Ofgem’s RIIO-2 Challenge Group has released its report, critiquing the business plans of the energy network companies for RIIO-2.
It highlights six of the group’s key findings, following over a year of engagement with Ofgem, the Customer Engagement Groups of the gas distribution companies and the User Groups of the transmission companies and the Electricity System Operator (ESO).
Crucially, the cost of RIIO-2 was highlighted. The companies that the group talked to were asking for an additional £4 billion of expenditure compared to RIIO-1. This in an increase of 20%, but the group said that it could see little justification for such a request.
It said that while there are costs associated with the transition to net zero, they were “not a major factor in these expenditure plans”, which focused more on a business as usual approach.
On the cost of the new price controls, the group has concluded that: “Despite vigorous protestations from every company, none has persuaded us that Ofgem’s working assumptions for the Cost of Capital make their businesses unfinanceable.”
The industry came in for criticism from the group for a number of reasons, such as their output proposals in the areas of the environment. While these were described as “ambitious”, they were also seen as “unclear” by the group, who was unconvinced that Consumer Value Propositions demonstrated significant additional value for consumers.
Crucially, the group stated that: “Given the huge transformation that will be required in energy networks to implement the energy transition we are disappointed that no company, apart from the ESO, has been genuinely proactive in shaping the path to net zero.”
However, the group questioned National Grid ESO’s ability to deliver its IT change programme, “which is much larger and more challenging than what it has done in the past”.
The ESO submitted its business plan for the RIIO-2 period to Ofgem in December, which had a heavy focus on going carbon free.
The group was initially put together in November 2018 to challenge network companies’ business plans for RIIO-2. It is an independent panel of 13 experts formed of members from Competition and Markets Authority, Imperial College London, the National Infrastructure Commission and others.
Further information can be found in the report.