National Grid Electricity Transmission s RIIO-T1 business plan overview

Transcription

1 MARCH 2012 National Grid Electricity Transmission s RIIO-T1 business plan overview Connecting a sustainable future UK ELECTRICITY TRANSMISSION

2 Contents 01 Introduction 02 The structure of our plan 03 Context 05 Our key challenges 07 Stakeholder engagement 08 Our planned expenditure 10 How our plan has changed 11 Outputs 12 Safety 14 Reliability and availability 17 Environment 19 Customer satisfaction 21 Customer connections 23 How we will deliver 25 Innovation 26 Managing uncertainty 28 Financing our plan 30 Impact on customer charges 31 Impact on consumer bills 32 Summary of key data 33 Who we are

3 Introduction This document sets out National Grid Electricity Transmission s (NGET) business plan through to the end of the RIIO-T1 period in Our plan has been developed in conjunction with our stakeholders and we would like to thank all of you for your time and commitment throughout this process. This will be our first business plan under RIIO the new regulatory framework introduced by Ofgem. The goal of RIIO is to ensure reliable and sustainable energy networks that give consumers today s and tomorrow s value for money. Informed by our stakeholders views, our plan puts our customers at its heart and addresses five key requirements: we will continue to operate a safe and reliable network whilst facilitating a lower carbon future, as well as managing our own environmental footprint. Sustainable Safe Innovation Customer Reliable Our plan considers the needs of investors as we ensure we can attract adequate capital to finance our growing business and deliver our agreed outputs. This is all underpinned by the need to ensure affordability for consumers. Innovation will be a crucial tool in ensuring we can deliver the required investments efficiently. We demonstrate within our business plan how we will challenge ourselves to drive down the cost of delivery, utilising benchmarking to demonstrate efficiency and working with other companies to develop and adopt best practice. Our plan is based on the Gone Green scenario and anticipates over 30 gigawatts (GW) of new customer connections during the RIIO-T1 period. As this is just one view of the future, however, we have modelled alternative outcomes in order to ensure that neither we nor consumers face windfall gains or losses if reality should differ. We have proposed a series of regulatory mechanisms to adjust our revenue to reflect what actually happens. Operating a safe, reliable and efficient network has always been at the heart of our operations. This, along with our role in facilitating a low carbon future and shaping UK and European energy policy, will continue to be our core priorities. Our business plan reflects this. We look forward to evolving the network and the way we manage it to meet our customers and wider stakeholders needs over the coming decade. Affordable Financeable Nick Winser Executive Director, UK Electricity Transmission s RIIO-T1 business plan 01

4 The structure of our plan This document provides an overview of our business plan. More comprehensive information is available in the detailed annexes that comprise our overall plan. These annexes are summarised below. This document:- Overview Summarises the elements of our plan that are of most interest to our stakeholders Detailed plan The detail behind our baseline plan, split into sections to aid readability How we will deliver The adaptability and deliverability of our plans, including key challenges such as workforce renewal and growth Managing risk & uncertainty Key risks we have identified and the proposed mechanisms to deal with future uncertainties Outputs The outputs we will deliver and how we will measure their delivery European context Our role in Europe and the benefits and challenges that Europe brings Innovation strategy Our innovation strategy (incorporating R&D, partnering strategy and grass roots innovation) Stakeholder engagement process The process followed to gather stakeholder views and how they shaped our plan Finance The proposed finance package to allow us to fund our investment plan Future of Energy Our longer term view of energy to 2050 Efficiency & value for money Demonstrating how we test efficiency and use benchmarking to lower the cost of delivery Assumptions and glossary Asset guide Network Development Plan Network Availability Policy OUR PLAN 02

