The £60 Billion Plan To Rewire Britain | Ep227: John Pettigrew

ML  

Even if everything arrives on time, are we not looking at high electricity prices for the foreseeable future?

JP 

So for us, we are building out all this transmission. Actually it will double the cost to domestic consumers in terms of what National Grid charges, but we currently charge about £25 a year for the transmission system, and it's going to double to about £50 a year with all the investment that we make. But what it will do is reduce what's called the constraint costs on the system, where currently generators who can't get access to the network are being constrained off and are paid for that. And actually that will reduce the bill by £40 pounds. So actually, net-net for infrastructure, it’s not a huge increase in the customer bill. You know, what's driving the pace to which the government wants to do this is to reduce their exposure to world gas prices. Because the fear is that we get a repeat of what we saw with the Ukraine-Russian instance, huge increase in wholesale prices. So the rush is really a bet against being exposed to those high gas prices by investing in domestic generation, albeit offshore wind, and infrastructure.

ML  

Hello, I'm Michael Liebreich, and this is Cleaning Up. No players in the energy system are under quite as much pressure to change as those companies running our transmission and distribution grids. There's more demand from electric vehicles, the electrification of heating, electrification of industry, and, of course, the dreaded AI data centers. There's also a lot more variable renewables in the system, and not just more of it, and not just variable, but also it's coming from new locations, which means a whole new build out. And there's new technology, whether it's solid state switching or whether it's new forms of conductor, whether it's digitization of absolutely everything, and the implications of rolling out AI. And at the same time, there are new vulnerabilities, greater attack surfaces for cyber criminals, fewer spinning reserves providing inertia and other stability services, and a lower and lower tolerance for outages as more of the economy goes electric. My guest today has been living with these issues for the last 35 years, and for the last 10 years, he's been the CEO of one of the world's major grid companies. Please welcome John Pettigrew, the outgoing CEO of National Grid, to Cleaning Up. 

ML  

John, thank you so much for joining us here on Cleaning Up again.

JP

Nice to see you, Michael

ML  
So you were first on the show, it was actually episode 85, and it was in May 2022, so just a few months after Russia's invasion of Ukraine, a lot has happened since then.

JP  

Yeah, huge amounts have happened since then. I was thinking back, actually, to when we last met, and thinking how many things I got wrong in terms of what I was assuming back in 2022, compared to what's actually happened over the last three years. So it's a massive change, both in terms of our UK business and in our US business.

ML    

I like to hear that — things you've got wrong. We'll definitely be going into that, I hope, in quite some detail. But it's also an interesting time for you personally, because you are on your victory lap. Your board has recruited your replacement after 10, frankly, pretty successful years as CEO, and you've got two more months until you hand over to your CEO designate.

JP  

Yeah, so Zoë Yujnovich started on the first of September. I think she's going to be absolutely brilliant. I mean, she’s got a fantastic energy background. Really understands capital delivery and loves what National Grid has been doing. So we’ve got two months together. She's, as you can imagine, drinking out of the fire hose at the moment, trying to get the business, to understand all the things that we do. And then on the 17th of November, my last act is to do our half year results, and then I'm going to step away and Zoe takes over. So it's been 35 years with the company, and as you said, nearly 10 years as CEO, so it's a big moment. But it's absolutely the right time for me, and I think Zoe's gonna do a fantastic job for us.

ML   

So in some ways, this is a great time for a conversation, because we can review some of your greatest hits, as well as obviously those things that you say that you've done wrong. But before we get started, what I would love to do is, if you could give the thumbnail of the organization, because everybody will have heard of National Grid, but some won't know exactly what it is that you do. And you've got US, UK, you've got electricity, gas, you've got transmission, distribution, you've got lots of people. Just give us the thumbnail sketch.

JP  

So very simply, National Grid is a transmission and distribution company. So we transport the energy from where it's produced to where it's consumed. We're broadly 50-50, UK and US, and actually about 18 months ago, we announced the refinement to our strategy to just focus on networks. So we focus on transmission, electricity and gas networks, electricity and gas distribution networks, regulated, non-regulated, offshore and onshore, and that's our business as National Grid. So we effectively are the transporter of energy. We don't own energy. We don't own generation. We just transport the energy. 

ML  

And how many people worldwide? 

JP

Oh gosh, we're well over 30,000 direct employees now, and probably twice that in contractors, Michael, as we sort of engage in the massive construction program we're on at the moment.

ML    

Yes, and that's going to be one of the questions, how has that grown since you and I last spoke?

JP  

Well, 18 months ago, we announced our refined strategy, and with that, we laid out a £60 billion pound capital investment program over the period 2024-29. So to put that into context, that's twice the level of capital investment in our preceding five years. Unprecedented in terms of scale. I mean, just to bring it to life, National Grid, historically, has done one major national transmission infrastructure project a year. We're doing 17 in the UK over the next few years, so it's a massive step up in the levels of capital investment that we need to deliver.

ML    

So I want to wind back 35 years ago, you joined as a fresh faced young graduate. I believe one of the things you've been doing this week is actually welcoming the new crop of graduates. How has the sector and the company changed? Let's have the short version. But if you look back to that day, 35 years ago, what are the most striking differences?

