, the relationships we have with trade unions, it is not just what you do, how you do it is very important. To your example, hold those companies to account in the right way, but the solutions are there. Forgive me for saying batteries again in this example; there are other technologies and ways of doing it. As a simple example there is the opportunity for a plant, a manufacturer, as we would do with domestic customers now, to store it up and use it when needed. We have talked about residential customers. It does not mean getting up at 2 am—as I watched Scotland fail again in the World Cup—to put my washing machine on. If you want to do it, and you have the opportunity to do it, that is good. As a very simple example, batteries mean that you don’t need to do that. Your shift example—when there is perhaps excess generation on the grid—raises the question of whether we can incentivise that through constraint payments, so that money goes not to generators but to manufacturers, to flip it on its head. There is a commercial opportunity for those to invest in that product to create revenue.

Does that market exist? Does the regulation exist for Carlsberg to say, “Fine then, I will put a battery on my brewery in Northampton and take advantage of cheap energy when demand arises.” Does that exist as a market and does the regulatory framework exist to enable it to do that?

It does. The problem is there are very little routes to market for exactly that flex. At the moment, if you are a large industrial customer, it is probably not worthwhile investing in a battery or solar on your roof. You mentioned food and drink. Cooling facilities can be cycled without having an impact on the temperature in the fridges, but it requires that industrial customer seeing a reward for providing that flex. What we are saying is that reward right now does not sit there for I&C flexibility. If an industrial plant did want to reschedule its operations—and some might—it would probably need a day’s notice to do it. Yet when the system operator is buying flexibility it is with one hour’s notice. Straightaway you are getting a sense that the way the market works at the moment has not thought about how we might tap into businesses that want to do this. We may come on and talk about data centres in a minute. Even some data centres have flexibility over how they schedule their operations, but they will need more than a one hour’s notice period and, right now, that is the main route to getting rewarded for flexibility for I&C customers. It is not suitable for them.

That is almost the point; we are working hard to find the industrial customers who can flex—and that can be through investing in batteries or the way their processes work—and data centres are an enormous opportunity. We have been told for years that data centres would never flex so we invested in a company called Emerald, which we brought over here. It has tested in data centres and found it can flex in ways that are incredibly valuable to us and to NESO. Because there are no physical workers, it is shifting its load to data centres in the US or other parts of Europe. We are incredibly excited about that because if we can get data centres to flex then obviously we have a lot more coming. These are vast consumers of electricity. If they flex around those hours they become part of the solution. We ran some modelling that said we are planning to connect 10 GW of data centres in the next five years. If we can use this technology to get them to flex that will bring £20 to £25 off residential customers electricity bills because they will pay so much more. It will be thousands of pounds for hospitals. It will be hundreds of thousands for the food manufacturers. Our focus is to say, “Let’s find the industries that can flex without those impacts and make sure we are giving them those incentives to unlock the opportunity”.

I should ask the questions I have in front of me on interconnectors and data centres. Steve, interconnectors play a key role in balancing Great Britian’s energy system. Are existing interconnectors being used as efficiently as possible, and what reforms could achieve greater savings?

Net-net interconnectors are fantastic for both sides of the equation. We worked out they have saved customers hundreds of millions over the last five years. The way the regulatory arrangements is we pass those savings quickly back to customers. There are some issues at the moment. This may be another black mark, but I am afraid they are Brexit related. As part of Brexit, we decoupled our markets from the EU and as a result of that there are some technical inefficiencies in the way the markets trade with each other. It is very clear that interconnectors benefit both sides. They generate a lot more savings. They could generate more and work more efficiently if we were able to get back to the arrangements we had, where we measure the prices between the two more frequently and ensured they are flowing in the right direction.

Rachel, to what extent are AI Growth Zones discounts for data centres intended to achieve the same outcomes as locational pricing? Do they similarly risk creating a postcode lottery?

It is slightly ironic that we are actually trying to create a zonal price for a certain class of customer. What we see is that it is not currently shifting the dial for data centres. Part of that is because there is currently no clarity on what the electricity price discount will be for data centres. As far as we can see it, the data centres that have committed to those Growth Zones are already located there, so they are simply expanding their operations, and we are not getting the uptick that we want. We have talked about the fact that some data centres have flexible demand. The training load data centres, for example, can work with relatively high latency. They don’t have to be located close to where their AI is being used. Those are the data centres that could be moving to help us with constraints, but fundamentally they are not doing that because our electricity prices are too high, and because they are flexible on where they locate, they are choosing to locate on the continent or elsewhere, where electricity prices are lower. We can put a few sticking plasters in place, but if we do not have a market that is creating an efficient system and getting electricity bills down, we will struggle to get the investment we need. I don’t think we have mentioned in this panel today that electricity demand is still flatlining in Britain, and yet we are building a system for 2040 that is assuming we have two or three times more electricity demand. We are at risk of ending up not getting that extra demand because we are not dealing with near-term price increases, and creating what I think of as doom loop where, because we are building this big system that is high cost and the demand is not turning up, the unit cost gets higher and higher for everybody—businesses and customers alike—who are here. We need to systemically sort out electricity bills, and a few sticking plasters will probably not be the answer.

Thank you. Polly.

I have completely forgotten what I was going to ask.

While you are remembering it, what is the number one change that you would like from the Government, given we are having reformed national pricing, to make the most of flexibility?

I think we do need regional markets for demand-side flexibility and batteries, so that they can be paid much earlier on in the electricity day for resolving system constraints. If I may be greedy and ask for a second, I would love the Energy Independence Bill to put a requirement on the system operator to report annually on how much gas it is using to resolve constraints, and why it is routinely skipping lower-cost batteries and demand-side flex to resolve the constraints that cannot be managed through regional clean flex markets.

