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National Grid – Budgets & Blackouts

national gridAgainst a backdrop of supply capacity becoming thinner, plants being mothballed as commercial terms prompt closure and government policies driving obsolescence in our energy network the virtues of the recent mild winter are clear for all to see.

The bullet being dodged in winter 2013/14 does not mean complacency has set in however.

National Grid, the owners of the pipe and wires network that transport much of the UKs energy around the country is taking the long existing concept of ‘interruptible’ supply to new lengths.

‘Interruptible’ supply is a quid pro quo for large energy users to receive a discount on their energy costs in return for being able to be ‘interrupted’ or taken off the main energy grid at points of high demand. These energy users invest in alternative energy sources to cover these ‘interrupted’ periods.

National Grid has entered talks to establish who of the businesses able to facilitate this will be willing to drop their calls for energy from the grid between 4pm and 8pm on winter weekdays.

Those four hours are critical in balancing energy demand and supply. At this point in the day businesses big and small are still operating whilst householders are returning home firing up the cooker and kettles.

As our guide to Profiles showed it is this 4-8pm period that sees peak demand all year round with particular sensitivity in the winter months.

It is this supply / demand balance that National Grid are keen to address well in advance of Winter 2014 and for which they hope to put an agreement in place to stretch over the coming years until new generation capacity finally comes on tap.

The current paucity of this supply capacity adds to the problems. Quite simply, with the decommissioning of nuclear, phasing out of fossil fuel and the slow, intermittent growth of renewables, the backdrop to demand surges is increasingly stark gap in generation capability.

The big fear is blackouts and as a result demand reduction, to the tune 850MW, is the aim of National Grid.

In addressing the risk National Grid Chief Executive Steve Holliday said:

“I am not uncomfortable but neither am I complacent.

“We have new tools in place given to us by Ofgem that allows us to do this. We will consider in the coming weeks whether we are going to exercise those rights”

The subsidy on cost that will allow these deals to progress however will fall on the consumer. Ofgem claim that the subsidy will amount to less than £1 per year per customer.

However given transportation charges can contribute anything up to 25% of an energy bill already, any further increase to cover the creaking network and early pensioning of viable generation plant places Ofgem’s claim in a different context.

That is not to say a do-nothing option would be acceptable.

Holliday claimed that the work being done today, in conjunction with the ‘interruptible’ project secures greater resilience and therefore less need to call on these demand reduction initiatives.

“During the year we have invested over £3.4bn in essential infrastructure while delivering one of our best years ever in terms of network reliability and resilience. At the same time we delivered strong cost efficiencies, particularly in the UK where around £70m of the savings will benefit customer bills starting in 2015/16.”

As a result National Grid need to use all the tools at their disposal to maintain balance and continuity supply.

But this comes at a time when National Grid are being heavily criticised for its £1bn dividend payment to shareholders and its bonus payments through a controversial incentive mechanism with Ofgem.

National Grid is required by Ofgem to agree a budget for the work it needs to undertake to keep an efficient network operating, this budget is funded via levies through customers’ energy bills.

With up to 25% of bills covering the cost of transportation this soon adds up to a significant number.

For the 2013-14 period National Grid undercut its budget by £170m; that is they spent £170m less than will be recovered through energy bills and paid to them. National Grid are keeping £100m of this over estimate / under budget amount, with £70m being returned to customers through future subsidy.

Questions have been asked as to whether National Grid over-egged the budget given their apparent out-performance just 12 months after the finalisation of the budget in 2012.

When challenged on the anomaly of an over-estimated budget and excessive customer contribution and whether this should be returned to the bill-payers, Holliday said:

“If they do that, we’re probably not going to innovate as much, are we? Let’s be realistic, this is still a business,

“Sharing the benefits is a fantastic philosophy.”

“I’m not at all ashamed that people are being smarter and more innovative than they were before. I’m not saying my engineers did a really sloppy job prior to this – they didn’t, they did a really good job. This is really clever regulation. If this incentive didn’t exist, we would pay more on our bills.”

Tim Yeo MP, chairman of the energy select committee countered:

“I fear the evidence may show Ofgem have been very weak in relation to transmission and distribution costs (National Grid’s income source)”

Yeo went further in calling for the Competition and Markets Authority investigation into the energy market to be extended to cover network companies like National Grid.

This met with derision from Holliday calling it nonsensical” and “irrational and illogical” claiming Ofgem’s apparent ‘scrutiny’ of the National Grid budget would suffice, despite results suggesting the contrary.

Ofgem for their part did their best to portray fairness, responding with:

“Ofgem’s network regulation has driven down costs and improved reliability. Ofgem monitors the companies’ performance and puts in place penalties and incentives to ensure they deliver for consumers. Where companies deliver efficiency savings these are shared with consumers.”

But the last word goes to Holliday where he claimed it was simply the incentive mechanism working “extraordinarily well”, he’s not wrong on that, sadly the benefit the National Grid see is pure subsidy from the rest of us.

Yeo is right; the CMA needs to be extended to cover networks and the regulator themselves with immediate effect for all our benefits.

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