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Ofgem ramps up RIIO-2 funding to £40bn in final determination

Image: Getty.

Image: Getty.

Ofgem has upped the funding available to network companies under the next RIIO-T2 price control period from 2021-2026.

In its final determinations, Ofgem unveiled £30 billion of upfront funding to help deliver a clean and reliable energy system, which is ~20% more than the £25 billion the regulator previously proposed in its draft determinations in July.

It also announced over £10 billion as being “on standby” for future green energy projects, such as reinforcement along the East Coast of England to anticipate the 40GW of offshore wind promised by the government. There is no limit on the additional funding that could be provided, Ofgem said, but it is subject to companies making good business cases.

A further £132 million package of support measures has been created for vulnerable consumers, as well as a “robust package of innovation funding” for increased research and development into green energy. This will include a minimum of £450 million under the Strategic Innovation Allowance and £209 million under the Network Innovation allowance to support development that contributes to the achievement of net zero.

Network companies’ rate of returns have also increased from the 3.95% proposed in the draft determinations to 4.3%, although this is still the lowest ever rate. The regulator said the returns set are “fair, based on market evidence and allow us to protect the interests of existing and future consumers”.

The initial returns proposed in the draft determination were slammed by ScottishPower Energy Networks (SPEN) in its formal response, branding them as “manifestly flawed”.

It also criticised a raft of what it claimed to be 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”. Fellow network Scottish and Southern Electricity Networks (SSEN) identified £172 million of calculation and methodological errors in cuts made by Ofgem, which it said would result in investments not being fully covered by allowances and therefore risking financial losses.

SSEN also laid out its concerns over cutting £300 million of investment in replacement of aged renewable generation connection assets, network reliability, Critical National Infrastructure and smart technology, which it said risked the reliability of the network.

Ofgem said that it has now been able to “green-light more funding” for crucial services, maintenance, upgrades and repairs due to companies submitting “much better” evidence on their spending plans, with approximately £13 million to maintain, replace and repair ageing network assets and further funding for network resilience.

However, SSEN also expressed concerns over Ofgem’s efficiency cuts in its response to the draft determinations, which it described as “unjustified”. In the final determinations, there is a 16% downward adjustment on average to the levels of funding that companies asked for in their business plans, which Ofgem said reflects its overall efficiency challenge to them to do more for less.

Between 33% and 50% of costs saved by network companies under RIIO-2 are to be shared with consumers, Ofgem said, adding that there will be greater accountability for what companies are asked to deliver. Around 70% of baseline allowances for transmission are to be linked to either uncertainty mechanisms or price control deliverables to ensure network companies are only paid for what they deliver.

David Smith, chief executive of the Energy Networks Association, said that they will be "studying the detail of Ofgem's determination over the coming weeks" to ensure it stands up to the challenges of delivering the Prime Minister's Ten Point Plan for a green industrial revolution whilst keeping energy flowing to homes and businesses, adding the net zero requires "sustained investment, innovation and a supportive and forward-looking regulatory regime".

A new funding approach for National Grid ESO is also outlined, enabling it to spend around £504 million over its first two-year business plan to progress the required changes to operate a zero carbon system by 2025, maximise competition and facilitate a whole system approach in network operation and planning.

Ofgem chief executive Jonathan Brearley said the £40 billion package “massively boosts clean energy investment”, ensuring network companies can deliver on the climate change ambitions outlined by the government last week as well as maintaining “world-leading levels of reliability”.

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