That is three, okay.

We are trying to transform the system. We have all agreed that. You need to be very clear on the objectives you are trying to achieve. You will have thousands of things you want to do, but you need to be ruthless in prioritisation, because you will look at that, create a roadmap, and then say, “We could not possibly do all of those things at once.” If you did that for the energy sector at the moment, there is nothing in that list that is not a good thing to do, but are we focused on the outcome we are trying to achieve. As Rachel said, affordable energy bills, more reliable system, cleaner system, should be the objectives, but I would start with affordable and then be ruthless in the prioritisation. There is nothing that DESNZ and Ofgem are doing that are not good things, but perhaps they need to look at the sequencing, priority, and the order that they are doing them in. That is what companies do ruthlessly. You say, “That stuff will have to wait to get these big three things done.” That is, I think, the problem.

Yes, and what would you do first?

If you have those objectives, it is hard to believe that you would not go harder at flexibility in the way that Rachel has talked about, and thinking about it in terms of the wholesale market.

You are backing Rachel. Does anybody have anything different?

The ultimate test has to be: are we reducing system cost? Because at the end of the day, the customer has to be the person that gets the value from the system. That is the opportunity we have in this as well. It is a challenge, but it is an opportunity and within our grasp to do it. There could be small changes—I will not take up the time—for example, letting DNOs have bilateral agreements and flexibility products. There are small tweaks that can make this happen, but ultimately the bigger point is a big push for electrification. Uniting that across government is a big piece in all of this. We have heard that there is a risk that lots of costs are baked into this and then are spread among a smaller and smaller group of people, which is completely self-defeating. Electrification is an economic driver, but that flexibility point is the unlock. If there is one test on every single conversation any of us should have—DESNZ, the Government, the Cabinet Office—flexibility first. That is the unlock for this.

Thank you. Anything different, Lawrence?

I agree with the flexibility point. The only addition I make is that we should also focus on accelerating the construction at transmission level. We cannot ignore that. That will have an immediate impact when those lines are energised.

Thank you. Polly.

Rachel, you talked about how we enable the system to make the most of businesses and their ability to be able to do demand management and flexibility. Is this simply a regulatory issue where the Secretary of State should instruct Ofgem to change the rules, or is this a legislative issue and, therefore, we need something in the Energy Independence Bill?

I do not think it is legislative. You have all the tools in place and everything that is required. It is down to objectives and priorities.

Are there any other things that you would like to see in the Energy Independence Bill that would increase the ability of the system to prioritise flexibility overall?

Levies off demand turn-up.

Levies off demand turn-up. Steve, you will be aware of the fact that I have an interconnector coming into my constituency if the Secretary of State makes the decision, although obviously other geographical options are available. Are you comfortable with the situation where Ofgem’s regulatory framework means that you could dig this up now and in 20 years’ time be digging it up again? Do you think that is okay?

Sorry, I am not sure I understand what—

There is an interconnector going into my community, probably—again, subject to agreement by the Secretary of State—to connect us up to France. You have made all the very strong cases for interconnectors and I totally understand. It is also part of Sea Link, which you will be aware of as well. Myself and my colleague, who represents Suffolk Coastal, are aware that when we look at the Ofgem regulations you can comfortably say, “We are only going to do this,” and then when you actually look at the rules Ofgem will allow you to go back and dig that up again to do more grid strengthening or something else in 20 years’ time. We could end up with a perpetual cycle of disruption in our communities because of that infrastructure. You and I know that infrastructure is vital. Do we think that framework that ends up with you digging up a nature reserve every 20 years is okay, or should we have something that reduces the level of disruption that communities—and indeed the environment—suffer as a result of the investment in infrastructure that we need.

I think both Ofgem and DESNZ are alive to this and there are discussions at the moment about the whole framework for interconnectors and how they are thought of. However, I think the long-term planning that NESO is trying to do is to avoid exactly that problem. There has been a sense of not looking far enough out to the future, so NESO put out documents last week trying to assess the needs over a much longer period. That is being addressed. I do not recognise that as a significant concern. Most of our interconnectors are built with a view to 40 years, and if you look at the first interconnector we built that is roughly its lifespan—

Forgive me, because NEMO was built in my community within the last couple of decades. The salt marsh was destroyed. National Grid said it would not be. There are genuine concerns, not only about the capacity of National Grid to fulfil its promises on nature restoration, but also that cycle ends up with people saying, “Again, here we go.”

On that particular one—and I am very sympathetic to the concern—we took an assessment at the time that open trench would work, and we did a lot of assessment of that. It turned out, for the reasons you said, that it did not. On our new interconnectors we are absolutely proposing trenchless digging. We are engineering our way around that solution. You do things with the best of intentions, if they do not work you move on and learn. For the interconnector, we are talking about a trenchless technology that will—to the best of our understanding—avoid that happening again. We are trying to learn from the mistakes of the past.

You do accept that community is going through that level of disruption within a short period of time?

We are acutely aware of the impact we have on all of the communities wherever we are building, whether it is bringing things onshore, and it is always part of the optioneering. There will always be an impact. The specific problem we had was that, when we looked at the other alternatives and the amount of onshore work we would need to do to accommodate landing at different points, we took a balanced judgment that the chosen option was best. At the end of the day, we have Ofgem and NESO scrutinising the decisions we make, so we do look at all the options and try to come to that balance of what has the least impact—accepting that everything will have an impact—and try to come up with the best option we can. Then that gets, as I said, scrutinised by Ofgem and NESO.