5 Context The energy industry between now and 2050 is set to change dramatically, driven by the need to provide secure, affordable and low-carbon energy. The path to low-carbon energy is driven by the UK Government targets for emissions and renewable energy, which aim to deliver an 80% reduction in greenhouse gas emissions, compared with 1990 levels, by In recent decades, energy policy and electricity industry regulation have largely been defined by the balance of two key drivers: affordability and security of supply. None of the challenges associated with these two drivers are likely to diminish in the future. We still need to connect new customers, renew and maintain our assets and operate our network in an economic and efficient manner, ensuring security of supply is maintained and a competitive market is facilitated. Existing electricity network Interconnectors Potential wind farm sites Potential nuclear sites In recent years, environmental sustainability and the needs of future consumers have been firmly added to this agenda. This will stimulate a transformation over the next decade. For example, approximately 25% of today s generation plant is expected to be decommissioned by New generation is required to fill this gap, and low-carbon generation is needed to enable the UK to meet its climate change targets. Gone Green The Gone Green electricity generation and demand scenario takes a holistic approach to meeting government climate change targets. Our business plan, including our proposed uncertainty mechanisms, is based on delivering the network needed to fully meet the government s energy security and environmental goals for 2020 and facilitates the connection of generation and demand assumed in the Gone Green scenario. Ireland Norway Netherlands Belgium During the business plan period we will be dealing with a large amount of change in the generation mix. With much of the existing nuclear plant coming to the end of its life, and coal and oil capacity limited as a result of the Large Combustion Plant Directive (LCPD), the majority of new power generation is forecast to come from Combined Cycle Gas Turbine (CCGT) and offshore wind generation, with new nuclear plants and more interconnection with Europe playing a greater role towards the end of RIIO-T1. France France Electricity Transmission s RIIO-T1 business plan 03

6 Context (continued) GW / / / / / / / / / / /31 Our business plan has to be flexible enough to cope with this uncertainty whilst being definite enough to be a useful indication of our activity and future spending. We have built our baseline plan on the industry-tested Gone Green scenario, which was supported by our stakeholders. Due to the range of credible outcomes over the next decade, we will need to be able to flex our plan. We have therefore proposed a number of uncertainty mechanisms tools that will deal with future changes in the most appropriate manner.? Want to know more? Refer to our Managing risk and uncertainty annex Gas Coal Hydro Nuclear Wind Marine Oil Biomass Interconnector Net Capacity Change Gone Green assumes that 40GW of new generation will connect across Great Britain between now and 2020/21 (which is a little under half the current installed capacity), with around 22GW of existing generation anticipated to close over the same period. Want to know more? Refer to our Future of Energy annex Adaptability and flexibility In light of the uncertainty regarding the exact demands our customers will place on our services over the next decade, our investment programme will need to be flexible. As our customers requirements evolve, we will alter the scope and timing of investments as more detailed information emerges, accelerating or delaying, creating or removing projects. Changes could be triggered by new requests for connections, customers changing their connection timescales or by market reform.? Operational context Today s transmission grid is designed to handle large, stable and predictable sources of generation, but the new sources which often depend on nature are inevitably less predictable and much less controllable. We will need to adapt to this fundamental change. Doing so will mean balancing, minute by minute, less predictable supplies of renewable energy with more flexible sources such as gas-fired power stations and stable sources such as nuclear plants. This will result in an increase in balancing activities, a rise in the level of operating reserve needed to maintain system frequency and a requirement for active and timely control of more sophisticated network assets. In order to achieve this, our plan is designed to deliver enhanced system operation capability. 04

7 Our key challenges We will deliver our plan in the face of considerable uncertainty, adapting and innovating as our customers needs evolve. We will do this while maintaining our high levels of operational performance and efficiency. In order to do this there are a number of major challenges we need to overcome. Expanding and renewing the transmission network Many of our electricity assets in use today were built in the 1950s or 60s and are now reaching the end of their useful technical lives. They need replacing, refurbishing or more extensive maintenance. Of the 13.6 billion capital expenditure programme proposed in our eight year business plan, roughly 40% is for replacing existing equipment. The other 60% will be invested in facilitating the connection of new sources of demand and generation, including new nuclear plants, wind farms and gas-fired power stations. Securing planning permission for our major infrastructure projects The Planning Act (2008) requires us to do more work earlier in the planning process including more engineering design and wider consultation before planning permission can be sought. Although we welcome the fact that the planning process is more predictable, this makes the process longer and more expensive. Because the Planning Act is relatively new, the effect it will have on major projects is not yet fully known. We will need to deal with the challenges of the new Act at the same time as increasing the number of planning applications we make as our investment grows throughout the RIIO-T1 period. Given the current level of interest in new infrastructure amongst many of our stakeholders, we will be dealing with these challenges against a backdrop of increased public scrutiny and greater levels of local consultations. Upgrading our critical IT systems Our complex network relies heavily on a small number of critical IT systems which help us to operate and manage it 24 hours a day, 365 days a year. The hardware for these systems needs to be upgraded approximately every five years to ensure that it can be supported. These upgrades will allow us to build in the flexibility that we will need to efficiently operate the transmission network of the future, as well as increasing our cyber security. It is certain, however, that we will incur costs at an earlier stage of our construction programme, as we develop a wider range of options earlier for the consultation process. The UK should have a state of the art control centre for the challenges that they are facing. Stakeholder comment, November 2011 Electricity Transmission s RIIO-T1 business plan 05

