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Ofgem bashed for ‘manifestly flawed’ and ‘miscalculated’ RIIO-2 proposals

Image: Ofgem.

Image: Ofgem.

Ofgem’s RIIO-2 Draft Determinations risk system reliability and will result in missing 2030 targets according to Scottish and Southern Energy Networks (SSEN) Transmission, with ScottishPower Energy Networks (SPEN) also wading in to brand the proposals “unacceptable”.

The Draft Determinations – which were released in July and detail Ofgem’s draft plans for the allowances of networks under the RIIO-2 price control period – have been slated by SSEN Transmission in its formal response following Ofgem outlining its intention to cut its baseline allowance by 33% - a move SSEN described as “unjustified”.

The cost of the Draft Determinations

Chief among SSEN’s concerns was the £172 million of cuts it identified as calculation and methodological errors made by Ofgem, which it said would result in investments not being fully covered by allowances and therefore risking financial losses.

SPEN also mentioned inconsistencies and errors, stating that they led to “a complete loss of confidence in the process, the model being used and in Ofgem’s decision making”.

SSEN continued to detail cuts created by the Draft Determination, including on top of £82 million worth of Real Price Effects (RPE) omission. Additionally it called Ofgem’s efficiency cuts, which amount to c.£190 million “unjustified”, as they are well in excess of the £123 million that it had incorporated into its plan.

The network operator criticised the removal of the basic funding required to develop customer and system investment, which it puts at a cut of £80 million. This will delay connections by at least a year while the company waits for enhanced customer development confirmation.

Finally, over £300 million of investment in replacement of aged renewable generation connection assets, network reliability, Critical National Infrastructure and smart technology has been cut according to SSEN Transmission, risking the reliability of the network.

Rob McDonald, managing director of SSEN Transmission, said the proposals contain “swathing cuts to investment plans, risking the delivery of net zero and severely impacting our ability to maintain a reliable and resilient network”.

“We now look to Ofgem to show the regulatory leadership required to ensure that final determinations deliver, not delay, net zero.”

In total, SSEN Transmission has placed the unjustified cut to its core allowances made by Ofgem’s Draft Determination at £780 million.

‘Unacceptable’ changes to returns

Many of these concerns were echoed by SPEN in its equally damning response, stating it believes Ofgem’s Draft Determination to be “unacceptable” to SP Transmission due to the returns proposed being the “lowest in UK history for this sector” and claiming the proposals are “manifestly flawed”.

It outlined unfair cuts, including errors in the cost assessment process amounting to £66 million, contradictory cost assessment decisions amount to £21 million and the removal of 75% of the risk management allowances at a cost of £35 million.

SPEN is therefore calling on Ofgem to provide a revised Draft Determination by early October correcting the identified mistakes as well as reversing the £15 million business plan penalty.

Will they hinder the UK’s net zero ambition?

A common thread through both networks criticism was the impact of the Draft Determination on reaching the UK's decarbonisation target. Overall, the proposals would slow down the ability for new renewable generation to be connected, according to SPEN, and would therefore directly hinder net zero.

This was echoed by SSEN, which stated that the proposals introduce delays and “bind up network investment in red tape” instead of enabling net zero. The operator stressed that if the determinations for the price period are left as they are, the proposals will result in a failure to meet 2030 targets, as well as resulting in a missed opportunity from a green recovery, a lower service for customers and a failure to attract essential investment.

Ofgem’s proposals for “uncertainty mechanisms that would take too long to implement” would introduce a barrier to Great Britain and Scotland meeting their respective energy decarbonisation targets through connecting renewables and low carbon technologies to support the wider uptake of electrified heat and transport. SSEN gave the example of the Large Onshore Transmission Investment (LOTI) mechanism.

SPEN said that the Draft Determination “won’t deliver the Green Economic Recovery at pace” to support the UK and Scottish government’s ambition in response to the economic impact of COVID-19.

“As things stand, this is a missed opportunity to create job opportunities and wider economic benefits across the energy sector for the UK,” Frank Mitchell, CEO of SPEN, said. “We look forward to further discussions with Ofgem and look to reach a final settlement that creates jobs and supports net zero now.”

Current± has contacted Ofgem for comment.

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