Thank you. We will end there as we have run over time and have another panel. We will suspend the sitting while we change over. Thank you very much for your evidence today. Witnesses: Claire Dykta, Matthew Billson and Alastair Martin.

Welcome back to this morning’s session of the Energy Security and Net Zero Select Committee inquiry into reviewing the electricity market. Welcome to our second panel. Please introduce yourselves, starting with Matthew.

Good morning. Matthew Billson, Chief Strategy Officer at Elexon.

Good morning. Claire Dykta, Director of Strategy and Policy at NESO.

I am Alastair Martin, Chief Strategy Office at Flexitricity. We do demand response and flexibility.

Thank you. We look forward to your evidence, starting with questions from Christopher.

Yes. As you say, NESO passes the costs on that it incurs in balancing the system.

Balancing costs are a relatively small amount of your average bill. On an average electricity bill they are about 3%; about £3 a year of an average bill.

The decisions about our policy and what is paid to whom are taken by Government, but what you describe is exactly what we are doing at NESO through our medium to long-term strategic planning. We are seeing out the strategic plans for the system to show you can maximise the efficient use of generation, such as allowing storage to be located in the right places to soak up wind. In the short term there are fewer levers that you can pull because they require market change or they require new network build, which cannot be delivered in one or two years. At NESO, with the impact we can have, we have introduced a number of initiatives over the last few years, and over a three-year period took £1.2 billion-worth of costs out of balancing costs.

Exporting on to the continent still requires that energy to be moved, so still requires investment in network infrastructure. The policy decisions and the design of contracts for different payments are a Government decision, not NESO’s.

We are an independent organisation. In the short term, we have a licence obligation to run the system economically and efficiently, and we are always focused on reducing balancing costs, such as the initiatives I mentioned just before.

What you are referring to is a discussion that has taken place about the events two weeks ago, during the extreme weather. As everyone here knows, we had extreme weather that week, with the Met Office issuing a red alert. All national infrastructure was under strain that week, including the energy system. The electricity network remained resilient: there were no disconnections to customers, and there were no excursions of voltage or frequency outside our statutory limits. Any suggestions made about who is making operational decisions, or about record-keeping, are not in line with how we operate at NESO.

It would be wrong to suggest that. Operational decisions are taken by authorised, trained personnel only.

Operational decisions are taken by the trained personnel in the control room who are on shift at the time.

Yes. We use Microsoft 365, so all our documentation is stored. We have a document retention policy, and all version histories of documents are kept in our systems.

I want to pick up the point you opened with, which is the analogy of the farmer who cannot ship the crops south, so he burns them in the field, and why are we subsidising that? There are two ways to deal with a situation where you are subsidising a discarded product. One is to cut the subsidy—which is pretty well impossible, given that the payments are actually, in this case, for building the assets. That is what they are for. The second thing you can do is not discard the product. What we are doing, working as hard as we can, is trying to find ways of making better use of the product where it is, when it cannot be shipped. Bear in mind that even the Scottish food and drink industry consumes enough heat that, in the form of electricity, could use up basically half, if not more, of the discarded wind over the course of a year. We heard about thermal storage and coolth storage in the last session. The volumes of energy there are of the same order as the volumes of energy discarded, but they keep burning gas. That is the bit you did not need to do: it is not just burning the crops; you do not need to burn the gas. We lack the ability to tie that together at the moment.

This is one area where I do appreciate the level of openness we get from NESO, as opposed to what we had from National Grid in the past. We have more information about how they make their decisions, to the extent that we now have a working group developing a project to make use of wind energy where it is generated, with heat and cooling stepping up as potential capacities to make use of that. It is called the Thermal Constraints Collaboration Project—a NESO piece of work—and demand for constraints is the particular one we are picking up. It is all happening a bit later than I wanted, at the standard pace of large organisations, and I would rather it were faster, but it is not doing nothing. It is moving.

Ms Dykta, if the allegations are untrue, is there an investigation under way at NESO as to how this information has been shared and why it has been shared?

We are undertaking a review. In any operational event, when we see anything out of the ordinary, we always undertake a review. We started a review as soon as that week concluded. It is ongoing at the minute, so it would not be right for me to speculate about what it will say, but we expect to be able to share some early outcomes with DESNZ, the Secretary of State and Ofgem this week, and for the full review to be ready in around two weeks or so. We will publish it as well.

Should we expect any more whistleblowing incidents?

I cannot comment on where that has come from. If the person who mentioned that yesterday wants to share the information with us, we would be able to give a more informed response.

It would be poor form to disclose the identity of a whistleblower. NESO has been criticised by the panel earlier today for not making the best use of the energy available, immediately reverting to gas, which is more expensive, rather than looking at other available, cheaper renewable sources. Is that a fair criticism? Are there any alternatives to the actions that NESO takes currently that would address the criticism you face this morning?

As I have had the pleasure of telling this Committee before, we are operating in a system where everything was designed for the world that we were in at privatisation. That includes the rules, the IT systems, and the system. We are in a huge programme of modernisation of all that, and, as Alastair alluded to, that is seeing results. We would all like to see change faster. These things do take time. They are complicated, and there are a lot of interested parties. You need to change at a pace where you retain confidence in the market and the security of the system. We have seen a significant increase in the use of batteries on the system, for example. In our most recent procurement of demand flexibility, we have seen almost a doubling of what we have procured through that compared with historically. The change is happening. I agree with Alastair’s sentiments.

Do you think the pace of change has the necessary sense of urgency—taking into account the restrictions you have just laid out—that there is the right sense of urgency around the need to get this done, and get it done quickly?