8 Our key challenges (continued) Finding and developing enough people with the right skills Over the next decade, we will build a larger, smarter and more flexible electricity transmission network. Doing this will require more people with specialist skills, people who are currently recruited from all around the world and for whom there is a great deal of competition. In addition, around 600 electricity staff just under one quarter of our current workforce will retire between now and And although staff turnover remains relatively low at around 3% per year, it nevertheless means that a further 800 employees will leave during the course of the business plan period. To replace these people and further grow our workforce, we anticipate recruiting and training around 2,000 new employees by the end of the RIIO-T1 period. To ensure we can be flexible enough to facilitate the 2020 targets, we need to start recruiting now as it can take up to four years to fully train a new starter. We are recruiting via a wide range of channels and are developing our training schemes to make sure our employees have the skills we need. We are also doing what we can to increase the number of potential recruits. This includes expanding our apprentice and graduate recruitment programmes as well as working with schools to encourage more children to study science, technology, engineering and mathematics. Managing commodity price volatility Independent, specialist advisors forecast that prices for commodities such as fuel, materials and specialist labour will rise faster than general inflation. This is a result of increasing worldwide competition for these resources. Our business plan presents evidence of these potential cost increases and explains the actions we will take to mitigate the impact this has on the cost of running our business. Europe As one of the driving forces behind the creation of the European Network of Transmission System Operators for Electricity (ENTSO-E), we put a great deal of effort into influencing the way the European energy industry is regulated. Europe will have an increasing effect on the UK s energy regulation and legislation in the coming years, as signalled by the development of European Network Codes. We will work towards our aim that regulation should maximise the benefits to UK consumers while minimising the cost to them by, among other things, ensuring that generation, transmission and supply companies have the right incentives to innovate and invest. A concern raised at more than one event was the shortage of people with relevant skills to meet future energy needs Comments from stakeholder workshops, March-May

9 Stakeholder engagement Change on the scale we are talking about affects everyone, and we have listened hard in order to produce this business plan. We have always sought stakeholders views, but they have now become an integral part of the way we do business and make decisions. This is a permanent change, not just for RIIO-T1. Under the banner of Talking Networks, we have been proactively engaging with our stakeholders on topics related to our RIIO-T1 business plan. We promised our stakeholders we would discuss our future challenges and plans with them, listen to what they had to say, and act on what they told us. Talking Networks builds on our regular stakeholder engagement activities, through which we have been engaging with our stakeholders for many years on the critical energy challenges facing the UK and Europe as well as on our day-to-day operational activities. These take the form of many different types of engagement, from energy industry discussions through our Transporting Britain s Energy process to community engagement in relation to new infrastructure projects. In the course of developing our business plan, we held 16 workshops, talking directly to several hundred stakeholders with a broad range of interests. We also carried out three consultations, held dozens of bilateral meetings and explored consumers attitudes to transmission. The stakeholders we consulted included consumers (current and future bill payers) and consumer representative groups, government, other regulators (e.g. the Health and Safety Executive (HSE) and the Environment Agency (EA)), the energy sector, environmental organisations, and academic experts. These sessions were facilitated by an independent third party so that we could be sure we were not unwittingly influencing, misunderstanding or misinterpreting what our stakeholders were saying. There has been a positive reaction to our Talking Networks process and the transparency with which we have developed our plan. We will continue to build on our stakeholder engagement activities, liaising with our stakeholders throughout the RIIO-T1 period. We have welcomed the open and transparent way in which the business plans have been developed. EdF, November 2011 consultation response? Want to know more? Refer to our Stakeholder engagement process annex or visit Electricity Transmission s RIIO-T1 business plan 07

10 Our planned expenditure Over the period we anticipate 16.4 billion of totex (total expenditure, i.e. capex plus opex) will be required to deliver the outputs agreed with stakeholders. Our actual spend will be driven by user requirements and we are proposing uncertainty mechanisms to adjust revenues in line with what becomes reality. RIIO-T1 investment profile Total forecast expenditure over the RIIO-T1 period m, 09/10 prices Customer-driven capital expenditure Non customer-driven capital expenditure Strategic Wider Works* 2013/ / / / / / / /21 Total 1,042 1,308 1,191 1, , , ,356 System Operator capital expenditure Total operating expenditure Total ,828 2,088 2,318 2,248 2,281 2,050 2,080 1,791 1,540 * Strategic Wider Works are defined as projects over 500m which are dealt with via within-period cost determination 08

