RIIO-2 business plans fail on net-zero, says Ofgem panel
Ofgem's RIIO-2 Challenge Group has criticised most of the energy companies that submitted their business plans in December for lacking strategic vision on reaching net-zero, although National Grid ESO was given an honourable mention.
29th January 2020 by Networks
Its work will also inform Ofgem as it devises its regulatory approach for the RIIO-2 price control period.
The independent report looked at the business plans submitted by Cadent; SGN; Northern Gas Networks; Wales and West Utilities; National Grid Electricity Transmission; National Grid Gas Transmission; Scottish Power Electricity Transmission; Scottish Power Hydro Transmission; and National Grid Energy System Operator (ESO).
The report’s summary said: “Given the huge transformation that will be required in energy networks to implement energy transition we are disappointed that no company, apart from the ESO, has been genuinely proactive in shaping the path to Net Zero”.
In the body of the report, the challenge group said: “The implications of short- to medium-term energy sector transformation are not currently or adequately addressed in plans.
“Issues to be explored further include: anticipated change to clean gas only in new houses after 2025 [via the Future Homes Standard, currently out for consultation]; implications of significant reduction in gas demand; smart networks and the implications of distributed energy.”
According to the challenge group’s report, the overall quality of the plans submitted in December had substantially improved.
However, the final plans varied in quality, with Scottish Power Electricity Transmission (SPT) and Northern Gas Networks (NGN) submitting better plans, while those National Grid Electricity Transmission (NGET) and Scottish Hydro Electricity Transmission (SHET) were “least convincing”.
In addition to its conclusions on the net-zero shortfall, the group drew five other key findings from the scrutiny process.
First, in its view the gas and electricity transmission networks’ plans to spend an additional £4 bn compared to RIIO-1, representing a 20% increase, could not be justified as they were largely proposing “business as usual” and had not factored in future policy decisions around net zero.
The challenge group also believed that “scope for significant improvements in efficiency” had been overlooked.
Its second point related to expenditure for the gas distribution network companies mandated by the Health and Safety Executive (HSE) Repex programme, which will see over £3 bn spent during RIIO-2 on replacing gas mains pipework.
But as this policy was last reviewed by HSE and Ofgem in 2010, the group thinks that it should be urgently reviewed, “to ensure consumers pay only for what is necessary, based on the latest risk information available and taking account of the projected fall in gas demand”.
Its fourth finding was that the companies had not made a convincing case that Ofgem’s working assumptions for the cost of capital – or the cost of debt and the cost of equity – had disadvantaged their businesses.
The group also found that the network and transmission companies had often failed to put forward convincing explanations for their plans on the environment and to support vulnerable customers.
Although some plans demonstrated “ambition” and “had merit”, in many cases the costs were significant and value proposition for consumers was unclear.
Its final message for Ofgem was the group felt there was still a lack of clarity over the precise role of National Grid ESO, while fearing that it was not “proactive enough in ensuring that the key issues for energy transition are addressed, and the benefits from whole system planning are realised”.
Possible ESO roles, it said, include “delivery body, system architect, leader of industry reform and change, market or platform operator”.
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