JP  

When I joined, it was just after privatization of the electricity sector in the UK. So National Grid had just been formed. It was a new company trying to find its way. It was very much focused on electricity transmission in the UK, nothing else. And it was a new market. So everything had come from the CEGB (Central Electricity Generating Board), which was government owned and centrally controlled. So market mechanisms needed to be developed. The 1990s I remember the dash for gas, for CCGT — so combined cycle gas turbines — the new generators and trying to connect to the grid. And my first job, actually, was connecting these gas generators to the grid system. By the time we got to 2000, National Grid had suddenly become international. We'd been very successful in developing a telecoms company called Energis during the telecoms bubble, which we then sold, and used the proceeds from that to expand into the US, into the northeast. And actually for a period of time, we were in Argentina and Brazil and in Poland and Zambia, and a whole host of other countries, which we ultimately refined down to being a focus on the UK and the US. So you know, today, we are a much bigger company, much more diverse, gas and electric transmission and distribution, and very focused on our US and UK markets. So it's gone from being a relatively local utility to one of the biggest investment owned utilities in the world. And with that, the scale of what we do and the opportunities for young graduates who I talked to this morning, is fundamentally different.

ML    

And you talked about diversification into gas, but you also, in a sense, at least in the UK, de-diversified, right? You've been in the process of selling. When we spoke three years ago, you had started that process. I think you'd sold the first 60%. But you've continued that process, and in the UK, you're completely out of gas, I believe?

JP  

Yeah, that's right. So the way that we thought about it, Michael, is we wanted the company to really reflect how we saw the energy transition, and to deliver a proposition to our investors, which is, you know, a mixture of growth and yields. Being a utility, we generate a yield and a dividend. And the way we looked at the UK market, we could see that gas was going to play an important role, but we didn't see it growing going forward. Whereas actually in our US business in the northeast, three times as much energy goes through our gas network as through our electric network, and it continues to grow. So we took the decision to reshape the group to actually broadly get to 80% electric, 20% gas. But that's made up of being 100% electric in the UK and broadly 50-50 in the US.

ML    

Is the difference in strategy driven by climate constraints? I mean, not to put too fine a point on it, the UK is going very quickly on climate and climate action, which is going to be largely around electrification. And the US, ahem, how shall I put this nicely, perhaps is not going as fast?

JP  

Interestingly, for us, our focus in the US is in the northeast, who actually up till this point, have been as ambitious as the UK in terms of climate goals. So New York and Massachusetts have set very stretching goals for climate. So there wasn't a huge amount of difference. The reality is that the UK has replaced the vast majority of its distribution gas system over the last 20 years, and the US is still going through that process. And therefore, actually, it's just about the growth opportunities in the US through investment, we're much bigger on the gas side than the electric side. And as I said, gas in the northeast, given the weather, is a hugely important energy source in the Northeast, and one that we see continuing for many years.

ML    

So I suspect we'll come back to this. Because when we last spoke, we talked quite a bit about renewable natural gas, or bio-gas, versus potentially hydrogen, playing a role in that North America gas decarbonisation. But before we go there and disappear down any of those rabbit holes around hydrogen and so on, let's talk about some other structural changes. And I want to come back to the UK, that incredible build out of transmission in the UK, structural changes. When we spoke, what is now NESO, (National Energy System Operator) was part of National Grid, and it had been decided it was going to be separated out, but there was still some doubt about whether that would actually happen, correct?

JP  

Yeah, that's right, the electricity system operator was part of National Grid since it was formed back in the 1990s. Over more recent years, it's been legally separate from National Grid so that there aren't any conflicts of interest. And really the debate was, as the energy transition rolled out, the government and the regulators wanted NESO to play a bigger role in advising government and regulators on policy. And therefore it got to a point where the role that they were going to play in the future was inconsistent with a commercial company like National Grid. So we agreed with the government and with OFGEM that the right thing to do was effectively for us to sell it, and to sell it to the UK Government. And we successfully did that in October 2024. We've been managing that transition. So the role that they play, so they're now called the National Energy System Operator, is much broader than just electricity. They're expected to develop long term plans for gas and hydrogen and transport as well as electricity. 

ML   

As I said, National Electricity System Operator, I had this moment of panic, realizing I didn't actually know what it was called. I know it's called NESO, but you're right, it is, of course, the other networks as well. Could we do the following? Can I be cheeky, given that you are so qualified — the most qualified person possibly anywhere in the country, certainly in the UK — explain why you need a system operator and a National Grid, because it all feels like one big monopoly. So what is the split of jobs, the split of roles between NESO and National Grid?

JP

Yeah, at the most simple level, Michael, you could say that the system operator is responsible for minute by minute, second by second operation of the grid. So they are balancing the demand that they see on the grid with the generation. And effectively they are dispatching generation to meet that demand second by second, and they're responsible for ensuring that that happens. So there's resilience and reliability across the UK, and you know, to some extent in the US as well. National Grid's role is effectively that we build out the infrastructure, we maintain the infrastructure, and we develop that infrastructure to meet the needs of our customers. So if a new generator wants to connect to the grid, it's National Grid’s job to build the substations and the overhead lines to facilitate that, but the system operator’s job is then to operate that in real time.

ML    

You know, those who are not specialists in the audience might not know about all the different markets when you say dispatching, so, knowing what the demand is, making sure there's enough generators. But it's more than that: There's also inertia and reactive power and balancing over different time frames. That's all run by NESO, the system operator, but on your wires?

JP  

That's absolutely right, yeah. So again, I'll try not to get too technical, but first and foremost, they have to match the energy needs, which is: Generators are dispatched, so basically, NESO asks them to produce electricity. They do so, and that meets the demand, but there are a whole host of technical products that are needed to maintain the stability of the system. With a lot more renewables on the system, there's a lot less inertia, because rotating traditional generators spin at 3,600 revolutions a minute, and therefore there's a lot of stability on the system. Renewables don't provide that rotating plant, and therefore there's less inertia. So the system operator's job is to buy these technical products, which are things like voltage control and reactive power and frequency response. And they are basically ancillary services that ensure the quality of supply and the resilience of networks, and they're all different markets and different ways of buying them.