11 In order to deliver the outputs, our plan contains a number of key activities. These can be grouped into five core categories and form the foundations upon which we operate to optimise efficient delivery and drive our choices of delivery model and organisational structure. Load-related activities (customer-driven) Load-related investment is driven by changes in the pattern of generation and demand, both through direct interaction with customers via connection applications, and through the need to ensure that the interconnected transmission system fulfils certain security requirements, given the anticipated background of generation and demand. Our plan is based on Gone Green (see page 3) and anticipates connection of over 30GW of new generation, resulting in total load-related investment in the business plan period of 7.8bn, which equates to 48% of our plan. Investment in Strategic Wider Works (projects greater than 500m) is forecast to be 1.4bn. Non load-related activities (non customer-driven replacing and maintaining our assets) Non load-related expenditure is driven primarily by the need to manage the ongoing safety, reliability and environmental performance of our asset base. The potential customer impact associated with the deteriorating safety, reliability and environmental performance of assets reaching the end of their useful life continues to drive a programme of replacement, refurbishment and maintenance. The forecast total for non load-related investment in the business plan period is 6.4bn (made up of 5.3bn capex and 1.1bn opex) which represents 39% of our business plan. System operation The costs associated with our system operation function are predominantly driven by the resources and IT solutions that we require to safely and economically run the network, whilst still maintaining reliability. During the business plan period, the total spend for direct opex is forecast to be 367m and investments in IT systems (for asset health purposes and enhanced capability) are forecast at 271m. We also plan to invest 42m to improve the resilience of our data centres. Expenditure on system operation represents 4% of our total baseline plan. Network planning and support Network planning and support activities represent 4% ( 730m) of our plan and are those activities which provide the expert technical assistance required to plan and deliver construction and maintenance work. Business support Business support activities represent 5% ( 758m) of our plan and are defined as operational services such as IT, property management, HR and finance which are provided across National Grid with Electricity Transmission s proportion allocated using an agreed regulatory methodology. These support functions aid the delivery of our core activities, and maintain the longterm health of our business by providing key services such as financial control, transactional processing, recruitment and IT support. Want to know more? Refer to our Detailed plan annexes? Electricity Transmission s RIIO-T1 business plan 09

12 How our plan has changed Since our July 2011 submission, we have updated our business plan following feedback from Ofgem and other stakeholders. The key updates agreed with Ofgem are: Updates to reflect the Gone Green 2011 scenario Alignment of our 2011/12 and 2012/13 forecasts to reflect our actual expenditure and latest forecast These updates have had the following impact on our business plan headline numbers: billion July 2011 March 2012 Capex Opex Creating a new outputs annex, which: Links expenditure to outputs Assesses the impact of delivering more or less in order to justify our baseline plan as the best outcome for consumers Provides more information on our environmental strategy Developing our new Innovation strategy annex, which provides more information on our overall approach to innovation, including commercial innovation. Totex As part of the development of our updated plan, we have also addressed stakeholders feedback on other areas of our initial submission. This has included: Developing our stakeholder annex: To demonstrate a wider range of stakeholder views To engage more with the voluntary sector and local communities To explain the implications of our uncertainty mechanisms on charging volatility To show more clearly how stakeholders have influenced our plans Developing our Detailed plan annex to demonstrate the linkages between capital and operational expenditure. Further justifying our finance proposals by: Providing more detail on the link between risk and the cost of equity Justifying our requirement for 7.5% cost of equity Providing the rationale for our proposed notional dividend policy 10

13 Outputs During the RIIO-T1 period, we will deliver agreed levels of outputs for safety, reliability and availability, our environmental impact, customer satisfaction and customer connections. In developing the outputs we will deliver over the next decade, we have actively sought stakeholders views on what they want from our network over the period. The following pages examine each of the RIIO outputs in turn. We explain the key elements that contribute to delivery of each output, including what we already do to deliver these and what we will do in the future. For each output, we describe what was included in our July 2011 business plan, what our stakeholders have told us is important to them, and what we are proposing in our updated March 2012 submission. We list the primary and secondary deliverables in each area and explain how we will be funded and, where appropriate, incentivised to meet our targets over the business plan period. Most of our activities contribute to several outputs, so we have mapped costs to the most significant outputs that each activity delivers. For example, the money we spend on maintaining our assets contributes to the safety and environmental outputs, but the main reason for the work is to maintain reliability. These costs are therefore split, with 50% allocated to reliability, 35% to safety and 15% to the environmental output. The chart below shows the proportion of our totex costs associated with each output. Not surprisingly, maintaining reliability is our biggest focus. Mapping costs to outputs Following our July 2011 submission, Ofgem and our other stakeholders told us they wanted to see better linkage between our costs and outputs. As a result, each of the following output sections includes our forecast expenditure for RIIO-T1. In assessing how much of our proposed spending can be attributed to each of the outputs, we have made some broad assumptions. Electricity Transmission s RIIO-T1 business plan 11