It is fair to say that, certainly within NESO, we are committed to moving forward at pace, within the boundaries of keeping the system safe as we go through this period of transition. What we have achieved in the UK is amazing: we have had 98.8% zero-carbon operation on the system this year. The pace is there; some elements are going more quickly than others.

Will NESO’s actions—I do not want to put it on your shoulders alone—stop constraint costs reaching £8 billion by the end of the decade?

As I mentioned earlier, NESO always looks across the balancing costs to the extent that we can influence or reduce them, and has put in place numerous initiatives and projects over the last few years that have reduced them by over £1 billion. We will continue to do that, but the critical element in tackling those constraint costs in the short term is flexibility, so an increase in flexibility, and the buildout of network infrastructure.

Claire, you have two sets of questions, followed by Polly: first, on the Reform National Pricing, balancing and settlement reforms, and then on reducing the balancing mechanism threshold.

If I can start with Claire, because obviously NESO is leading the reform programme—you have been running your call for input on the reforms. What have you learnt about industry support from that so far?

As I alluded to, any significant change to market arrangements always requires a balance between pace, confidence in the market, and resilience of the system. The call for input was designed to take in industry feedback on the changes we are proposing. There is a whole package of them. They largely all combine towards making the market more efficient, requiring NESO to re-enter the market to balance it more often, making assets on the system more visible so that the system operators know what they are doing, and, in some instances, making a clearer handoff between the market arrangements into the system operator. There is a variety of support across those proposals. It is probably fair to say, although my colleagues here will correct me if they do not agree, that broadly, the greater visibility of assets—elements like that—are seen as no-regrets. The discussion about where a clear handover should sit between the market and system operation, and who controls what at what point, requires further discussion.

Are you hearing different feedback from different types of players in the system?

In the nuance of different trading models, or different motivations, yes, you do get a bit of a difference, but overall there is alignment that the markets today are not fit for purpose. They are not designed for the system we have. We do need to change, but we need to do that in a way that changes at pace, while also balancing the need to maintain confidence in the overall market arrangements.

The reforms rely on having more granular and locational data, but can you actually handle that data? Do you have systems in place? Do you have the capacity to do that, and the expertise? It is all very well having huge amounts of information, but if you do not have the capacity to do anything with it, it is not going to help, is it?

As I mentioned, IT systems and interfaces are part of that ecosystem that was designed for the system we have. We have been in a huge programme over recent years modernising those systems; they are more modular now, so it is easier for us to implement big changes, like market changes. We are also preparing for the world we are talking about, where there is more data moving back and forth, and where AI is more integrated into things. We already take in, as an example, 35 gigabytes of weather data, so we have already seen that shift in the volume of data we are ingesting.

Is it going to need any further resources, or have you already done this work?

Resources in the broadest sense, I would say, so not necessarily people, but perhaps different skill sets from what we have always historically had, complementing our expert engineers with data scientists, and more resource in terms of the technology and AI tools available to us.

I am going to turn to Matthew. One aspect of the reforms is to get participants to improve self-balancing before gate closure happens. What are the behaviours in the current market that are driving those unnecessary balancing actions, and what will need to happen to stop those behaviours?

There are probably a couple of things. One of them is what is called NIV chasing: you get some actors in the market who will deliberately take actions that create imbalances so that they can profit from them. That is allowed in the market. I think it was referred to by the previous panel. In some ways you may want that from a market; you want market participants to enter a market with ambition.

Surely a helpful ambition. We do not want them—

That is the point: at the moment it is allowed, but actions could be taken to try to constrain that. That is one thing that should reduce some of the imbalances, changing some of the market rules, and then some aspects of what is talked about in the wider package may also help with that, so greater visibility.

You said there were other behaviours, as well as—

Another thing is around the lack of visibility, and perhaps lack of participation by some of the smaller assets, and separately at distribution level, about how we maximise the use of those assets. We have talked about flexibility more broadly. There is more that can be done to align some of the market rules and unlock some of that value that can be done, and that may again help with some of the self-balancing.

Obviously, one aspect of the reforms is bringing more assets into the balancing mechanisms?

Correct. I think you are off to a lowering of the threshold.

Yes, lowering the threshold. Beyond bringing them on, is there anything else that needs to happen to drive the right behaviours?

There probably are. On that one in particular, I think it is a bit more complex about whether lowering the threshold is a good idea.

I was going to come on to that.

Shall I pause for you to get on to that—I will answer it now. One of the complications is if you start putting mandatory requirements on participants who are not as able to handle some of these complex rules, it could be quite onerous on them. What we would encourage is that consideration be given to how you lower the threshold in a proportionate way, and potentially allow some of the rules to be adapted depending on the size of the actor, so that you encourage people to participate rather than forcing them to and making them cover the costs.

Maybe I am not fully understanding, and this may not be a sensible question, but is it possible to put some of that rule-making on to NESO’s side, rather than the participants, so there is not so much requirement on participants to understand those rules? Is it possible to have a pull—I am not sure I am describing it very well—what I am suggesting is, could NESO be driving those choices to some extent, because it has the granular information?

That is what we would agree with: there is more that could be done, across the piece, to help NESO have more visibility of where an asset is and what it is doing, so what actions it has taken in the electricity markets, and the pricing it does. We still feel that the packages perhaps do not focus as much on that issue as they could. For example, if I can just add, you mentioned how to handle the data. Something we have been leading, which has affected the whole industry, is collecting and analysing meter data much more. By next year, we will be handling about 500 billion meter readings a year, which has been a big project, for us and for the wider sector, but we think it will have significant benefits. That will be the first time such a rich data set is available. We are keen to work with NESO and others on how that can be used to help inform, raise awareness, and raise visibility of what is going on in the market.

