Putting customers at the heart of RIIO2

Continuing our series of exclusive contributions from Cadent, Richard Court - head of regulation and external affairs - tells Network why Ofgem's RIIO2 framework consultation is at a critical stage.

Putting customers at the heart of RIIO2

Decisions due to be announced this summer, following consultation, on how Britain’s gas distribution networks are funded and incentivised will shape the pathway to decarbonisation to 2050 and beyond.

Network regulation has hugely benefited consumers. Since privatisation, energy networks have cut their element of consumer bills by 17 per cent whilst at the same time investing £100 billion in Britain’s energy system.

The current RIIO framework has delivered significant benefits for our customers – bills continue to reduce due to efficiency savings that are shared with customers and we have seen step change improvements in customer satisfaction, stakeholder engagement, outcomes for customers in vulnerable situations and innovation. In addition, the pioneering approach to cost of debt indexation, introduced by Ofgem has, by our estimates, saved customers over £2 billion through incentivising efficiency in networks’ financing decisions.

This gives us a solid platform to build on for the next price control, underpinned by enhanced engagement with our customers.

 

Balancing risk and reward

In formulating the RIIO2 framework, Ofgem must consider how to establish the right balance of risk and reward between energy networks and customers. The regulator must protect customers while simultaneously maintaining the incentives for companies to take a long-term view of managing the networks, driving innovation and efficiency benefits for customers.

This is vital as energy networks get to grips with decarbonising heat and transport. Gas networks have a crucial role in delivering the UK’s challenging 2050 carbon targets in the most affordable and least disruptive way for consumers.

A study by KPMG revealed that repurposing the existing gas networks for low or zero-carbon gases would save £10,000 per household compared with electrification. Even with those savings decarbonisation still comes with a need for investment – anywhere from £100 billion to more than £300 billion of incremental spend on the networks by 2050.

To attract that level of investment and continue to innovate at the pace required, it is vital Ofgem maintains a stable and predictable regulatory environment and all the networks have the opportunity to achieve attractive but fair returns.

However, those returns must be underpinned by incentives that drive cost and quality of service improvements for our customers. We support changes that build on the existing framework and, we think, will help achieve the right balance.

Firstly, we welcome proposals to give customers a bigger say. We are looking to establish a Consumer Engagement Group within the next three months, made up of experts who can challenge us on our customers’ involvement in our business plans.  We are serious about ensuring our customers’ voices are heard.

Secondly, we think introducing phased customer sharing factors on efficiency and output incentive performance could help balance the risks. Under this mechanism a banding could be introduced so if a network performs particularly strongly on efficiency or output delivery, the customer share of those benefits would increase. This mechanism is clear, upfront and would encourage the collaboration between the networks that is already delivering great results for customers.

 

Decarbonisation is key

Finally, RIIO1 innovation funding has enabled gas networks to redefine the role of gas in decarbonisation. For example, Cadent has led and been in collaboration with the other gas networks on such ground breaking projects as a bio-substitute natural gas plant, the Leyland CNG filling station, and the HyDeploy and HyNet hydrogen projects. 

These projects are ground breaking and have the potential to create thousands of jobs at the same time as tackling the decarbonisation of both heat and transport and we support Ofgem’s proposed changes to the innovation stimulus to focus on the big challenges facing networks and believe decarbonisation of heat and transport should be the focus.

By building on the existing framework and ensuring the underlying financial package is set at the right level to both maintain investment and promote innovation we believe RIIO2 has huge potential to support the delivery of decarbonisation, affordably and sustainably while providing exceptional value for money for consumers. For our response to the consultation, go to https://cadentgas.com/about-us/regulation/riio


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