14 Outputs: Safety Safety is at the core of our business and is a top priority for us. We will continue to mitigate risks and strive to eradicate injuries. Our business plan enables us to comply with our statutory duties and maintain our focus on safety as a priority. Attendees felt that National Grid places a strong emphasis on, and performs well in the area of safety. They expressed a desire to see this continue Comments from stakeholder workshop, December 2010 An important contributor to staff and public safety is the condition of our assets. Assets are designed and constructed to be as safe as practicable throughout their lifetime. We take all necessary steps to prevent major accidents and have tested mitigation plans in place to limit consequences should they occur. Asset condition is managed in the long-term by a combination of maintenance, refurbishment and replacement activities. We take a risk and criticality approach to our asset replacement investment, which assesses the condition of an asset and the consequences of its failure in order to prioritise investment. Physical Security The UK Government (DECC), working closely with the Centre for the Protection of National Infrastructure, has designated a number of our sites and critical IT systems as Critical National Infrastructure. Our security strategy allows for effective and appropriate security measures to be employed to safeguard our assets and provides for the enhanced protection necessary to ensure the continued safe operation of our IT systems. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will ensure compliance with relevant legislation Stakeholders agreed, stating that safety is not negotiable Our plan is designed to comply with all applicable legislation 12

15 The following table outlines the key deliverables in relation to the safety output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Safety Primary deliverable Compliance with all applicable safety legislation regarding operation of the electricity transmission network and all people potentially impacted by it (including staff, contractors, customers and members of the general public) Secondary deliverable Maintaining the current level of network risk (NOMs) through maintenance and the use of our asset health and criticality approach to replacement Funding and incentives Ex ante allowance Financial exposure to under/over delivery against NOMs targets (to be agreed) Relevant uncertainty mechanisms None applicable How stakeholders can assess our performance Compliance with Health and Safety Legislation Total forecast expenditure for safety over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ,269 Want to know more? Refer to our Outputs annex? Electricity Transmission s RIIO-T1 business plan 13

16 Outputs: Reliability and availability Stakeholders have told us that the reliability of the transmission network is important and it is not appropriate for this to be reduced. They recognise that this has an associated cost. We have documented our approach to maintaining availability of the transmission network within our draft Network Availability Policy. We will continue to meet the connection dates sought by generation customers by completing the local works required for the generator to connect to the transmission system in a timely manner. Wider works may be required to fully secure the network and allow efficient ongoing operation of the network; constraint costs may be incurred while the wider works are being delivered. Energy Not Supplied The primary output within reliability is minimisation of Energy Not Supplied, which incorporates the number and duration of supply interruptions. We are already incentivised on this and over the business plan period we are aiming to maintain Energy Not Supplied at current levels. This represents a considerable challenge as network risk is forecast to rise over the same period. Network Output Measures The condition and performance of our assets deteriorate with age and use. Maintenance can help manage the associated risk; however, there will come a point where replacement or refurbishment is required to maintain reliability. Our asset health and criticality indices Network Output Measures (NOMs) consider reliability as well as safety and environmental impacts. The NOMs methodology scores the consequences of asset failure in terms of the potential impact on the network. By understanding the distribution of asset condition and criticality across the network and how that relates to average circuit unreliability and Energy Not Supplied, we can manage our large asset population effectively. NOMs allow us to forecast the future network risk based on what we know about how assets degrade over time. We are therefore able to draw conclusions about future reliability and Energy Not Supplied and adjust our asset management strategy accordingly. We need to balance replacement, refurbishment and maintenance activities with works to connect new customers. 14