What do you think should determine the balancing mechanism threshold?

One is to make sure that the threshold is set at a level that is proportionate to the ability of the asset to deliver it. That may sound cryptic, but usually, if you go from 50 MW, typically those are very large assets, with companies that specialise in generating electricity. If you start going down on a gradient and drop below 2 MW, you are starting to attach assets whose primary purpose typically is not to generate electricity—some of the other flexible assets. That is where those companies, aggregators and participants may start struggling with some of the rules put on them. I am afraid it is not a clear answer, because there is going to be a gradient of pros and cons.

You are saying it is very hard to create a level playing field between the larger and smaller participants, just because of the availability of—

It is not straightforward, because you have different types of participants. As I said before, we think there is potentially something around not having exactly the same rule for everyone, because there is a different level of adaptability.

If I can come to Claire again: is your timetable for reducing the balancing mechanism threshold realistic? Do you have the systems in place? That is going to create a much more complex system of assets for you to communicate with, so do you have the systems in place to do that, at the same time as having all the extra granular data we have discussed previously? What benefits do you expect, and what will happen if the reform fails to deliver them?

For the whole package of reforms we have consulted on, including this lowering of the threshold, there are two sides to the benefits. From a system operation point of view, it gives us greater visibility of what those assets are doing, and gives us the ability to interact with them. For those assets, it gives them another marketplace they can enter—in addition to revenue streams, and I am sure Alastair will talk about aggregation opportunities as well. I mentioned some of the modernisation we are already doing; that is all designed to be fit for the future, so the components are already going in. I do agree there is a strategic conversation around the concept of opening up the markets to more assets. You then have to make that workable and proportionate. There is absolutely a conversation about how you make that proportionate, so that it does not place undue burdens on the market participants while also maintaining system security. We have been running a trial for some time now where we have relaxed some of those rules to allow assets to come into the balancing mechanism.

If I can re-ask the question I was trying to ask Matthew: effectively, at the moment you have a system where people are bidding into it. Is there a way that, for much smaller assets where people do not have the capacity to do that, you can effectively use a pull approach, where you have got the data available—no, I am getting a shake of the head from Alastair.

That is not NESO’s role in the system. There is a very effective model already in place, through aggregators, to do that. I tend to think of these things in two horizons: there is the transition we are in now, and how we remove barriers and open up markets. Where we are going is towards moving from an analogue system to a digital one, with most of these assets interfacing through some type of optimisation platform or AI interface. However, the aggregator model works well now.

Shall I come to Alastair, then? You are a licensed energy supplier, so you can trade in the balancing mechanism. How would lowering the threshold affect your organisation? Can you explain how you can help with the issue of smaller generators?

First, to pick up the point about the NESO pool of actions: we believe that flexibility from the customer side should be the choice of the customer, through automated systems and their own parameters, setting what they are willing to do. They present what they have ad hoc, and they do that through an aggregator if it is more convenient, which deals with the complexity issue quite well. If they want to go it alone, they can, but they are not compelled. If you happen to be making a product and the market is screaming for your product right now, you will just opt out of flexibility, and the NESO pool is not what you want in that respect. The point has been made a few times about location: NESO control knows exactly where every large power station is, but if I present capacity in the north of Scotland to NESO control, it does not know whether it is in Dundee or Lerwick or anywhere in between. There is no focusing in to show that for the type of assets we present, and that is to do with the structure of the data that goes in—there is not yet a project that I am aware of to get that. Now, when control does not know exactly where something is, it takes a conservative approach: is this asset in the wrong place? It might be, so I will lock it out. That is substantially worse for the person who has actually shown up and said, “I am here, I am ready, I will do what you want. Why are they not calling me?” We have that problem all the time; it has bedevilled the flexibility industry. Have I answered your question?

I think so. I used to work in software. Is it just about adding that locational data that would enable them to make those—

You need to add it into workflow. Believe it or not, for some of the assets we present, we have to send spreadsheets, which do not get used, because you cannot use a spreadsheet in an operational control room. The workflow issue actually runs right through so much of this. I do not think the idea that the head office at NESO told the control room what to do is plausible. If the head office tells the control room what to do, the control room ignores it and does what the control room does. That is about workflow. The result is that there are some decisions that are much easier to take when you are ahead of that hour in which they have total control. If you are ahead of that period, in that four-hour scheduling and planning period, that is manual. That is not done with the new systems. The new systems are great, fantastic, but the scope is limited. When somebody is planning, “What do I know about the next four hours, six hours, eight hours?” There is a certain amount of uncertainty, so what they will do is schedule some gas—bring on a big gas station. Immediately, they have paid the costs of doing that, and immediately they have put margin into the system that is then not necessarily at a lower price than if the full price had been put into the energy cost of that asset. Suddenly, everybody who has invested in flexibility—whether it is heat decarbonisation, batteries, or a fleet of EV chargers for bin lorries—is being undercut by somebody who got a payment outside of that. This is called the free option problem, because we can stand up and be ready just like that. We do not get paid to be there, and we get skipped and neglected. We have heard about the skip rate, I am sure. Do we give out black marks for skip-rate mentions? I don’t know. The skip rate as published is a very tightly focused measurement of one aspect of skip, but what is going on at the workflow level is much broader, where it is almost unmeasurable. The level of planning and scheduling that ignores the potential that, when real time arrives, the flexible assets that could soak up the wind in Scotland, or stand up to deal with the replacement gas south of a constraint, are ignored because they are a little bit different, a little too granular, and the systems do not tell us quite where they are. So, some gas gets scheduled. That happens all the time.

Are these reforms going to fix that, or is this still going to be a problem?

