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Striking the right balance: Will Ofgem’s RIIO-2 proposals help or hinder net zero?

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Ofgem’s draft proposals for the RIIO-2 were met with a very mixed response when the regulator published them yesterday.

They pledge £25 billion of upfront spending to upgrade Britain’s energy networks over the five years, earmarking much for the net zero transition, along with additional spending for research and development.

Jonathan Brearley, Ofgem’s chief executive, said the regulator was working to deliver “a greener, fairer energy system for consumers".

“This is why we are striking a fair deal for consumers, cutting returns to the network companies to an unprecedented low level while making room for around £25 billion of investment needed to drive a clean, green and resilient recovery.”

However, the proposals faced immediate backlash from the networks, with ScottishPower CEO Keith Anderson labeling it “a massive missed opportunity”.

He added: “Today’s announcement is gravely at odds with the UK government’s ambition to boost investment in green infrastructure to help drive the economic recovery and accelerate net zero opportunity.

“Coming just one day after Rishi Sunak has taken welcome steps to kickstart the green recovery, Ofgem is now trying to slam on the brakes. It makes no sense whatsoever.”

In a rather scathing response, Anderson continued to say that Brearley has “flunked” his first test as chief executive, calling the proposals a “short-sighted return to austerity” and stating that no one will benefit from this “half-baked plan”.

The criticism is largely levelled at the change in the allowed rate of return for network companies, which is being halved to its lowest level ever.

“Net zero can be an accelerator of the economic recovery, but only if private companies are given the right conditions for investment,” continued Anderson. “Slamming the door in investors’ faces by offering one of the lowest rates of return of any developed country traps the UK in an economic cul-de-sac.

“These proposals to drive companies to the lowest cost denominator leave us with big questions about how Ofgem can match its framework against the clear drive and leadership that we are seeing from government, at both UK and Scottish levels, where there is rightly a focus on how best to attract investment in a powerful economic stimulus that delivers long-term benefits.”

If the draft proposals are approved after the consultation period – which lasts until December – the networks rate of return will drop to 3.95%. This will save £3.3 billion over the next five years according to Ofgem, helping to fund investment and lower consumer bills by £20 per household per year from the start of the period in 2021.

Given the findings of the National Audit Office’s report in January the changes may seem unsurprising. It stated that networks profits had been higher than necessary due to Ofgem errors during RIIO-1, and advised that more needed to be done by the regulator to avoid such a “windfall” again.

The Energy Networks Association voiced its concern yesterday, with the group’s chief executive David Smith saying the proposals “don’t go far enough to encourage the investment needed to achieve net zero emissions and support the UK’s economic recovery".

“While network companies have historically been able to raise billions of pounds to invest in the networks and support the transition to a sustainable future at low cost to the customer, the proposals set out by Ofgem could significantly inhibit their ability to do so.”

Many of the companies have stated that the proposals will have a negative impact on the country’s ability to reach net zero by 2050, particularly at the moment as the energy sector calls for a green recovery from COVID-19.

National Grid said it was “deeply disappointed” by the proposals, which left it "concerned as to our ability to deliver resilient and reliable networks, and jeopardises the delivery of the energy transition and the green recovery".

While RenewableUK’s head of policy and regulation, Rebecca Williams, said: “These proposals won’t bring forward the investment that the government says it wants to kickstart a green economic recovery. That means fewer jobs and slower progress towards net zero. So it’s a missed opportunity by Ofgem to encourage investment in grid infrastructure and it means consumers would lose out as vital grid upgrades wouldn’t happen.”

But while the networks have been vocal in their concern, many have welcomed the proposals as striking a good balance between investment and consumer protection.

Dame Gillian Guy, chief executive of Citizens Advice, said the announcement was “another step closer to a price control that stops network companies from overcharging energy customers by billions of pounds".

“These decisions are extremely technical, but they matter. Ofgem has struck the right balance between shareholder returns and value for money for energy customers, while making sure networks can continue to attract investment.”

She continued that energy networks will be essential to meeting net zero, but cautioned that future demands will be hard to predict as technologies like EVs and heat pumps could challenge the network.

“Measures outlined today should protect consumers by ensuring the transition to net zero is done at a lower cost,” she concluded.

Citizen’s Advice’s support was echoed by other parties, with Richard Neudegg, head of regulation at Uswitch.com, stating: “The amount of profit that network companies have been allowed to make in recent years has been a matter of significant controversy, given our energy suppliers have to pass on these charges to our bills.

“Ofgem has to balance making sure these monopoly companies can’t take too much profit out of the system, with the need to allow them to invest in things that will make our energy network greener. Transforming the energy system to contribute to meeting net zero emissions by 2050 will not come cheap.

“There is still some way to go in Ofgem finalising these proposals, but these are a step in the right direction.”

For more details about the draft proposals, and to respond to the consultation, see here.

Editorial

Molly Lempriere Deputy Editor, Current±

Molly Lempriere is deputy editor at Solar Media, responsible for its UK-facing publications Solar Power Portal and Current±.

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