17 Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will utilise the Gone Green generation and demand background as our baseline assumption and have modelled credible alternatives to this scenario Stakeholders questioned some of the assumptions but supported Gone Green as the most appropriate scenario for our baseline plan Our plan is based on Gone Green, updated for our March 2012 submission. Alternative scenarios have been developed to identify a credible range of outcomes. Our asset management framework is designed to maintain the integrity of the network Stakeholders said that reliability levels should be maintained We will use NOMs to monitor and maintain the integrity of the network and help prioritise expenditure of 6.4bn We will further discuss the benefits and risks of a targeted N-1 security standard with stakeholders so they can make an informed choice Stakeholders did not support a blanket change to the security standards but supported trials of targeted N-1 operation Our plan provides for targeted N-1 operation. The lessons learnt will be monitored and shared through the SQSS review group. We will enhance our smart operation to cope with the challenges facing the industry Stakeholders said the network is already smart but it needs to be smarter. Smart actions should not detract from investment where it is needed and should not be restricted to assets. We are evolving innovative ways of working and implementing technology to become smarter, whilst ensuring reliability and security are maintained We will create a Network Development Policy, stating the steps we will follow to identify required wider works Stakeholders accepted the proposals, not being able to identify an alternative. Some questioned whether our scenarios are comprehensive enough. Our Network Development Policy forms part of this submission. We are investigating combining some of our consultation processes and continuously review our scenarios in conjunction with stakeholders. We will invest 262m in new IT systems and the maintenance of existing systems to enhance control room capability Stakeholders were supportive of this approach and keen that it is progressed quickly We have included 271m of investment in our plan to deliver enhanced IT capability including some expenditure deferred from 2012/13 Electricity Transmission s RIIO-T1 business plan 15

18 Reliability and availability (continued) The following table outlines the key deliverables in relation to the reliability and availability output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Reliability and availability Primary deliverable Maintenance of the current level of Energy Not Supplied, with a target of 316MWh per annum for the RIIO-T1 period and complying with our Network Availability Policy Secondary deliverable Maintaining the current level of network risk (NOMs) through maintenance and the use of our asset health and criticality approach to replacement Provision of boundary capacity to meet customers requirements Funding and incentives Ex ante allowance for replacement/refurbishment of high Replacement Priority assets Financial incentive on Energy Not Supplied (at 16 per KWh) Financial incentive (penalty only) against Network Availability Policy Financial exposure to under/over delivery against NOMs targets Exposure to the consequences of non/under-delivery via SO incentives (BSIS) Ex ante allowance for boundary capacity to meet the Gone Green scenario Relevant uncertainty mechanisms (see page 27 for more details) Wider reinforcement works Real Price Effects Demand-related infrastructure Local generation connection Critical National Infrastructure Climate change EU and GB market facilitation How stakeholders can assess our performance An annual report will be created under Licence Condition 17 detailing our performance against the Energy Not Supplied target BSIS quarterly updates at Operational Fora Information within the Seven Year Statement Total forecast expenditure for reliability and availability over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total 1,334 1,470 1,374 1,348 1,186 1,255 1, , Want to know more? Refer to our Outputs annex?

19 Outputs: Environment Our plan supports the decarbonisation of the electricity sector and puts us on track to deliver our environmental legislative obligations. The impact of our operations in the local communities we serve is another key environmental consideration. We are consulting stakeholders about this outside of this business plan submission process. Facilitating the connection of low-carbon energy Stakeholders see this as our main environmental priority. Whilst we cannot prioritise the connection of renewable sources of generation, we will meet our connection obligations throughout the RIIO-T1 period to enable low-carbon sources to connect as quickly as possible. Our business carbon footprint The greatest contributor to our direct emissions is the leakage of SF 6 from our switchgear. The volume of assets on our network containing SF 6 will increase throughout the business plan period. We therefore propose that our target for SF 6 leakage is based on the number of assets installed, with a best practice target leakage rate of 0.5% for all new switchgear, leading to an overall reduction in leakage as a percentage of the total mass installed. As a group, we have traced previously published and verifiable data back to 1990 to define our baseline emission level as 19.6 million tonnes of carbon dioxide equivalent. We are committed to reducing our emissions by 80% by 2050, compared to 1990 levels. Visual amenity In September 2011 we published our latest approach to the routeing of new transmission lines. This states that we will carry out full and thorough stakeholder consultation in relation to every new route, taking this into consideration with the applicable technical considerations in order to determine the best route possible for each individual case. Additionally, we are currently carrying out research to determine consumers willingness to pay to mitigate the effect on visual amenity of existing infrastructure and expect to publish the results of this research in Summer Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will act to minimise our impact on the environment both directly through reducing our own emissions and through our role in facilitating the decarbonisation of energy Most stakeholders saw our primary role as facilitating the connection of renewable energy, although some were interested in our own business carbon footprint Our plan facilitates the connection of around 24GW of renewable and low-carbon generation, which will support the decarbonisation of the electricity network. We will minimise our business carbon footprint, evaluating short-term reductions against longer-term benefits. We included a provision for a nominal 10% of new electricity lines to be built underground, with an uncertainty mechanism in place to reflect the outcome of each individual consultation process Stakeholders were concerned that 10% was a target and therefore the number was too low We discussed our plan with stakeholders, explaining that 10% is a nominal figure and that the uncertainty mechanism will flex funding up and down depending on the outcome of each individual planning application. We have not changed this assumption since July Electricity Transmission s RIIO-T1 business plan 17