These reforms do not fix that workflow. There is the five plus one: you have your hybrid dispatch concept, which is the plus one, the extra. There is potential in there, but the detail is not there for us to be quite sure how that is going to work. The issue for me is that all the reforms are actually dependent on fixing this other problem—the workflow, the dispatch, actually sending the right signals to the right assets, knowing you can, and planning for it. None of them do that, and they all depend on it. Without that, they are worthless.

Are they doing this because they are being over-cautious, or because of the complexity of understanding what you are offering?

It is a mixture. Over-cautious is part of it. I am sure you will disagree in some way, but one of the things NESO does now is bring control room people out into the industry to talk to people like me, which the old National Grid would have been very careful of, and would not have wanted to do. We learn a lot about how they work things out, and there is a degree of over-caution in there. I don’t know what that flexible asset is, but I do know what Connah’s Quay is. I do know what Sutton Bridge is. I do know what these gas power stations are. There is conservativeness associated with that, but there is also the question of how you actually implement these actions. NESO can do a trade ahead of this famous gate when the balancing mechanism cuts in, but to do that there is an exchange of paperwork. It is a manual process, not done automatically, not done by the click of a mouse. Systems have not reached there yet, so you do not do it with the small assets. You do it with a few big ones.

Thank you. We do not have very long, so we will have to move on.

Alastair, Great Britain’s imbalance settlement period remains at 30 minutes. The EU is moving to 15. Australia is moving to five minutes. Should it be shortened and if so to what length?

In theory we should absolutely shorten the settlement periods, and we should take them to five minutes. In practice, you should leave them alone and solve the problem in some other way. That is my view. There are two reasons—the practicality, so we know what market-wide half-hourly settlement was like. It is a swamp and we only just made it across and so this project could go straight through into that same swamp and take the same amount of time and cost the same number of billions. That could happen, or you could scout round it and say that the five-minute thing only applies to big generators. Then we are back where we started with a special market for big generators and nothing for the flexible consumer.

Matthew, the market half-hour settlement is seven months delayed under your business’s programme. Are you going to meet May 2027?

We are. We are already making good progress so more than half of the meters—or nearly half, 30 million—have already been implemented into this so the half-hourly is making good progress, and we will meet our targets. Building on what Alastair said, it was a big project, a significant change for us but also the wider industry. Now we have done these systems we, Elexon, could change it. One of the things that we built into changing the system is making sure if we needed to we could change it again. It is not a trivial thing, but we could do it however it would be a significant ask to the wider sector because it is them who have to also change their systems. That is why we would agree with Alastair that we have some caution that the overall benefit of changing the settlement period is not clear. As you alluded to there are other things that will perhaps be factored in. One of them is how we align with Europe. If the Government do want to move closer to Europe on electricity markets that will need to be considered and there are other side effects which could affect things like capacity.

If we did move to 15 minutes to be closer aligned with European markets, which may or may not help trading and so on, who would pay the cost of doing that? Where would that cost sit if we were going to change the settlement period?

Probably ultimately consumers again. That is ultimately where all the businesses in the sector will pass the costs down on to unless it is bid on.

Any idea of the level of cost it would be to move to a 15 or a five?

There is an outdated cost estimate that I think was from 2020 that it could cost around up to €2 billion. It is in euros because of the way it was done. That was done at the time of thinking to align to Europe, and it was not done because of the negative cost benefit. That is an outdated estimate and is not our estimate.

If we did move to a shorter settlement how would it impact on your ability to manage all the data that comes into the different organisations that you work with?

As I said, we think we could change our systems. It would still take some time. It would probably take two or three years to update the system. We could do it but there would be some cost to us and, as I said, cost and complexity to others. One of the points that we raise is that if you did change it the amount of data storage you need to move to 15 minutes would be twice the data storage and if you did it by five-minute intervals, as Alastair said, you would need six times the data storage. As I said, it is not an insignificant change and the benefit of doing so is not clear.

Thank you very much. Polly, bearing in mind we have to finish by half past.

This all seems unnecessarily complicated to me. It is a make work. Seriously, how many people are employed at NESO?

Currently about 2,700.

The equivalent organisation in France is well under 1,000, isn’t it?

There is not an equivalent. There was another system operator that has the same boundary that we do.

Do you think it is defensible to have that many people working at NESO?

Although we are now publicly owned we are still regulated by Ofgem and we submit a business case to Ofgem every two years where they challenge us on cost and efficiency.

Yes. I am interested in market reform not just so that people can understand it, but they obviously get the best possible deal out of it. From what you have talked about in terms of the balancing mechanism, I am somewhat sceptical that we have a system that works for the kind of energy sector that we want. I understand that there are growing pains turning from an analogue fossil fuel dependent system to a smart clean system but I wonder whether there is quite a lot of, as I say, make work in the interim where lots of people are faffing about in various different sectors of the market to avoid what you were talking about there, the NIB thing, right? If people are playing like that, why do we not just kick them out and just say, “You cannot play. If you are going to play wrong you just cannot play” rather than spending endless amounts of time tweaking bits of the market to stop people from mucking about with it?

I don’t think it is an either/or. We have a ring-fenced market monitoring function within NESO that does look for behaviours that are operating against the rules and that is reported into Ofgem who then take action. Where the market arrangements are not fit for purpose or are creating inappropriate incentives then they should be changed. I agree with you, you must look at it in the whole and look at the costs versus the benefits of the whole and then make the change that is in the best interests of consumers. I completely agree.

