The UK market is not very concentrated, by European standards. As Dan Monzani said, there is a significant amount of independent generation. Of course, there is an on-going Competition and Markets Authority investigation into whether there are any adverse effects on competition. It put out an updated issues statement earlier in the year. That is an independent process, and I have no special insight into where the authority will go with it. However, in that issues statement, it seemed that it was mainly talking about the retail end of the electricity and gas markets. There are some elements to do with locational pricing and so on, but those concern market design upstream, rather than the point that you are getting at.
As Dan Monzani said, we are seeking to frame policy in a way that allows independents to come in. That is being done partly on the generation side—by the way, but we think that the contract for difference is also good for independent generators. On the network side, we have a regime of competition with regard to the offshore links that we have and, along with Ofgem, we are looking to see whether we can introduce more competition for onshore assets, which we believe will keep National Grid on its toes.
The use of auctions is a powerful way to drive value and to ensure that we do not end up with control being exercised by one or more players. That approach is used partly through CFD and partly through the capacity mechanism. Dan Monzani might want to say a bit more about the extent to which the capacity mechanism has brought forward things that we would not have thought of immediately, such as small-scale gas generation that is operated, in effect, as a virtual power station. That could be quite interesting to Scotland, in time. One of the characteristics of the Scottish system at present is that there is a small number of quite large chunks of thermal generation. If a large chunk shuts down, there is a question about what that will mean.
As it happens, we think that Scotland is very well provided for as regards generation and, with the investment that has been made in transmission, it is pretty well placed. However, the transmission pricing changes when one of the large chunks comes off. It may be that a power station shuts, which would mean that transmission pricing in a particular area would drop significantly. There would then be a response, either in the shape of investment in new hydro, if lack of investment was what was keeping it back previously, or in smaller-scale thermal generation, to help to fill that gap. That is potentially quite an organic system.
One other point concerns National Grid’s role as system operator. National Grid has a fully merchant arm, which does some interconnection business and various other things; a regulated arm for the transmission regime; and a system operator role, which is much more akin to a public policy function.
There has been quite a lot of debate about whether there is the right level of separation within National Grid. On the one hand, it has a lot of skills and strengths, and it is a very professional body. I believe that the committee heard from Mike Calviou—he certainly knows his stuff. National Grid has already taken action to strengthen the separation within it in order to give confidence that what we are discussing is done in a way that is not affected by broader commercial incentives.
The committee may or may not have picked up that Ofgem is thinking about the issue. Through one of its projects, it is strengthening the planning and delivery role of the transmission and system operator. We are hoping to get the onshore competition going. One can imagine that, in future, if we end up with a system in which there is more storage and more demand-side response and less wire, the potential conflicts of interest between that area and the system planning role could become more stark.
I think that National Grid realises that, and it is thinking about what it can do in response. Personally, I do not worry about how National Grid is operating at present. In fact, when it first provided advice to us on the capacity mechanism, our view was that it was slightly understating—or very much understating—the potential benefit of interconnectors to system security in GB. If National Grid’s merchant arm, so to speak, was influencing its advisory arm, one would expect the opposite to be happening. It has been a bit whiter than white, and further work has borne out the notion that interconnectors could make a more positive contribution to security of supply.
One issue is whether we should have an independent system operator—as some places in the world do—that might position us to move forward. Meanwhile, there is another debate going on about whether we should have a system architect. Some eminent engineers are saying, “Look—the electricity system is changing very rapidly by historical standards.” A lot of new stuff is coming on in great volumes. We have always had a predict-and-provide model, but is that really where we need to be over the long term? Can we be sure that the system will remain secure and represent value for money? That is a fair question to ask, and I believe that the committee has had some debate about that. We have no particular view at this stage.