RIIO-2 – Ofgem proposes new regulations and starts consultation

March 2018 saw the publication of Ofgem’s proposed RIIO-2 framework and it’s call for feedback and consultation. Fundamentally Speaking looks at the highlights and what happens next. 

Following the introduction of Revenues = Incentives + Innovation + Outputs (RIIO) for gas distribution and gas/electricity transmission price controls in 2013, Ofgem is now set to further tighten regulations with RIIO-2.  

After publishing an open letter on the RIIO-2 Framework last year, a full proposal was released by Ofgem at the beginning of March 2018 along with announcement of the consultation process which will close on 2nd  May 2018.  The regulator will make a final decision on the new rules in the Summer. 

According to Ofgem, the new rules will “enable the networks to meet the needs of current and future consumers, but will be more challenging than previous price controls. We expect a lower cost of capital and challenging cost allowances and performance targets.”

At a consultation seminar held in London on 22nd March, Ofgem’s Jonathan Brearley made it clear that while the regulations would be tighter, Ofgem would need the industry’s collaboration to ensure the right balance between managing rapid change in energy production and deliver and managing costs to the consumer.

Amongst the proposals are a cost of equity range (the amount network companies pay their shareholders) of between 3% and 5% based on current rates.

Other proposals include:

  • A default five-year price control instead of the current eight-year period
  • Tougher requirements to put network companies’ business plans for the next price controls under the microscope.
  • Wider scope for opening up high value network upgrades to competition across the gas and electricity sectors.
  • A targeted innovation support programme to support strategic challenges across the sector.
  • Measures to ensure that consumers don’t pay for capacity which is not used. 
  • Failsafe measures to protect consumers including companies having to share more of the savings they make with consumers.

Ofgem has published a comprehensive consultation document and it hasn’t wasted any time in setting up events surrounding the consultation. Having already held seminars in London and Cardiff, a further event will take place in Glasgow on 19th April. 

The regulator is also using social media to keep interested parties up to date with the process through #RIIO2 on Twitter

Meanwhile, responses to the consultation – including any attachments – can be emailed to James Veaney at riio2@ofgem.gov.uk or he can be called on 0207 901 1861.