Ofgem has confirmed its methodology for setting the RIIO-ED2 price controls, focusing on data sharing, flexibility and forward planning.
This price control – which is to run for five years from April 2023 - is to require distribution network operators (DNOs) to grow their capacity using flexible solutions where possible, with the regulator giving examples of battery storage or smoothing peaks in demand as ways of achieving this.
Digitalisation will also increase during the period, with electricity network companies required to share and coordinate data on local energy use better. This will include requirements to share and coordinate this data with flexibility providers.
This echoes commitments in the government’s energy white paper to implement all of the Energy Data Taskforce’s recommendations, which included encouraging the energy sector to adopt open data principles.
The price control is set to retain what Ofgem described as a “strong” innovation stimulus through direct funding and access to the new £450 million Strategic Innovation Fund, with more if needed to drive the decarbonisation of power, heat and transport at a lower cost than current technology allows.
It will also maintain high levels of reliability and customer satisfaction, and ensure less of consumers’ money goes towards DNOs’ profits and more towards investing in network capacity to fight climate change.
Overall, the price control will support strategic investment to deliver net zero emissions targets, Ofgem said, ensuring DNOs can increase capacity to support growing demand. It pointed to the example of providing more electric vehicle (EV) charge points ahead of an anticipated increase in EV use.
It will also ensure DNOs support an “accelerating and increasingly decentralised” energy market, requiring new distribution system operation responsibilities with enhanced capabilities in planning, operation and market services.
Jonathan Brearley, Ofgem chief executive, said the DNOs will need to make sure “the right arrangements are in place to support the capacity and charging infrastructure” for the electrification of transport and the solutions needed for decarbonising heat, which will require “a more modern, smarter, digitally enabled grid”.
“Our approach to our price control for electricity distribution will encourage the investment needed to deliver these ambitions while maintaining world class levels of reliability and keeping costs as low as possible for consumers,” he added.
This follows Ofgem last week announcing it is upping the funding available to network companies under the RIIO-T2 price control period (2021-2026) to £40 billion.
Of this, £30 billion is upfront funding to help deliver a clean and reliable energy system and £10 billion is to be “on standby” for future green energy projects.
The regulator said it has been exploring measures to bring forward energy network projects that drive green recovery and decarbonisation, including increasing grid capacity to support new connections and upgrading grids to support green energy.
It said work is ongoing with the networks to develop further opportunities to stimulate low risk, low carbon strategic investment to support net zero, with more information on this expected in early 2021.
Graham Halladay, operations director at Western Power Distribution (WPD), welcomed the commitment from Ofgem, stating that 2020 has been an “incredibly tough year for the economy” and that there are still “great challenges in decarbonising the UK’s energy system”.
He said that the Prime Minister’s Ten Point Plan alongside the energy white paper and commitment to reducing emissions by at least 68% by 2030 “will not only set the tone for 2021 but the next decade”.
WPD has identified a number of key areas - including providing infrastructural support for the mass adoption of EVs and installation of heat pumps in domestic homes – that will require up to £90 million of investment over the next three years, with Halladay adding that it will be these areas where WPD investment will “have the most impact”.