ML  

And that split between the system operator and the National Grid, is that fairly general in Europe?

JP  

Not always, no. So quite often they are separate. The roles are well defined, but they can sit under a single company. Of course, in the US, we've had ISOs, independent system operators, for many years. So there is a very clear demarcation. So it varies country by country, but the roles are very well defined in terms of a system operator versus a transmission owner-operator.

ML 

So the same things are being done, they just may not be done in quite the same sort of corporate envelope? Of course, John, it's a trick question, because I'm going to get on to Spain, where they had this fearsome power cut in April, I think April 28th, and everybody wants to know who was at fault. So I was just establishing the runners and the riders. I suppose you've got generators, you've got a grid, the equivalent of National Grid, and then you've got a system operator. I'm not going to ask any sort of trick question, because it's just a question of, what is the official view at the moment of what happened?

JP 

Yeah, so at the highest level, Michael, during the period of the incident, there was an awful lot of renewables providing the generation to support the demand in Spain. As I said, renewables typically don't provide those technical services like inertia that's needed, so the system operator in Spain was managing that by asking traditional generators to provide those services. And there were oscillations going on the system, those oscillations got to a point where actually generators, to protect their equipment that could be damaged, started to switch themselves off, which created a cascading effect, which meant there wasn't enough generators to meet demand, which resulted in the blackout. Based on what I've seen in terms of what was the root cause? One is that those renewable generators weren't providing those technical products. Now, in the UK, for example, they're obliged to provide those technical products. And secondly, if you look at the UK, our system operator, over the last five years, has been developing these technical products through third parties to supplement what's not provided by renewables. And it looks like there was less of that going on in Spain. So it seems to me that there were some technical issues with the renewable generation and some ancillary services that were needed that weren't provided on that particular day. Actually, the system operator, if you stand back from it, once the blackout occurred, got the system back incredibly quickly. I mean, super quickly. So that's super impressive, but it's really linked to these ancillary services that are needed when the network is hugely reliant on intermittent generations such as wind and solar.

ML  

And for me, it was a real learning experience, I think for many people. I've known about ancillary services, I've even probably been able to list them for quite some time, but the difference between a frequency that gets outside some sort of zone, and these harmonics, or these oscillations, which is more like kind of feedback in the speakers at a rock concert, and how you deal with those, and who is meant to deal with those, I’ve got to be honest, it was an education diving into what happened in Spain.

JP  

Yeah, and I think there will be some, I'm sure, lessons that have come out of it. There'll be obligations placed on the generators to provide some of these services, and the system operator, I suspect, will look much more carefully at the volumes of those ancillary services they're going to need going forward.

ML  

That's right. So as I've been digging around, I found it very hard to find those ancillary services quantified. And how much do you need? If you've got this big of a grid with this much wind, this much solar, this much spinning reserve, then how much reactive power do you need? Or how much black start capacity do you need in order to get it back up and running after an event and so on? It's quite hard to get a quantification on that. Is that fair, or am I just not in the weeds enough? Is that a fair critique?

JP  

I think that's a fair critique, Michael. It's pretty much, outside of system operators, a bit of a black box, and obviously it's changing all the time depending on the dynamics of the network, and also what the makeup of the generation on the network is at any particular time. And it's also shifting. If a generator falls off the system, you're going to get a different impact depending on the nature of that generation. So it is complex, but, yeah, it's not very transparent, and there probably are opportunities going forward for more transparent market mechanisms to solve these problems.

ML  

So I guess the question on probably quite a few of the audience's minds is, could what happened in Spain happen in the UK? 

JP  

So I'm always careful to never say never. I think there's no room for complacency. The two mitigations I say that give us some comfort in the UK is one, that the generators who connect to the grid, even renewables, have grid code obligations to provide a certain level of those ancillary services. And secondly, to be fair to NESO, over the last five years, they've had what they call their pathway projects to develop these new types of ancillary services from third parties. So, for example, batteries can provide a good source of these ancillary services, short-term batteries. So they've been developing these products over the last five years, getting them out to the market and then procuring them. So they're probably in a better position than perhaps Spain was.

ML  

Are you able to take credit for at least the first two years of the five, or three years, because that work will have started while NESO was part of National Grid?

JP  

Well, I'd like to take some credit. They were, of course, part of National Grid. And the fact is, many years ago, I was the system operator for National Grid. So it's something that's close to my heart, so something I take a lot of interest in.

ML  

Excellent. So if it works well, you'll take the credit. And if it doesn't, then it's obviously something that's happened more recently.

JP  

I'm not sure that's good leadership, Michael. They were certainly under our umbrella, when those products started to be developed.

ML 

Although National Grid is a member of the Leadership Circle, it is the culture of Cleaning Up that I also get to ask the difficult questions. And we're talking about resilience. And of course, we also had the situation at North Hyde, where Heathrow Airport went dark, had to shut, and amazingly enough, took longer to get back running than all of Spain and Portugal, which, as you say, they got back within 12 hours. Heathrow was down for a whole day. What are the lessons that are learned? And you know, there are reports on it, and it's all out there in the public domain, but what are the lessons learned, whether it's for National Grid, yourself, or frankly, for the broader UK? It exposed some real weaknesses in our resilience did it not? Different from Spain, but also weaknesses, no?

