Ofgem’s RIIO2 price controls move a step closer

Ofgem has confirmed that the default length of the next price controls will be five years with the energy regulator's plans to deliver savings of over £5 billion to consumers moving a step closer.

Ofgem’s RIIO2 price controls move a step closer

Under the plans for the second round of RIIO price controls, which will start in 2021, Ofgem has also confirmed the following:

  • Lower returns for network companies
  • Network companies spending plans to be subject to open hearings
  • Using the benefits of competition to deliver the power link to Hinkley C nuclear power station to drive value for consumers.

 

The energy regulator has confirmed the cost of equity range (the amount network companies pay their shareholders) will go down to between 3% and 5%, from 6 to 7% currently. This is the lowest rate ever proposed for energy network price controls in Britain.

Ofgem estimates this will result in savings of over £5 billion for household consumers (or about £15 – £25 per year on the dual fuel household bill).

The price controls set the revenue monopoly network owners can earn from charges to consumers, and from 2021 the length will be reduced to five years, compared with the current eight years. 

Ofgem will extend the scope for opening up high value network upgrades to the benefits of competition across the gas and electricity sectors in the next price controls. To signal its intent Ofgem has confirmed that National Grid can build the grid upgrade to connect the new Hinkley Point C nuclear power station. However, Ofgem will set the revenue National Grid can earn from the upgrade based in part on its experience in cutting the costs of connecting offshore wind farms to the grid by tendering the ownership of these links.

Jonathan Brearley, Ofgem’s executive director for systems and networks, said: “Today we have set out our plans which will bring in tougher price controls with lower expected returns for network companies. This is part of our ongoing programme to ensure that consumers get reliable and secure power supplies at a fair price.

“As part of this continuous drive to deliver value for consumers we are using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station. This is another example of how we are evolving regulation to deliver the upgrades to our power network while ensuring the impact on bills is kept as low as possible.”

Ofgem’s decision on the framework for setting the next price controls also confirms that new independent user groups and customer engagement groups will be set up by each of the companies to give consumers a stronger voice in how the price controls are set. For the first time open hearings will take place in the spring of 2020 where companies’ spending plans will be scrutinised.

Ofgem is also retaining a funding package in the next price controls for innovation. Technologists, scientists, inventors and innovators will be able to use this funding to solve some of the biggest research and development challenges in adapting the energy networks to a smarter, more flexible energy system. These include increased use of electric vehicles, more local production of energy and integrating digital technology.

 

Industry reaction:

A spokesperson for the Energy Networks Association said: “Energy networks are focused on providing homes and businesses with a safe, reliable network and the best possible service. Since 1990 they have improved significantly the reliability of their networks while at the same time cutting costs for consumers by around 17%. They are the nerve-centre of a low cost, smarter and cleaner energy system and are responsible for delivering a range of exciting new services for their customers.

“Dynamic regulation is fundamental to help the networks continue enabling new, low carbon technologies while responding to the changing needs of consumers. RIIO-2 must allow networks to carry on delivering while also being founded on the principles of transparency and stability to provide predictability for investors, innovators and consumers.”

“Customers are at the heart of our businesses so we will be looking to build on our track record of high customer satisfaction throughout the current price control period and into RIIO-2. New Customer Engagement Groups will help us to reflect customers’ views so we can take them into consideration for future plans. Network companies look forward to working closely with Ofgem in the weeks and months ahead on their RIIO-2 proposals.”

 

Gillian Guy, chief executive at Citizens Advice, said: “Ofgem’s continued commitment to a tougher settlement for energy network companies is another welcome step in the right direction.

“These decisions are extremely technical, but getting the numbers right matters. Ofgem’s decisions to examine how risky these firms are to investors, and to require firms to return unspent infrastructure funding to consumers are positive news. Our research shows that changes to these calculations could save consumers a further £4.1 billion during the course of the price control period.

“Ofgem’s commitment to putting consumers at the heart of future settlements is essential. Limiting network costs can take pressure off household bills. While people’s changing energy needs and the growth of new technologies like electric cars means networks should be made to work harder to understand their customers’ needs.

“There is a long way to go until the process is finalised and Ofgem will face significant pressure to water down these proposals. It’s essential that the regulator is able to see these measures through and deliver a fair deal for bill payers.”

 

A spokesperson for National Grid said: “We will read Ofgem’s Framework decision document, and take into account the decisions made in the development of our plans.

“At National Grid, we are focused on delivering world-class reliability at the lowest cost to bill payers. The current regulatory system has already seen us generate £540m of savings for customers, and we look forward to the opportunity to contribute to a system that will continue to work for consumers.

“In particular we believe that it is important the energy sector remains a place that investors want to be part of, allowing us to deliver a low carbon future at the lowest cost.”


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