Ofgem’s RIIO-ED2 proposals receive lukewarm reception from industry

A potential £35bn investment programme and stated aim to “turn Britain’s streets green” is dampened by intention to drive down running and financing costs and halve DNOs earnings.

The Regulator’s draft determination document may make positive reading for consumers, but it has been greeted by a mixed reception from the energy industry.

The Ofgem proposals for 2021-2026, with the cost controls set to run from 2023-2028, set out a £25bn, five-year investment programme for the energy sector.  A further £10bn plus is potentially available if required to “transform Britain's energy networks to deliver emissions-free green energy for GB, whilst cutting the cost of this investment for consumers.”

There are also details on how distributors can upgrade their networks ahead of forecast increases in local electricity demand and to encourage the use of flexible solutions, such as battery storage, to mitigate demand peaks. The aim is to discourage large, capital-heavy capacity projects for the network.

The proposals also encourage development of new technology through an initial £450m innovation pot, rising to a possible £630m, which will fund R&D focussing on the use of green energy. 

Newly-appointed Ofgem CEO, Jonathan Brearley, stated: “Our proposals will help turn Britain’s streets green, putting in place the wires and technology for families to travel in electric vehicles and heat their homes and businesses with clean energy.

“The green energy transformation is not just about putting more copper in the ground. We need a modern, digital grid that uses all our energy assets as efficiently as possible.”

Challenging times

However, the drive to meet a net zero target by 2050 helped by separate price control and a funding boost for the ESO, Ofgem appears to offer a contradictory position regarding the network operators.

After stating: “To drive these changes, we will need to invest more in our networks. Some must be made immediately, much will follow in the coming years,” Ofgem then goes on to say: “We think that networks can go further, for less profit, giving consumers much better value for money.”

The statement continues: “So, from 2021, we intend to push network companies to cut right down on their running and financing costs to keep the network charges on your bill as low as possible. We plan to set them tougher targets for customer service, safety, reliability and going further faster on green energy. Our proposals would almost halve company earnings, saving up to £3.3bn across all sectors to help fund crucial improvements, now and throughout the price control. We'd cut over £8bn from company spending plans, because we don't think they've justified their proposals are value for consumers' money.”

Lukewarm, choppy waters

Perhaps understandably, the draft proposal received a lukewarm reception from industry body The Energy Networks Association. In an open statement, Chief Executive David Smith commented: “We are concerned that they [the proposals] don’t go far enough to encourage the investment needed to achieve net zero emissions and support the UK’s economic recovery. While network companies have historically been able to raise billions of pounds to invest in the networks and support the transition to a sustainable future at low cost to the customer, the proposals set out by Ofgem could significantly inhibit their ability to do so.”

The statement continued: “Network companies listened to their customers and stakeholders and put forward plans informed and influenced by their extensive engagement through focus groups and events held around the country. The plans put forward by network companies would make this possible with little to no impact on the average energy bill.”

According to reports operators and other industry experts have also criticised the proposal as hindering rather than helping the transition to a net zero energy in the UK; Scottish Power’s Keith Anderson calling the proposals “a massive missed opportunity.”

At the same time as the draft proposals, Ofgem also released a draft set of Business Data Plan Templates for DNOs to submit alongside their RIIO2 business plans. The draft pack includes a number of spreadsheet-based reporting tools for elements such as Secondary Deliverables and Reinforcement Load Index, plus commentary, guidance and a glossary.