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RIIO-2 as we stand: Five key talking points

Image: Ofgem.

Image: Ofgem.

Ofgem has published its update on its next set of RIIO price controls, with the immediate headline to take away being that the regulator has deferred a final decision on appropriate returns until December. But there are a number of interesting points within the 120-page document that are sure to get the networks sector talking.

Innovation package maintained

Ofgem confirmed it is to retain an innovation stimulus package, but crucially this will only apply to projects that would not otherwise be supported by the core RIIO framework, and incorporate both the Network Innovation Allowance and Network Innovation Competition that is included within RIIO-ED1.

This will be of significant importance to network operators and trade bodies like the Energy Networks Association, which have routinely lobbied on behalf of networks innovation projects that have delivered key benefits to consumers.

However there is still work to do for Ofgem. It intends to conduct some further work for broader reform of the innovation stimulus package, chiefly to align it more broadly to the ongoing energy transition, create greater co-ordination with public funding and to increase third-party engagement.

Ofgem notes that the vast majority of respondents to the consultation said the funding should be maintained, however issues could arise from evidence submitted to Ofgem that suggested many innovations resulted in ‘business as usual’ operations, actions which would invariably fall out of the innovations envelope.

Shortened reform periods to five years

While other decisions have been deferred until the end of the year, Ofgem has confirmed its minded to decision to reduce the length of RIIO periods from eight years to five. This proposal, Ofgem said, was “overwhelmingly supported” by stakeholders and described as a “sensible precaution at a time of high uncertainty”.

Indeed, Western Power Distribution was the only network company not to back the proposal, considering that it would be better to wait until the end of the current accounting period in 2023 before making a decision.

Ofgem did however state that it would consider proposals from network companies within their business plans – which are still to be submitted by next autumn – for certain activities that may require a longer term outlook, however these will need to be clearly evidenced.

A ‘whole system’ definition

Ofgem has elected that price controls should not be a barrier to anything able to offer improvements elsewhere on the energy system, particularly those that benefit consumers. As a result, the next set of RIIO proposals will need to tackle the definition of ‘whole system’. This will be necessary to determine the whole system value of investments, rather than just their intrinsic value to networks.

Ofgem is to undertake further work and investigate whether or not the reforms will support whole system outcomes, with a commitment to clarify an industry-backed definition of ‘whole system’ that is incorporated into RIIO-2.

However the regulator has backed away from previous proposals to align both the transmission and distribution price controls following fairly unanimous feedback from industry that this was unnecessary.

However, Ofgem has remained steadfast in its approach on that matter, as evidenced by last week's publication of proposed reforms to the grid access and charging arrangements regime. This included plans to spread the whole use of system charges more evenly across the transmission and distribution systems.

The role of networks in energy efficiency

Much has been said of networks’ role in energy efficiency adoption and Ofgem has moved to tackle this head on. Consultation feedback sought to address an argument that network companies could play a much greater role in encouraging energy efficiency technologies given their potential to reduce the need for network reinforcements.

Responses to the consultation concluded that either network operators were already working on such programmes, albeit in a limited capacity, or that there would be a concern if network charges were used to fund activities delivering wider social benefits. This, respondents said, would be more the duty of general taxation.

But there would be scope for energy efficiency improvements to sit alongside battery storage and demand side response technologies to help reduce energy demand and could, therefore, be treated as an alternative to network reinforcements.

Ofgem is to work with government on the proposals but stressed the importance of creating a level playing field between demand and supply-side solutions, maintaining a technology-neutral approach. In essence, any approach taken by the regulator cannot favour, implicitly or otherwise, one technology over others. This will be the unenviable task of Ofgem to design forthcoming price controls in such a way to ensure this is maintained.

No decision on underutilisation and asset stranding

Under RIIO-2, Ofgem has stressed the need for network operators to pick and choose their investments wisely, indicating that all investments must consider long-term value for consumers and long-term trends. But as new technologies emerge and demand patterns shift, this is becoming increasingly difficult and the prospect of network underutilisation, or even asset stranding, has been raised.

Respondent views on the consultation were mixed, and varied from network companies facing higher thresholds to justify network investments to market-focused approaches wherein network build is competed for and those bidders holding the risk of underutilisation in the future.

One option mooted was for greater incentives to fall around network utilisation. Others questioned if network companies should face network utilisation risk at all considering the impact it could have on their ability to source investment.

The lack of industry consensus could be a defining reason as to why Ofgem has declined to reach a decision either way at this point and instead conduct further work. This will focus on refining price controls to manage the risk of inefficient network investments.

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