JP 

And it brought some of the resilience things to the fore, actually, because Spain had happened as well. But, I mean, I think there’s the impact itself in terms of what happened, and then there's the consequence of what happened. So if I separate out the two. So North Hyde is one of three substations that provides power to the distribution system that supports Heathrow. And actually what happened for us was that a manual process back in 2018 was missed, therefore the defect on a particular asset wasn't registered, and then that asset failed earlier this year. It's a brushing on a super transformer, for those who are engineers who follow these things. It caused a fire, and the intensity of the fire resulted in the loss of the whole substation. Now, to put that into context, I've had, I think, one transformer fail in the last 10 years, and I've never had a substation entirely fail because of a fire in 35 years. So it's an incredibly rare event. And we should also recognize the UK's reliability is 99.99999%, so we’ve got a fantastically reliable network. So there's a lesson for us, you know, why did that manual process fail? We have already addressed that and also checked the whole of our old sampling processes, which is where it was picked up. The consequences are something where there's a broader debate, Michael, which is we lost a substation, but the other two were still providing power into Heathrow. What we weren't aware of is that Heathrow takes 12 to 14 hours to switch from one substation to another, because they have their own private network. And it's raised, and we're quite pleased actually, the government is looking at a resilience strategy, and it's due to be announced in the UK later this month. There is, because of the different players in the industry, there isn't one single player who's got the oversight of the resilience of things like national critical infrastructure. So Heathrow wasn't a National Grid customer, so we weren't aware that their private network takes 12 to 14 hours to switch. So there's a need, actually, for more cooperation across not just National Grid, but the distribution companies, and actually companies outside of the sector to decide what level of resilience you want, and who's accountable for putting that in place, and who should then pay for that? And I think that's quite an important question in the context of the energy transition that's going on. And the fact that electricity for society is going to be increasingly more important as we electrify heat over time, we electrify transport, as well as the increasing need for electricity for other uses in society. So I think there's some lessons for us, but some broader lessons for society as well, I think.

ML  

So we had a fantastic guest fairly early on in Cleaning Up. We had a guy called Roger Dennis, who's down in New Zealand, and I don't know quite how to describe him, but he's a thinker about resilience. He's a kind of futurist, but with a very strong resilience perspective. And he said that resilience is always incredibly expensive, except in retrospect. And we talked about whether you should invest more in planning and preparation or more in fast response. And obviously you've got to do a bit of both. But what is your sense there? Because you can never fully forecast every possible thing that could go wrong. You can do more work on it, but you'll never forecast everything. So should we be spending more time on very rapid black start, very rapid failovers, the recovery, rather than the avoidance of problems?

JP  

I think as a society, we just need to be more selective. So as I said, the UK network is 99.6-nines reliable. Everybody assumes that means 100%. But the reality is occasionally an asset will fail, however good your processes and maintenance is. And then the question is, what's the consequence? So for national strategic infrastructure, you might say, well, actually, we want a higher level of resilience than you do for a corner shop that we're providing energy for. The way the planning standards work and the way that networks are designed, we don't differentiate between megawatts. Everyone gets the standard level of resilience and reliability. And therefore, I think it is a question, what level do you want for certain demands? So airports, for example, military installations, may need a higher level of resilience than your local corner shop. And I think that's the debate that needs to be had as we move forward. And maybe we need more resilience at a domestic level as well. You know, if you're reliant on electricity for your home and for your heating and for your car, you might not be willing to take, I think on average, an outage one hour once every three years. You may go, ‘well, it's fine, I'll cope.’ But you might not, and those are the debates we need to have as we move forward.

ML  

But doesn't that have technological implications as well? Because if we treat every kilowatt hour as needing to be equally resilient, if we're now going to say, ‘Well, no, some are special and must have, frankly, 100% resilience and some, it doesn't really matter.’ Doesn't that mean that the technology has to change. I mean, it's not dissimilar to the water industry, where what we flush our toilets with is essentially drinking water that's more pure than Evian, and that can't be cost effective, but it's the system we're kind of stuck with. Do we have a similar problem with the electricity grid? 

JP  

No, I don't think we do, actually. I think it is just a fundamental question of what standard you need that the technology is there. It's really a balance of risk and cost, to be honest. Michael, so, you know, I can provide a transmission-distribution system with five feeders going into a facility, all independent of each other. There's a cost to that. The question is, who should then pick up the cost? Is it society broadly through taxation? Is it energy players through their bills? Or is it the person that's receiving that higher level of resilience? I think that's the level of debate that's needed. It's not really a technology question in that regard.

ML  

So I want to get on to the £60 billion plan, most or all of which is the UK preparing the country for CP30, which is Clean Power 2030, which is the government's commitment to be at clean or nearly clean electricity within just five years. Can you talk us through what are the big elements of that? That £60 billion is a lot of money. What are the big elements of it? How are you financing it? What's the implication for the country?

JP 

Yeah, so if I start at the highest level, for those not familiar with the UK system, the grid was built in the 1960s and it was built predominantly with all the infrastructure in the middle of the country, because the generation was in the north and most of the demand is in the south. So there isn't much infrastructure actually on the edges of the UK. The government has set its CP2030 target, which is to get to basically 95% of all electricity produced from renewables by 2030. And most of that is going to come from offshore wind in the North Sea. So when it hits our coast, National Grid now has to build all the infrastructure to take it from the coast to where the demand is. So a lot of that infrastructure is now coming into Lincolnshire and East Anglia, where there's very few transmission lines. And the volume of electricity that's coming in off the North Sea means we're going to have to build new lines to bring it to places like London, where there's a lot of load. The requirement on us is to build, effectively, 17 major transmission programs to deliver that by broadly 2030. As I said earlier, it's a massive ratchet up in the levels of investment that's going to be needed because typically we'll be doing one or two, and each of these projects individually is a multi-billion pound project. So these are not insignificant projects, and they're multi-year, so in the UK, you have to get planning approval for any infrastructure project that's built. That can be a multi year process in itself, and then it's two or three years to do the construction. So it's a major rewiring of Britain from north to south to actually, from the east into the south of the country, which is effectively what National Grid is going to be doing over the next few years.