I would not say people are faffing about. These are complex things, but I agree with you—

Hang on. You used the word “complex”. I think what we find is that when we have these kinds of discussions it is unnecessarily complicated. We understand the energy system is complex but we get the impression and I think I am not alone in this on the Committee, from finding that players within the energy sector including regulators or people who are ostensibly trying to sort things out, like Elexon, are complicating things, which makes it harder for us to maintain accountability on behalf of our constituents and making sure that the Government get the right advice from us about how they should change things to ensure that it is as efficient as possible.

I would agree that with any change there will be winners and losers. That is why you have very vibrant and vigorous debate about some of the changes. I suppose I would say that the changes that we think are needed many countries are grappling with. We do think things could be done quicker and simpler. As I said, we think there are newer solutions coming through on data and visibility of the assets, some of which we are doing and some of which other people are doing. We do not think those are being fully embraced yet, the newer things that could be done perhaps in parallel with some of these more complicated changes we need to make. We think some things could be done faster.

Do you think there will always be a need for Elexon?

Yes, if you want certain functions.

Why?

Because someone needs to do the calculations about the buying and selling orders in the market. That needs to be done by someone. We have been given additional functions by the regulator to drive flexibility because Ofgem felt that was not happening. You have been talking about flexibility, so that is what we are doing more of. We have already implemented some of the big changes that we have talked about around metering, which will bring massive benefits, which we are only just about to see.

You mentioned metering—I want to come to Alastair in a minute—but we only have 65% penetration of smart meters in this country. In France they have 95%. Your data might be great, but it is only great for 65% of the population.

The data we are getting is from all meters, not necessarily smart meters. Decisions on how to implement smart metering was done by DESNZ. What you have referred to—

I am not suggesting it was your fault. I am just saying you are dealing with that situation.

Yes. We are getting data not just from smart meters but other meters as well.

Alastair, what do you think?

I think it is not a make work, but we do go to an awful lot of meetings and we do not always—

Meetings are a popular alternative to work sometimes.

What I feel goes on is that in a lot of the discussions we have come up against some point of principle that the institutional or quasi-institutional organisations that we are in a room with, whether it is NESO or Elexon or the distribution networks, or even Ofgem, do not feel that they have the vires to address. Specifically, how about a mandate on the network operators and the system operator to make maximal use of renewable energy and minimise the discarding of it, whether it is at grid edge, so the EMN schemes that you will have heard about, or whether it is through constraints across the Scotland-England border and from East Anglia? That gets stuck because the SOs do not think they have the vires to deal with that. Why are they not coming to this part of the country to ask if they can please have a clear mandate that they must do this and then they go back and do it? That would cut out a lot of meetings, and it would mean that there would be an absolutely clear steer. Claire would not have to go to board meetings and wring her hands and ask, “Can we or can’t we force this?” She would know that she had to force it and then we could stand up and do it. That would really help.

What is stopping that happening?

Mandates and all of the—there are many regulatory—

Can I just get an answer?

The mantra of technology neutrality, which is applied not entirely evenly, but is something that has been there for longer than I have been in the industry. NESO feels that it must dispatch in a technology neutral way. Therefore, whatever shows up, whatever the price is, we must dispatch it. Theoretically fine. In practice very uneven but more importantly it misses the Clean Power 2030 strategic goal and to get to that goal you must change the mandate so that NESO control can hear from Claire that they now must push to use that energy rather than discard it. That would change things.

Do you agree with that, Claire?

We do have a really clear mandate. We have a mandate to plan, maintain and operate a reliable system and to do that economically and efficiently. We also have in the NESO strategic measures that we are all held to account to do what sits within our mandate to achieve government policy. They are all there and it is not as we were alluding to earlier in my scope to instruct operational colleagues what they should or should not be doing. Our mandate is very clear.

Can I just follow up? Some people have talked about the distribution level co-ordination and data layer between household assets and national markets and that there is a missing middle. Nobody has talked about that today. What should we do to make the most of that when we are talking about balancing the system?

As I say more can be done. One of the things that we are doing that Ofgem and DESNZ have asked us to do is create this central mechanism so that NESO and DSO and distributional operators can see some of these assets to understand where they are, the smaller assets you are talking about probably, the size and what they are doing. We have just started doing that and it should be finished in about 18 months. That is the first stage of helping address that system. There is still more that Ofgem could do to drive NESO and the DSOs to collaborate and co-ordinate more.

What do they need to do?

Certainly, they need to share some of the data, agree who can call on some of those assets, agree some of the market rules and go into the co-ordination a bit more enthusiastically.

What is the principle? I have been very struck by Alastair’s point that we need to have some agreed principles so that people do not end up in meetings bouncing their head up against. What is the principle that Ofgem needs to apply when making this bit of the system work, or is helping you make the system work?

Helping us make the system work. The Government have helped by having the Clean Power 2030 target because that is some of the driver but there is still more that Ofgem could do with some of the price control mechanisms and the incentives within that. That is what drives the network operators to change their behaviour. The other thing we would say is I do not think we would agree with Alastair that you need to favour renewables. What we would say is you need to make sure that the rules are changed so that they do not favour fossil fuels.

If you did it on price then that would not be on the system, would it?

There are things that can be done with the DSO or the rules to address some of that.

To your earlier point, though, that is all in the background and you need a simple framework or boundaries and principles that people operate within. The household consumer or the community energy project that you mentioned do not care about any of that. You need to also make the space for innovation for all these clever tech companies to come in with a simple interface that they provide to engage people and allow them to operate. All the complexity that sits in the backgrounds no household is interested in.