20 Environment (continued) The following table outlines the key deliverables in relation to the environment output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Environment Primary deliverable Compliance with SF 6 leakage targets based on installed assets. New assets will have a best practice target leakage rate of 0.5% per annum. Secondary deliverable Minimisation of losses from our network, balancing short-term increases with the longerterm benefits of energy industry decarbonisation Maintaining the current level of network risk (NOMs) through maintenance and the use of our asset health and criticality approach to replacement Proportionately maintaining our current business carbon footprint in the face of the increasing volume of SF 6 equipment on the network Funding and incentives Financial exposure to under/over delivery against NOMs targets (to be agreed) Symmetrical financial incentive based on SF 6 emissions and the social cost of carbon Reputational incentives based on network losses and percentage of new renewable energy connections (being consulted on by Ofgem) Fund for undergrounding existing lines Relevant uncertainty mechanisms (see page 27 for more details) Planning requirements Climate change How stakeholders can assess our performance Compliance with legislation, annual publication of our SF 6 leakage statistics Total forecast expenditure for the environment over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ,591 Want to know more? Refer to our Outputs annex? 18

21 Outputs: Customer satisfaction To deliver our part in meeting the UK s climate change targets, we need to be a flexible organisation that is in tune with the market environment and with our customers. Customer research helps us understand our customers perspective of our performance and helps us continuously improve our customer service levels. Feedback is important to us and as such we introduced a formal survey in 2009 to help identify potential improvements to our customer service levels. This survey will be further enhanced throughout the RIIO-T1 period. Our work in this area is underpinned by our customer commitment, which articulates for ourselves and our customers what is expected in the delivery of our services. There are, however, times when we get it wrong and so we have introduced a formal complaints process that provides an independent escalation route in the event that customers do not receive a satisfactory resolution to their concerns through their normal dayto-day contacts. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will introduce a customer complaints process Stakeholders felt that tracking customer complaints is a good measure of customer service We have implemented a complaints process and customer commitment to drive improvements in our service We will improve our website Stakeholders said our website is difficult to navigate We have started work on website improvements and these will be released incrementally over the next 12 months We will consider stakeholder requirements in relation to predictability of charges Stability is the preference, but if unachievable, charges must be predictable and transparent We have adjusted our financing proposals to make revenue recovery smoother over the period and are progressing developments to improve the transparency and predictability of charges Following our July 2011 plan, we discussed a customer survey as the tool to measure customer satisfaction Stakeholders were wary that customer satisfaction would be measured by surveys alone. The survey itself must not be a resource burden on stakeholders. We continue to work with Ofgem and the other TOs on the format of the survey Electricity Transmission s RIIO-T1 business plan 19

22 Customer satisfaction (continued) The following table outlines the key deliverables in relation to the customer satisfaction output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Customer satisfaction Primary deliverable Improved levels of customer satisfaction and, along with Ofgem, other TOs and stakeholders, further development of a customer and stakeholder satisfaction survey Secondary deliverable Not applicable Funding and incentives Ex ante allowance for staff and systems Financial incentive based on annual customer survey (in the range of +/-1% of total annual revenue) Discretionary reward for outstanding stakeholder engagement (up to 0.5% of total annual revenue) Relevant uncertainty mechanisms (see page 27 for more details) Planning requirements EU and GB market facilitation How stakeholders can assess our performance Publication of survey results and our stakeholder engagement submission Total forecast expenditure for customer satisfaction over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ? Want to know more? Refer to our Outputs or Stakeholder engagement process annex or visit our Customer Commitment website: CustomerCommitment/ 20

23 Outputs: Customer connections One of our obligations is to meet any reasonable customer request for connection to the network. Once a formal application is received, we have a requirement to respond within three months with a connection offer and date. We engage in early and regular discussions with customers throughout the connections process and assist potential developers in preparation of a shortlist of development options by offering advice on likely connection times and complexity. We assist customers in completing our application form for a new connection. This results in an increase in applications proceeding to final signature and a reduction in speculative applications. Customers welcome this approach, acknowledging the improvement this has made to the process. We will continue to seek improvement to the process throughout the business plan period. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will comply with our connections licence obligations Supported by stakeholders We will comply with our connections licence obligations We will continue to work with our customers to make the connections process accessible and easily navigable Stakeholders supported further development of the process We will continue to work with our customers to make the connections process accessible and easily navigable Electricity Transmission s RIIO-T1 business plan 21