ML  

The question that everybody's going to be asking, one thing we need to ask is, are we on track?

JP  

So I've always said it's hugely ambitious. It’s the best way I can describe it. Just the magnitude of what's needed, the bit that we're responsible for, I'm pleased to say we are on track. So we wanted to have six of those 17 projects in construction by the beginning of this fiscal year. We're in construction, so that's great news. With regards to that, obviously, there are things that are outside of our control, which sit with the government and with regulators. So obviously, the next auction for offshore wind, and the results of that is going to be massively important as to whether the government hits those targets. Today, we've got about 15 gigawatts of offshore wind operational. The government’s CP2030 target is aiming for 45 gigawatts by 2030. So by any stretch of the imagination, that's going to require a lot of work very quickly. It'll be interesting to see what the next auction does, and how many people win those contracts, and where they are with their planning processes to get that done. I think planning is a big risk, which I've been very clear on. It takes a long time to get planning consent in the UK, and although the government is doing the right things by changing the planning process, it's probably not going to have a huge impact this side of 2030, and therefore there's a risk that people challenge the infrastructure that's being built, and that delays projects, for example. But hugely ambitious under any measure.

ML 

Within that £60 billion pound portfolio, are there projects that have not yet begun construction that still need to go through the planning process?

JP  

Yeah, so this week, actually, we had great news. One of the biggest projects we're doing is from Norwich in East Anglia down to Tilbury in the southeast. It's 180 kilometers in all. The headline is we had to make our planning application to the planning inspectors, and then they decided whether we've done everything with the consultation with local authorities to allow them to then examine it over the next 18 months. And we got news this week that we passed that hurdle, that we provided all the information they needed. So they now take 18 months to assess that project, and it's only when we get planning approval that we can start construction. So that gives you a sense of how tight this is. In terms of construction it will take us two to three years. So there isn't a huge amount of space in these projects to get these things done.

ML 

To be fair, some of the context here, or an example of the context. I'll give you two examples. One, I was on the board of Transport for London. In fact, I was on the Finance Committee, and we got all the way through till August 2018 thinking that the Elizabeth Line would open in December 2018, and it finally opened four years later. So we got within four months and then learned that there was a four year delay, and a lot of that was to do with the information being provided, frankly, to the board of Transport for London. The other example would be smart meters. And you'll be familiar with this. We were supposed to have pretty much universal smart meters by 2019, and that was then pushed back to 2020, back to 2024, to 2025, and we now think it's going to be 2028-2029. We're at about 65% in the UK. So not a great record in this country, is it? And HS2 is the third example, of course.

JP  

No, those are all examples where things have struggled. And I'm pleased to say National Grid has got a good track record of delivering these large, major projects. We've had to fundamentally change the way that we deliver these projects to meet that volume. So we met with all our supply chain, for example, Michael, and just said to them, how are you going to provide us with all the contractors and skills that we'll need to deliver this volume of work? And very simply, they said they needed more transparency and certainty. So we've just entered into a £9 billion contract with our supply chain to provide us with all the skills that we need to deliver these projects, and we've incentivized them to deliver individually and collectively across the whole program. And we also entered into a £60 billion framework agreement for all the HVDC cables we're going to need over the next few years. So we're having to change the way that we procure and the way that we manage these projects, to deliver them on time and on budget. As I said, the first six are on track, which we're really pleased on, but I'm very conscious the track record in the UK building infrastructure is not that great.

ML  

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ML  

Have you found yourself in the last, let's say 18 months, in more intense competition when it comes to the supply chain with AI data centers? Are they snapping up all the cables, and are they demanding more places to feed in or to take off from the grid? Are they kind of distracting you with the existential need for AI data centers, at least as they see it?

JP 

No. I started this by saying I got lots wrong back in 2022. And the one thing I definitely got wrong was forecasting low growth and demand increases from things like data centers. So we are seeing, both in the UK and in the US, a huge increase in data centers wanting to connect to our system. The challenge is less around access to the supply chain. The challenge is that these are huge data centers that consume masses of electricity, and they want to connect in very short timescales. So to give it some context, you know, the UK has only got three cities that have a domestic electricity demand of 200 megawatts. That's London, Manchester and Birmingham, and we've got data centers that are one gigawatt, so 1,000 megawatts, who want to connect to our network in two years. So that's our challenge. What always amazes me is that people are surprised by this, but there aren't swathes of spare capacity on the network waiting for this new demand, because if there had been, customers would have been paying for something they weren't using. So we have to build out the network to meet these increased demands from data centers, and the challenge is, how do we do that quickly enough? So we're working with them, to point them to places on the network where there is spare capacity. We're also working with the government to say, how can we reduce the time for things like planning, and we're also looking at technology. And you may have seen last week, we announced a partnership with a company that actually has developed a platform where data centers can shift their demand that's non essential, away from the peaks. 

ML  

This would be Emerald AI, my friend Varun Sivaram.