No, I understand that they are not interested in it, but I do think it is not so much the households but also making sure that the energy system is properly accountable and the players within the energy system are accountable because otherwise complexity is the equivalent of opaqueness and the opposite of transparency unless you can explain yourselves. That is why I am pushing on it. Is there any security risk around the missing middle? Some people have suggested there could be a security risk. Do you think it needs to be treated as critical infrastructure, bearing in mind some of the stuff we talked about in terms of the more distributed energy increases our potential for resilience? Do we need to think about that?

Resilience operates both ways. A distributed set of assets on the system makes the system more resilient because you do not have all your eggs in one basket, but you are right there is another side to that and there have been incidents on other systems in the world where—

What should we do?

We have an extremely robust critical national infrastructure and some of the people who work at NESO are the ones that do all that. It is a risk. We are very cognisant of it.

The missing middle bit is a risk, is it?

The security risks that that can prevent but that absolutely should not and is not a reason for not engaging that part of the market. It is just that you need the appropriate protections in place.

One of the things that we are doing again on behalf of DESNZ is to work with the industry to develop some of these cyber standards for some of the smaller assets you are talking about so that work is just starting. That should give more reassurance that this is not a problem. I do not think we would go as far as saying they should be classified as critical national infrastructure because of the burden that brings but—

Why does it make it more burdensome?

Our worry is that would create additional regulatory standards that some of the EV chargers need to meet. We think there is a middle ground where you develop some of the technical framework a bit more to give more reassurance on cyber, because it is very important infrastructure, without going the whole hog of labelling it critical infrastructure and then rolling out more regulation.

I have one question on self-dispatch that as written is incomprehensible to me, which is no disrespect to our clerks at all but is illustrative of the challenges that we face. I am going to ask it in a slightly different way. What do you think is the argument behind the Government’s decision to retain self-dispatch rather than move to central dispatch? I want to understand what you think the Government’s thinking is, their argument, not what has happened.

I think the argument the industry made against central dispatch is that the central dispatcher looks a little bit like the old CEGB, which basically sits in a room, made its own decisions, told everyone what to do, and ignored anyone who came along with a good idea. That was a real threat. We do have a lot of activity and a lot of innovation that comes through, because you can enter a market as soon as you are ready with whatever it is you have. That is a good thing. The reason that we have this heavily caveated support for most of NESO’s options on balancing and dispatch reforms is that, nevertheless, there is a problem that the market cannot solve because there is no way of locating energy in the wholesale market. We are happy with the concept of a degree of control, an increased degree of control, passing to NESO on the basis that they use it. With great power comes great responsibility. If you take control of this you must use it right, and at the moment those measures are not in place. They are too tightly focused, and we would lose that again. Hopefully, that partly answers the question.

There were a number of decisions made by the Government in the last couple of years in this space. That being one of them. What they have done is look at the balance across making the market fit for the future, retaining investor confidence, and not putting too much change into the sector and I think they would say that that change, moving to that model, would fail on that test.

A hybrid dispatch model would not work?

That is still on the table because that still retains the ability of market participants to retain their commercial positions.

Alastair, what do you think of a hybrid model? It sounds to me like a complication.

We are never going to get away from complication in this. What we must do is bust through the weird little rules that make it impossible for people to participate. Once you understand the rules you can still discover that you cannot comply with them because they have locked you out in some way. That is the problem, not the complexity. With hybrid dispatch if we are going to get instructions to our assets that are in a particular location where they can help to go and help then we are cool with that. We are really supportive of it. If in fact we just get ignored because the hybrid dispatch just ignores us, then we are very unhappy and we are back here yelling.

I think we would broadly agree with what Alastair is saying. We can understand why the Government were cautious about moving to central dispatch. What we would also say is often, not always the case but often countries with central dispatch also have some form of locational and nodal pricing.

Oh my God, somebody has said it again.

If you do not have that—which we are not going to have—that does mean the case for central dispatch versus hybrid dispatch is not as clear.

That is good. Thank you very much.

That is very helpful. In the first panel we heard not for the first time in this Committee that demand is flatlining, that the predictions of growth are not as certain or reliable as perhaps we have been led to believe. Claire, should you be worrying more about demand flatlining than seeing lots of growth?

Demand in our latest analysis was projected to increase by about 11% by 2030 and then 30% by 2035. We look at it all the time to check that that is relevant, but I know that conversation goes into that we should be rethinking investment. It is not really a conversation of should we or should we not invest. It is about investing now so that we do not pay later.

Was it not the point that there is the danger of massively over-investing and then consumers get lumbered with ever higher bills?

We started this session talking about constraint costs. The way out of those constraint costs is building network. The network needs to come in front of demand. Two weeks ago we saw 30 GW of demand in the summer. People are in a process of electrifying in terms of transport and heat. It may not be quite as quick as we said but we still need the investment there.

Do you agree with that, Alastair?

I think if we do not see electricity demand picking up and gas demand going down it is because the Government do not have their heat policy right and heat feeds into this because heat is easy to store. It is 10 times cheaper than storing electricity as lithium and it is massive. That is where the biggie is. That is where the demand growth is going to be and it is going to be very flexible demand, which means that it can allow power to flow at all times during the network. We will not be sitting there looking at a 15% utilised network and worrying about its peak capacity because we will be filling those troughs to avoid those peaks and we will ship a lot more electricity and we will decarbonise a lot more.

Presumably heat and cooling?

Absolutely heat and cooling, yes.

Yes, you do need more investment in the transmission system. You need it in the distribution system, but you need more flexibility as well. I would say that initially Ofgem, when it was looking at distribution operators, muddled its messaging because it appeared to give the message that it was changing its stance on flexibility and it was not important. I think it has corrected it a little bit, but it is still very important to emphasise flexibility is as important as more investment.

Thank you to our second panel for your evidence. It is very much appreciated. That is the end of our session.