24 Customer connections (continued) The following table outlines the key deliverables in relation to the customer connections output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Customer connections Primary deliverable Meeting our licence obligations to deliver timely connections Secondary deliverable Not applicable Funding and incentives Ex ante funding for a team to carry out the connections process Penalty for not meeting connections licence obligations Relevant uncertainty mechanisms None applicable How stakeholders can assess our performance Quarterly connections report Total forecast expenditure for customer connections over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ,401 Want to know more? Refer to our Outputs annex? 22

25 How we will deliver To provide the outputs our stakeholders want, we will continue to optimise our structure and deliver work efficiently. Deliverability We need to make decisions on delivery model, organisational structure and our preferred balance between cost and risk. We have weighed up the benefits of alternative delivery models for our main activities and have explored the trade-off between activities to deliver required outputs. Delivery models Delivery models cover the way we organise ourselves within the business as well as the choices we make about the mix of work completed in-house and delivered by third parties. We take a variety of factors into account such as the complexity of the work, where the expertise sits, the need for flexibility and economic factors when assessing whether insourcing or outsourcing is most appropriate. For example, we use competitive tendering where the highly-specialised nature of the work means that retaining the skills and equipment in-house is not efficient, such as for our cable tunnel projects. Conversely, we use alliance models for long-term predictable work in order to leverage economies of scale and drive learning and year-on-year improvements. Throughout the business plan period, we will continue to review and evolve our practices, seeking to continually improve and find innovative ways of working. Equitable trade-offs In undertaking our operations, we make a number of trade-offs between different costs, risks and benefits. The main trade-offs within our business are the interactions between our Transmission Owner (TO) and System Operator (SO) functions and balancing capital and operational costs in relation to asset replacement, refurbishment and maintenance. As TO and SO, our risk profile is different to networks which are TO only. This is considered within our risk and uncertainty analysis and our finance package.? Want to know more? Refer to our Managing risk and uncertainty and Finance annexes We assess the optimum balance between trading off the higher costs of investment (capital expenditure) with the costs of maintenance and condition monitoring (operational expenditure) and the risk of failure. For example, over the current price control period we have been able to use the latest condition information and performance data together with the outputs of research projects to extend technical asset lives for certain types of equipment. We will continue to assess these trade-offs to ensure we are achieving the optimum result. Electricity Transmission s RIIO-T1 business plan 23

26 How we will deliver (continued) Efficiency We anticipate that we will be entering a phase of steep capital and workload growth, delivering investments required by our customers whilst operating and maintaining an increasing asset base. As such, the majority of our costs are increasing and a growing element of our forecast efficiencies will take the form of delivering more for the same through productivity initiatives, mitigation of upward pressures and spend to save transformation programmes, along with more traditional cost reduction methods. Innovation will be critical in ensuring the efficient delivery of our challenging plans. For operational expenditure, we have embedded an average long-term efficiency level of 1.6% per annum. This efficiency level is challenging and is at the top end of historical utility averages and regulatory precedent. As demonstrated below, the embedded efficiency (which we expect to deliver through avoided cost efficiencies due to forecast workload growth) will help to offset upward cost pressures. We test ourselves through mature industry benchmarking studies such as ICTSO and ITOMS which take place every two years. Membership of these organisations also allows us to discuss best practice with other member companies, and to collaborate where this is mutually beneficial. At the highest level, 98% of our current cost base has either been market tested via competitive tenders or benchmarked in the last four years. Non-load related capex and maintenance Load related capex and connections System operation Network planning and support Business support Volume of our expenditure benchmarked / market tested Alliances Market tested Benchmarked Not tested million Offsetting upward cost pressures Other 22 IS capabilities 26 Resourcing 24 Asset condition 17 Asset growth 26 Real prices 43 Efficiencies /11 Upward cost pressures Efficiencies 2020/21 We are a long-term business. The scale of asset replacement and system reinforcement needed gives us an opportunity to invest in the latest technology to deliver long-term value. We are currently incentivised to focus on the lowest cost choice from a capex and opex perspective. This may not always be the right approach as it does not consider future stakeholders needs. We have therefore developed a Whole Life Value process that focuses on all the different aspects of stakeholder needs on a systematic basis. This framework supports our investment and policy decisions, with the aim of creating an enduring value over the lifetime of our assets.? Want to know more? Refer to our How we will deliver and Efficiency and value for money annexes 24