JP  

Indeed. So they're working with National Grid because quite often the grid is built to meet a half hour in the winter in the UK, the rest of the time there is fair capacity. So if we can get data centers to not use the electricity over that peak, we can get them on quicker without building the infrastructure. So that's the purpose of the pilot that we announced last week, to try and find ways to help data centers connect. It's good for the country in terms of economic good, and it's good for us. Obviously, there are customers, and we want to meet their needs.

ML  

But it's very tough, isn't it, because these data centers, they're mainly being built by five or seven companies that have enormous amounts of capital. And for them, they're in an existential race. So to say, well, you know that those few winter evenings where it's going to get really tough, do you mind just stepping back and maybe not competing quite as fiercely with Sam Altman, because it will cause all sorts of trouble for the heating system. Are they not likely just to say, well, sorry mate, if you're asking for more money, the answer is yes. If you're asking us to slow down, the answer's no.

JP  

Absolutely right, Michael. Our job is to find ways of connecting as quickly as possible. They want to connect to the system. Quite often, what we find is that their aspiration for 1,000 megawatts is further into the future, and actually what they need in the next two years is 200 megawatts or 100 megawatts. So we spend a lot of time both educating them and also really understanding what their needs are, so that we can find ways of meeting those needs. But ultimately, we talked about the energy transition being a big investment driver through connecting renewables over the last three years. AI has just added to that challenge. So we've not seen growth in demand on the networks for the last 10 years, because any economic growth has been offset by efficiency over the next 10 years. Things like these data centers are going to drive load growth, demand growth, as well as require us to connect to the renewable generation that we're seeing in the UK. So it's added to the challenge massively, actually.

ML  

Having said that, though, you were anticipating, when we last spoke, demand growth, and it was going to be demand growth from electric transportation and the electrification of heating. And I think it's fair to say, I'm guessing, that the demand growth from transportation is probably tracking about where you thought it would be. People talk about, ‘oh, nobody's buying these electric cars.’ That's all nonsense, they are. So I think that one's probably on track. But heating, we are well behind, where we would have expected to be. So are you now seeing heating going slow, and data centers picking up the slack, but of course, with a very different type of demand, very concentrated in these 200 megawatt chunks, instead of being distributed across every housing estate or every every residential area?

JP  

Yeah, I think that's a pretty good summary, actually, Michael. So we are seeing increasing EV utilization, and that's driving demand on our networks. It is slightly slower than I think we were forecasting in 2022, but only slightly actually. So we have continued to see people take up EVs. Heat pumps, so electrification of heat, is significantly slower than we anticipated. I think we've connected something like, I'm going to say, 40,000 in the last three years. And the estimate was hundreds of thousands. So it's way slower than anybody was anticipating. The thing is that those types of demand were, at the distribution level, as you said, distributed. Whereas the data centers have much bigger demand growth, much more quickly on the transmission system. So we've seen a shift from data centers, from being on the distribution system because they were relatively small, to wanting to be on the transmission system. So therefore, the load growth we're expecting now is significantly higher than we were expecting three years ago.

ML  

I want to come back to this question of whether there's a sort of a race between building out that huge amount of principally offshore wind, another 30 gigawatts of offshore wind and your transmission networks. If it goes well, it all arrives. If it doesn't, then I suppose you could end up with a lot of wind but without the transmission, or you can end up with the transmission but without the wind. But it's almost like it's going to be expensive in any of those three scenarios. Even if everything arrives on time, are we not looking at high electricity prices for the foreseeable future?

JP  

I mean, it's a great question. It's a really difficult equation for the UK government, in a way, because for us, we are building out all this transmission. Actually it will double the cost to domestic consumers in terms of what National Grid charges, but we currently charge about £25 a year for the transmission system, and it's going to double to about £50 a year with all the investment that we make. But what it will do is reduce what's called the constraint costs on the system. Currently generators who can't get access to the network, are being constrained off and are paid for that. And actually that will reduce the bill by £40. So actually net-net for infrastructure, it’s not a huge increase in the customer bill. Now, having said that, the big challenge, and the thing you have to believe for the UK in particular, is what's driving the pace at which the government wants to do this, is to reduce their exposure to world gas prices. Because the fear is that we get a repeat of what we saw in the Ukraine-Russian incident, huge increase in wholesale prices, because UK prices are set by the gas generator, who is the marginal generator on the system. And then UK consumers get exposed to that. So the rush is really a bet against being exposed to those high gas prices by investing in domestic generation, albeit offshore wind and infrastructure. You have to forecast where you think world gas prices are going to be and what shocks might come along to determine, which is the right part of that equation.

ML  

Okay, so you make a good argument that the transmission costs are not the big driver, because they're £25, they can go to £50. The difficulty, though, with looking at the entire electricity bill, is that, you know, it all connected. So you've got the gas drives, the wholesale price. You've also got this big chunk, which is not just transmission, you've also got the distribution charges. You have all those ancillary services we've talked about. And it feels to me like the only way to reduce the transmission, or not just transmission but transmission, distribution ancillary, that piece in the middle, which is about half of the bill, is to electrify, is to have a lot more demand, so that everything you're doing and all the people elsewhere in that kind of middle chunk gets divided by a bigger denominator. Is that fair?

JP  

That is fair. I certainly agree with that. So if you stand back, you're going to end up in the UK with a lot more generation capacity than we have today. I mean, effectively, more than a doubling of generation capacity that has to be paid for, whether that's offshore wind, future nuclear, onshore wind, solar. But the demand today is not doubling in that same period. So ultimately, there is a question of, how do you pay for that? The more demand that can come onto the network, you're right, it can be spread across. So things like data centers potentially could be a real positive. In that regard, there is a challenge, which is that a lot of the policy costs are sat with energy customers, and therefore in the short term, they are picking up all those policy costs, as well as being exposed to the world gas prices. So that is a real challenge. And one of the things that gets debated a lot is, are the policy costs, the subsidies for CFDs and all the other things, should they sit on the energy bill, or should they sit somewhere else? And that is a fair debate behind as well.

ML  

So I'm trying to do this without asking a sort of overtly political question, like, you know, is CP30 a good idea? In other words, is the government's target to get to clean power by 2030, is that the right policy? So if I ask you that, then I suspect you'll say, ‘Well, sort of above my pay grade, not allowed to, not going to comment.’ But it does strike me that if you chart the cost of getting to clean electricity, it starts to really go, maybe I could say parabolic, when you get to that kind of 80-90%. And yet, we've got almost no policy in place to drive the electrification of heating or to accelerate the uptake of electric transportation. So we're not chucking more volume in the system. And it seems the only plan we've got is to try to have more wind as a sort of blunt instrument to break the link with gas, which seems a very blunt instrument to me. 

JP 

Yeah, I mean, I think there's no doubt that the risk that's perceived of exposure to oil and gas prices is the thing that's driving that acceleration of delivery by 2030. It is common sense that it will drive incremental prices, because if you're trying to push the supply chain to deliver everything quickly, then you're going to see price increases. And the reality is, we do see that, but it's a balance, isn't it, as to, is it worth doing that versus potential exposure to those world gas prices? If you don't do it, the UK is in a difficult position. It hasn't got enough domestic gas to decouple itself from world gas supply.

ML  

But then you come to the structure of the power markets, because, and I agree, decoupling from gas is an incredibly important strategic goal for the UK. But of course, at the moment, you've got the gas setting the electricity price 96% of the time, despite providing only 26% of the electricity. So something else is going on, other than just dependence on gas. And of course, it's the structure of the national market. Now, I would argue that’s one of the great benefits of zonal pricing, a decision that the government didn't make. Had we gone to zonal pricing, wouldn't that immediately break the link with gas, for at least those zones where gas is not needed in the moment? So would we not have reduced the dependence on gas as a price setting mechanism for electricity?

JP  

Yeah, but it was only so… So I agree with you that we need to break that link, but I disagree with you that zonal pricing is the right way to do that now, and there's a couple of reasons for that. So NESO, the National Energy System Operator, said that to put a zonal pricing mechanism in place in the UK would take five years. So you've just injected five years of uncertainty into the market in terms of any investment decisions that any generator is going to take. The second point I'd make is that the vast majority of the locational decisions on generation in the UK have already been made through administration rather than the market, and those investments are lumpy, so one of the big benefits of zonal pricing is to send a signal to generators about where to locate. But we've already decided in the UK, we're going to be a mixture of offshore wind and nuclear, which will be located on the coast and in the North Sea and in the Irish Sea. And therefore it dampens the impact to a marginal effect. So we've argued that we actually think there may be a role for zonal pricing at some point in the future. But actually there are simpler ways of addressing the challenge you put, Michael, without going to a full zonal model. If you look at what causes constraints in the UK, it's been driven by the way that storage in the UK, battery storage is dispatched. It basically discharges and charges at the wrong time, and the system operator hasn't got a way of managing that at the moment. So you can find better ways of managing that that will reduce the constraint costs. You potentially can increase locational charging for the transmission element of the bill, which is something we actually looked at in the 1990s. And obviously, if you look at the interconnectors as well, they're not necessarily helping to balance the UK. So you could think about the way that interconnectors trade across the UK and Europe. We think there are some things you can do through the reform of the national market — which doesn't require full zonal pricing, which is incredibly complex, and could disrupt the investment that's needed — and could it help to sort of do that decoupling that we talked about.

ML  

I do hope you're right, because I do worry, as I see it, that the reform of the national market, the acid test, is whether we eliminate those constraint costs or not. Because I think the public will not tolerate seeing on a windy day, wind turbines not spinning, receiving money, and then other generators, probably in the south, burning gas and and also being paid. So whatever we do has to eliminate that.However it's done, I don't really think matters that much.

JP  

One point to you Michael, which is you'll never eliminate constraint costs. There are three reasons for them. One is there isn't enough infrastructure to get the power to where it's needed, and the investment in the network will address that one. But you have to balance the system so generation equals demand all the time. So when you've got twice as much capacity as you've got demand on windy days, you will still have to constrain that wind off the system, because there's nothing to do. It's got nothing to do. And the third reason is back to our ancillary services conversation, which is there are reasons why the system operator needs a certain mix of generation in different locations. So if the generators are in the wrong location, the system operator will need to pull it off for no other reason than they need ancillary services. So you'll never get to the elimination of constraints, but you can reduce them. 

ML  

You can't get rid of the constraints, I agree, for exactly the reasons you said. I think the question is whether you pay people, or whether it should be the generators who bear the risk, or should it be socialized and passed on through whatever other mechanism. And I suspect on this one, we're going to end up being on the wrong side of history in the UK, I think. The trend that I see around the world is more and more to locational or zonal pricing. And I don't know of a single other country that says it takes five years to implement it. That's just not what we've seen in places that have shifted.

JP  

I'm not disagreeing with you in the long term. That might be the right answer, but the concept of having uncertainty for five years certainly pushed my view as to what needs to be done.

ML  

I want to come back to one final question, in fact, which is: when we spoke a couple of years ago, three years ago, we talked about, what do you do during what the Germans call the dunkelflaute — that period when there's no wind and no sun. And there was talk of renewable natural gas and hydrogen, potentially in the US, particularly where you've got a gas network. I think we talked about it in that context, the mix between, potentially hydrogen and renewable natural gas. So I'm interested in the US question, but also in the UK, because of course, if it is going to be an element of hydrogen, then you would be impacted, mainly through the transmission network, which might be ferrying around large amounts of electricity, or larger amounts if we do go to some hydrogen. So where are you in the US and UK on that question today? 

JP 

Yeah I started this interview by saying I got some things wrong. And I think back in 2022, I was probably way more optimistic about the prospects for renewable natural gas and hydrogen than I've seen play out over the last three years. So in the US, we've always said that the gas network has got a very long term role to play. But we also said a few years ago that we felt that things like RNG (renewable natural gas) could contribute to the decarbonisation of it. The reality is, we've seen very little take up of that at the same time. You know, particularly in New York State, what we've seen is less renewables come on the system, more traditional generation fall, our demand for gas continuing to increase. And therefore, from a resilience and reliability perspective, we've actually found ourselves in a world where we actually need more infrastructure for gas to support it for many years to come than we were anticipating back in 2022. And interestingly, the state is starting to get there now. They've just published their draft Energy Report, which says they now recognize that gas has got a much longer role to play. So the story of gas has evolved, and with it, a lack of progress, as far as I've seen, on hydrogen potentially playing a role, or indeed, RNG being captured in sufficient quantities to play a significant role. So it has changed, I think our mindset, about the opportunity for that. We still see it at the margins, but it's still at the margins, Michael.

ML  

Michael, I've been on a journey as well, you'd be pleased to know, thinking about what do you do for the dunkelflaute, that last few percent. And where I've landed is to say it's just really, really hard. It's just really, really expensive, and it's not really a decision that we need to make now, as long as we're not building big, inflexible CCGT, so combined cycle gas turbines that are inflexible. Once you build them, you need to run them as close as 24/7 as possible. So as long as what you build, or what you transition to is flexible gas capacity, then I think we're just going to continue with unabated gas and just try and use it less and less and less each year, fewer fewer and fewer days per year.

JP 

Yeah, and I think in a way, the Clean Power Plan in 2030 in the UK got there. Because behind that huge ambition for renewables by 2030 is an assumption that you've got 35 gigawatts of gas generators sat there for those days when the sun doesn't shine and the wind doesn't blow, I suspect, providing some of those key ancillary services in the short term, and then wait to see how technology evolves over the next decade or so, as to what's the next stage is going to be.

ML  

Yes, I think it's how technology will evolve. But also, what is our willingness to pay? What is the urgency that is perceived by society to pay what will be a very large amount for just a few percent, the last few percent of emissions removals. And so I think it may be an unsatisfying argument or an unsatisfying position for some in the audience, but I don't think that we need to have the answer today. So I'm not going to push you for one.

JP  

I mean, I think my reflection on the last three years is that, the trilemma, as we called it, has shifted massively to be truly a balancing act of, yes, people aspire to decarbonization, but it has to be done in the context of delivering reliable and resilient services today, and it has to be affordable. And perhaps three or four years ago, there was more focus on decarbonisation, and less on affordability and security of supply. And things like the Spanish incident remind people of just how important resilience is in this journey.

ML  

Yes, and I think that trilemma, it doesn't really bite until you start looking at the last sort of 5 or 10%. Because until then, you really can be affordable and clean and resilient. So therefore, you know, why go crazy worrying about what we're going to do in 2045 or 2050 when actually there's just so much good, interesting work to be done between now and then. Which brings me to my final question, 35 years ago you entered National Grid, you devoted your career to the organization. You've just this morning spoken to a bunch of new graduates joining. Is it a more exciting, less exciting, or equally exciting place to start your career now and then? What do you think? 

JP  

Oh, I think it's more exciting. What I said to my graduates this morning was, we are the words I use, rewiring Britain. We're fundamentally reshaping the way that energy is going to be delivered at a time when technology is making leaps and bounds. So when I came into the industry in 1990, the network was built and we were modifying it, but we're going to be transforming it over the next decade or two decades. So it is a much more exciting time for any engineer or anybody coming into a company like National Grid. It’s going to be like one of those moments in a generation.

ML  

John, thank you so much for spending time with us today. Thank you for your support of Cleaning Up as a member of the Leadership Circle. And I wish you the absolute very best with whatever it is that you go on to do after you've decompressed, no doubt, for a suitable period, taken some time off when you do hand over the reins to your successor.

JP  

Well, thank you, Michael. It's lovely to talk to you as always.

ML  

So that was John Pettigrew, the outgoing CEO of National Grid. And as always, we'll put links in the show notes to resources that we mentioned during our conversation. So that's Episode 8 with Roger Dennis, The Price of Resilience, from early in 2020. Episode 85, John's first appearance on the show, when we talked about matching supply and demand of clean energy. And we'll also put links to National Grid's great grid upgrade and to the National Energy System Operators website so you can read about them. And with that, it remains only for me to thank our producer, Oscar Boyd, our video editor, Jamie Oliver, the team behind Cleaning Up, the Leadership Circle without whom none of this would be possible, and of which National Grid is a member, and you, the audience. Please join us at this time next week for another episode of Cleaning Up. 

ML  

Cleaning Up is supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP of Portugal, Eurelectric, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you've enjoyed this episode, please hit like, leave a comment, and also recommend it to friends, family, colleagues and absolutely everyone. To browse the archive of over 200 past episodes, and also to subscribe to our free newsletter, visit cleaningup.live.